while some other banks in the same jurisdiction, might adopt the standardised approach. since the irb approach is more risk sensitive vis - a - vis the standardised approach, a small change in the degree of risk could result in a large additional capital requirement for the banks following the irb approach - which would dissuade such banks from assuming high - risk exposures. from a systemic point of view, therefore, the banks adopting the standardised approach, and consequently, having a greater concentration of high - risk assets in their portfolio, could perhaps become vulnerable in times of economic downturns. these issues would need to be appropriately taken into account while deciding on the implementation of the basel ii. implementation challenges in developing countries even though it has been mentioned in several places that over 100 countries had implemented basel i, the assessments done in 71 countries as a part of financial sector assessment program ( fsap ) have revealed many deficiencies in the areas of risk management, consolidated supervision and corrective action for undercapitalised institutions, which are considered to be crucial to sound supervision and proper basel ii implementation. while a supervisory system which is fully or largely compliant with basel core principle 6, which incorporates basel i as the capital adequacy standard, is considered necessary for moving to basel ii, the assessments reveal that about 37 % of these countries had not complied with this core principle. the remaining countries were at various stages of compliance. given this level of compliance, the challenges that are likely to be faced by the developing economies in implementing the basel ii framework, will be daunting. as acknowledged by the imf, they do not have adequate internal expertise to assess and assist basel ii implementation in various jurisdictions. given the complexities of financial regulation and the added complexities of the basel ii framework, which will have to be specifically tailored to suit the domestic economies and the domestic banking systems, the regulators are right in insisting on the freedom and flexibility for adopting and implementing an appropriate roadmap without being constrained by any external pressures, direct or indirect. the ideal solution for managing a complex task of this nature is through mutual cooperation and assistance amongst the central banks. dangers of asymmetry in financial intermediation a likely scenario, which might arise post - basel ii implementation, is the asymmetry in regulatory regime amongst the competing broad segments of the financial sector viz., banking, securities and insurance sectors. while the commercial banking sector is expected to migrate to the basel ii regimen

soon, the other segments are not likely to be subjected to the same or similar discipline unless they are a part of a banking group, where basel ii regimen would apply indirectly through the parent bank. hence, we are likely to see some scope for regulatory arbitrage amongst the three broad segments unless the regulators of these segments also recognise the need and relevance of a comparable prescription for those segments. the joint forum has taken some initiatives in this direction, which may have to be pursued further to achieve parity in the level of regulatory burden across the three sectors, which compete amongst themselves for the business of financial intermediation. basel ii and social dimensions the three - track theme to basel ii implementation, which i had mentioned earlier, might give rise to scope for regulatory arbitrage within the banking system. this would, however, not be of much concern in the indian context on account of the relatively insignificant size of the non basel ii entities and their relevance from the systemic perspective. while the desire would be to reduce the scope for regulatory arbitrage, we may have to strike a delicate balance to ensure that this desire does not constrain the non - basel ii entities from discharging their respective specified roles in the national economies viz., achieving greater financial inclusion, playing a developmental role, and acting as conduits for credit delivery to the neglected sectors. i think, the multi - track theme for basel ii implementation and the consequent handling of regulatory arbitrage and stability issues may be reflected in other similarly placed emerging market economies as well. a roadmap approach for implementation of basel ii in the light of experience gained by us, it appears that the balance of advantage would lie in favour of encouraging the central banks / banking sector regulators to implement basel ii framework at their own pace and in a manner as appropriate to their economies, banking systems and supervisory mechanisms. it is also possible that the multilateral development agencies are yet to get fully equipped to assist in basel ii implementation. ideally each country may devise a road map to be implemented flexibly taking account of the country context. in telugu, the official language of the state of andhra pradesh, we say ‘ samayam, sanderbham mukhyam ’. it means timing and context are vital for anything and, in my submission, it also includes basel ii in asia. thank you.