key shock absorber in banking operations. for that, simple risk mitigation measures in basel i were not considered adequate. therefore, a risk sensitive capital requirement and risk mitigation practices were combined in a more meaningful manner. banking is a highly leveraged and risky operation and it is imperative to mitigate risks. with or without the basel capital accord, banks and financial institutions must find ways and means to identify risks, assess them and put in processes and procedures to deal with such risks. risk mitigation is not new to bankers all over the world and same is true for sri lanka. most of you who are sitting here this evening are professional bankers of high calibre. banking is like swimming across waters. bankers know how to swim. regulators need not teach you how to do it. we can warn you of bad weathers, choppy waters, high - tides and currents that can pull you down, but we cannot swim for you. that ’ s why the regulators expect the shareholders, boards of directors, ceos, senior management and all employees of banks to understand potential risks of their own operations and be ready to deal with them if such risks were to occur. therefore, all bank officials individually and collectively are responsible for risk mitigation. basel ii seeks to balance leveraging internal risk systems with supervisory prudence. it is also a reflection of the rapid change in financial market innovations, advances in risk management and enhanced supervisory approaches. in essence, we expect from the banking profession to objectively and reliably identify risks, evaluate them and come up with appropriate risk mitigation measures. many enterprises fail due to unforeseen risks because they have not paid attention to risk mitigation. when it comes to banking and financial institutions, we need to be much more careful, because they are the custodians of other people ’ s money. flexible approach by cbsl in the process of adopting basel ii, cbsl will endeavour to adhere to the basel criteria as far as possible and to retain the spirit of the accord. however, certain modifications have been made and will also be made in the future to suit local conditions. since basel ii provides a menu of approaches for the measurement of risk to suit the level of sophistication of the banks, it is suggested that the banks in sri lanka adopt the simplest approaches, initially. credit risk for the measurement of credit risk under pillar i, we have requested banks to adopt the standardised approach, which

been issued and they are expected to comply with them. usa ’ s umbrella supervisory provisions are included in the graham leach – bliley act. in sri lanka, we still have not come to terms in dealing with a consolidated or a group - wide financial conglomerate. x. proper definition of capital how do you identify new capital instruments such as hybrid capital and perpetual debentures? should it be tier i or tier ii? one needs to be cautious here as hybrid capital can disappear given its derivative nature. currently, there is a wide disparity between the basel ii preparation processes in europe, usa and asia. the issue of treating hybrid capital is significant as many asian banks are moving towards synthetic securitization in producing hybrid capital and exposing their portfolios to credit risks, especially when equity participation has been synthetically securitized. the basel committee has now decided to pay greater attention to give a standard definition for capital, hopefully before the implementation begins in 2008. international comparison many countries have not tackled all these issues associated with basel ii, but there is notable progress ; some slowly, some moderately and some at a faster phase. for example, the development bank of singapore ( dbs ), the largest bank in singapore and the 5th largest group in hong kong with universal banking, providing full range of products and services for consumer, small and medium enterprises, corporate banking, investment banking, fund management, trade finance, cash management, securities and treasuries has taken a keen interest over the last 2 - 3 years in meeting the basel capital adequacy requirements and to implement the same in 2008. at present, it has a tier i capital ratio of 10. 1 % and a total capital ratio of 14. 1 %. the main philosophy behind the dbs ’ s approach is a balanced and enlightened one based on the management of capital. the approach is led by the dbs ’ s board and senior management and it is embedded within business of a whole group. it is constantly reviewed by supervisors and communicated to the markets. the dbs group has implemented a large - scale basel ii governance structure at several levels which is a success factor. its governance structure is based on dbs ’ s credit model risk policy which sets out the minimum principles and standards for the oversight control and management of all credit risks models in the group and the roles and responsibilities. several committees have been set up at the board level and at group credit level to identify and manage risks. in terms of