on the basis of our calculations, the banks ’ capital requirements will surely increase with said adoption. however, if a bank has right risk management systems that can effectively capture the risk exposures, there is an opportunity for them to lower their capital charges. as financial markets progress towards the market transparency mechanism that is promoted under pillar 3, risk management will be seen as a potential differentiator and a source of competitive advantage. ultimately, it will reward banks that manage their risks effectively, and penalize those that do not. good risk management practice is thus even more essential for banks to maintain competitiveness over the long run. • corporate governance is not a mere risk compliance measure ; it is vital to the institution ’ s health. as far as the banking industry is concerned, corporate governance relates to the manner in which businesses and affairs of the individual banks are directed and managed by the board of directors and senior management. it provides the structure though which the objectives of the institutions are set, the strategy of attaining those objectives is determined and the performance of the institution is monitored. corporate governance is essential to the institution ’ s health. it seeks to meet legal requirements and uphold fiduciary responsibilities to investors, creditors and depositors. it attracts and retains good senior management, officers and employees. it also makes the organization attractive to investors, clients and business partners. equally important, corporate governance reduces exposure to reputational risks or the potential that a negative publicity regarding an institution ’ s business practices will cause a decline in the customer base or lead to costly litigation. • risk management matters are necessary parts and parcel of sound strategic planning. the need to include risk management in strategic planning cannot be overemphasized as we have seen a number of banks getting into trouble where the root cause can be traced to inconsistencies between the bank ’ s strategic goals and risk management objectives or simply the lack of risk management objectives. sound strategic planning should involve not only setting targets such as revenue, assets under management, and the number of new accounts, but also include the establishment of control and risk management systems. specifically strategic planning should lead to an objective assessment of the institution ’ s risk profile and highlight areas of strengths and weaknesses. it should help the firm determine the risks it wants exposure to, the risk it cannot avoid, risks that the firm is not prepared to face and the risks it can reduce. strategic planning should involve the use of internal risk assessment as such could uncover natural hedges, or countercyclical

##ities, that exist across different businesses of a firm. such knowledge helps the firm focus on its net exposures and more effectively allocate resources. risk assessment often results in a better understanding of the internal and external environment, which can be a source of competitive advantage by the uncovering of business opportunities or the early assessment of threats which in turn allow the firm to have competitive lead over less informed competitors. • stress testing enhances management of risks. many of us here today may wish that we have the ability to predict with certainty when the next crisis will strike. regrettably there appears to be no existing technology that would allow us to predict it with accuracy. however, we can prepare for it well in advance it if we know how it would impact on us, if and when it comes, and plan in advance the right level of resources to withstand it. we can do this if we have the capability to perform on a regular basis, the suitable stress testing and scenario analyses. • a proactive risk culture must exist in an institution to ensure effective risk management a proactive risk culture means there is awareness of risk within an institution which permeates the actions and words of all the members of the firm. this can be done through regular risk awareness activities, education, open communication lines among units / groups concerned, and continuous interaction with senior management. when considering the importance of risk culture, it may be asked why some firms fared better than others at risk management. nick leeson ’ s actions at barings would have been less likely if a meaningful “ risk culture ” had been in place which institutionalized management oversight, upheld segregation of duties, and permitted closer monitoring of the trading in books that appeared to be profitable. risk culture is important today because the complexity of modern financial instruments makes it possible for even a single, unsupervised trader to gamble and lose, the entire capital of a firm. a good example of recent failure of risk culture is that of the national australia bank. in january of 2004, the national australia bank ( nab ), australia ’ s largest bank and second biggest company was reported to have lost $ 360 million in foreign currency trading. a report released by the australian prudential regulation authority attributes the losses to the four currency options traders who, possessed of an abundance of self confidence, positioned the nab ’ s foreign currency options portfolio in the expectation that the fall in the us dollar that occurred mid last year would reverse and that volatility