with financial markets, which should admittedly be two - way for optimal results, exclude communication by / with the government? naturally communication by / with the government, by its very nature, will have a differential and, at times, overlapping impact. but how does it affect the independence of the central bank and its policy effectiveness? this dimension poses a challenge for communication policy. third, the education function of central bank communication, that professor blinder referred to, may be more important in emes. in fact, such a function may enlarge the role of a central bank in the emes, when it carries credibility. in this regard, let me quote from an undelivered speech of a distinguished central banker 2 on the subject. “ communication is not just about transparency. it is also about education, guidance and steering things in the right direction. in this, the central bank can be an honest broker between the government and the public and even the parliament. ” in fact, a central bank can influence changes in public policy that are relevant to monetary and financial policies. for example, at the cost of modesty, let me quote mr. tarapore, a respected central banker. " … when the definitive history of india ’ s policy on gold is written up, the speech by dr. y. v. reddy, deputy governor, reserve bank of india, at the world gold council conference on 28 november 1996 will stand out as a watershed as it is perhaps the only speech by a senior indian official which squarely takes on issues on gold policy and it will be appropriately recorded as a forerunner of major policy change ". 3 fourth, relative to many other institutions in the public sector, central banks in many emes happen to have professional skills, experience and objective and independent thinking which can be drawn upon by the government, especially during the process of reform, in particular reforms in the financial sector. structural changes involving institutional and legal changes in emes may need active inputs from the respective central banks. how do theory, practice and expectation of a transparent and independent central bank reconcile with these practical compulsions? fifth, the issue of financial stability is of great significance and enormous complexity for central bankers in the emes. these economies vary considerably with regard to their fiscal, current account, openness to external sector, and dependence on oil - earnings or oil - imports. yet, the analysts in the financial markets often treat them as a group, presumably because the emes are perceived to be high -

were already in place. we have been alert to dealing with systemic risks, both procyclicality and interconnectedness, at least 4 – 5 years prior to the global crisis. we had also put in place robust otc market infrastructure and central counterparty mechanisms. we were lucky to have put in place some of the regulations, based on our own perception, that have now been designed internationally. the approach to these issues today is, however, much more structured. review of regulatory framework after giving you a background of what caused the crisis, let me now turn to the reforms in regulation put in place globally, drawing lessons from the crisis. every weakness and flaw that i have mentioned has been tried to be corrected. the basel iii regulations stipulate enhanced quality and quantity of capital. the component of tier i capital as part of total capital has been raised to 6 % ( out of total 8 % crar ), requirement of equity capital has been raised very substantially to 7 % ( including 2. 5 % of capital conservation buffer ) from the earlier 2 %. there was no concept of capital conservation buffer earlier, though there is something similar in pillar ii of basel ii. pillar ii deals with two kinds of risks : ( a ) the pillar i risks which are not covered under pillar i such as concentration risk and interest rate risk in the banking book, and ( b ) the impact of a stress situation on banks and estimation of additional capital required for banks to withstand the stress. during the crisis, it was observed that the losses in the trading books of banks were several times the losses as computed by the var models. as regards the counter party credit risk, it was found that most losses arose from the mark to market losses due to deterioration in the credit quality of the counterparties rather than due to outright default. the basel iii regulations have, therefore, expanded the risk coverage, specially, in the trading book and of risks relating to counterparties. as regards liquidity, a global framework has been built for the first time in several years, both in terms of the requirement for banks to have adequate high quality liquid assets to withstand a stress situation over a 30 day horizon and also from the perspective of avoiding asset liability mismatch by requiring banks to fund long term assets with stable funds. in my view, the most important lesson from the crisis is the recognition of systemic risks and the development of a framework to deal with that. i would touch upon these issues briefly, as there is a