are aligned with the bank's risk appetite and policies. the benefits of basel ii cannot be achieved with just a strict regulatory compliance approach. while basel ii serves as a powerful catalyst to reposition the role of, and the attention to, risk management in banking institutions, significant efforts need to be directed at strengthening the financial structure, corporate governance, risk management and data capabilities within the banking institutions. the approach adopted by bank negara malaysia has been for these efforts to complement and reinforce the positive outcomes of basel ii. these are important preconditions for, and not automatic outcomes from the adoption of basel ii. in the wake of the sub - prime mortgage crisis in the united states, several aspects of basel ii have attracted attention. among them has been the use of ratings in the regulatory framework and whether this has unintentionally discouraged investors from performing their own due diligence. the underestimation of risk for structured credit securitisations has now come under greater scrutiny. there has also been increased debate over the cyclicality impact of basel ii. the effectiveness of the supervisory review process in ensuring that additional capital buffers are provided by banks for risks not fully captured under pillar 1 of the framework has also been the subject of this review by authorities. the relative importance of these issues will be different for different countries, depending on the stage of development of the financial markets and the banking system, as well as the supervisory structure that is in place. among asia pacific countries, experiences with the implementation of basel ii have been varied. for emerging economies, basel ii has arguably a more far reaching impact. this is on account of several factors. firstly, many emerging economies continue to depend heavily on the banking system to finance economic activity. with a few exceptions, commercial banks are the main providers of credit in most emerging economies, accounting for an average of 90 % of total credit. this produces a higher correlation to the economic sectors where the implications on the banking system could result in significant disruptions to credit supply which could in turn affect economic activity. secondly, the more advanced approaches of basel ii are calibrated to the environment of the g10 countries, with significant acceleration of capital charges as the probability of default ratings deteriorate. to the extent that this inappropriately amplifies economic cycles by inducing the systemic misperception of risk in emerging economies, this can exacerbate a credit crunch during periods of weak economic performance. thirdly, the anticipation of lower regulatory capital

theory and practical policy, it was gradually recognised that there is no trade - off between inflation and unemployment in the long term. in the early 1980s, many countries again focused on the need to restore confidence in the nominal anchor. in norway the shift in policy took place in 1986. following the last devaluation of the krone in 1986, economic policy was oriented towards securing confidence in the fixed exchange rate system. a fixed exchange rate was an intermediate target for achieving low and stable inflation. the fixed rate policy was abandoned in 1992, and the experience of the latter half of the 1990s demonstrated that monetary policy cannot fine - tune the exchange rate. norges bank therefore placed increasing emphasis on low and stable inflation. after almost two decades of high inflation, the rise in prices stabilised in many countries in the 1990s. at the beginning of the 1980s, annual inflation in industrial countries was about 13 per cent. in the course of the following decade, it fell below 2 per cent. monetary policy in other countries the formal framework for monetary policy varies somewhat across countries. inflation targeting is the norm in small and medium - sized open economies, and has been introduced in more than 20 countries. new zealand was the first to do so – in 1989. canada, sweden, australia and the uk followed suit in the 1990s. a number of countries that have not formally introduced inflation targeting have nevertheless oriented their monetary policy towards low and stable inflation in practice. among them are the euro area countries and the us. nor does the bank of japan have a formal inflation target, but since 9 march this year its monetary policy has been oriented towards achieving an inflation rate of between zero and two per cent in the medium and long term. in a number of countries, price stability is ranked above managing output and employment. examples are the uk and the euro area. price stability is regarded as a condition for monetary policy contributing to stable output and employment. in the federal reserve act, in the us, the objectives of full employment, stable prices and moderate long - term interest rates are given equal weight. but the federal reserve states itself that in the long term stable prices are a condition for sustained output and employment growth. the introduction of formal inflation targeting has been under discussion in the us for several years. the debate was rekindled with the appointment of ben s. bernanke as chairman of the federal reserve on 1 february this year. he has argued that quantifying the concept of long - term price stability may reduce the uncertainty