An operating environment based on prudent risk management rather than aggressive risk taking, gives us regulators comfort that profits are conservatively stated. This is the essence of prudence which underpins safe and sound banking. BIS Review 70/2004  1  In an increasing trend to harmonise prudential frameworks across the globe, in recognition of the fact that banks, wherever they may be domiciled, are exposed to the same risks, it is becoming increasingly difficult to pursue country-specific solutions. We recognize that we too have to be internationally compatible in adopting common standards for regulation and supervision which are spearheaded by the Basel Committee. Global financial reporting practices are not far away and there are efforts underway to establish a common set of internationally accepted financial reporting standards. Differences of opinion between standard setters and regulators need to be reconciled IAS 39 is one such which is being hotly debated. The efforts taken by CRISIL India, together with the SLBA, in this regard are commendable and I would like to see this initiative gather momentum to provide the platform for the improvement of risk management techniques by the banks in Sri Lanka which would, in turn, make them ready, if not in 2007, even later, to meet the challenges of Basel II. The transition to Basel II calls for a fundamental shift from the basic rudiments of risk management to sophisticated risk management techniques. The period of transition and the cost of transition has to be closely examined by the banking industry.
As I see it, expected corporate profits and access to reasonable investment financing are vital for a process of transformation. Wage formation Let us now take a look at a period when wage formation was one factor behind a less successful transformation of the Swedish economy. When the industrialised economies began to recover after World War Two and international competition increased, partly because trade barriers were dismantled, it became increasingly necessary for Swedish firms to adjust their product range. The requirements resembled those that now seem to lie in the not too distant future. For much of that period the level of Swedish wage costs rose rapidly. This meant that corporate profitability was under pressure both from the increased international competition and for rising wage costs. To cope with this pressure, firms tried to cut production costs by means of rationalisation rather than by investing in new products. With diminishing profits, they lacked the new investment stimulus and the rapid renewal of the capital stock that the pressure for change called for. During a period of transformation, rationalisation is not enough; new developments are equally important. At first, most things still went well. The 1960s was a fantastic decade for growth. In time, however, the strategy proved to be defensive and stagnation set in in the 1970s. There are limits to growth through rationalisation. Without renewal, growth normally slows sooner or later. Compared with other countries, the trend rate of growth in Sweden did indeed turn downwards.