This has proved to be a stabilising factor, inasmuch as it has not induced an imbalance in the incentive structures and has also proved to be less pro-cyclical. Moral suasion and supervisory review Moral suasion and public articulation of concerns has helped in achieving a desired rebalancing of suspected excesses in risk-taking among banks.
Some of the areas where moral suasion has been used are the need for banks to monitor unhedged foreign currency exposures of their corporate clients, adoption of appropriate incentive mechanisms by banks for encouraging disclosures of derivative exposures by their corporate clients, banks’ reliance on non-deposit resources to finance assets, their excessive reliance on wholesale deposits and uncomfortable loan-to-value (LTV) ratios in respect of housing loans etc.