The LAF coupled with OMOs and the Market Stabilisation Scheme (MSS) has provided the Reserve Bank greater flexibility to manage market liquidity in consonance with its policy stance. The introduction of LAF had several advantages (Mohan, 2006b).
As a result, a simpler approach for defining the regulatory minimum capital is likely to continue to work well for community banks, even as we need to move to a more complex and more risk-sensitive approach for LCBOs. In the United States, supervisory oversight--pillar 2 under the new proposal--has long been an integral part of our regulatory framework, both for LCBOs and community banks.