##bfis. with the commencement of operations of the central bank of sri lanka in 1950, the bank supervision department was set up, and has since been entrusted with the responsibility of supervision and examination of banking institutions. the scope of functions of the bank supervision department was extended with the enactment of the control of finance companies act, no. 27 of 1979, to include the supervision of nbfis. the bank supervision department was entrusted with the responsibility of providing the public with the required confidence in the financial system and protecting the interests of depositors. in order to achieve this objective, the department was charged with the duty of continuous supervision and periodic examination of all banks and nbfis in sri lanka. during the period 1986 – 1988, several finance companies showed some distress due to mismanagement of funds. this required the central bank to bring in swift reforms to maintain overall stability and efficiency of the companies in the non - bank financial sector of sri lanka. accordingly, the finance companies act, no. 78 of 1988 was enacted and the department of supervision of non - bank financial institutions was established at the central bank in late 1988. however, with the continuous and rapid development in the nbfi sector, the regulations effected by the 1988 act became futile, despite the amendments made in 1991. ambiguities in the supervisory powers in respect of the licensed finance companies and inadequate regulatory framework to deter unauthorised deposit taking persons and institutions that existed in the act compelled the authorities to introduce a more effective legislation. accordingly, finance business act, no. 42 of 2011 was enacted addressing all prevalent concerns and lacunas of the finance companies act. with regard to the banking sector, the banking act was also amended from time to time, inter - alia, to introduce more prudential standards such as the amendments made in 1990, 1995, 2005 and 2006. these banking laws and regulations are regularly updated in line with the best practices in the industry, both locally and internationally, covering requirements, principles and guidelines issued by the “ basel committee for banking supervision ” of the bank for international settlements ( bis ). basis 3 : international experience on financial sector consolidation ladies and gentlemen, i would like to share with you the global experiences of financial sector consolidation. in formulating a consolidation model for sri lanka, we studied several consolidation models of other countries, as they were useful for us to fashion our programme in an effective manner. in asia, following the asian financial crisis, many countries consolidated their financial institutions successfully

early to tell whether the changes on the financial markets have determined the end of “ credit cycles ”. y. altunbas, l. gambacorta and d. marques, “ securitisation and monetary policy ”, mimeo, may 2007. 4. 2 monetary policy and asset markets while the role of banks in monetary policy transmission is diminishing, other channels are gaining in importance. to the extent that financial innovation makes markets more complete and more efficient, actual and expected changes in official interest rates are readily transmitted to a wide range of financial assets. overall, the effects of policy decisions on financial markets are stronger and faster. a more immediate impact of monetary policy on a wide range of asset prices may have favourable implications, since it provides monetary authorities with a powerful instrument for affecting the economy. market expectations on future policy intentions move long - term rates and affect financing conditions, even before official interest rates are changed. the modification of asset prices affects consumption and investment decisions. if policy communication is effective, these changes may partly “ do the job ” for central banks. at the same time, unless we are suitably careful the consequences may be disruptive. policy actions that diverge from the pace expected by economic agents, which is built into long - term interest rates and other yields as well as into positions taken on the market, may upset markets, increase volatility and, in extreme cases, induce a simultaneous revision in positions, with potentially disorderly effects on liquidity and asset prices. the concern not to destabilize financial markets is one reason why many central banks have striven in recent years to reduce the uncertainty arising from policy decisions. they are paying more attention to proper communication of their objectives, strategies and, with different nuances and practices, future intentions. a trend to greater gradualism in policy action has emerged in all the main industrialized economies ( policy moves in excess of 25 basis points are now quite rare for major central banks ) partly in response to the greater uncertainty over the impact of rate changes on the financial markets. as the interplay between policy actions and market expectations gathers importance, we should also guard against the risk of what has been described by alan blinder as the “ dog chasing its tail ”. it is fundamental that we to avoid a situation in which financial markets look at the central bank and the central bank looks at financial markets, both losing sight of the underlying factors that determine inflation. in the eurosystem, we consider it