has been relatively insulated from the impact of the credit market turmoil, the sub - prime episode, in retrospect, provides several useful lessons for the banks as also for the banking supervisors all over the world. allow me to briefly touch upon some of the major lessons emanating from the episode. underwriting standards the episode has once again brought to the fore the imperative of observing prudent underwriting standards by the credit intermediaries. the traditional banking tools such as the loan to value ratio, debt service ratio ( particularly, after the initial “ teaser rates ” came to an end ), purpose of the loan, verification of documentary evidence of income and assets of the borrowers, and ongoing monitoring of the borrowers ’ affairs have demonstrated their continued relevance, despite rapid advancements in the financial technology and products. it is important to note that the products created through sophisticated financial engineering may not be sustainable over the long term if their building blocks are not underpinned by rigorous underwriting standards. risk transfer the risk transfer by adoption of “ originate - to - distribute ” models by the credit intermediaries needs closer supervisory attention. the episode has demonstrated that there was insufficient understanding of how complex structured products work, the nature of the risks to which the investors were actually exposed, and, in the case of risk transfer through securitisation, etc., where the risk ultimately resided, and indeed, whether any risk has really been transferred from the originators. liquidity risk there had been an insufficient recognition on the part of supervisors and banks of the close link between market liquidity ( ability to rapidly sell assets without impacting prices ) and an individual bank ’ s funding liquidity ( ability to raise funds from the market ). the recent credit turmoil has highlighted the importance, for both banks and supervisors, of considering market disruption scenarios as well as institution - specific scenarios in liquidity planning. this should also encompass the liquidity demands arising from off - balance sheet commitments, implicit or explicit, of the credit intermediaries. also, the assumptions underlying the liquidity contingency plans need to be realistic and not overly optimistic. valuation the recent market turmoil and resulting illiquidity has highlighted the importance of reliable valuations and transparency of risk exposures. some banks seemed to have used inappropriately optimistic valuation and modelling methodologies to determine the value of certain securitisation exposures, such as collateralised debt obligations ( cdos ) and residual interests. it has been demonstrated

financial market participants, media persons, entities regulated by the central bank, academics, financial markets analysts, rating agencies, international or multi - lateral bodies, etc. let me illustrate with a communication initiative that rbi took recently. the ombudsman scheme for banks was revised recently and hence, the objective was to inform the widest section of our population. a press release might not have fully served the purpose. so, a decision was taken to issue an advertisement – for which the content was indeed common but the languages differed. it was interesting to notice that while 17 leading english newspapers have a combined circulation of 6. 3 million and readership of 17. 9 million, the 15 leading hindi newspapers have a larger circulation at 8. 1 million and a far larger readership at 87. 0 million – that is, almost five times larger. in fact, 54 leading non - english newspapers in india have a circulation of 21. 4 million and a readership of 197. 2 million. this has been our target coverage for the latest effort in communication, recognizing that most of the targeted 200 million middle - class in india reads vernacular newspapers. there are several dilemmas faced by central banks while designing an appropriate communications policy. what should be communicated and to what degree of disaggregation, are one set of issues. the second set relates to : at what stage of evolution of internal thinking and debate should there be dissemination. the third set relates to the timing of communication with reference to its market impact. the fourth relates to the quality of information and the possible ways in which it could be perceived. thus, alleged incoherence or an element of ambiguity at times on the part of central bankers in explaining policies is as much a reflection of the complexity of the issues as it is of the differing perceptions of a variety of audiences to which the communication is addressed. in assessing the contribution of the media to the financial sector as a public good, i would distinguish among at least four types of effects. the first type may be characterised as the ‘ news effect ’, which would normally reflect factual or formal positions or events. in a sense, the media ’ s reporting would be faithful and non - controversial. a second type can be identified as ‘ rumour effect ’, and often rumours have a destabilising effect and in some cases have the potential to degenerate into self - perpetuating or self - fulfilling events. the rumour effect often results in unintended losses or gains and