at times acting subconsciously. this reinforced our view that it was necessary to enhance the role of research for policy making. this conference series was one step in that direction. through this conference, the reserve bank intends to bring together central bankers, academicians, policy makers, financial regulators and supervisors and private sector experts to a common platform to share their thoughts and to evolve solutions. the conference will hopefully provide a useful forum for the economists across the globe to exchange their views and research findings on issues relevant from a central bank ’ s perspective, which will, in turn, provide valuable insights for policymakers. motivation behind the second international research conference the world has moved a great deal since the first conference, but without resolving its financial problems. as a result, the sustainability of the recovery is in doubt. at the time of the bis central bankers ’ speeches first conference, we were seeing green shoots of revival and were hoping that recovery may well strengthen in due course. since then, growth in emerging markets rebounded but inflation surged. by contrast, recovery in advanced economies was relatively subdued. inflation remained largely benign, but nevertheless did climb up from extremely low levels, posing some difficulties. financial fragilities stayed unresolved. in spite of some deleveraging, risks abounded and were compounded as public sector balance sheets weakened with weaker growth and private sector bailouts. clearly, new dimensions of financial crisis have emerged since the first conference. the nature of the crisis has changed with fragilities of the private sector balance sheets transmitting to the fragilities of the sovereign balance sheets. there appears to be no solution till the burden sharing problem amongst various state and non - state actors are resolved. sovereign debt sustainability poses the biggest threat to sustainability of the recovery, while coming into potential conflict with the central banking objectives of price stability and financial stability. any crisis resolution strategy needs to accord priority to resolution of sovereign debt problems, but there is a lack of clarity on what roles central banks can perform in this. a case could be made that it would be better that central banks focus on their main jobs, while let governments handle their debt problems. however, at the present juncture there are significant spillovers. monetary authorities ’ actions impinge on markets ’ ability to refinance debt and fiscal authorities ’ actions constraints monetary responses. central banks were seen as partly responsible for the current crisis, but they were also at the forefront of unprecedented public policy response that was put in place swiftly, using a combination of conventional

output : the production approach, the intermediation approach, the operating ( income - based ) approach and more recently, the modern approach. under the production approach, banks are primarily viewed as providers of services to customers. the input set under this approach includes physical variables ( e. g., labour, material, space or information systems ) and the outputs represent the services provided to customers and are best measured by the number of deposit and loan accounts. under the intermediation approach, financial institutions are viewed as intermediating funds between savers and investors. banks produce intermediation services through the collection of deposits and other liabilities and their application in interest - earning assets, such as loans, securities and other investments. this approach includes both operating and interest expenses as inputs, whereas loans and other major assets count as outputs. in principle, there are three variant of intermediation approach, viz., the asset approach, the user cost approach and valueadded approach. the asset approach is a reduced form modelling of the banking activity, focusing exclusively on the role of banks as financial intermediaries between depositors and final uses of bank assets. deposits and other liabilities, together with real resources ( labor and physical capital ) are defined as inputs, whereas the output set includes earning assets such as loans and investments. the user cost approach determines whether a financial product is an input or an output on the basis of its net contribution to bank revenue. if the financial returns on an asset exceed the opportunity cost of the funds or alternately, if the financial costs of a liability are less than the opportunity cost, they are considered as outputs ; otherwise, they are considered as inputs. the value - added approach identifies major categories of produced deposits and loans as outputs because they form a significant proportion of value added. the operating approach ( or income - based approach ) views banks as business units with the final objective of generating revenue from the total cost incurred for running the business. accordingly, it defines banks ’ output as the total revenue ( interest and non - interest ) and inputs as the total expenses ( interest and operating expenses ). finally, the modern approach seeks to integrate some measure for risk, agency costs and quality of bank services. in this approach, the individual components of camel 3 are derived from the financial tables of the banks and are used as variables in the performance analysis. source : adapted from berger and humphrey ( 1992 ) and frexias and rochet competition and profitability of indian banks beginning from