is not the only option for addressing increased risks in a bank. although capital serves the purpose of meeting the unexpected losses, capital is not a substitute for inadequate control or risk management systems. banks should strive to create sound internal control or risk management processes. from the point of view of analyzing risks and assigning capital against those risks, pillar 2 is much more inclusive in the sense that it not only captures the risks covered under pillar 1 ( credit risk, market risk and operational risk ) but also the credit concentration risk which is not fully captured by pillar 1. in addition, pillar 2 must address the risks not captured by pillar 1, such as, interest rate risk in banking book, liquidity risk, business risk, strategic risk and reputation risk. the business cycle effects which represent factors external to the bank are also to be covered under pillar 2. india has implemented the risk based supervision ( rbs ) framework which evaluates the risk profile of the banks through an analysis of 12 risk factors viz, eight business risks and four control risks. the eight business risks relate to : capital, credit risk, market risk, earnings, liquidity risk, business strategy and environment risk, operational risk and group risk. the control risks relate to internal controls risk, organisation risk, management risk and compliance risk. the rbs framework is currently undergoing further refinement. the rbs methodology can be used as a starting point for the implementation of pillar 2 proposals in india. pillar 3 - market discipline regulation is not and cannot be an alternative to market discipline. actually, market discipline supplements regulation in the sense that monitoring of the banks and financial institutions is not only carried out by the regulators but also by the markets, which includes other banks & financial institutions, customers, depositors, subordinated debt instrument holders, rating agencies etc. the discipline imposed by the markets can be as powerful as the sanctions imposed by the regulator. reserve bank of india has been advising banks to make disclosures in order to enhance market discipline. although banks in india make several disclosures in their notes on accounts to the balance sheet, for implementing pillar 3 more work requires to be done. the banks are required to have a formal disclosure policy approved by their board of directors highlighting what disclosures the bank will make and the internal controls over the disclosure process. the banks have also to implement a process for assessing the appropriateness of their disclosures, including validation and frequency. the reserve bank of india may consider imposing a penalty, including financial penalty, in

to a risky environment. corporate governance of banks is an essential element of sound regulatory architecture. the regulatory response is an imperative of ethics. is the business of business just business? milton friedman had a view that corporate executive ’ s responsibility generally will be to make as much money as possible while conforming to their basic rules of the society, both, those embodied in law and those embodied in ethical custom. the objective is the maximisation of consumption and production. “ the business of business is just business ”. this is not an axiom one can concur with. if you consider the business of companies historically, it has embraced colonialism and slavery! so the element of ethics must always underlie necessity of both business personal and organisational conduct. formal codes of ethics while many of the governance issues that organizations face are not new, the environment in which they confront them today is more challenging than ever. many companies are adopting legal compliance mechanisms which address ethics or conduct issues in formal documents. rbi ethics @ work the rbi, with the assistance of professor dipankar gupta, who is also a director on the rbi central board, has formulated a code of conduct for itself, which we term ethics @ work. you may well ask, why an ethics manual and i quote from the ethics manual “ an ethics manual promotes : solidarity among colleagues ; pride and commitment to working for the organization ; personal aspirations that are aligned with organizational goals. ” the ethics manual is expected to define and clearly set out what will be deemed to be acceptable behaviour. we hope that this will promote and ensure high standards of practice and also establish a benchmark for self - evaluation lay down the mainframe for professional behaviour and responsibilities enable a sense of occupational identity ideals we can clearly ascribe to. the written code of ethics will be useful for socialization of our new recruits in the organization, serve as an implement of employee training. be a benchmark transgression of the same, will invite disciplinary action. it will also help in dispute and conflict management. the moral dilemmas, the approach - approach conflicts will be more easily resolved with reference to the touchstone of the code of ethics. it clarifies the organisation ’ s expectations from the employee and vests on enshrining complete transparency. this is a formal code of business conduct and ethics, to be ascribed to and strictly adhered to by all employees. it is morally incumbent upon them to do so. bis central bankers ’ speeches some organisations also have