When regulation is good

Arvind Panagariya at Columbia University analyzes how foresight and strict Reserve Bank of India regulations have helped domestic financial markets to stave off serious trouble.

'(RBI governor) Reddy is reported to have held the view that if bankers were given the opportunity to sin, they would. As a result, whereas banks and financial institutions around the world were massively lured into investing in assets and derivatives backed by U.S. subprime mortgages, banks and financial institutions in India were largely kept out of them. Under the watchful eye of Reddy, only $1 billion out of India's total banking assets of more than $500 billion slipped into toxic assets or related investments. When the crisis came and financial institutions around the world found themselves writing off almost $1 trillion in assets from their books, Indian banks had at most a few hiccups.'

Read the full article here.

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