.......... RBI’s bias against market mechanisms is to a fault, but the then governor Y.V. Reddy and his officials understood that the reason why we regulate the financial system over and above the way we regulate other industries is that the financial system cannot insure itself. Financial crises are large, pervasive and a result of market failure. Market prices cannot easily protect us from such market failure. Bail-in investors will underestimate risks in the good times and will be shocked and ruined in the bad. In the good times, they will use optimistic valuations of these instruments as backing for other holdings. Then..........
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