. in the life insurance sector, the average roe increased between 2003 and 2004. non - life insurers enjoyed an even more significant improvement in profitability. by contrast, the reinsurance industry saw a marked decline in profits in 2004. profits in the non - life sector were driven by strong underwriting performances. in the life insurance sector, lower guaranteed rates of return and cost - cutting supported the results. reinsurers suffered mainly from falling net investment income and a reduction in risk transfer from the non - life sector to the re - insurance sector. the solvency positions of insurers may be broadly measured by the ratio of surplus to net premiums written. as shown in the right - hand chart on slide 9, in the non - life and re - insurance industries, this ratio rose in 2004 from the previous year. despite rather subdued profits, the capital base of the reinsurance industry grew as companies limited the amount of dividends distributed to their shareholders. in the life insurance industry, there was a slight decline in the solvency ratio in 2004. regarding unregulated financial institutions, the risks associated with hedge funds have remained a topical issue in 2005 ( see slide 10 ). the ecb, in collaboration with the bsc ( national central banks and supervisors ), carried out a survey of eu banks ’ exposures to hedge funds, which has been published and is now available on the ecb ’ s website. the december 2005 financial stability review contains a box summarising the key findings of the survey. the chart on the left on slide 10 shows that according to publicly available data, inflows to the hedge funds sector continued in the first half of 2005, albeit at a decelerating pace. the chart on the right on slide 10 illustrates that at least certain hedge fund strategies suffered losses in march - april 2005 owing to the turbulence in the corporate credit markets that was generated by the widely expected downgrades of two large us automakers which subsequently materialised in may. this weaker performance in hedge fund returns may, at least in part, explain why inflows tapered off somewhat. iii. overall assessment having reviewed developments in the key parts of the financial system, the overall assessment of risks to euro area financial stability can be formulated as follows ( see slide 11 ). a number of recent positive developments support the judgement that the euro area financial markets, institutions and infrastructures are robust and capable of withstanding shocks : first, the pace of global economic activity has

duvvuri subbarao : post - crisis reforms to banking regulation and supervision – think global, act local inaugural address by dr d subbarao, governor of the reserve bank of india, at the federation of indian chambers of commerce & industry - indian banks ’ association ( ficci - iba ) conference on “ global banking : paradigm shift ”, mumbai, 7 september 2010. * * * 1. thank you very much for inviting me to inaugurate this ficci - iba conference on “ global banking : paradigm shift ”. this conference is a flagship event in the annual banking calendar, and i attach a lot of value to this opportunity of speaking to and interacting with the banking community. 2. when i spoke at this forum last year, i had touched on some of the early lessons of the global crisis and how they were shaping the debate on reforms to banking regulation and supervision. over the last one year, there has been significant progress in crystallizing the reform agenda and in reaching a shared understanding on most of the measures. the thrust of the reform package has been to fortify the banking system, correct the incentive framework and ensure its long term stability. reflecting one of the big lessons of the crisis that a collection of healthy banks does not necessarily result in a healthy banking system at the aggregate level, the reforms focus on both the microprudential dimension at the individual institution level and the macroprudential dimension at the systemic level. 3. the effort has been led by the basel committee on banking supervision ( bcbs ) which held several meetings and consultations over the last year to define the reform agenda and to flesh out the individual components. india, as you know, has been a newly inducted member of the bcbs, and the reserve bank has been actively engaged in the process of crystallizing what has now come to be called basel iii. 4. in july 2010, the bcbs put out a comprehensive paper indicating the broad agreement reached on the basel iii proposals. broadly, these reforms will require banks to hold more and better quality capital and to carry more liquid assets, will limit their leverage and mandate them to build up capital buffers in good times that can be drawn down in periods of stress. the basel iii process is not yet complete. in particular, the actual calibration of the measures and their phasing in is yet to be determined. this will be done after a further assessment of the reasonableness of these measures and their