ranee jayamaha : basel ii – a roadmap for sri lankan banking system with international comparisons opening remarks by dr ranee jayamaha, deputy governor of the central bank of sri lanka, at an event of lecture series, organized by the association of professional bankers, colombo, 18 december 2006. * * * mr. theagarajah, mr. ajantha madurapperuma, officials of the association of professional bankers, distinguished participants, ladies and gentlemen. thank you for the invitation to deliver the opening speech on “ basel ii – a roadmap for sri lankan banking system with international comparisons ”. let me deviate a bit from the topic and first deal with the flexible approach the central bank of sri lanka ( cbsl ) has adopted in moving forward for full compliance of basel ii in the next few years. i will then set out some of the key implementation issues which need to be addressed not only by us but also by the basel committee and all host / home supervisors. for international comparison, i will provide a brief a summary of how some of the other countries have fared in implementing basel ii from 2008 onwards. mr samarasiri, director, bank supervision will outline a broad roadmap in implementing basel ii. the basel committee on banking supervision has released the document, “ international convergence of capital measurement and capital standards : a revised framework ” in june 2004 which is well known as basel ii. since then, the bankers and the regulators all over the world have been occupied with the adoption of the revised framework. the accord in full is meant for the internationally active banks but other banks are expected to follow suit. although international institutions such as the imf and the world bank have announced that the adoption of basel ii will not be a yardstick for measuring compliance with the international best practice, sooner than later it will be the international norm and they will start monitoring the progress. so, there is no point in debating whether or not we should implement basel ii. the debate, if at all, should be how best to implement it and, where possible, be ahead of others. overall, the benefits to the industry in terms of improvements in risk management and corporate governance and the supervisory action embedded in the accord cannot be ignored. basel ii has three mutually reinforcing pillars, namely, the minimum capital requirement under pillar i, the supervisory review process which is pillar ii and market discipline or pillar iii. the whole purpose of this exercise is to make capital the

goals, the monetary policy too should play a key role. towards that end, the monetary policy framework adopted by the central bank has been made consistent with the government ’ s macroeconomic framework. accordingly, the 2007 targets in the monetary programme of the central bank have been set, after taking into consideration the potential growth and liquidity needs of the economy to move along the projected growth path while keeping inflationary pressures in check. your excellency, in november 2006, the government of your excellency announced its medium - term macroeconomic framework within a 10 - year development framework. this programme targets an 8 per cent growth for the next six years and 9 - 10 per cent thereafter. these are tough targets. but these are achievable. when striving towards such goals, we must remember that our development focus should always be clear. we must also remember that our external environment may not always and necessarily be ideal. but we would do well to remember that ours has been and is a resilient economy. we have shown that we can grow even in the face of highly adverse circumstances and scenarios. in that context, we would be wise, if we do not develop our economic plans on the overriding assumption of a totally terrorism free environment. of course, if the peace process is successful and a early political solution is found to the on - going conflict, it would be highly desirable. but at the same time, if we consciously develop our plans and frameworks on less than perfect conditions, we could still find ways and means to succeed and deliver the planned results. we owe that to our people, who cannot and should not have to wait until everything falls in to place. therefore, our future strategies should be aimed at moving ahead even in the face of threats of terrorism and other adversities without setting out as a pre - condition, the achievement of a permanent peace or ideal conditions to embark on our development projects and programmes. we are also working today on the basis that all our strategies would be of no avail, if we are not sufficiently committed to achieving those plans. we know we are serious in our efforts. we also have to show we are serious. that is why, at the beginning of 2007, in close consultation with the secretary to the ministry of finance, the monetary board developed a comprehensive monitoring mechanism of key macroeconomic variables in the external, fiscal and monetary sectors. these are based on a financial programming framework to ensure that key macroeconomic targets are met as announced