Synopsis
Both theory and evidence reveal that compared to real sector business units, banks are more vulnerable to contagious shocks, the impact of which is much more pervasive and pernicious. So, capital, especially equity capital, plays a crucial role of loss absorbency in banks.
The Reserve Bank of India (RBI)’s ‘Report of the Internal Working Group to Review Extant Ownership Guidelines and Corporate Structure for Indian Private Sector Banks’ (bit.ly/38ZZihs), released on November 20, emphasises ‘capital-based’ licensing of private banks. This is a move in the right direction.Both theory and evidence reveal that compared to real sector business units, banks are more vulnerable to contagious shocks, the impact of which
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