BIMAL JALAN COMMITTEE

About: 

Reserve Bank of India (RBI) had constituted an “Expert Committee to Review the Extant Economic Capital Framework of the RBI” under the Chairmanship of Dr. Bimal Jalan. Major recommendations of the Committee with regard to risk provisioning and surplus distribution are as follows:

• RBI’s economic capital: A clearer distinction between the two components of economic capital (realized equity and revaluation balances) was recommended.
  • Realized equity could be used for meeting all risks/ losses as they were primarily built up from retained earnings.
    
    
  • Revaluation balances could be reckoned only as risk buffers against market risks as they represented unrealized valuation gains and hence were not distributable.
    
    
  
  
  
• Risk provisioning for market risk: It has recommended the adoption of Expected Shortfall (ES) methodology under stressed conditions (in place of the extant Stressed-Value at Risk) for measuring the RBI’s market risk. It has recommended the adoption of a target of ES 99.5 % confidence level (CL).
  
  
• Size of Realized Equity: Contingent Risk Buffer (CRB) – made primarily from retained earnings – has been recommended to be maintained within a range of 6.5 % to 5.5 % of the RBI’s balance sheet, comprising 5.5 to 4.5 % for monetary and financial stability risks and 1.0 % for credit and operational risks.
  
  
• Surplus Distribution Policy: It has recommended a surplus distribution policy which targets the level of realized equity to be maintained by the RBI. Under it, only if realized equity is above its requirement, will the entire net income be transferable to the Government.
  
  
• It has also suggested that the RBI’s economic capital framework may be periodically reviewed after every five years.