Mr. [Y.Y.] Reddy saw his job as making sure Indian banks did not get too caught up in the bubble mentality. About two years ago, he started sensing that real estate, in particular, had entered bubble territory. One of the first moves he made was to ban the use of bank loans for the purchase of raw land, which was skyrocketing ... When Mr. Reddy saw American banks setting up off-balance-sheet vehicles to hide debt, he essentially banned them in India ... He increased risk weightings on commercial buildings and shopping mall construction, doubling the amount of capital banks were required to hold in reserve in case things went awry. He made banks put aside extra capital for every loan they made. In effect, Mr. Reddy was creating liquidity even before there was a global liquidity crisis.But then Indian regulators have always been good at saying no. This was simply the one instance where the highly cautious Indian approach to regulation worked. Usually, it just means that the animal spirits of capitalism are throttled, leading to slower growth and less innovation. Even a stuck clock shows the right time twice a day. I hope people don't learn the wrong lesson from this.
Right once in a while
Why did Indian banks escape the global liquidity crisis? Because the head of the Reserve Bank of India, unlike Alan Greenspan who was Federal Reserve Chairman at the time, applied the brakes quite early: