##acerbate, other types of risk such as market, liquidity, or credit risk in an unanticipated way that could pose a systemic risk, resulting in participants incurring significant losses. it may not stop there. payment and settlement related operational risks could filter into businesses of banks ’ clients, governments and the country ’ s international correspondents as well. this aspect of banking operations was ignored for many years and it is fairly recently that regulators and banks started addressing payment and settlement related operational risks. today ’ s consensus is that payments, clearing, and settlement systems must be safe, reliable, efficient, and secure, which are critical to financial system stability. that ’ s why most regulators, the central banks in particular, have become owners and operators of clearing and settlement systems. although the tendency is to outsource this function, many regulators at some stage or other have owned or operated these systems. 7. another technology related risk is the desire of banks to acquire the leading edge with propriety systems, stand alone systems and specific it systems. banks tend to hang onto this short - lived approach. individual systems are costly not only to banks themselves, but also to customers. the norms should be not attracting customers, but reducing their operational risks and reduction of transaction costs to customers. both are often forgotten or ignored by banks and continuous reminding has become a regulatory responsibility. despite moral suasion banks in many countries have not realized the gains of having common atm platforms, back - up sites, disaster recovery sites and sharing of costs. 8. it may also be necessary to for banks to recognize that different risks matter in different lines of businesses. a comparison of business unit economic capital requirement by risk type indicates that operational risk is highest in fund management, private banking, and in retail banking when compared to corporate banking, insurance business ( if banks are allowed to engage in ). the new operational risk element is expected to hit banks specializing in areas - such as custodian arrangements and asset management. the regulators should be mindful of high operational risks in these businesses and bring them to the attention of banks. 9. uncertainties, regulatory challenges in promoting banks in a lighter vein, operational risks can be categorized into two, i. e. man - made risks ( mistakes, faulty models, frauds, terrorism, wars etc., ) and god - made risks ( earthquakes, floods, tsunami disasters, electrical blackouts, telecom interruptions etc. ) some of these are well known

banking system towards good financial health. a sound corporate governance regime would seek to promote the highest standards of professional behaviour and integrity. policies should be implemented to prohibit any behaviour or relationship that diminishes its quality. this is very often evident in conflicts of interest, connected lending, which is not on an arms length, and preferential treatment to related parties. the independence of directors too is crucial where directors should have the ability to exercise objective judgement, regardless of board structures or ownership structures. well established corporate governance committees such as the board audit committee which oversees the bank ’ s internal auditors, with objectivity and independence, should 1 / 2 comprise of non - executive members of the board who have the requisite knowledge that is commensurate with the complex nature of the banking institution. independent, competent and qualified auditors is an essential pre - requisite of good corporate governance which would achieve a number of important objectives. it would ensure timely identification of risks and the publication of financial statements which accurately represent the financial position and performance of the bank. auditors should understand their duty to the bank and its stakeholders to exercise due professional care in the conduct of audits. in this connection, we have, in the recent past, strengthened the relationship of auditors with the regulator and the company to benefit from each others ’ capabilities, expertise and knowledge. basel ii has attempted to capture all these critical aspects into the new accord. a bank ’ s own assessment of its capital needs, coupled with the regulator ’ s assessment of the adequacy of capital, which would encompass all other aspects of its operations, apart from credit, would ensure adequate capital to insulate the bank against its risk exposure. after all, managing risk is fast becoming the single most important issue for the regulators as well as for the institutions that are regulated. therefore, basel ii is good news and we can only benefit mutually from its adoption. a roadmap is therefore already drawn up and we hope we can all commence our journey down this road to reach our goal of a safe and sound banking system resulting in financial stability which is what we all aspire. as you are all aware, our banking community is in the process of adopting the standardized approach within basel ii by 2007. however, the major challenge faced by the banks in the next few years, are the it, skills development and training that are required to implement the more advanced approach which relies heavily on quantitative techniques. it is imperative, therefore, that banks start