david opiokello : basel ii and its impact on financial services in uganda address by mr david opiokello, acting deputy governor of the bank of uganda, at the opening of the 6th east african banking school, kampala, 3 july 2006. * * * background i am pleased to speak to you this morning at the 6th east african banking school annual seminar. since launching the banking school, the annual school is increasingly becoming a prestigious regional event for bankers and all other key players in the financial services sector. this is yet another commendable contribution towards capacity building and harmonization efforts within the financial sector of the east african sub - region. it is incumbent upon all of us stakeholders to continuously review the standards set by the school to ensure that we not only maintain but strive to improve them going forward. on behalf of governor e. t. mutebile, the patron of the uganda institute f bankers, i would like to formerly welcome the invited resource persons in their respective capacities and all distinguished participants. the subject i was asked to speak on namely “ basel ii and its impact on financial services is a complex one and i wish to state from the outset that the implementation of basel ii remains very much “ work in progress ”. briefly, the basel committee on banking supervision ( “ the committee ” ) issued a revised capital adequacy framework which is widely called basel ii in june 2004. this framework has been endorsed by the central bank governors and heads of banking supervision of the g - 10 countries. the group of ten ( g - 10 ) is made up of eleven ( 11 ) industrial countries namely ; ( belgium, canada, france, germany, italy, japan, the netherlands, sweden, switzerland, united kingdom and united states ). the committee believes that the revised framework will promote the adoption of stronger risk management practices by the banking industry worldwide. the new accord is designed mainly for internationally active banks and is to be implemented as of year end 2006. however one year of impact studies or parallel calculations has been allowed for the most advanced approaches to be implemented as of year end 2007. the committee recognizes that the adoption of basel ii may not be the first priority for the nong10 countries. furthermore the imf and world bank are of the view that future financial sector assessments will not be conducted on the basis of adoption of or compliance with the revised capital framework. rather, assessments will be based on the countries performance relative to the requirements of the committee ’ s core principles for effective banking

integration in the equity markets is less advanced but shows signs of improvement. between 1997 and 2006, euro area investors doubled their holdings of equity issued in other euro area countries to 29 % of their total portfolio of euro area equity assets. the retail banking segment has remained more fragmented. in particular, the euro area cross - country dispersion of bank interest rates, especially of interest rates on consumer loans, has remained relatively high. this reflects different conditions in national economies ( e. g. credit and interest rate risk, size of firms, industrial structure and degree of capital market development ), institutional factors ( e. g. taxation, regulation, supervision and consumer protection ) and financial structures ( e. g. degree of bank / capital market financing and competitiveness ). it was probably overoptimistic to expect a faster convergence in this segment. the creation of the euro also gave rise to expectations of a broad based convergence of underlying economic developments. these expectations were quite varied, in fact. some people expected greater divergence as a consequence of specialisation. others expected greater convergence. the result is mixed. some convergence has been observed, in particular in terms of business cycle and dispersion across countries, which is comparable with that among the us states. the degree of business cycle synchronisation has remained at the same levels reached in the second half of the 1990s. 1 on the other hand, some underlying variables have diverged, in particular cost and price competitiveness, leading to an accumulation of payments imbalances within the euro area. some countries have accumulated large current account deficits, while others have growing surpluses. you could argue that imbalances do not matter in a monetary union, because they are automatically financed. but such imbalances might make countries more vulnerable to external shocks and their financing might become more difficult in the midst of a financial crisis, even within a monetary union. one of the disappointing aspects of the last ten years has been the lisbon process and the slow pace of structural reform. what does this have to do with the euro? the lisbon process is an eu initiative. it is voluntary, it imposes no constraints, and rightly so, since it involves policies which follow the principle of subsidiarity and remain in the hands of the member states. would the lisbon process have been more effective without the euro? i seriously doubt it. overall, i believe that the euro has largely fulfilled the expectations. maybe with one exception : the cash change