##cy ratio, is reflected in the resilience of the banking sector. second, domestic banks did not have a huge trading book. the bank recently issued the final guideline on market risk management after analysing the trading book of commercial banks over a period of more than a year. our analysis revealed that the trading book accounted for only 2 per cent of the balance sheet of banks. banks did not have any large exposure to assets prone to asset price bubble valuations. even their liquid assets comprise largely investments in government securities and paper with no credit risk. third, the bank adopted a prudential approach to regulation, not only from the viewpoint of financial system stability but also to protect the interest of depositors. this prompted the review of several guidelines to enhance prudence in an environment of increasing uncertainty. the transition from basel i to basel ii was effected seamlessly in march 2009, after a year - long parallel run. while applying the basel ii risk - weighting system, the domestic scenario and market conditions were always borne in mind. banks were not given the option of moving over to advanced approaches because of serious reservations and uncertainties regarding the reliability of models built on a thin database. the lower risk weight of 35 per cent on residential mortgages was only allowed to be applied very restrictively. moreover, considering the importance of liquidity management, the guideline was revised to address new concerns that the crisis threw up. banks have been advised to net - off deposits received by them from corporates and parastatal entities which are part of their customers ’ treasury operations given that such deposits tend to be highly volatile. fourth, enforcement. given the systemic importance of the banking system as a whole in a small country as ours, the bank tightened the supervisory process by increasing the frequency of on - site examination of banks, enhancing the levels of exchange with the regulated entities and more intensive analysis of off - site prudential returns. fifth, unlike many other countries, we did not have the problem of transmission of the crisis through foreign banks. although the banking system in the country would appear to be dominated by foreign banks at least in terms of numbers, with 12 of the 18 banks being either subsidiaries or branches of foreign banks, the important positive factor has been the larger share of the domestic financial intermediation business that rests with local banks. in fact, more than 60 per cent of domestic banking assets are held by these banks. moreover, none of the parents of the foreign banks having a

data. these returns are analysed on a weekly basis and information submitted to management regularly. these reports, in conjunction with feedback on market activity generated by the multi - disciplinary cell, enable us at the bank to keep a close tab on the financial systems ’ activities. as the crisis developed, we began sharing some of the data with the treasury as part of the coordinated response that we felt was warranted. we all know the importance of trade channels for a small open economy like ours which basically relies on inward and outward trade to survive. by and large, the availability or nonavailability of trade credit was not directly under the purview of the central bank in as much as this was taken care of by the commercial banks and their network of correspondent banks in all the major countries. but as the crisis began to pinch and as banks became nervous about lending to one other, we saw some signs of potential difficulties for some local banks due to the non - availability, or inadequacy, of foreign exchange credit facilities from their usual sources. the bank immediately decided to make available to commercial banks operating in mauritius a special foreign currency line of credit, aggregating usd125 million, to finance the country ’ s requirements in trade. that line of credit represented more than 5 per cent of the total resources available to the central bank. this showed how concerned we were and how prompt we were to react to emerging financing difficulties which would have made it impossible for us to keep our economy on an even keel. there were a few other things that we did even before the crisis unfolded. we at the bank were the first to warn about a possible real - estate bubble in the integrated resort scheme sector which prompted a few well - targeted attacks on the governor but did lead to greater caution on the part of banks. similarly, well before the sub - prime crisis had assumed the dimensions it took, the bank had debated the efficacy of allowing all mortgage - related exposures of banks being allowed the lower risk weight of 35 per cent under basel ii. 2. coping with macroeconomic challenges let me now move on to the 2nd theme, coping with macroeconomic challenges. mauritius, as a small open economy, has of course not been immune to the effects of the global crisis. although we weathered fairly well the first - round effects of the global financial crisis and the ensuing economic downturn, the global financial crisis began to impact on economic activity in the country in the second half of 2008, hitting the export