rameswurlall basant roi : evolution of the basel capital adequacy requirements address by mr rameswurlall basant roi, governor of the bank of mauritius, at the seminar on " enhancements to the basel process : recent developments relating to basel ii & basel iii ", hosted by afritac south, international monetary fund, africa training institute, ebene, 21 august 2017. * * * ladies and gentlemen thank you mr ravi mohan, resident advisor to the imf ’ s afritac south, for inviting me again to share my views on this very interesting topic : capital adequacy framework. it ’ s a great feeling to be in the midst of so many regulators from our continent. i said it ’ s a “ great feeling ” because of “ fellow feeling ”. our contributions as regulators and supervisors of financial institutions to financial stability are seldom recognized. but we always hit the news headlines when all the sins of an ailing or a failed financial institution are conveniently heaped on us. as regulators, we however need to have the unswerving faith in our abilities to regulate and supervise financial institutions that have become increasingly complex in a world where trillions of dollars flow across the world in a single day by the simple click of a mouse. true, at times, the weight of the regulatory and supervisory burden turns out to be exceedingly demanding, so demanding that it takes a serious toll on us. i am nevertheless truly happy – and very happy indeed – to be here, this morning, to address the participants of the afritac south seminar today on a topic that constitutes the very foundation of a safe and sound financial sector. to set the backdrop for the sharing of your regulatory and supervisory experience during this seminar, i believe it ’ s fitting to go back into history in order to give it a sense of perspective. but before i do so, let me narrate a short childhood story about myself. in my native village which is in the southern part of this country, there was only one, what used to be commonly known as, barber ’ s shop. the barber was a plain and financially lean countryside fellow. my parents used to send me to that barber ’ s shop for a haircut about once every month in the early 1950s. once seated in the chair for a haircut, no person could miss a framed picture of what looked like smartly dressed businessmen in an office with one of them in a standing position talking

measured and managed in isolation from one another, whereas in reality, they are closely linked. a credit event that drives down the value of a particular asset is likely to reduce the liquidity and price of that asset as well, at least in the short term. therefore, as trading in those credit instruments grew, new portfolio models were developed to take on board the interaction between credit risk and market risk. traditionally, regulation has distinguished between credit risk and market risk, and has treated both risks independently. the basel ii accord requires banks to keep capital for credit risk for banking book exposures and market risk for trading book exposures. however, it does not provide an implicit capital cushion for correlation between the two risks, other than a capital charge for counterparty credit risk for certain trading book exposures. however, emphasis is put on stress testing credit portfolio for these types of events. the recent events in financial markets have brought central bankers, regulators and risk managers to rethink and question the reliability of these new risk management systems for credit risk and market risk ; and the diversification effects and the relevance of risk aggregation embedded in these instruments. having said this, it may also be opportune to reflect over the future of regulatory practices for credit risk and market risk. ladies and gentlemen, as my time is almost over, let me take the next few minutes to tell you more on our distinguished speakers for this session. we welcome today, experts from mckinsey & company. ( presentations by the speakers ) concluding remarks i thank you all gentlemen for your fruitful presentations on such an interesting topic. this session has indeed been very informative for all of us present today and i hope that we may all draw lessons from your presentation on credit risk and market risk, particular on part of the presentation that was focused on the experience of indian banks in managing those risks. i now wish to quote a few sentences from the report : “ towards superior risk management in indian banking. ” “ banks will need to continuously refine today ’ s practices. it is important to constantly revisit the risk architecture through the on going refinement of models, stress testing scenarios, revalidating limits, redesigning customer facing processes and restructuring of the organization. this also implies broadening the traditional purview of risk management to include newer practices such as reputational risk, business process re - engineering and concurrent audit improvement. ” to conclude, as banking gets more sophisticated, risk management systems should be able to size up