the financial system, the higher would be the demand for governance as regulation and supervision cannot cover all risk elements in their supervisory processes. 1. 3 the next critical pillar or imperative is risk management ; i. e. identification, assessment, continuous monitoring of risks ( real or hypothesized ) and risk mitigation, while maximizing returns. in financial business, risk can emanate from many areas. the wellknown risks are credit, liquidity, market, operational and human capital risks. there are several other risks, such as cross - border product risks, illiquidity risks etc. the new and complex products that are being offered by foreign financial markets or institutions can have cross - border risks as their distribution can bring in serious contagion risks across global markets. most financial institutions do not view equity as risk capital. in banking, risks must include situations of drying up of liquidity. a case in point is the northern rock episode in which the bank exposed itself to the illiquidity risk. the need to bring in new capital to cover illiquidity was not given adequate attention by northern rock. such risks should also be analysed by banks and financial institutions and include them in their risk management framework. ignoring this risk or not taking action to mitigate can be construed as the “ moral hazard ” we often speak about. moral hazard leads banks and financial institutions to expect the public to rescue their institutions and continue to run on an illiquid basis, until they hit serious drying up of liquidity. if managed properly, risks can be confined to the institution concerned. if not, any one of these risks or a combination can affect a group of financial institutions or the entire financial services industry thereby creating a systemic risk. as martin wolf, a well known financial times journalist said “ the financial services industry is famous for privatizing its gains and socializing its losses in that it expects the society at large to rescue them through public funds ”. 1. 4 the third component is compliance, which relates to laws and regulations, internal policies and procedures. literally, compliance means obedience or dutifulness, but it has broad scope and various interpretations. compliance generally covers matters such as observance, application of standards of market conduct and managing conflicts of interests. more recently, compliance has expanded its scope to cover specific areas such as operations of money laundering and terrorist financing and even tax laws that are relevant to financial services. in brief,

free movement of goods etc. the underlying argument is that, if a country is self - sufficient in all its requirements, it can manage its affairs even in the worst conditions. in contrast, a country dependent on others, will have to follow a complaisant foreign policy so as not to antagonize them. it does not enjoy the freedom which self - sufficient countries have in charting their domestic and foreign policies based on national ideologies. raymond lim, singapore ’ s minister for transport and second minister for foreign affairs, referred to this limitation in the context of a country dependent on global trade, as “ … …. not having the luxury of pursuing a foreign policy of abstract ideals ”. it is, however, to be noted that such freedoms should not necessarily imply higher welfare. this is because the level of welfare of a country is dependent on the quantum of wealth created and the level of real consumption and quality of life of its people. yet, the critiques of the services sector based growth have often voiced these concerns and labeled such growth as illusive. the examination of the economic history of countries shows that there is a set pattern of the transformation of the structure of economies. the pattern has been from agriculture to industry and then to services. this trend has been equally observed in both developed and developing economies alike. in the first stage, which covers the pre - industrial era, the almost entirety of the economic value was created by agriculture. with fast industrialization, the source of a country ’ s economic value got shifted to industry. the wide - spread development of markets, first internally and then globally, led to the creation of a new growth sector in the form of services. this is because, the existence of an efficient services sector was necessary for further growth in both the agriculture and industry. when the natural resource endowment of countries set an effective limit on further expansion of agriculture or industry, the vacuum was filled by a sudden boom in services. good examples of this phenomenal development from the modern era are hong kong and singapore. both these countries have been able to create wealth through rapid industrialization supported by a strong and dynamic services sector. “ staying relevant in the midst of globalisation ”, experience singapore, july, 2006. p. 12 throughout its history, sri lanka has been a beneficiary of being an active partner in global trade. in addition to be located on a very convenient naval route, conducive policies adopted by successive rulers have been a booster