important institutions and an assessment of the contribution of a systemically important institution to overall systemic risk. there is also another issue – that of determining the extent of the systemic risk surcharge. this is as yet an issue of debate though there are calls to measure in a rigorous and scientific way relating it to the downside risk of the financial system. the systemic risk assessment would require macro - prudential analysis to examine the dynamically changing interactions between financial institutions, the financial markets and the real economy, as well as risks from unregulated or less regulated entities for the banking systems. regulated entities may have tendency to escape or circumvent regulation by using structures and subsidiaries, which could be alternative sources of extra return during normal times but could as well be potential sources of risk. if a special “ capital charge ” has to be imposed in proportion to the risk posed by a systemically important financial institution to the entire financial system, then developing the matrix for institution specific capital charge would be a real challenge for the regulators. orderly bank resolution : existing legal and regulatory arrangements across jurisdictions are not generally designed to resolve problems in a financial group operating through multiple, separate legal entities. this is true of both cross - border and domestic financial groups. while the regulatory framework has been harmonized across jurisdictions, the resolution framework has remained jurisdiction specific. there is no international insolvency framework for financial firms and a limited prospect of one being created in the near future. to prevent weakness in one institution affecting the entire financial system, a pre - planned resolution mechanism should ensure winding down of the problem in an orderly manner, only affecting the shareholders or at best the creditors, but not tax payers in general. different proposals in this regard include “ living wills ” prepared by institution, particularly large and systemically important institutions during normal times approved by their respective boards, or resorting to “ narrow banking ” that could limit the activities of a bank once its problems exceed some threshold. another suggestion, that i referred to earlier in the context of systemic institutions is to segregate “ utility banking ” from “ casino banking ”, thereby making access to lender of last resort support only to “ utility banking ” and allowing “ casino banking ” to fail without any support from the authorities. while these suggestions are being discussed and debated, the basel committee is working on developing a bank resolution framework that would facilitate the orderly resolution of cross - border banks. this of course would involve significant cross - border cooperation and information sharing

equity needs, though over an extended time frame, would put downward pressure on the banks ’ roe. while the higher capital requirements would bring down risks in the banking sector and eventually investors would recognize the lower risks and be willing to settle for a lower roe, in the short term, the only answer is raising productivity. 15. rbi and banks would be estimating the capital requirements under basel iii once our guidelines for implementation of basel iii are finalized. while implementing basel iii, our dilemma is ( a ) where our capital regulations are more stringent, should we continue with the more stringent norms? and ( b ) should we adhere to the extended timetable or step up the bis central bankers ’ speeches implementation schedule, given the fact that the banking system would be comfortable at the starting point i. e. at transition? 16. other areas that need strengthening include securitization related regulation, market risk management tools and improvement to the supervisory review and evaluation process of pillar ii of basel ii as per the basel iii enhancements. ( b ) liquidity management 17. the financial stability report ( fsr ) of the reserve bank of india for the half year ended june 2011 has expressed concerns over growing reliance of banks on wholesale funding / market borrowing to fund assets. one reason for such reliance could be the low growth of deposits not commensurate with the credit growth. such reliance, however, could prove disastrous as evidenced during the crisis as the wholesale funding sources can dry up quickly. banks, therefore, have to factor this in their liquidity management. there, however, remains an issue under basel iii about the extent to which slr holdings can be taken into consideration for the purpose of calculating the liquidity ratios. as the slr holdings are required to be maintained on an ongoing basis, these would technically not be reckoned for liquidity purposes. however, it may be reasonable to reckon, under stress conditions, at least a part of the slr holdings in calculating the liquidity ratio, as the slr holdings are primarily government bonds against which the reserve bank provides liquidity. further, the major challenge for indian banks in implementing the liquidity standards is to develop the capability to collect the relevant data accurately and granularly and also to formulate and predict the liquidity stress scenarios with reasonable accuracy and consistency. given that indian markets have not experienced the levels of stress that global markets were subjected to, predicting stress scenarios is going to require a qualitative judgemental call. ( iii