implementation of the new capital accord requires higher specialised skills in banks. in fact it requires a paradigm shift in risk management. the governance process should recognise this need and make sure that the supervised entity gears up to it. risk awareness has to spread bank - wide, the manner of doing business that measures risk adjusted returns needs to permeate the system. top management and the human resource development policy of banks thus need to get tuned bis central bankers ’ speeches to this requirement. we in the reserve bank also need to hone up our skills in regulating and supervising banks under the new system. we see this as an ongoing process and are continuously working towards skill improvement. governance 18. one can have the capital, the liquid assets and the infrastructure. but corporate governance will be the deciding factor in the ability of a bank to meet the challenges. bcbs has added a separate principle on corporate governance in its core principles for effective banking supervision which were revised in 2012. it is interesting to note that before 2012, there was no separate principle on corporate governance. i think global community is recognising the importance of corporate governance and is trying to fix the issues. thus while strong capital gives financial strength, it cannot assure good performance unless backed by good corporate governance. element of conservatism in minimum standards 19. several speakers mentioned about the super equivalence issue. let me add my bit to that discussion before i conclude. there is a general feeling that we have put in place a more stringent framework than what basel norms require. of course one would point out to the 9 percent crar, the 4. 5 leverage ratio, the slr running parallel with lcr, the higher ccf for otc derivatives and the like. we need to see this in a context. i have already dealt with the slr - lcr issue. on capital, all i can say is that in the ultimate analysis, on an aggregate basis, it does not make much difference. we must also appreciate that relatively much longer recovery process of defaulted loans, shorter history of ratings assigned by rating agencies in indian conditions putting certain constraint on benchmarking them against the international standards, relatively large population of unrated borrowers especially in mid and sme corporate sectors, market risk factors exhibiting more volatilities, etc. add challenges. besides, pillar 2 process and related add - on capital requirements is also yet to be fully stabilised. the higher prescription of 9 % minimum requirements in comparison to basel minimum of 8

residential mortgage and 125 % for personal loans. these are hard decisions which we, as a regulator, have taken with a view to capturing the true level of underlying risk knowing fully well that this might cast a burden on the banks in india. d ) internal capital adequacy assessment process the internal capital adequacy assessment process which forms an important element of pillar ii is an integral and important part of the basel ii framework. yet, some doubts are being raised with regard to its relevance for banks adopting standardised approach and basic indicator approach. i would like to mention here that though pillar ii is not a formal part of basel i framework, the reserve bank has been discharging some of the pillar ii responsibilities even under the current framework. the basel ii framework takes this a step forward by making it a formal requirement. the additional element which casts some formal responsibility on the banks under the new framework is that banks are required to put in place an effective internal capital adequacy assessment process ( icaap ) which should not only address the 3 major risks ( viz. credit risk, market risk, and operational risk ) but also other risks for which explicit capital has not been prescribed under pillar i. further, banks are also required to address suitably other dimensions of the three pillar i risks. a professionally managed bank would suo moto strive to plan for and achieve most efficient use of capital even if there were no formal regulatory requirement. the icaap merely attempts to formalise these efforts of bank managements as a part of the capital adequacy framework. i am sure this would clarify the relevance of including icaap as an integral part of pillar ii. e ) stress testing stress testing has become an integral part of banks ’ risk management systems and is used to evaluate their potential vulnerability to certain unlikely but plausible events or movements in financial variables. the supervisory review process under pillar 2 of basel ii framework is intended not only to ensure that banks have adequate capital to support all the risks in their business, but also to encourage banks to develop and use better risk management techniques in monitoring and managing their risks. banks must demonstrate, under the internal capital adequacy assessment process prescribed by pillar 2, that they have enough capital to not only meet the minimum capital requirements but also to withstand a range of severe but plausible shocks. in the above background, the need for banks in india to adopt ‘ stress tests ’ as a risk management tool has been emphasised in the annual