The high-level working group set up to suggest strengthening of the resolution regime, on Friday, recommended setting up of a single Financial Resolution Authority (FRA) that is institutionally independent of regulators and the Government.

“The mandate of FRA will be to resolve failed financial institutions and financial markets infrastructures (FMIs) — other than those owned and operated by Reserve Bank of India (RBI) — along with providing deposit insurance and protection to insurance policy holders and investors / clients within limits, if required at the resolution stage,” the group said in its report.

The FRA should be the sole authority responsible for operation and implementation of the financial resolution framework, including the decision to choose the appropriate resolution tool, except the power to take an institution into temporary public ownership (TPO) that will be invoked by the government on the recommendation of the FRA.

This working group was set up by the sub-committee of the Financial Stability and Development Council (FSDC).

FRA can be set up by either transforming the present Deposit Insurance and Credit Guarantee Corporation  (DICGC) into FRA or by setting up a new authority, namely, FRA that will subsume DICGC.

“The aim of resolution is not to preserve the failing institution, but to ensure the continuity of the functions that are critical for the financial system as a whole and limit any use of taxpayers’ money,” the group stated in its report.

The group recommended that as the ultimate objective of regulation and supervision in India was to protect the interests of depositors, insurance policyholders, and investors, the proposed statute for financial resolution framework should explicitly provide for preference to be given to depositors, insurance policyholders and investors over other unsecured creditors in resolution of failed financial institu- tions.

It also said that equal treatment may be provided to uninsured depositors of banks and claims of DICGC on account of payments made to insured depositors.

To ensure that regulators/supervisors can intervene at a sufficiently early stage with clear trigger levels to prevent the institution from reaching situation of non-viability, the group recommended each financial sector regulator/supervisor to formulate a prompt corrective action (PCA) framework for the institutions under their regulatory jurisdiction. (The Hindu)