ajith nivard cabraal : responsibilities of financial institution directors in the current turmoil address by mr ajith nivard cabraal, governor of the central bank of sri lanka, at the seminar on regulation, governance and legal responsibilities of directors of the registered finance companies, colombo, 24 april 2008. * * * deputy governors, assistant governors, directors of finance companies, my dear friends, i welcome you warmly to this seminar organized by the department of supervision of nonbank financial institutions. i also want to say “ thank you ” to all of you for taking the time to participate at this important occasion. you may have wondered as to why the central bank has decided to have a seminar of this nature and invited you to spend nearly half a day with us. therefore, at the outset, i will try to give you a little insight into the financial turmoil that the world is facing today. many of you, i am sure, are aware of the upheaval that is taking place worldwide, and i am also sure many of you understand the risks that are associated with it. my dear friends, somewhere around july - august of last year, various changes took place in the financial world. it started softly, like all difficulties, like all problems, and then suddenly, we realized that it was gathering momentum. the expression “ sub - prime issue ” was first of all, whispered ; people didn't say it out loud ; many didn ’ t even know what it is. however, they soon realized that there was a serious issue that was brewing ; some danger lurking. then, gradually people realized that a major calamity was taking place in the financial markets of the world. the crisis gathered momentum and then people also realized that the problem was highly complex ; little by little, the major triple a rated banks also started to feel the impact. banks realized that they have to change positions, and they started doing that. some of the biggest banks in the world, who were highly rated for many many years, and held in esteem all over the world as being institutions that could never be in danger, began to feel the pinch. then, we heard about the european central bank, the federal reserve and the bank of england pumping money into the mortgage markets in order to save the markets. we also heard about northern rock. the bank of england had to put in well over 30 billion pounds, that is, more than double the gdp of sri lanka, just to save this one institution. the

the newspapers saying that such and such banks, finance companies and leasing companies are regulated by the central bank. do you know that immediately after our advertisements, we get many calls? the callers say, “ we have deposited our money in such and such institution. but, we don ’ t see its name in your list. is that institute regulated? ” when we say that such organization is not regulated, many get frightened. so you see, people take regulation seriously. people believe that if something is regulated, then there is some element of order that is brought into that system. we are well aware of this and therefore we take a lot of pains to fulfil the regulating task. we have a deputy governor in - charge who looks into all these aspects. we have the department of supervision of non - bank financial institutions that supervises finance companies. they take their jobs seriously. that is why they are organizing a seminar of this nature. today, the business world is continuously looking at risk and trying to figure out how to manage risk and hedge against risk. sometimes, unfortunately, some directors of finance companies think that they are immune from this risk. some of them say : “ we have a highly respected chairman ; we have a super ceo. we have entrusted the entire management to those wonderful persons ; they are very good ; they are well known ; they know their subject ; so therefore we can take it easy and relax. ” that appears to be their philosophy. if you think so, you may do that. but remember, you would be doing that at your own risk! you must realize that you are also fully responsible. it is the collective board that will be held accountable. recently, you may have recently seen some advertisements that were placed by the failed finance companies commission, summoning all the directors, in the course of their inquiry. they have not said, “ we will summon only the chairmen and ceos of the failed finance companies ”. no. they have summoned all. that is perfectly correct because every director is responsible. so, each one of you too, will be responsible in the future with regard to your company. that is why we have invited eminent professionals to come and explain to you, your duties and responsibilities. sometimes, directors may not really appreciate their responsibilities and they may be quite comfortable about leaving key decisions to their colleagues, whom they trust implicitly. maybe, you may comfortably place your trust in them, and indeed you may think you are entitled to do