radical changes which are designed to give greater flexibility to banks in the management of their investment portfolio while addressing concerns through enhanced disclosure. the idea is to align the prudential framework with global standards, while retaining elements which are germane to the domestic context. some of the proposals in the discussion paper are symmetric recognition of fair value gains and losses, removal of various restrictions on investment portfolio such as the ceilings on investments in held to maturity ( htm ), allowing non - slr securities to be included under held to maturity ( htm ) book, etc. the proposals in the dp, especially those on disclosures, would promote transparency and market discipline while giving the increased degree of freedom to banks. we are in advanced stages of finalising the revised norms based on feedback received and hope to issue guidelines on the new framework soon. 24. another issue that is engaging our attention is the framework for provisioning on loan exposures. currently, banks operating in india are required to make loan loss provisions on incurred loss model, wherein provisions are made after occurrence of default. however, loan default itself is a lagging indicator of stress, or more to say an outcome of build - up of stress over a period in the loan account. thus, incurred loss approach is inefficient since it may prove pro - cyclical during economic downturns which can severely impact the health of banks as well as the financial system. 25. this also meant that recognition and crystallisation of credit risk usually lags the actual increase in credit risk for the banks. such delays in recognizing expected losses under an “ incurred loss ” approach were found to exacerbate the downswing during the financial crisis of 2007 - 09. faced with a systemic increase in defaults, the delay in recognizing loan losses resulted in banks having to make higher provisions which eroded the capital maintained precisely at a time when banks needed to shore up their capital, thereby affecting their resilience and exacerbating the systemic risks. further, the delay in recognizing loan losses and consequent higher dividend pay - outs reduced internal accruals to the capital. 26. this experience prompted the g - 20 and the basel committee on banking supervision ( bcbs ) to recommend to accounting standard setters to modify the provisioning practices to incorporate a more forward - looking approach rather than to require the losses to happen before they are recognized. this encouraged the move towards adoption of provisioning standards that require the use of expected credit loss

parties concerned ought to realise one thing. leverage constructions increase the risk for the taxpayer – the relationship between leverage and risk is one of the first lessons from the financial crisis. what in any case must be rejected is a leveraging by granting the efsf a banking licence, which would allow the efsf to engage in eurosystem refinancing operations – in other words, to borrow directly from central banks. for then, the eurosystem would largely be unable to shape monetary policy autonomously. indeed, the efsf would be able to generate a virtually unlimited flow of funds to the capital markets and shift risks bis central bankers ’ speeches around between member states by purchasing large quantities of sovereign bonds. with that, the ban on monetary state financing set forth in the eu treaties would be well and truly violated. overall, the question that presents itself is : how is a sanction mechanism – no matter how severe – in the stability and growth pact supposed to prevent unsound fiscal policy if threats of sanctions are made, yet favourable conditions are lavished on a country that continuously disregards the rules? this is a question of fundamental importance to monetary union. whether the answer proves convincing will depend on what appear to be purely technical aspects of the solution, since they can have unexpected implications. one example concerns the choice of a triple - a rating for the bonds with which the efsf rescue fund borrows money on the capital market for the assistance programmes. this top rating ought to remain intact as long as the borrowing by the efsf does not exceed the guarantee amount of the liable countries that are triple - a rated. thus, the effective lending volume currently amounts to €440 billion. in connection with the call for additional funds for the efsf, insistence on this top rating for efsf bonds leads, however, to the problematic leverage proposals i mentioned earlier. on the other hand, abandoning the triple - a rating would also enable the efsf to lift its lending volume. with regard to the efsf in its present form, it was reported that the lending volume of around €250 billion could have been increased by just over half if an aa rating had been accepted instead of triple a. in contrast to a leveraging, however, the risk borne by the taxpayer would be lower if the top rating were dispensed with. if the efsf bonds had a somewhat lower rating, the effect would be to raise the efsf