banks. bis central bankers ’ speeches 28. as i mentioned earlier, containing frauds means focussed action by all stakeholders, not leaving any flank uncovered. one of the flanks was the criminal investigations done by law enforcement agencies and bringing to book fraudsters soon after a fraud is committed. to facilitate this and smoothen the process of commencing the investigations the reserve bank has been working with the ministry of finance and coordinated actions have been initiated. fraud prevention 29. i have dwelt on loan frauds at length as they form a major portion of frauds reported by banks. however the aspects of continuous monitoring and timely action on the basis of any early warning signals apply equally well to other types of fraud like deposit frauds, cyber fraud, etc. 30. it is here that i am sure that adhering to the kyc norms and real time transaction monitoring, transaction analysis, centralized databases, etc. rigours will come in handy for banks. fraud risk and governance 31. it is when we think of the dynamic nature of frauds ’ landscape that we need to pay attention to certain systems and enduring values in a bank. without a strong system guiding the anti - fraud initiatives of a bank, the responses to quick changing fraud risks may end up being knee jerk reactions than the flexible and appropriate measures that are called for. this requires a look at the corporate governance in banks and board level ownership of the antifraud initiatives. 32. the board of a bank should be proactive in understanding the fraud risks facing the bank and also put in place a robust anti - fraud machinery. they should have a deep understanding of the institution ’ s strengths and weaknesses and be able to steer the institution in the right direction. for this they need to retain their common sense in the face of an information overload. as a famous saying goes, you can find out if a man is clever by his answers, but you can find out if a man is wise by his questions ( naguib mahfouz ). as another saying goes, the wise man doesn ’ t give the right answers, he poses the right questions ( claude levi - strauss ). 33. the board needs to ask the right questions. they need to assess the robustness of the internal controls, with each new threat detected and be in a position to get the data analysed in a holistic fashion. 34. our recent initiatives in separation of the post of chairman and managing director in banks is also aimed at giving the

and draw these down during downturns so as to be able to continue lending while absorbing losses. the underlying rationale is sound, but somewhat counter - intuitive. experience shows that markets demand that banks maintain higher capital and provisioning during a downturn to withstand higher risks. if markets continue with such expectation, banks would likely “ hoard ” capital and stop lending which will exacerbate the downturn. the communication challenge, therefore, is to educate the market on the basel iii notion of buffers and their manner of use so that these safeguards function the way they are intended to. 34. the second communication challenge under the proposed basel iii package comes from the “ comply or explain ” framework under which countries have the option to deviate from certain components of the package and explain why they have deviated. the concern really is that the market, known for its unfailing ruthlessness, will penalize any deviation, and the communication challenge for regulators is to persuade the markets to evaluate the country ’ s compliance based on the explanation. ( viii ) systemically important financial institutions ( sifis ) 35. the basel committee on banking supervision ( bcbs ) and the financial stability board ( fsb ) are currently engaged in devising a framework for regulating and supervising systemically important financial institutions ( sifis ). sifis, as is well known, were at the centre of the recent crisis. since they are “ too big to fail ” and “ too interconnected to fail ”, they had to be rescued at a huge cost to the tax payers. the international level work, currently in progress, is engaged in identifying ways to reduce the moral hazard of sifis, defining the criteria for their identification and designing differential capital and liquidity surcharge for them. 36. under the arrangement presently under discussion, sifis will be pre - identified on the basis of some defined criteria and subjected to graded prudential surcharges and other safeguards. these are intended to eliminate the moral hazard, reduce their systemic risk potential, and should it become inevitable, allow them to fail in an orderly manner. the intent “ post crisis reforms to banking regulation and supervision – think global, act local ”, inaugural address by dr. duvvuri subbarao, governor, reserve bank of india, at the ficci - iba conference on “ global banking : paradigm shift ” at mumbai on september 7, 2010. bis central bankers ’ speeches is