The pressure on the balance of payments, led by net capital outflows in the third quarter of 200809 and the associated intervention sales by the RBI in the forex market also implied corresponding withdrawal of domestic liquidity from the banking system, which the RBI had to more than offset by expanding liquidity against domestic assets in its balance sheet.
Under Basel I, a bank’s capital requirement does not adequately reflect gradations in asset quality and does not change over time to reflect deterioration in asset quality. Further, there is no explicit capital requirement to account for the operational risk embedded in many of the services from which the largest institutions generate a good portion of their revenues.