##uid ; permit reclassifications from the fair value to the amortised cost category ; which should be allowed only in rare circumstances following the occurrence of events having clearly led to a change in the business model ; promote a level playing field across jurisdictions. some critical accounting standards have been / are being amended to take cognisance of the lessons of the crisis and will contribute significantly to ensuring that the capital and provisions held by the bank are better aligned to the risks in the banks ’ balance sheet. the estimation of both expected and unexpected losses is an inexact science. the attempts to better estimate, provide for them and to present an assessment of the adequacy of buffers, therefore, remains a continuing one. role of audit let me now turn to the role of audit in ensuring the efficacy of risk management and capital adequacy systems in banks. put in an extremely narrow perspective, auditors ensure that the audited entity is adhering to the prevailing accounting standards pretty much like supervisors are tasked with ensuring that banks are following the prescribed regulatory framework. but expectations from supervisors and auditors – from society, from the financial system and from ourselves – goes beyond this narrow perspective. in the context of the current discussion, both supervisors and auditors have a vested interest in ensuring that banks are resilient both to “ known ” risks and to “ unknown ” shocks. in particular, both supervisors and auditors are keen to ensure that banks put in place an effective system of risk management which ensures that risks are identified, measured, managed and correctly priced. it is important in this connection that the auditors ask probing questions about the adequacy of banks ’ provisions and capital. this is not to suggest that auditors currently are not focussing on these aspects at the moment. gaps, however, remain as suggested by the findings of the annual financial inspection of banks by the reserve bank. there remains thus scope for more rigorous attention to the issues of adequacy of capital and provisions by auditors. going forward accounting standards and accounting statements were not geared to take into account the compulsions of the risk - return trade off. to some degree, the post crisis reforms to accounting standards are addressing this. going forward, however, it will be critical that accounting statements assess and present the gamut of issues related to the level of provisions and capital maintained by banks and their adequacy in ensuring the resilience of banks to risks and shocks. the role

modelling of the distress dependencies between banks are also being deployed for the purpose. bis central bankers ’ speeches going forward, it would be critical that the stress testing results be incorporated in the business and capital assessment and planning exercise of banks. the overall acceptable levels of expected and unexpected loss willing to be incurred by banks should be a management decision driven based on rigorous and analytical assessment of available information. while it is not expected that banks provide for unexpected losses in the manner prescribed for expected losses, the “ economic capital ” which the bank seeks to maintain must be driven by considerations which encompass such losses. ( iv ) role of banks ’ management in building up resilience to risks and shocks as the regulatory architecture has evolved over a little over the last couple of decades, it has been accompanied by an increasing emphasis on internal controls and methodologies for building up the banks ’ resilience to risks and shocks. first line of defence for risk management has to come from bank managements and specially from bank boards. assessment and planning of capital adequacy by banks is key to ensuring that banks remain resilient to risks and shocks. for the management of losses arising from realisation of risks or emergence of shocks, there is no substitute for senior management and the board asking the right questions. unless the bank ’ s management is geared to internalize and institutionalize a risk and control culture in banks, any attempts to increase the resilience of banks can be effective only to a limited extent. if management has to pose the right questions, it is critical that information systems in banks are geared to respond to these questions. banks today will be hard pressed to respond to questions about the risk return characteristics of different activities, for example. unless information systems are developed to answer such questions, effective decision making, which takes into account associated risks, will remain a casualty. i recollect in this context, a comment made by governor alan greenspan who stated that : “ it has been my experience that competency in mathematics, both in numerical manipulations and in understanding its conceptual foundations, enhances a person ’ s ability to handle the more ambiguous and qualitative relationships that dominate our day - today financial decision making ” 2. given that financial decision making is becoming complex, it is up to us to design information systems which facilitate such decision making. in the context of putting in place a risk management framework in particular, there is a need to ensure that information systems in banks are able to provide “ information on