to capture weaker parts of the economic cycle. to address this problem, the agencies have proposed a supervisory mapping function that can be used in the interim by those institutions unable to estimate appropriate downturn lgds. the mapping function allows an institution to “ stress ” its expected lgds, generating an input to the capital calculation that conforms to the basel ii requirements and hence produces a more appropriate capital requirement. the federal reserve supported the introduction of this supervisory mapping function, as an important component of u. s. basel ii implementation, in order to address a specific challenge articulated by the industry. banks would be able to shift from using the mapping function to using their own internal estimates of lgds when their own estimates become reliable. about a month ago, the basel committee released the results of qis5, which was conducted by a number of countries but not the united states, since we had already conducted qis4. as you know, the qis4 results from u. s. institutions are not completely comparable with the qis5 results from institutions in other countries. nonetheless, some similarities are worth noting. first, the aggregate declines in minimum regulatory capital of banks using the advanced approaches were similar in the two exercises, particularly considering that qis4 did not include the 1. 06 capital multiplier and qis5 did. for both exercises the aggregate declines reflected relatively good economic times - which, as we know all too well, do not last forever. second, both studies pointed to dispersion of changes in minimum required capital. the dispersion among banks in qis5 was attributed largely to a combination of differences in portfolio characteristics and differences and uncertainties in estimation methodologies. the u. s. agencies highlighted similar issues in their public release on qis4 and have stated their intention to monitor issues related to dispersion very closely in the future, because we want to ensure that the basel ii framework does indeed accurately produce similar capital for similar risk. the basel committee ’ s release on qis5 also stated that methodologies and systems for lgd calculation are still being developed and that, as a result, some of the effects of downturns may have been underestimated. the u. s. agencies'release on qis4 stated that u. s. banks also faced some challenges in estimating downturn lgds. basel i modifications at this point i would like to say just a few words about ongoing efforts to revise

financial sector is the east asian crisis, where banks were the predominant provider of finance. post - crisis reflection on events brought forth the realization of the significance of alternative debt markets and in particular, money and bond markets, as a complementary source of finance. moreover, the continued integration and deepening of financial markets is a significant issue for policy makers, and particularly for central banks entrusted with the formulation and implementation of monetary policy, since well - integrated and efficient financial markets are crucial in ensuring a smooth transmission of monetary impulses to the economy. indeed, banking sector dominance is an impediment to the fundamental principle of market competition ; it leads to inefficiencies and therefore to sub ‐ optimal outcomes in the loan market, which may jeopardize the stability of the financial system. consider the following : ( i ) when the banking sector has to face competition from a well developed local currency bond market, it is forced to improve the efficiency of its operations and develop corporate financial services beyond primary lending. in pakistan, the banking sector faces very little competition from the corporate debt market. indeed, extraordinary banking spreads, as witnessed in pakistan recently, provide some evidence of the lack of strong competition and efficiency in pakistan ’ s financial markets. so our capacity for corporate finance remains undeveloped. ( ii ) the short tenor of bank loans, itself a consequence of the nature of banks ’ deposits in pakistan, leads to maturity mismatch issues in the banks ’ asset and liability portfolios. this essentially means that long - term funding needs are financed by a consistent roll - over of short - term loans and in times of tight liquidity, borrowers may find themselves unable to roll over their maturing obligations. access to bond markets then serves the purpose of a complimentary, rather than the alternative source of finance, as encapsulated in the much cited example of the essential “ spare tyre ” that a financial system needs. this is particularly true when a growing economy like pakistan needs to raise sufficient funds for financing long ‐ term infrastructure projects. ( iii ) when firms can raise their own funds through the issuance of market bonds, they are less dependent on banks and therefore not vulnerable to difficulties that banks might face. this also puts pressure on banks to diversify and widen their portfolio and service range, as they no longer possess captive clients. consequently, banks can focus more on enterprisers in the economy that typically face credit constraints due to their small size, relatively new stage of development, or simply as