- a - vis us dollar has been attracting large foreign institutional inflows during the last two years. while we have an all time high foreign exchange reserves of more than $ 130 billion, high capital inflows pose a big challenge to monetary and exchange rate management. in this context, operationalisation of market stabilisation scheme ( mss ) has given an additional instrument for liquidity and monetary management. to sum up the challenge, i would like to quote a statement of dr. y. v. reddy, governor, reserve bank of india, which he made at the annual meeting of bank for international settlement ( bis ) on june 28, 2004. and i quote, “ ….. special defences need to be put in place for ensuring financial stability in the case of countries like india that are faced with the prospect of volatile capital flows. the issues relating to cross - border supervision of financial intermediaries in the context of greater capital flows are just emerging and need to be addressed. ” technology is the key as i mentioned in the beginning of my speech, technology has thrown new challenges in the banking sector and new issues have started cropping up which is going to pose certain problems in the near future. the new entrants in the banking are with computer background. however, over a period of time they would acquire banking experience. whereas the middle and senior level people have rich banking experience but their computer literacy is at a low level. therefore, they feel the handicap in this regard since technology has become an indispensable tool in banking. foreign banks and the new private sector banks have embraced technology right from the inception of their operations and therefore, they have adapted themselves to the changes in the technology easily. whereas the public sector banks ( psbs ) and the old private sector banks ( barring a very few of them ) have not been able to keep pace with these developments. in this regard, one can cite historical, political and other factors like work culture and working relations ( which are mainly governed by bipartite settlements between the managements and the staff members ) as the main constraints. added to these woes, the psbs were also saddled with some non - viable and loss making branches, thanks to the social banking concept thrust upon them by the regulatory authorities in 1960s. globalisation of financial services growing integration of economies and the markets around the world is making global banking a reality. the surge in globalization of finance has also gained momentum with the technological advancements which

euro zone willing to enter into cooperation arrangements with the ecb. second, the adoption of mechanisms to ensure that the ecb ’ s supervisory tasks are strictly separated from the conduct of its monetary policy. third, the involvement of national supervisors in the preparation and implementation of decisions. the proposal is in my view well founded. in particular, it makes sense to subject all financial institutions in the euro area to a single supervisory mechanism. recent experience shows that the instability of medium - sized or small institutions with limited links to other european institutions may sometimes generate disruption at both the national and the euro area level. moreover, the coexistence of different supervisory regimes for institutions sharing the same market place may generate competitive distortions, which should be avoided. similarly, it is important to establish institutional mechanisms to mitigate any potential conflict between the objectives pursued by the supervisory and the monetary policy functions. i believe that the crisis has already helped to allay our concerns about the extent to which those conflicts could actually arise in practice. indeed, most central banks have understood that financial stability considerations should be taken into account when designing monetary policy measures without challenging the priority that should be given to the price stability objective. in any case, from a procedural point of view it seems reasonable for the governing council of the ecb – the interest - rate setting body – to make relatively extensive delegations to the supervisory board envisaged in the draft regulation as the operational body through which the ecb will exercise its new supervisory functions. finally, on the involvement of national supervisory authorities, the draft regulation envisages a model under which the ecb will have ultimate responsibility for the tasks conferred on it by the new regulation. in performing the new functions, the ecb will however take full advantage of the expertise of national authorities. the principle under which national central banks and supervisory authorities are to help in preparing and implementing decisions is an essential ingredient of the new supervisory mechanism. at the same time, it is probably reasonable to develop that model in such a way that the principle of delegation is flexibly used so as to take into account the different nature of the supervised financial institutions and the specific supervisory functions to be performed. although the involvement of national authorities should always be required, the ecb should normally participate more directly when institutions of systemic importance and actions of a strategic nature are involved. the draft regulation foresees that the ecb will start performing its functions through national supervisors already in january next year and that the new system will be fully operational