Sunil Mendis: Risk management in Sri Lankan banks in the changing environment Inaugural address by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, at the CRISILSLBA seminar on risk management in Sri Lankan banks in the changing environment, Colombo, 15-16 November 2004. *  *  *  Good morning ladies and gentlemen, Let me first thank the SLBA (Sri Lanka Banks Association) and the representatives from CRISIL India (Credit Rating Information Services of India Ltd) for the initiative taken to organize this Seminar on a very important aspect of banking business - risk management. As we all know, risk management in banking is a continuous process of planning, organizing and controlling a bank’s assets and liabilities, their volumes, maturities, rates and yields. This is the most simple definition that I can think of. However, its implications on banking business are what we concern ourselves with, especially from the regulatory point of view. In the context of Sri Lankan banks at least, of the major risks confronting financial institutions, credit risk remains the predominant or core risk. Risktaking is part and parcel of banking. The highly leveraged nature of banking business itself illustrates the risk exposure level of banks. Therefore, what is important is how we manage these risks, how we measure and price risk and above all what measures we take to mitigate these risks.
What I’d like to offer in my remarks today are some steps I see as necessary for institutions navigating in this new environment to begin to address the concerns I’ve outlined above. And, I’ll close with a couple of issues that remain on my “insomnia” list that will continue to warrant increased efforts in the coming year. What will it take for firms to navigate in this new environment? Addressing the weaknesses I’d like to start first with a fundamental observation: we need to focus first on fixing what was so obviously broken. The new sets of rules and regulations, whether global or local, were designed to address the very weaknesses that led to bad outcomes during the financial crisis: low levels and quality of capital; insufficient liquidity; fundamental weaknesses in a range of risk management practices; poor management information and reporting systems; complex structures and systems that couldn’t be quickly taken apart; and the list goes on. We know we need a more resilient system that is able to withstand a wider range of stresses, as well as provide buffers when firms do falter. And, importantly, we need to do this to restore confidence in the financial system. The new rules and regulations are intended to address the known weaknesses, and before we can talk about whether the global business model is viable or how to operate more efficiently within the constraints imposed, the basic underpinnings of a strong and resilient financial system need to be in place and functioning.