##p ) to capture all the material risks, including those that are partly covered or not covered under the other two pillars. the icaap of the banks is also required to be subject to a supervisory review by the supervisors. the pillar 3 prescribes public disclosures of information on the affairs of the banks to enable effective market discipline on the banks ’ operations. enhancing risk management under basel ii ; remarks by ms. susan schmidt bies ; at the risk usa 2005 congress on june 8, 2005. 10. as you are aware, rbi has already issued the guidelines for the new capital adequacy framework in regard to pillar 1 and pillar 3 on april 27, 2007. as regards pillar 2, the banks have been advised to put in place an icaap, with the approval of the board. a two - stage implementation of the guidelines is envisaged to provide adequate lead time to the banking system. accordingly, the foreign banks operating in india and the indian banks having operational presence outside india are required to migrate to the standardised approach for credit risk and the basic indicator approach for operational risk with effect from march 31, 2008. all other scheduled commercial banks are encouraged to migrate to these approaches under basel ii in alignment with them, but, in any case, not later than march 31, 2009. it has been a conscious decision to begin with the simpler approaches available under the framework, having regard to the preparedness of the banking system. as regards the market risk, under basel ii also, the banks will continue to follow the standardised - duration method as already adopted under the basel i framework. for migration to the advanced approaches available under the framework, prior approval of the rbi would be required. pillar 2 considerations 11. while the implications of pillar 1 and pillar 3 are fairly well known in the banking community, the importance of pillar 2 in the new framework is perhaps not that well understood. i would, therefore, like to take this opportunity to dwell a little more on the criticality of effective implementation of pillar 2 by the banks while adopting the new framework, in view of its importance. 12. as i mentioned earlier, the pillar 2 of the framework deals with the “ supervisory review process ” ( srp ). the objective of the srp is to ensure that the banks have adequate capital to support all material risks in their business as also to encourage them to adopt sophisticated risk management techniques for monitoring and managing their risks. this, in turn, would require a well -

role as a source of information and as such will indicate the value of the company at the moment of the statement of accounts. fair value for prudential purposes is more forward looking in its approach as it includes not only incurred losses but also expected losses. this tension can be addressed by the regulators addressing the regulatory and prudential aspects in the case of banks. keeping in view the systemic implications of the standards, regulators will have to carry out an indepth assessment of the concepts and tools relating to valuation. ( ix ) great emphasis is now being laid on implementing a central counterparty for otc derivatives particularly for credit default swaps. well regulated counterparties reduce potential for disruption in financial markets and promote operational efficiencies and transparency. in india as early as in 2001, the clearing corporation of india was set up to settle interbank spot forex transactions and all outright and repo transactions in government securities whether negotiated or order driven systems. ccil has also introduced a collateralised money market instrument called cblo which is also settled through the ccp. ccil has also commenced non - guaranteed settlement of otc trades in interest rate swaps on 27 november 2008. guaranteed settlement of these trades will commence later once we clarify the exposure requirements. in the near future it will also act as central counterparty for forward contracts which will mitigate risks releasing counterparty exposure limits. the margins are in the form of cash and government bonds ensuring the quality and liquidity of the settlement guarantee fund ( x ) recent developments will also pave the way for more effective regulation rather than reliance on self regulation, credit rating agencies assessments or setting of standards by industry participants. ( xi ) lastly, on the issue of selling of complex products, we have to collectively work towards a viable framework. what is the solution? in this context i would like to recount the application of a surprisingly simple idea to the realm of public policy that has received tremendous attention after being advocated by richard thaler and cass sunstein in their international bestseller “ nudge ”. the authors advocate the use of " choice architecture " by businesses or governments to influence choices in ways that encourage choosers to make decisions in their best interest. they call it " libertarian paternalism ". this involves utilizing " nudges " such as the wording of choices in ways that influence individual actions, designing default choices ( in the absence of action ) that do not penalize individuals, limiting choices to those that are more comprehensible