hamad al - sayari : challenges posed to investment in saudi banks speech by his excellency hamad al - sayari, governor of the saudi arabian monetary agency, to the symposium on challenges posed to investment and saudi banks, riyadh, 2 december 2006. * * * dear audience, at the beginning, i would like to welcome all honorable attendance. it gives me a great pleasure today to address you at the outset of the deliberations of this symposium on " challenges posed to investment and saudi banks in an environment of global economic openness " which is convened at a time the kingdom is witnessing a period of economic growth accompanied with and enhanced by steps of economic reforms in the fields of streamlining of regulations, restructuring of the national economy, and approval of a number of mega development projects as well as the accession to the world trade organization which is an important step towards enhancing integration into the world economy, coping with economic developments, and attraction of foreign investments apart from accession to global markets which will be reflected on the competitive capacity of the national economy. dear audience, the current symposium is being held in a promising economic environment in this country. the kingdom has recorded outstanding economic results. the real gross domestic product rose by 6. 5 percent in 2005. this growth rate was reflected on almost all sectors of the economy which is characterized by strong investment. international rating agencies recorded their appreciation and certified the efficiency and strength of the national economy. eventually, they raised the credit rating of the kingdom to advanced grades. this environment promoted the interest of foreign investors to participate in and benefit from the various investment opportunities available in the saudi economy. the saudi banking system has played a vital role in the enhancement of the national economy. thanks to its use of the latest technologies and various banking products, the banking system has witnessed good development under a supervisory system which is very keen to meet domestic requirements and legislation and to comply with international standards, including basel capital adequacy standard. the banks operating in the kingdom are very serious in the application of this standard. as a result, the kingdom's banking system has become one of the advanced systems, not only at the regional level but also at the international one. dear audience, basel ii standards are the most important supervisory initiatives of this decade, and they will have a considerable impact on changing the conduct of risk management at all banks regardless of their size and location. the standards aim at achieving a number of objectives, including ensuring the capital adequacy of

cover every single risk in the complex world of banking, the regulation, too, had to become more complex – and that is still taking a very heavy toll on smaller institutions ; too much so, if you ask me. for small institutions, especially, the work this entails is disproportionately time - consuming and costly. at the same time, many a provision grasps at thin air at small institutions. just take the existing disclosure requirements, which are there to ensure that large publicly traded institutions are subject to public accountability. yet market discipline hardly has any bearing for small institutions which are not publicly traded – so why force them to satisfy the same provisions? another point worth mentioning in this regard is that the many smaller institutions represent an important component of a diverse banking landscape. during the financial crisis, it was notably the savings bank and cooperative bank sector which proved to be an anchor of stability in germany. savings banks and cooperative banks, operating as they do within their own regions, were far less exposed to international disruptions. plus, close relationships built up over time with customers exuded stability in an environment fraught with uncertainty – clearly, the diversity of germany ’ s banking landscape paid off on this score. if you ask me, that alone is reason enough to systemically scour the existing rulebook for provisions that ask too much of smaller institutions and to then set about eliminating them. in europe, the rulebook is presently being subjected to a thorough and comprehensive review, and the european commission has already tabled quite a few proposals for amending the rules. some of these proposals would bring relief for smaller institutions. these are proposals i advocate in principle. adjustments could be made to the magnitude and frequency of disclosure and reporting 2 / 5 bis central bankers'speeches requirements. the standards for remuneration systems are another area that could be addressed, while sensible exceptions might be made to the new standardised approach for market risk. while i have a great deal of time for the legitimate interests of smaller institutions rooted in their home regions, there ’ s one issue i would like to stress : proportionality isn ’ t a gateway to relieving smaller institutions of regulation altogether. it should most certainly not be about lowering quantitative requirements – for capital or liquidity, for instance – but rather a case of tracking down operational requirements that can be dispensed with. the diversity of a banking system cannot be protected by classifying small banks and savings banks as completely risk - free. trouble can