as the crisis is not fully behind us, several lessons are clear. first, the received wisdom is that prevention is better than cure and that central banks should take countercyclical policy actions to prevent build up of imbalances. second, a consensus is emerging around the view that central bank purview should explicitly include financial stability. third, there is growing acknowledgement that financial stability needs to be understood and addressed both from the micro and macro perspectives. at the micro level, we need to ensure that individual institutions are healthy, safe and sound ; we need in addition, to safeguard financial stability at the macro level. some of the significant actions already taken to bolster the resilience of the international financial system include the enhancement of the basel ii capital framework, particularly with regard to trading and off - balance sheet securitisation activities of banks, setting strong risk management standards for banks and financial institutions on governance, management and disclosure of liquidity risk and stress testing, integrating sound compensation principles in the basel capital framework, introducing central counterparties for derivatives trading, developing new accounting standards to enhance the consolidation of special purpose vehicles, making transparent banks'relationships with such entities and the issue of internationally agreed principles for the oversight of hedge funds. beyond actions already taken, work is under progress on several initiatives to strengthen stability and i want to highlight some of the more important ones. • strengthening the regulatory capital framework : recognising that the banking sector entered the crisis with an insufficient level and quality of capital, the basel committee on banking supervision is developing concrete proposals to strengthen the quality, consistency and transparency of the capital base of banks. • developing a global liquidity standard : recognizing that illiquidity of banks can threaten its solvency as much as inadequate capital and also adversely impact the stability of the financial system, work is under way to develop an international framework for liquidity risk regulation and supervision. • strengthening the supervision of cross - border entities : given the growing number of cross - border financial conglomerates and their role in transmitting risk, arrangements are being put in place for cross - border cooperation among regulators and for establishing supervisory colleges. • strengthening the macroprudential framework : regulation has typically focussed on individual institutions, which as has become evident now is necessary but not sufficient. it is equally important to monitor systemic stability. the basel committee is now developing macroprudential regulations to address procyclicality and systemic risk issues. • reviewing international accounting standards : there is

how much to tighten and when, is more a question of good judgement rather than analytical skill. this judgement skill is the one that central banks, especially in developing countries such as india, need to hone as they simultaneously pursue the objectives of growth and financial stability. fourth challenge : reforming regulatory architecture as the lessons of the crisis emerge, central banks are vigorously reinventing themselves and almost all countries are reviewing their regulatory architectures. two key lessons are driving this change : first that the responsibility for financial stability cannot be fragmented across several regulators ; it has to rest unambiguously with a single regulator, and that single regulator optimally is the central bank. and second, that there is need for coordination across regulators on a regular basis and for developing a protocol for responding to a crisis situation. i want to address three issues in the broad area of regulatory architecture. the first issue has to do with regulatory coordination. in india, we have a host of regulators in the financial sector – rbi, sebi, irda and pfrda. in order to facilitate coordination between them, there is a high level coordination committee on financial markets ( hlcc - fm ) comprising all the regulators and the finance secretary. while the governor of the reserve bank chairs the hlcc - fm, the ministry of finance provides the secretariat. the hallmark of the hlcc meetings, and one that adds most value to them, is that the meetings are informal and there is free exchange of positions, views and opinions. there is a view that the hlcc - fm should be given a formal structure. while a formal structure will have the merit of enforcing accountability, the flip side is that it may make the forum excessively bureaucratic and detract from its other value adding features. this is an issue that we must debate further. one area where the hlccfm could have a more defined role relates to oversight of large financial conglomerates. the second issue relating to regulatory architecture with relevance for financial stability has to do with changes, if any, warranted in the regulation of financial markets. two recent reports, both influential, one by percy mistry on mumbai as an international financial centre and the other by raghuram rajan on financial sector reforms, have recommended that regulation of all trading of financial products and instruments be brought under sebi. we need to seriously debate the advisability of such a unification. currently, the arrangement for regulation of financial markets is as follows. apart from banks