Financial reporting and accounting issues  It is equally important for banks to take care of the financial reporting framework, be it international accounting standards or local accounting standards given that Basel II requires financial reporting on international accounting standards. Most banks in Sri Lanka will have to apply local accounting standards and make necessary adjustments in their financial accounts to comply with Basel II principles. The Institute of Chartered Accountants is proposing to adopt the International Financial Reporting Standards (IFRS), in particular IAS 39 and 40. CBSL will monitor the impact this will have on the regulatory capital of banks and formulate policies in this regard taking into consideration the international developments and practices of other regulators. IV. Single borrower limits and other sub-limits  Should the regulators and supervisors continue with the regulations imposed on single borrower limits, group borrower limits and aggregate limits that are in operation under Basel I, when they proceed to Basel II from 2008 onwards? and when will the supervisors lift sub-limits such as the single borrower limits that are currently in place and give more flexibility to the financial intermediaries? There is no clear answer to this, but we hope that some of the commercial banks which are conscious of the fullscale risk mitigation would be able to put in place appropriate processes and convince the supervisors of their ability to move to advanced approaches of risk mitigation. At that point we need to adopt more flexible attitudes towards limits and sub-limits in lending.

They are plagued with issues such as options and national discretions, different interpretations and practices, reporting requirements across the EU system and the difference between legal and operational structures in banking groups, basically, issues under pillar II. As a country within the EU-system, Sweden will have to comply with common reporting frameworks for capital requirements and have consolidated financial data. They have to deal with common recognition processes for external credit assessment institutions and comply with home/host country guidelines. Sweden is attempting to deal with these issues in a systematic manner during 2007, following the regulations to be passed by its Parliament. Fortunately, Sri Lanka does not have to deal with such cross-border issues as in many other countries. South Africa is well ahead in terms of handling implementation issues on time targets. During 19992003, they have complied with core principles for banking supervision issued by BIS. In 2004, Basel II regulations were issued and economic impact studies were completed in 2005. In 2006, consultations have begun and in 2007 parallel runs will be conducted to implement Basel II in 2008. In fact, South Africa has begun data capturing and mandatory requirements way back in 2004 and had discussed appropriate models with banks opting to use internal rating based models. Informal field tests were also conducted in 2006. In order to avoid supervisors performing redundant and uncoordinated approval and validations of models and risk assessment by banks, South Africa has established supervisory colleges to share information and coordinate supervisory actions.