EMERGING SYSTEMIC RISKS IN THE BANKING SECTOR: A DETAILED LEGAL ANALYSIS WITH SEVEN LANDMARK CASE LAWS, INDIAN BANKING LEGISLATION AND INTERNATIONAL REGULATIONS

ABSTRACT

The banking sector is one of the most important components of the financial system. Banks perform essential economic functions by accepting deposits, providing loans, facilitating payments, financing businesses and supporting national economic development. However, the increasing complexity of financial markets, globalisation, technological advancement and interconnectedness among financial institutions have created new forms of systemic risks.

Systemic risk refers to the possibility that the failure or financial distress of one or more financial institutions may cause serious disruption to the entire financial system and adversely affect the wider economy.

Emerging systemic risks include liquidity crises, excessive credit expansion, cyberattacks, technological failures, interconnected financial exposures, climate-related financial risks, cryptocurrency-related instability, non-performing assets, concentration of banking activities and international financial contagion.

In India, the Reserve Bank of India (RBI) plays a central role in monitoring and controlling systemic risks through prudential regulations, capital adequacy requirements, liquidity management, inspections, supervisory directions and corrective action frameworks.

Indian banking institutions are governed by important legislation, including the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, Deposit Insurance and Credit Guarantee Corporation Act, 1961, Insolvency and Bankruptcy Code, 2016 and Payment and Settlement Systems Act, 2007.

At the international level, the Basel Committee on Banking Supervision, Financial Stability Board, International Monetary Fund and World Bank establish important regulatory standards for banking stability.

This research examines the meaning, causes, types, legal implications and regulatory control of emerging systemic risks in the banking sector. It also analyses seven landmark Indian judicial decisions and discusses Indian legislation, international regulations, recommendations and future challenges.

Keywords: Systemic Risk, Banking Sector, Financial Stability, Reserve Bank of India, Banking Regulation, Basel III, Cybersecurity, Liquidity Risk, Financial Contagion, Non-Performing Assets, Banking Insolvency, International Banking Law.

CHAPTER 1: INTRODUCTION

1.1 Meaning of Systemic Risk

Systemic risk refers to the risk that financial difficulties affecting one institution, financial market or component of the financial system may spread to other institutions and eventually threaten the stability of the entire financial system.

It is different from ordinary individual banking risk.

Ordinary banking risk generally concerns the possibility of losses suffered by an individual bank.

Systemic risk concerns the possibility that financial difficulties may spread across the banking sector and affect depositors, financial markets, businesses and the national economy.