In the original concept, the defining characteristic of inflation targeting and the MPC was the scope it offered for exercising constrained discretion. We need to hang on to that big idea. 7  I would have a similar concern if people came to believe that the MPC could keep output growing steadily, quarter by quarter, irrespective of wider economic circumstances. BIS Review 20/2007  7
Therefore, the Basle Committee has quite rightly advised that regulators and banks should approach it with caution even with regard to the simplest approach to Basel II. We commenced our journey one year ago, together with the industry, and we will move slowly, but steadily, towards full implementation of the basic approach, hopefully in 2008. We will, however commence our test runs in parallel with Basle I in 2006, fine tuning our systems for full compliance as we go along. This would be in line with the widely accepted policy that countries should adopt the options and approaches that are most appropriate for the state of their markets, their banking systems, and their supervisory structures. In Sri Lanka, as in most countries, the banking sector enjoys predominance in our financial system. As is to be expected, the financial environment, domestically, is becoming more innovative and competitive to meet the sophistication of peer foreign banks and the needs of investors and consumers. This naturally increases their risk profile. Increasingly, therefore, our remit as regulators is to ensure an 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 .