efficient risk management framework and the adequacy of resources to mitigate risk. against this background, therefore, basle ii is synonymous with good risk management, not only of the core risk of credit default, but of a wider range of risks such as market risk and operational risk in pillar i. together with the mutually reinforcing pillars ii and iii, of regulatory review and market discipline, basle ii represents a formidable tool to insulate banks against inherent risks in the highly leveraged business of banking. in this process, we must be mindful of the fact that basle ii has been built on the experiences and risk parameters of developed, sophisticated economies. through customization to suit conditions and markets in emerging economies, which have fundamentally different characteristics, the principles of basel ii should be appropriately adapted to suit such conditions. the “ one size fits all ” solution of basle i will not suit the complexities of basle ii. the markets in which we operate have their own peculiarities and their own cultures. promoting international best practice in such a culture is, indeed, a challenge which demands a fundamental change in credit cultures, attitudes, and policies. the will to change is important and in the case of banking institutions, has to be mandated, if it is to be in the best interests of the major stakeholders, the depositors. full implementation of basel ii is, indeed, demanding for banking institutions and regulators alike. capacity building is an imperative on both sides, as is the framework for good risk management built on risk models. the supervisory capacity to assess and validate these models must be enhanced and developed. the magnitude of the investment in technology by the banks must be justified in a business sense. we must ensure that the cost of compliance does not outweigh the benefits from basle ii. emerging market economies are very vulnerable to the reputational risk of non - compliance. therefore we must take one step at a time. the infrastructure for compliance - legal, accounting and market - must be established and is an essential pre - requisite which underlies the success of these initiatives. the implications on the several sub sectors of our economy from basle ii will have to be examined carefully with regard to access to finance and the pricing of risk. uneven playing fields may arise as a result of the internationally active foreign banks adopting more advanced approaches, thereby improving their competitiveness over their local counterparts. will the models developed by the foreign banks be relevant for the risks in our markets? these are

sunil mendis : is it time for a common currency in the saarc region? inauguration speech by mr sunil mendis, governor of the central bank of sri lanka, at the 15th forex conference of the forex association of india, colombo, 20 august 2004. * * * it is with great pleasure that i accepted the invitation from the forex association of india to inaugurate its 15th annual forex conference here in colombo. i would like to extend a warm welcome to this distinguished gathering of forex professionals from sri lanka as well as from many of our neighboring countries. i am sure that this is an excellent opportunity for all of us to promote goodwill among ourselves. it also gives us an opportunity for sharing our thoughts on the way forward for south asia ’ s currency and financial markets, which is the theme of this year ’ s conference. forex, as you very well know, is the largest financial market in the world. unlike many other markets, the international forex market is open 24 hours a day. its daily turnover is well over us $ 1. 2 trillion. this turnover is more than the combined turnover of the world ’ s major stock markets on any given day. hence, the international forex market is a very liquid, and thus, a desirable market for trading. as with any other market, technology has also contributed immensely towards its expansion. now trades are executed increasingly through the internet. it has allowed even smaller investors the access to the market. as conservative central banks, our involvement in the forex markets is limited to strategic investments and stabilising the exchange rate. following this role, the central bank of sri lanka does not get involved in speculative type of trading. however, it plays a major role in the development of the country ’ s forex as well as other financial markets. we know that in a market - oriented economy, all financial market segments, namely, the foreign exchange market, money market, government debt securities market and the stock market are inter - linked. the central bank, while watching the operations of each market segment individually, needs to take a macro view of all the market segments to ensure financial market stability. the focus today, however, should be on the foreign exchange market. in the exchange rate area, it is appropriate to mention at this juncture, sri lankan authorities made a fundamental change to its policy on 23rd january, 2001 by moving to a freely floating exchange rate arrangement. this was necessitated by the inability