, we are aware that our effectiveness as supervisor of banks is as important as the skills available in the banks to implement basel ii. hence, we have invested heavily in enhancing our supervisory capacity to keep up with the task. this we have done continuously and in line with international best practices. second, this new framework is relevant to our aim of promoting and maintaining monetary and financial stability in the country. as i have stated earlier, basel ii strengthens the link between regulatory capital and risk management as it will help us ensure that banks will maintain capital appropriate to their risk - taking activities. banks are also expected to properly assess and manage the risks. moreover, banks would be required to disclose pertinent information necessary to enable market mechanisms to complement the bsp ’ s supervisory oversight function. these intensified efforts to deepen and accelerate the evaluation, measurement, and disclosure of risks under basel ii are expected to strengthen the financial system. in this regard, risk management is consistent with the greater transparency and forward - looking nature of inflation targeting ( it ), which is the monetary policy framework that the bsp has been using since 2002. as in the it approach, a wider set of information and disclosure requirements are used to enhance risk management. there is also more emphasis on anticipation of risks over a longer horizon and on greater sensitivity to market views. as a major channel for monetary policy, a stable financial system is a necessary condition for inflation targeting to work well in this country. let me now pose some questions that our experts may want to consider for discussion. 1. what are the key challenges encountered by commercial banks in their preparations? 2. what are the implications of the new supervisory framework on intermediation activities of banks and their financial stability, government borrowing, investment and capital flows, and the conduct of monetary policy? 3. will basel ii increase procyclicality as there are arguments that adopters may tighten credit standards in response to rising capital requirements in the event of a deterioration in credit conditions? will current developments such as reserve accumulation and rising liquidity in asia affect the adoption of basel ii in the country? 4. will the change in the supervisory framework lead to further restructuring of the banking system through mergers and consolidations? 5. how extensive will be its impact on bank lending for the country, and for developed and emerging economies? the implementation of basel ii underscores the bsp ’ s commitment to deep and far - reaching reforms to promote the stability and soundness of the banking system.

and aig provided an example of such critical players ; key custodian banks or large correspondent banks play a similar role. let me add to this, that a particular institution might not only be critical to the functioning of financial markets or market infrastructures because other institutions are financially exposed to it, but also because other market participants rely on the continued provision of its services. for us as policymakers this is a crucial point, as the impact of a failure of a given market player also hinges on the ability of the financial infrastructure to support its resolution and to facilitate the orderly unwinding of positions. so let me now turn to the specific application of network theory to payment and financial systems. 3. network analysis applications to payment and financial systems research in network theory has received relatively little attention in economics until the last decade. therefore, i am delighted to see that this literature is growing and today ’ s workshop clearly illustrates its growing importance. the papers from today ’ s program highlight how direct and indirect interlinkages and contagion dynamics among financial institutions, as well as among institutions, markets and infrastructures, can be significantly influenced by three important network characteristics : first, the degree of connectivity, second, the degree of concentration and third, the size of exposures. we see from the papers that network analysis can help to better understand the interlinkages and systemic connections in many different segments of the financial markets, ranging from money markets to networks of credit default swaps ( cdss ), and from largevalue payment systems to cross - sector exposures in the euro area financial system. we see that this research gives important insights into the various amplification mechanisms in the global web of financial connections. such amplification very much depends on a number of factors, such as the size of aggregate macroeconomic shocks, asset price volatility, liquidity risk and financial leverage. moreover, network analysis can be used to simulate the effect of credit and funding shocks on banking and financial stability by taking into account – beyond the direct balance sheet exposures – also the impact of contingent claims and credit risk transfer techniques. see m. propper et al. ( 2008 ), “ towards a network description of interbank payment flows ”, dnb working paper no. 177, for an analysis of dutch payment flows ; c. puhr and s. w. schmitz ( 2009 ), “ structure and stability in payment networks – a panel data analysis of artis simulations ” in h.