Previous Year Question
With reference to the ‘Financial Stability and Development Council’, consider the following statements:
It is an organ of NITI Aayog.
It is headed by the Union Finance Minister.
It monitors macro-prudential supervision of the economy.
Which of the statements given above is/are correct?
1 and 2 only
3 only
2 and 3 only
1, 2 and 3
Correct Answer: C
Detailed Solution
The Financial Stability and Development Council—FSDC is an apex-level coordinating forum concerned with India’s financial system. It was constituted by the Government of India in December 2010.
Statement 1 is incorrect. The FSDC is not an organ of NITI Aayog. It is administratively associated with the Department of Economic Affairs, Ministry of Finance. It is also not a statutory body created under a specific Act of Parliament; it was established through an executive decision of the Government of India.
Statement 2 is correct. The FSDC is chaired by the Union Finance Minister. It includes representatives of the principal ministries, departments and regulatory institutions concerned with the financial sector.
Its members generally include the Governor of the Reserve Bank of India, Finance Secretary, Secretary of the Department of Economic Affairs and heads of financial regulators such as SEBI, IRDAI and PFRDA. The composition of the Council can be modified when required.
Statement 3 is correct. The FSDC deals with Macro-prudential Supervision, which involves monitoring risks that may threaten the stability of the financial system as a whole.
Macro-prudential supervision does not focus merely on the condition of one bank or financial institution. It examines system-wide risks such as:
The possibility of several financial institutions becoming exposed to the same risk;
Contagion risk among banks, insurance companies and capital markets;
Excessive credit growth or an asset-price bubble;
Systemic risks created by large financial conglomerates;
The possibility of a financial crisis spreading to the real economy.
Other major functions of the FSDC include financial stability, financial-sector development, inter-regulatory coordination, financial inclusion, financial literacy and coordination for crisis management.
The FSDC also has an FSDC Sub-Committee, which is chaired by the Governor of the Reserve Bank of India. It considers operational and inter-regulatory matters connected with the work of the Council.