duvvuri subbarao : lessons from the financial crisis for monetary policy in emerging markets welcome remarks by dr duvvuri subbarao, governor of the reserve bank of india, for the l k jha memorial lecture given by prof john b taylor, mumbai, 24 february 2010. * * * on behalf of the reserve bank of india, i have great pleasure in welcoming prof. john brian taylor who will shortly be delivering the l. k. jha memorial lecture. we are very happy to welcome also ms. raye allyn taylor who has accompanied prof. taylor. i also want to acknowledge the family members of late dr. l. k. jha – smt. dipika maharaj singh, smt. and shri. aditya maharaj singh, trisha maharaj singh. many thanks to all of you for rejoining the rbi family. and of course, a hearty welcome to all our invitees who have made the time to come for this lecture. this year ’ s l. k. jha memorial lecture has special significance as it forms part of the platinum jubilee celebrations of the reserve bank. 2. dr. lakshmi kant jha was an outstanding economist and a distinguished civil servant. a member of the ics, he was governor of the reserve bank from july 1967 to may 1970. prior to his appointment as governor, dr. jha served as secretary to the prime minister. he headed the reserve bank during one of the most challenging phases of the indian economy. the country was shaken by food security concerns, and initiatives to redress this eventually resulted in the much celebrated “ green revolution ”. the reserve bank, under dr. jha, was an influential force in shaping these initiatives. the overall scarcity situation renewed the urgency for focusing public policy towards poverty reduction. this led to several path breaking policies, including the nationalization of fourteen major commercial banks in 1969 on dr. jha ’ s watch. subsequently, he served as india ’ s ambassador to the united states and as governor of jammu and kashmir. dr. jha was also member of the brandt commission. in recognition of dr. jha ’ s extraordinary services to the reserve bank and to the nation, the reserve bank of india instituted this lecture series in 1990. so far, there have been 10 lectures, and the lecture by professor taylor this evening will be the 11th in the series. 3. it is perhaps presumptuous to introduce prof. taylor,

the risks, develop a system to relate risk to the bank's capital levels and establish a method for monitoring compliance with internal policies. national discretion : basel ii norms set out a number of areas where national supervisor will need to determine the specific definitions, approaches or thresholds that they wish to adopt in implementing the proposals. the criteria used by supervisors in making these determinations should draw upon domestic market practice and experience and be consistent with the objectives of basel ii norms. disclosure regime : pillar 3 purports to enforce market discipline through stricter disclosure requirement. while admitting that such disclosure may be useful for supervisory authorities and rating agencies, the expertise and ability of the general public to comprehend and interpret disclosed information is open to question. moreover, too much disclosure may cause information overload and may even damage financial position of bank. disadvantage for smaller banks : the new framework is very complex and difficult to understand. it calls for revamping the entire management information system and allocation of substantial resources. therefore, it may be out of reach for many smaller banks. as moody's investors services puts it, " it is unlikely that these banks will have the financial resources, intellectual capital, skills and large scale commitment that larger competitors have to build sophisticated systems to allocate regulatory capital optimally for both credit and operational risks. " discriminatory against developing countries : developing countries have high concentration of lower rated borrowers. the calibration of irb has lesser incentives to lend to such borrowers. this, along with withdrawal of uniform risk weight of 0 % on sovereign claims may result in overall reduction in lending by internationally active banks in developing countries and increase their cost of borrowing. external and internal auditors : the working group set up by the basel committee to look into implementational issues observed that supervisors may wish to involve third parties, such a external auditors, internal auditors and consultants to assist them in carrying out some of the duties under basel ii. the precondition is that there should be a suitably developed national accounting and auditing standards and framework, which are in line with the best international practices. a minimum qualifying criteria for firms should be those that have a dedicated financial services or banking division that is properly researched and have proven ability to respond to training and upgrades required of its own staff to complete the tasks adequately. with the implementation of the new framework, internal auditors may become increasingly involved in various processes, including validation and of the accuracy of the data inputs, review of activities