during the expansionary phase since 2004, the rapid growth in housing and consumer credit was flagged as a concern and as a temporary counter cyclical measure, the risk weight applicable to these loans was increased by 25 basis points in october 2004. second, in the context of continuing high credit growth, the limitations of the prudential framework in capturing the ex - ante risks of procyclical nature of bank credit were explicitly recognized in october 2005 which triggered an across the board increase in provisioning requirement for standard assets. third, to counter the possibility of an asset bubble in addition to concerns about credit quality led to risk weight on banks ’ exposure to the commercial real estate ( cre ) and capital market being increased from 100 per cent to 125 per cent in july 2005. fourth, given the continued rapid expansion in credit to the commercial real estate sector, the risk weight on exposure to this sector was increased to 150 per cent in may 2006. fifth, the general provisioning requirement on standard advances in specific sectors, i. e., personal loans, loans and advances qualifying as capital market exposures, residential housing loans beyond rs. 20 lakh and commercial real estate loans was increased from 0. 40 per cent to one per cent in april 2006 and further to two per cent on january 31, 2007. reserve management the bis paper notes that large foreign exchange reserves expose central bank balance sheets to significant losses mainly from two sources : losses on holding of reserves due to exchange rate appreciation and carrying costs – the difference between the interest rate cost of funding the reserves and the return on foreign assets is the carrying cost of reserves. the bis central bankers ’ speeches guiding objectives of foreign exchange reserves management in india are similar to those of many central banks in the world – safety, liquidity and returns. in india, given that the domestic interest rates are higher than return on reserves, the carrying cost is positive. this cost has to be traded - off with the benefits associated with higher reserves in terms of confidence it provides to the market and serving as key ammunition to face crisis. the exchange rate movement of major currencies is exogenously given to any reserve manager. the reserve manager has to devise strategies so as to minimise the losses or gain from the movement in exchange rate. the foreign currency assets are invested in multi - currency, multi - asset portfolios as per the existing norms which are similar to the best international practices followed in this regard. the broad strategy for reserve management including currency composition

is sometimes a tendency by the authorities to try to solve all problems by more regulation. it is true that we could regulate away all the risks in the banking sector – but such regulation would hamper economic development. there must be a balance. thus for each regulation we introduce we must also conduct a fair analysis of its costs, also non - financial, as well as its benefits, also non - financial. i agree that this is not easy, partly since in most cases you will not find any clearly measurable indicators, but the process of conducting the cost / benefit analysis will in itself help you in your decision. supervision good regulation is closely linked to good supervision. supervisors must be able to build their work on a broad and relevant regulatory framework. supervisors must also possess the necessary powers and other prerequisites to conduct efficient work. there are at least four important aspects : first, the supervisory authority must have operational independence from industry as well as from politicians. these must not interfere in the operational decisions of the supervisors, e. g. to take remedial measures or to close banks. such decisions must be taken on purely prudential grounds. of course, the supervisors are still responsible for their actions and could be criticized afterwards, e. g. in parliament hearings, but they must be able to perform their operational duties independently. also the bank, its owners and management should be able to sue the supervisors for malpractice and they may receive compensatory payments. however, this should not stop an action started by the supervisor to deal with a presumed problem in the bank. the supervisory management and staff must also have reasonable protection should they be sued for their bona fide decisions taken as supervisors. in some countries the supervisors are harassed by frivolous lawsuits by bank owners, managers or other parties. even if the supervisor is in the end acquitted from any guilt, the process may take years. during this time the supervisor will be severely hampered in performing her job having to concentrate on her defence. such lawsuits will also reduce the willingness of other supervisors to take necessary supervisory decisions, since they are themselves afraid of being sued. a first line of defence is to take all major supervisory decisions in a collegiate fashion at the top level. thus only the agency such can be sued as an institution. nevertheless, should individual supervisors be sued, they must be provided assistance in the court proceedings, such as legal counsel and protection against any costs. of course, if the supervisor is finally found guilty