differs from country to country in these regions. what is, however, different from the south asian and some of the middle income east asian economies, is that some of these economies, such as japan, hongkong, taiwan, singapore and korea have large financial sectors, given their state of development, and have proceeded with a swifter adoption of irb approaches, almost consistent with the implementation schedule of basel ii. but again, the process of implementation is dependent on the state of technology prevalent in the banks in these countries. china has been pursuing a very cautious and steady approach in respect of basel ii, and it plans to put in place first of all international accounting systems and then a robust risk management system before it graduates to basel ii. let me now turn to the issues, challenges and the implications of basel ii. in some senses basel ii is a revolution in regulation and risk management. according to the kpmg international whitepaper, depending on its current risk management processes, size, customers, portfolio and markets, a particular bank is likely to experience varying effects of basel ii on at least four levels, namely internal processes, customers, businesses and global interaction. however, it is not just the banks that will be impacted in the basel ii environment. i believe this accord would also affect the behavior of a number of other industries, including credit rating agencies, external auditors, banks ’ customers, regulators and finally the corporate sector at large. what are some of the key challenges pertaining to the basel ii accord? the list that i am about to cover is by no means an exhaustive one. first of all, i would like to underscore that there is an absolute need to instill a well functioning, integrated and efficient risk management system at the macro level by the supervisors and by the institutions. second, we need absolute accuracy and reliability of information. third, we need asymmetry in supervision ; we need to recognize that the markets are imperfect. fourth, industries face pro - cyclicality which needs to be recognized and due consideration needs to be given to incorporating this phenomenon. also, there are serious implications for access to finance for certain sectors, groups and the disadvantaged segments of the population, given that there is going to be a huge operational cost for the banks and the regulator with the implementation of basel ii. and lastly, there will be cross - border challenges for not only pakistan but a number of other jurisdictions, including the developed countries. let me first briefly touch upon the risk management aspect

includes an acknowledgement of the variety of risks and treatment of those risks. the second pillar is the supervisory review, and the third, market discipline. all the three pillars complement and mutually reinforce each other. i would now like to turn to discussing briefly where i think some of the important regional economies are in terms of their preparation for basel ii before i conclude by discussing the issues and the challenges for its implementation. let me first talk about pakistan. whereas the state bank of pakistan has chalked out a roadmap for the transition of the banking system to this new capital regime, we intend to, like so many other economies, first adopt the standardized approach to credit risk and operational risk from january 1, 2008 and then move forward with the adoption of the internal ratings based ( irb ) approach from january 1, 2010, subject to due diligence of the banks with international presence. once sbp is satisfied that commercial banks have the appropriate models and risk management capacities, permission will then be granted for them to proceed with the irb approach. with respect to this game plan, the first phase of a parallel run involving relatively simple approaches has already taken off from july 1, 2006 and will continue for one and a half year. similarly, the second phase for the adoption of advanced approaches will begin in january 2008 and will last for two years. the transitional period is expected to provide the banks and the supervisors, hopefully ample time to fine tune and strengthen their systems, and hone their technical and human resource capabilities. among others, we rely on ibp to help in this process. irb approaches present an incentive to all banks, including pakistani banks, to economize on capital. the large banks are expected to become more inclined towards this. however, as i stated earlier, state bank would like to ensure adequate preparedness of the industry before we endorse the move towards irb, and before we declare victory on this important subject. all other countries of south asia like india, bangladesh, sri lanka etc. have issued their plans along similar lines. there are, of course, some differences regarding the pace and sequencing of the timetable depending on financial conditions and the type of banking activities in these countries. east asian countries, including malaysia, indonesia and the philippines, which are broadly implementing initially the simple approaches followed by a gradual transition to irb approaches, have adopted their own course, depending on the prevailing situation. i know also that the extent of adherence to the existing regulatory framework