to get regulators from several jurisdictions together to devise the means to safeguard national and international financial systems, identify systemic flaws, promote governance and set out financial stability as an explicit goal of financial regulation. by september 1997, the bcbs presented its 25 core principles for effective banking supervision. the core principles have since then become the very foundation of modern banking regulation. the final objective behind all this effort to strengthen banking supervision is to avoid market failure, which can have vastly disruptive effects on the functioning of entire economies and can spread out to wider regions or impact adversely on the global economy if not attended to in a timely manner. the direct impact of these international regulatory developments has been felt very closely by the industry in mauritius. the bank of mauritius has issued a series of guidelines over past years on a wide range of subjects covering ias 39, corporate governance, internal controls, liquidity and operational risks management, public disclosure and outsourcing of financial services, to name but a few. a visible intensification of our onsite and offsite inspections of banks over several years has led to enhancing the regulator ’ s understanding of the precise framework in which banks actually operate. it has also led to a higher degree of appreciation by banks of the objectives behind supervision. the amount of trust and confidence that this interactive process has generated between the two sides will no doubt have its own positive impact on the ongoing implementation of pillar two of basel 2. better mutual understanding between the two parties, regulator and banks, will also ward off the risk of over - regulation. besides, several forums exist for the purpose of concensus building between the bank of mauritius and the banking sector on major policy issues. this existing collaborative plan should assist in pillar 2 implementation more effectively. given also that the banking sector of mauritius accounts for over 70 % of total financial assets of the country, we cannot underestimate the relevance of applying sound and timely rules and principles towards maintaining the safety and stability of the banking system in the general economic context of the country. however, to be productive, those rules and principles have to be adapted to the ultimate objective sought by bank regulation to strengthen the domestic banking system. they should not merely reflect decisions taken in other contexts for other countries and in different market circumstances, or not have direct bearing on the realities of banking practices in mauritius. country - specific issues we have in mauritius our own banking environment and specific banking culture. of the 19 banks that have been licensed, a couple of banks only account

capital accord. pillar two of basel 2 advocates dialogue between banks and well trained regulators, able to apply the relevant judgment on the choices that have been exercised by each bank to quantify risks in their portfolio and hence to determine the commensurate amount of capital to be maintained as a buffer against those risks. moreover, pillar 3 emphasizes transparency in the capital allocation process through the provision of full information to analysts and market participants to enable the latter to judge whether the bank is adequately capitalized, given the nature of the risks taken by it. pillars 1, 2 and 3 cannot therefore be viewed in isolation from each other. however, as it is usually the case for rules and codes of universal application which transcend the original purpose for which they were initially formulated, not least in those jurisdictions that were expected to be the first ones to embrace it, there are difficulties of implementation. issues have cropped up about the reasonableness and practicability of the ratings system inherent in the standardized approach. this factor has been highlighted specifically in environments in which smaller banks adopting the simpler approach of basel 2, have no alternative to abiding by the system of ratings for their customers whereas there is no supportive borrower rating culture in these environments and it is unlikely that it would be so in the near future. this is the case for a jurisdiction like mauritius. issues have also been raised about competitiveness implications of basel 2 adoption in mixed environments in this case, with certain banks adopting the simpler approach, the capital charge is expected to be higher for such banks as compared to other larger banks which go for the more sophisticated irb models to allocate a lesser amount of capital on their lending to the same customers. the debate is whether the irb capital advantage will price the blue chip borrowers completely out of reach of banks adopting the simple approach. if so, the structural impact of a shift in this direction would be far from negligible. cross - border coordination issues for banks operating in distinct environments has become another issue in so far as banks do not want to be the disadvantaged due to differences in supervisory practices and approaches in different jurisdictions in which they have operations. this has raised the question as to whether there is effectively a level playing field and how far it can be achieved. issues have also been raised on the assessment of lossgiven - defaults ( lgd ’ s ) in the downturn phase of the economic cycle, the efficiency of supervisory validation and the quality of stress testing. these problems