syed salim raza : reflections on financial sector dynamics keynote address by mr syed salim raza, governor of the state bank of pakistan, at the institute of bankers, karachi, 18 june 2009. * * * it gives me great pleasure to chair this event organized by the institute of bankers and to share some thoughts with senior bankers and the distinguished personalities attending. i wish to congratulate all those who have passed the ibp examination and have qualified for the awards to be distributed today. they deserve much appreciation on their achievement. i am sure the banking industry will utilize their knowledge for the larger benefit of our society and economy. i would like to take this opportunity to share some views on emerging trends in the financial sector. even though financial institutions in pakistan have remained largely insulated from the shocks of the global financial crisis, we cannot ignore the implications of events which started in the summer of 2007 in the global financial system. the crisis brought forth the realization that organizations which are not just too - big - tofail but also too - interconnected - tofail, are the major source of systemic risk. it reinforced the fact that complete reliance on mathematical model - based risk management systems is insufficient in assessing the wide array of risks faced by the financial sector, some of which need a more qualitative analysis and judgment. most importantly, it showed how its protracted duration severely impaired the basic function of the financial sector i. e. efficient allocation of resources in the process of financial intermediation. as i will elaborate, the regulatory focus in pakistan has strived to prevent and mitigate the occurrence of these factors as the financial sector continues to evolve and progress. the banking sector in pakistan has undergone a sea change in the last few years. the unprecedented performance in terms of profitability, in building up a resilient capital base as reflected in the aggregate capital adequacy ratio ( car ), implementation of basel ii and stringent provisioning requirements etc. have all contributed in providing a cushion against shocks from both the external and domestic macro - financial environment. banks in pakistan have been able to withstand the headwinds from weakening macroeconomic fundamentals since fy07. now that the economy is poised for a turnaround, the banking sector has an even more emphatic role to play in supporting the real sector by meeting its financing needs. admittedly, banks face a challenging environment going forward : first, there is increased credit risk in the industry, a large part of

down in the following years due to both overall slowdown in economic activities and the policy - reversal by the government to re - allow institutional investment in nss. the corporate sector issued only two bonds worth rs 6. 1 billion during fy09. in view of the above, the following factors could potentially facilitate the development of a debt market in pakistan. ( i ) the banking sector, which has a virtual monopoly on providing financing to all sectors of the economy, can play a central role in the development of the debt market. banks are often among the most important issuers, holders, dealers, advisers, underwriters and guarantors in the market. given the skewed nature of their balance sheets with maturity mismatch issues, banks can issue long - term bonds for asset liability management ( alm ). this is particularly relevant from the perspective of financing long term projects. to further manage their risk profiles in changing interest rate environments, there are now sophisticated risk ‐ management tools such as interest rate swaps ( irs ) at their disposal. ( ii ) the central bank has a crucial role in promoting secondary market trading of debt securities – by improving the effectiveness of monetary policy implementation. efforts to reduce the volatility of short - term interest rates, while credibly signaling the policy stance, go a long way in increasing investor confidence while promoting the maturity transformation of financial intermediaries ’ portfolios. moreover, stable money market rates foster repo activity and anchor the yield curve as trading develops in longer maturities. sbp has focused essentially on improving the transmission of the policy rate, by managing market liquidity and maintaining the o / n repo rates close to the discount rate. this approach has proved to be very effective and sbp will continue to work towards further improving the mechanisms of monetary policy implementation. ( iii ) development of the term structure of interest rates depends on regular issues in the primary market, increased trading activity in the secondary market, and providing ease of entry and exit to both the issuers and the investors. regular auctions of pakistan investment bonds ( pibs ) since may 2006 is a step in this direction. developing bond markets and enhancing the capacity of public - and private - sector borrowers to issue long - dated, domestic currency denominated debt securities is high on the country ’ s policy agenda. among other factors, the presence of the requisite investor base is crucial for the development of both the primary and the secondary markets in debt securities