to the real sector is huge especially on the vulnerable segments of society. urban co - operative banks – the weak link the tightening of regulation over the banking and nbfc sectors saw the gravitation of risk to the lightly regulated urban co - operative banks ( ucbs ) which were under dual regulation of the rbi and the registrar of cooperative societies. the stock market crash in 2002 triggered a payments problem and it was found that the nexus between the broker and a large ucb ( madhavpura mercantile co - operative bank ) led to huge exposure to the broker and the bank collapsed. the systemic implication was that hundreds of small ucbs had exposure to this bank and the collapse of these banks would have been very disruptive though confined to a small region. the deposit insurance and credit guarantee corporation ( dicgc ) had to make a large payout to the collapsed bank under a restructuring package and averted the domino effect. but the madhavpura bank collapse led to erosion in public confidence and there were a series of ucb failures across the country. the immediate measures taken were to ban connected lending, exposure to share - brokers and inter - ucb deposits. the supervisory system – both on - site and off - site – was triggered and strengthened. in 2004, all new branch and bank expansion was stopped and a vision document was put out in 2005 which provided for a mou with the state governments to work out a way for non - disruptive exit of weak ucbs while simultaneously incentivising the growth of strong banks. subsequently various resolution options have been provided such as merger with or without support from dicgc, restructuring of liabilities, introduction of new capital - like instruments, and transfer of assets and liabilities. the ucb sector has seen a reduction in the number of weak banks from 725 to 496. 102 banks have gone out of the system through mergers and liquidation. dicgc has also strengthened its claim payments system to ensure that prompt relief is given to small depositors of failed banks. the lessons learnt were : • in dealing with a crisis arising out of interconnectedness, breathing time needs to be provided through liquidity injection. • reduce interconnectedness within the financial system as it leads to a “ moral hazard ” problem of “ too interconnected to fail ”. • the most lightly regulated entity in the financial system becomes the weakest link. the system's weakest link becomes a source of reputation risk and erosion in public

to the evolution of central bank monetary policies and operations over the past fifty years by taking the experience of the bank of japan as an example. in considering these changes, i have realized once again the difficulty of reaching a universal definition for such a unique organization as a central bank. today, instead of trying further to precisely define the central bank, i would like to talk about the three points i always highlight regarding the roles of a central bank. bis central bankers ’ speeches first, the most important role of a central bank is to provide a stable financial environment. sustainable economic growth tends to be achieved in a stable financial environment, even if that is not always the case. second, a central bank is an organization that plays its role through banking services. the specialized knowledge required of a central bank is not only knowledge of macroeconomics, but the wisdom to cover a wide range of activities. what is especially important for central banks is practical knowledge related to the details of the circulation of money. borrowing the phrase of one central banker i respect, this kind of knowledge is akin to the knowledge required by a good plumber. third, a central bank is an organization that needs to learn constantly from the changes in the world. earlier, i referred to a stable financial environment. the specific elements from which a stable financial environment is constructed also change with time. when price stability is achieved, many economic entities gain the confidence to take more risk. and, as a result, the stability of the financial system is compromised. this paradox of price stability is a good example of the need for the central banks to stay vigilant and keep learning in a changing environment. the staff members from the bank of japan will now explain the current central bank policies and operations of the bank. we would also like to take this valuable opportunity to learn from your experience and to deepen the ties of cooperation with you. thank you for your attention. bis central bankers ’ speeches