reserve bank ’ s standpoint, initiatives relating to credit culture, financial literacy, financial inclusion and priority sector lending would continue to remain high on the policy agenda. concluding remarks rbi has considerable professional skills and the states recognise and value them better when we are willing to consider state - specific orientation to our broader analysis. the rbi, like most of the central banks, commands considerable credibility and good public image and as a public institution is considered relatively apolitical in viewing the vertical relations between the centre and the states and horizontal ones amongst the states. the bi - annual conference of the state finance secretaries sponsored by the rbi has proved to be an excellent forum for wide - ranging discussions. the technical committees or groups that are formed, have membership entirely from the states, though centre may occasionally be associated, but rbi provides secretarial and technical support. the centre and each state concerned decides the appropriate course of actions. the fact that some of the states have adopted a few but not all the recommendations of the committees and groups, demonstrates the shift away from the perceived centralisation of the past towards a participative process. i am happy to submit that all the states, though with varying degrees of enthusiasm, fully endorse the immense contribution of the process of partnering between rbi and the states in the cause of better financial sector and fiscal empowerment in the states. let me conclude with profuse thanks to the madras school of economics for provoking me to think aloud on this subject and share the thoughts with wider audience. the school came into existence in 1995, but very soon, it could obtain “ a ” grade from the national assessment & accreditation council. the ministry of environment and forests has also designated the school as a centre of excellence in environmental economics. i have no doubt that the school would emerge to be an internationally recognised centre of excellence in economic studies attracting the best of students and teachers from different parts of the country as well as other countries. on our part, we in the rbi are in close touch with the school with a view to obtaining their expertise in the process of monetary policy formulation. thank you.

basel ii has only been fully implemented in europe since the beginning of this year. the us is rolling it out more slowly. even so, there is already strong agreement that basel ii will improve incentives for risk management and market disclosure and enhance capital regulation and supervision. let me point out some key enhancements relevant to the current crisis. among other things, basel ii will deliver better risk differentiation. banks that enter upon more risky lending practices will need to strengthen their capital base accordingly. moreover, under the new capital regime all exposures will be subject to regulatory capital charges, whether on or off the balance sheet. basel ii will also create more neutral incentives between retaining exposures on the balance sheet and transferring them to the capital markets through securitisations. it will reinforce capital requirements for banks ’ trading books, which are rapidly growing. and last, basel ii will enhance disclosures of banks ’ risk profiles, notably with regard to structured credit and securitisation activities. given that basel ii is a risk - sensitive framework, there is some concern that it may turn out to be too procyclical. however, to achieve more risk sensitivity in minimum capital, there has to be some fluctuation in that requirement over the cycle. the basel committee has tried to balance the objectives of risk sensitivity and capital adequacy over the cycle. for instance, banks are required to perform forward - looking stress tests to make sure that they hold enough cushions above the minimum. basel ii will also require much stronger firm - wide aggregation and management of risk exposures. and banks that take on more risk will be required to hold more capital in the first place, helping to prevent the build - up and underpricing of risk. we will also be tracking the framework over time and make any necessary adjustments based on our findings. so, it is safe to say that the basel ii framework is a major improvement. but it is not the ultimate answer to the financial markets problems of today and tomorrow. in december 2006, the basel committee had already identified “ pressure points ” and weak spots in the regulatory and supervisory regime that should be addressed. fortunately, the framework is flexible enough to evolve over time. in light of recent developments, the basel committee has already begun to evaluate certain aspects of the framework. these include issues such as the securitisation of complex products, reputational risk and disclosure. but strong capital, though essential, is only one aspect of a stable banking and financial system. sound risk