jwala rambarran : consolidated supervision, risk - based supervision and market discipline opening remarks by mr jwala rambarran, governor of the central bank of trinidad and tobago, at the basel ii implementation workshop, organised by the caribbean regional technical assistance centre ( cartac ), port of spain, 17 – 20 september 2013. * * * good morning first, i wish to thank cartac for arranging this basel ii implementation workshop and for inviting me to give some brief opening remarks this morning. as we all know, safe and robust banks operating in a well regulated financial system play a key role in the economy and society. one of the main lessons of the recent global financial crisis is that banks must improve their ability to manage risk, so they do not inflict serious damage on the economy. this calls for a stronger risk management culture within banks. this calls for stronger regulation and supervision within central banks and other regulatory agencies. in today ’ s discourse, most commentators assume that “ strengthening regulation ” is simply a matter of implementing international standards, of which the most important is the basel capital accord, designed by the basel committee on banking supervision. other commentators, however, have examined alternative approaches to prudential regulation beyond standards. they argue that a strategy for prudential policy must address three main weaknesses : the impossibility of fine - tuning bank safety margins in the uncharted territory that is banking in the developing world ; the need to provide insulation against the large shocks to which these economies are prone ; and the lack of enforcement that results from the concentration of political power in many such countries. this year marks the 25th anniversary of the 1998 basel capital accord, which through its two incarnations has emerged as the international gold standard for banks [UNK] capital requirements. the first manifestation came in june 2004 when the basel committee wholly rewrote the original basel accord, which has a number of flaws. for instance, it is risk insensitive, it does not differentiate between credit risk and other risks a bank typically faces, and it can easily be circumvented by regulatory arbitrage. the new accord, generally known as basel 2, represented a fundamental change of approach to regulation. the revised framework is highly complex and makes its understanding and implementation a great challenge, not only to regulators but also to the regulated community. basel 2, for example, assumes that discipline by the markets and by supervisors is beneficial. yet, as we have seen particularly, over the last five years, both markets

optimal inflation objective, whether zero or a low positive number, it seems odd to adjust it as a result of past events. the last element of objective setting for central banks is how quickly they should seek to return to an inflation target once having been forced away from it. there seems to be an emerging consensus, reflected, inter alia, in statements by the bank of england, that a period of 1 - 2 years is appropriate, this being the time it takes for a change in monetary policy to have the bulk of its effect in prices. to attempt a quicker restoration of price stability would risk overshooting, while to go more slowly would tend to undermine credibility. it should be noted, however, that this recommendation holds clearly only for minor departures from the objective. if the actual inflation rate is a long way away from the desired rate, there is no consensus on whether gradual or shock therapy is to be preferred. much depends on the political circumstances, as well as on surrounding economic policies ( e. g. fiscal policy ) that affect credibility. ( b ) anchors just as difficult as setting the objective of monetary policy has been settling on the means for achieving it. a variety of approaches have been in vogue at various times in the past twenty or thirty years. pure discretion has acquired a bad name because, at least in countries with nonindependent central banks, it is seen as a cloak for politically - motivated decisions. such decisions have sometimes been a crude attempt to buy votes by easing of monetary policy before elections, the benefits of monetary relaxation coming relatively quickly and the costs of higher inflation emerging only later. more frequently, however, they have involved an attempt to use a presumed output / inflation trade - off to strengthen employment prospects ; or an unwillingness to tighten monetary policy until evidence of inflationary pressures was already apparent in the data. whatever the motivation, a fully discretionary policy has often lacked the strategic coherence to prevent inflation accelerating. monetary targeting became popular in a number of countries in the 1970s, on the back of milton friedman ’ s dictum that “ inflation is always and everywhere a monetary phenomenon ”. 4 the powerful intuitive appeal of the money - inflation link was undoubtedly helpful in mobilising support for a rigorous anti - inflation policy in the united states, united kingdom and elsewhere in the late 1970s and early 1980s. nevertheless, one of the key requirements for such a policy, namely a stable demand for some monetary aggregate, has not been adequately fulfilled in recent years