s policy response to the crisis. the funding for lending scheme ; the liberalisation of our liquidity insurance to the banking system – through the extended collateral term repo scheme and the liberalised discount window facility ; and the financial policy committee ’ s related recommendation to the prudential regulation authority to relax liquidity requirements on banks – all these fell under the same broad heading. “ keynesian ” because we are supporting demand in order to help smooth the adjustment the economy is going through. but a central bank ’ s monetary and liquidity interventions cannot remove the need for adjustment. the uk economy entered the crisis with too much debt in banking, in the household sector, in government and, for the nation as a whole, externally. and the uk entered the crisis with the composition of demand imbalanced – too much public and private consumption, too little net trade. indeed, aggregate demand had been unbalanced for so long that the economy ’ s productive capacity was ( and probably still is ) unbalanced, investment in capital having followed the pattern of demand. for prosperity to be put on a secure footing for the longer term, adjustment is still needed. with one vital exception, engineering structural change in the economy is not the responsibility of the central bank. the exception of course is the safety and soundness of the banking system, which is a precondition for broader monetary stability. an undercapitalised banking system would not be able smoothly to supply sufficient credit to aid recovery as demand picks up, enabling investment in innovations and efficiency. nor has it been able to do so as much as needed to help capital shift to firms and sectors that are beneficiaries of the new pattern of global and domestic demand. in my view, that may explain some of the weaknesses in productivity growth. 9 the financial policy committee required recapitalisation of the uk ’ s big banks and building societies not simply because that is needed to underpin stability, which it is, but also because a resilient banking system is a precondition for sustained and better balanced recovery. new entrant banks can do a bit, but the big incumbent banks need to be healthy too. their repair is now underway. that has required, and will continue to require, realism about asset values, expected losses and risks – not pretending, taking the medicine. in that sense, it is a policy in the spirit of hayek. 10 so the overall policy package has combined keynes and hayek. conclusion in

hence, it is imperative that the approach to risk management in banks should be in tune with the realisation of more frequent, varied and bigger risk events than in the past. banks have to remember the old saying that care and diligence bring luck. to paraphrase oscar wilde, being caught unprepared in the face of a shock may be regarded as a misfortune, but to be caught unawares more than once may be a sign of carelessness. 2 17. notwithstanding the numerous steps already taken, there is always room for improvement to address several issues that may emerge in the medium to long - term. these issues are as common to nbfcs and other financial intermediaries as they are to banks. the supervisory approach of the reserve bank is to further strengthen its focus on developing financial institutions ’ ability to identify, measure, and mitigate the risks. the new supervisory approach will be two - pronged – first, strengthening the internal defenses of the supervised entities ; and second, greater focus on identifying the early warning signals and initiate corrective action. 18. to strengthen the internal defenses, higher emphasis is now being given on causes of weaknesses than on symptoms. the symptoms of weak banks are usually poor asset quality, lack of profitability, loss of capital, excessive leverage, excessive risk exposure, poor conduct, and liquidity concerns. these different symptoms often emerge together. the causes of weak financial institutions can usually be traced to one or more of the following conditions : inappropriate business model, given the business environment ; poor or inappropriate governance and assurance functions ; poor decision making by senior management ; and misalignment of internal incentive structures with external stakeholder interests. 3 19. we are placing special emphasis on the assessment of business model, governance and 4 / 6 bis central bankers'speeches assurance functions ( compliance, risk management and internal audit functions ), as these have been the areas of heightened supervisory concern. supervised entities generally tend to focus more on business aspects even to the detriment of governance aspects and assurance functions. there was also an apparent disconnect between their articulated business strategy and actual business operations. the thrust of the approach, therefore is, to improve the risk, compliance, and governance culture amongst the financial institutions. in this regard, the reserve bank has released a discussion paper on “ governance in commercial banks in india ” with the objective to align the current regulatory framework with global best practices while being mindful of the context of the domestic financial system.