to the rest. a line at the top of the picture read as follows : “ for credit, come tomorrow. ” i was six years old or thereabout when i had first read it. and i had not then understood what it meant and why was this colourless picture glued against the wall side by side with a mirror in the full view of all the barber ’ s clients. as i grew up, i had slowly started to get the gist of this line. years later, i had asked a school friend about the barber who was not around anymore. i was told that the barber had gone out of business because he had given up the idea of, “ for credit, come tomorrow. ” i had then asked myself the question, “ what if the principal business of an enterprise is not to give haircuts to people but to extend credit out of other people ’ s money? ” once i joined the bank of mauritius as an economist in the mid - 1970s, i got a very wide angle view and a fullscale appreciation of the importance of capital for any enterprise, more specifically for financial institutions. regulators have long realised that capital is the backbone of a bank ; it absorbs losses and it can prevent bank failures. what the capital base of a bank should be is a grand question. the determination of the right amount of capital has always been a very demanding exercise. why is it so? it is primarily because of credit and the risks associated with it. by definition credit is the disposition of one person to trust another. it is singularly varying. in the 1950s, the us federal reserve used the analysis of bank capital to bring up a formal evaluation basis for banks ’ capital adequacy. this approach was dropped in 1970 as it proved 1 / 5 bis central bankers'speeches difficult to precisely determine the adequate quantum of bank capital in the face of the growing complexity of the system. the long period of financial repression, that is, direct control on bank lending to the private sector and force - feeding banks with government debt instruments had made the core business of commercial banks safe between the mid - 1930s and the early 1970s. central banks ’ function of maintaining financial stability by way of regulation and supervision had atrophied. questions were vigorously set as to how monetary policy could be better applied to forestall booms and busts. the collapse of the franklin national bank of new york and the collapse of the infamous bankhaus herstatt in 1974 had turned out to

basic parameters of basel i unchanged, basel ii aimed at ensuring that the regulatory capital reflected actual risks banks were taking. in other words, basel ii dramatically altered the system for risk - weighting of assets. it, of course, goes to say that basel ii moved away from compliance - based supervision to a more complex risk - based supervision. basel ii thus assigned a pivotal role to the players, that is, banks and external credit rating agencies, in the workings of risk assessment. banks were allowed, under the foundation internal ratings - based approach, to use their own models for risk assessment by using metrics set by the supervisors. i am sure most of you here must be aware that basel ii requirements were more elastic and institution - specific. they brought on the scene a risk management regime whereby banks could opt for either the standardised approach with its fine - grained risk categories linked to external credit ratings or the internal ratings approach where sophisticated mathematical models could be used. the years following the implementation of the basel ii accord saw a surge in the reliance on various models by large international banks. 2 / 5 bis central bankers'speeches the 2008 financial crisis revealed weaknesses in basel ii. the risk - sensitivity of basel ii capital requirements were questioned as they were found to have exacerbated pro - cyclicality with deepened likelihood of crisis. the need to effectively address risks associated with securitization, counterparty credit exposure arising out of derivatives and securities financing was palpably felt. basel iii was thus agreed between 2010 and 2014 ; it seeks to increase the quantum and quality of banks ’ capital beside introducing liquidity standards and macro - prudential measures for preventing the build - up of systemic risk. with a view to giving a broad perspective of what is required of regulators in today ’ s world, let me give you a broad brush stroke of what basel ii and iii are made of. basel ii, whose focus was mainly on refining the risk sensitivity of assets, encompasses the following : 1. standardised approach to credit risk ; 2. foundation internal ratings - based approach to credit risk ; 3. advanced internal ratings - based approach to credit risk ; 4. basic indicator approach to operational risk ; 5. standardized approach to operational risk ; 6. advanced measurement approach to operational risk ; 7. standardized measurement method for market risk ; 8. internal models approach to market risk ; 9. pillar 2 which is the supervisory review process, and 10. pillar iii which is market discipline. basel iii has enhanced the