Topic: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment
Q5. What do you understand by regulatory capture in the banking sector? Critically examine how it undermines financial stability. (10 M)
Difficulty Level: Medium
Reference: NIE
Why the question
Global bank failures (Credit Suisse, US regional banks) and lobbying against Basel-III show how regulatory capture weakens oversight, making it relevant for financial stability debates.Key Demand of the question
The question asks you to first explain the concept of regulatory capture in banking, and then critically examine its consequences for systemic stability with examples.Structure of the Answer
Introduction
Give a context of regulatory capture and highlight its significance in banking.
Body
- Understanding regulatory capture in banking – nature, mechanisms like lobbying, revolving door, information asymmetry.
- How it undermines stability – weak capital buffers, hidden risks, moral hazard, taxpayer costs, loss of trust.
Conclusion
Stress need for independent and skilled regulators with institutional reforms for resilience.
