requirement and have required the banks in india to maintain capital charge for market risks on their ‘ available for sale ’ portfolio also with effect from march 2006. we continue to see considerable merit in pursuing a policy of gradualism in harmonising our regulations with the global standards. basel ii : benefits and major issues the complexity of basel ii arises from several options available and these are well known. consequently, many of the countries which have voluntarily adopted basel i also view these issues with considerable caution. compared to basel i, the revised framework, namely basel ii, is considered to be highly complex, making its understanding and implementation a challenge to both the regulatory and the regulated community. dangers of premature adoption since the revised framework has been designed to provide options for banks and banking systems worldwide, the basel committee on banking supervision ( bcbs ) acknowledges that moving toward its adoption in the near future may not be the first priority for all non - g10 supervisory authorities in terms of what is needed to strengthen their supervision. each national supervisor is expected to consider carefully the benefits of the revised framework in the context of its domestic banking system when developing a timetable and approach for implementation. the views of the executive board of the international monetary fund clearly indicate that premature adoption of basel ii in countries with limited capacity could inappropriately divert resources from the more urgent priorities, ultimately weakening rather than strengthening supervision. they agreed that countries should give priority first to strengthening their financial systems comprising institutions, markets and infrastructure and focus on achieving greater level of compliance with the basel core principles. against this background, the imf has cautioned that fund staff should avoid conveying the perception that countries will be criticised for not moving to adopt the basel ii framework. they have urged staff to be completely candid when asked to assess countries'readiness to move to basel ii and to indicate clearly the risks of moving too quickly and too ambitiously. varying implementation plans across jurisdictions in asia - pacific the implementation plans in regard to basel ii, as far as asia - pacific is concerned, may be broadly divided into three ranges – one, where the simplest approaches and the most advanced approaches are available at the time of first implementation ( australia, korea, singapore, new zealand ) ; second, where the simplest approaches are available initially and at least one of the most advanced approaches is available within a year or two thereafter ( hong kong, japan, indonesia, thailand ) ; and third, where the simplest approaches are allowed initially and the date of availability of the most advanced approaches is yet to be

these policies are prolonged long beyond repairing markets – and there the benefits are much less clear. let me list 4 concerns : 1. is ump the right tool once the immediate crisis is over? does it distort behavior and activity so as to stand in the way of recovery? 2. do such policies buy time or does the belief that the central bank is taking responsibility prevent other, more appropriate, policies from being implemented? put differently, when central bankers say, however reluctantly, that they are the only game in town, do they become the only game in town? 3. will exit from unconventional policies be easy? bis central bankers ’ speeches 4. what are the spillovers from such policies to other countries? for reasons of time, let me focus on the last two. exit the macroeconomic argument for prolonged unconventional policy in industrial countries is that it has low costs, provided inflation stays quiescent. hence it is worth pursuing, even if the benefits are uncertain. central bankers such as governor stein have, however, raised concerns about financial sector risks that may build with prolonged use of unconventional policy. one reason is that leverage may increase both in the financial sector and amongst borrowers as policy stays accommodative. one channel seems to be that a boost to asset liquidity leads lenders to believe that asset sales will backstop loan recovery, leading them to increase loan to value ratios. when liquidity tightens, though, too many lenders rely on asset sales, causing asset prices and loan recovery to plummet. because lenders do not account for the effects of their lending on the “ fire sale ” price, and subsequently on lending by others, they may have an excessive incentive to build leverage. leverage need not be the sole reason why exit may be volatile after prolonged unconventional policy. as feroli et. al. argue, investment managers may fear underperforming relative to others. this means they will hold a risky asset only if it promises a risk premium ( over safe assets ) that makes them confident they will not underperform holding it. a lower path of expected returns on the safe asset makes it easier for the risky asset to meet the required risk premium, and indeed draws more investment managers to buy it – the more credible the forward guidance on “ low for long ”, the more the risk taking. however, as investment managers crowd into the risky asset, the likelihood of possible fire sales increases if the interest rate environment turns. everyone may dump the