procedures, systems, models, methodologies, and delegations that govern the way credit risk is managed. all these processes put together, can be described as the credit risk ‘ architecture ’ of the institution. for the png banks, credit risk is mostly associated with their lending transactions. bis central bankers ’ speeches bpng has in place a prudential standard on asset quality which is titled asset classification, provisioning and suspension of interest. this standard is intended to ensure that : ( i ) loans and advances are regularly evaluated using an objective grading system that is consistent with regulatory standards ; ( ii ) the accounting treatment for accrued but uncollected interest on non - performing assets is consistent with international accounting standards and regulatory reporting requirements ; and ( iii ) timely and appropriate provisions and write - offs are made to the loan loss provisions account in order to accurately reflect the condition and operations of the bank. it is also intended to promote well - reasoned, effective work - out plans for problem assets, and effective internal controls to manage the level of such assets. as at end june 2011, asset quality of the banks was maintained at satisfactory levels. npls to total assets marginally decreased to 1. 0 percent as at end - june 2011 compared to 1. 1 percent at end - march 2011. provision for loan losses to npls decreased to 188. 8 percent from 121. 0 percent over the same period, while npls to total loans increased to 5. 5 percent from 2. 4 percent. market risk institutions must put in place a market risk management framework that should outline the policy and process on measuring, monitoring, managing liquidity, interest rate, foreign exchange and equity as well as commodity risk. bpng has in place a prudential standard for foreign exchange risk called foreign currency exposure limit. this standard is intended to : 1 ) assure that the potential risk of loss to a bank ’ s capital base is within prudential limits ; 2 ) promote maximum availability of foreign exchange at competitive rates ; and 3 ) allow banks to conduct business in a profitable yet prudent manner. apart from minor issues with the banks regarding adherence to the requirements of the prudential standard, it is pleasing to note that the banks are managing market risk adequately. challenges in risk regulation and compliance in banks in summary, and as mentioned in each of the risk areas, the following are the challenges we face at bpng regarding supervision of risks and compliance by banks : • the financial market is thin and

venture is undertaken. risk management is a discipline at the core of every bank and encompasses all the activities that affect its risk profile. banks in png can introduce risks into their operations through imprudent management practices. these include credit, operations and market risks. it is pleasing to note that banks in png are risk aware and have put in place necessary risk mitigation controls depending on their respective risk appetite. banks have generally achieved the various stages of defining, implementing and enforcing some risk framework to ensure that it is commensurate with the scope and complexity of its operations. i will now briefly touch on key risk areas that bpng focuses on in its reviews of the banks. bis central bankers ’ speeches capital risk bpng emphasizes that it is the responsibility of an institution ’ s board and senior management to ensure that the capital resources are appropriate to the size, business mix and complexity of the institution ’ s business. accordingly, the institution must have suitable systems in place to identify, manage and monitor the risks associated with its business activities, and to hold a level of capital that is commensurate with its overall risk profile. in controlling capital risk in the banking system, bpng has put in place requirements in the form of the capital adequacy prudential standard. the standard incorporates the minimum capital requirements as stated under the basel 1 accord. bpng has set the minimum capital ratios of an institution at 6 % ( leverage ratio ), 8 % ( tier 1 risk based capital ) and 12 % ( total risk based capital ). institutions are expected to have adequate buffers above the bpng minimum capital ratio. this may range from several percentage points for the smaller unsophisticated institutions to small margins for the larger institutions with sophisticated capital management systems. excessive leverage by banks is widely believed to have contributed to the recent global financial crisis. to address this, the international community has proposed the adoption of a non - risk - based capital measure, the leverage ratio, as an additional prudential tool to complement minimum capital adequacy requirements. its adoption can reduce the risk of excessive leverage building up in individual entities and in the financial system as a whole. it is pleasing to note that bpng is one step ahead as the leverage ratio forms part of our minimum capital requirements. adherence to these minimum standards has been a norm by the banking system and bpng has not experienced any adverse effects regarding capital run by the regulated institutions. as at end of march 2012,