in bonds and other instruments. more important, banks ’ overall exposure would also include the non - funded exposures through credit substitutes and derivatives transactions which have grown significantly over the last few years. the continuing close linkage between the balance sheet of banks and of the corporate sector is, thus, clearly evident but only the nature of bank - corporate interaction is getting diverse and wider. a regulator ’ s comfort, therefore, lies not only in satisfaction about the quality of risk - management in the banks but also in the banks ’ level of understanding of risk - management by their corporate clients. in a sense, there is an element of delegated supervision to be exercised by the banks over the corporates. in this background, a closer ongoing dialogue across a wider spectrum in a spirit of partnership between the banks and the corporates adds to the comfort of the regulator. consistent with the theme of the conference, it is essential to ponder over the implications of the paradigm shift in global banking for the bank - corporate relationship. there are differences across countries in the role and functioning of banks vis - a - vis the corporates. for example, the anglo - saxon, the european and the japanese practices do vary though there is some evidence of elements of convergence with the emerging importance of trans - national corporates, global banks as well as financial intermediaries and increasing global financial integration. in the bank - dominated financial systems, such as in india, banks support corporates not only by direct lending, but also through their positions in money, debt, equity and derivatives markets. further, the industrial progress involves entrepreneurship, inevitably entailing some measurement and management of implicit risks. as the partners in progress, the banks are now called upon not only to manage the risks in lending but increasingly, to also assess the risks involved in the business to which they are lending. in this background, the case for a more intense dialogue, to the extent of some partnering, becomes stronger. let me conclude by complimenting the organisers for the excellent conference ; the participants who met me deeply appreciated the high quality deliberations at this truly global gathering. thank you. 3 / 3

in the upswing of a cycle which can cushion their losses during the downswing. we, in india, also adopted a similar approach through a calibrated increase in the risk weights and provisioning requirements during the period of rapid credit growth. however, the important difference was that our approach entailed sector - specific prescriptions. the objective was not so much to lean against the wind of rising asset prices but as a cautionary measure to contain the exposure of the banking sector to sensitive asset classes where rapid credit expansion was observed. it is commonly agreed now that the monetary authorities can ’ t avoid creation of bubbles by targeting asset prices. however, they should communicate their concerns on the sustainability of strong increase in asset prices and contribute to a more objective assessment of systemic risks. however, this is where there is a tension between the regulatory approach and the accounting rule makers who, view such counter - cyclical measures as being liable to be misused for profit smoothening and find it against their basic principles of transparency and reporting plain economic reality. according to the critics, dynamic provisioning is a form of “ cookie - jar accounting ” and has the potential for misuse. earnings management of an entity is not something which is acceptable to the accounting profession since there have been accounting frauds which involved cookie jars. a solution that is being considered for resolving this tension is to add a separate line, further down the balance sheet into shareholders ’ equity instead. the envisaged counter - cyclical provisions will, therefore, be made after the net profit has been arrived at and will be in the nature of an appropriation of profits. this would be called something like “ undistributable reserves ” and to my mind, should also not be allowed to be included in regulatory capital – even though the general provisions are allowed to be treated as a part of tier ii capital, subject to the prescribed caps. going beyond “ capital ” as you are aware, over the years, the definition of “ regulatory capital ” of banks has gradually widened to include certain innovative and hybrid forms of capital also. for instance, besides the tier i capital, banks are allowed to treat their external liabilities, meeting certain well defined criteria, as part of tier ii capital. a portion of capital towards securities business is also allowed in certain countries to be maintained as tier iii capital. the expectation was that yields on subordinated debt would reflect the perceived strength of the bank and would, therefore, function as an instrument of market discipline.