getting ready for this eventuality sooner, than later. basel ii should not be looked at as an exercise in compliance but as an impetus to more efficient risk management across the banking sector. its benefits would be seen in the ability of the financial system, to promote sustainable economic growth which would be beneficial to the banks, the central bank and to the consumers of banking business. it would naturally require commitment of substantial capital and human resources from both the banks and the regulators. we should all work together, therefore, to achieve these goals. this should not only be the objective of the central bank as we are all guardians of financial stability – i trust this conference will provide an adequate forum for open discussion. thank you. 2 / 2

sunil mendis : financial system stability and basel ii - the way forward inaugural address by the chief guest mr sunil mendis, governor of the central bank of sri lanka, at the 17th anniversary convention of the association of professional bankers, colombo, sri lanka, 28 august 2005. * * * ladies and gentlemen it is an honour for me to be invited to give the keynote address at this forum of eminent bankers in sri lanka and distinguished persons from the international banking arena. i am happy to see our friends from the reserve bank of india and from the basel committee who will no doubt make this convention very lively for discussion on a subject which concerns us all. as central bankers we have a common interest in ensuring financial stability which impacts upon the macroeconomic performance. further, as monetary policy transmission takes place through the financial institutions for the achievement of its target of economic and price stability, the central bank has the responsibility for ensuring that the financial system as a whole is sound. it should be strong enough to withstand internal and external shocks. we must ensure that our payments and settlements system is protected from the risk of failure at any cost since it is the conduit through which our economic business and commercial activity is facilitated. the causes and consequences of the recent asian financial crises are still vivid in our minds and we from our part, as professional bankers, must endeavor to ensure that they are not repeated. the central banks can use both preventive measures and corrective action to maintain financial stability. a constant and continuous monitoring of risks is a preventive measure. crisis resolution is a corrective action. a strong regulatory regime would ensure the former and a financial safety net is an essential component of the latter. the two supplement each other. the cooperation of all parties concerned in both these actions is of paramount importance in maintaining financial system stability. in sri lanka, as in most emerging economies, we have a bank dominated financial system. therefore, ensuring banking soundness will inevitably lead to financial system soundness. the recent initiatives taken in this regard are significant – we have enhanced capital requirements to reflect the increased leverage in the industry. even regulatory capital is at a comfortable margin above the international norm but is still only 10 % of risk assets which is the absolute minimum should these risks materialize. therefore, increasing the minimum capital requirements would provide a healthy platform for growth and expansion of banking business. however, capital is the last line of defence. the more immediate needs are good corporate governance and good risk management which will steer the