Policies should be implemented to prohibit any behaviour or relationship that diminishes its quality. This is very often evident in conflicts of interest, connected lending, which is not on an arms length, and preferential treatment to related parties. The independence of directors too is crucial where directors should have the ability to exercise objective judgement, regardless of board structures or ownership structures. Well established corporate governance committees such as the Board Audit Committee which oversees the bank’s internal auditors, with objectivity and independence, should  1/2  comprise of non-executive members of the Board who have the requisite knowledge that is commensurate with the complex nature of the banking institution. Independent, competent and qualified auditors is an essential pre-requisite of good corporate governance which would achieve a number of important objectives. It would ensure timely identification of risks and the publication of financial statements which accurately represent the financial position and performance of the bank. Auditors should understand their duty to the bank and its stakeholders to exercise due professional care in the conduct of audits. In this connection, we have, in the recent past, strengthened the relationship of auditors with the regulator and the company to benefit from each others’ capabilities, expertise and knowledge. Basel II has attempted to capture all these critical aspects into the new accord.
A bank’s own assessment of its capital needs, coupled with the regulator’s assessment of the adequacy of capital, which would encompass all other aspects of its operations, apart from credit, would ensure adequate capital to insulate the bank against its risk exposure. After all, managing risk is fast becoming the single most important issue for the regulators as well as for the institutions that are regulated. Therefore, Basel II is good news and we can only benefit mutually from its adoption. A roadmap is therefore already drawn up and we hope we can all commence our journey down this road to reach our goal of a safe and sound banking system resulting in financial stability which is what we all aspire. As you are all aware, our banking community is in the process of adopting the standardized approach within Basel II by 2007. However, the major challenge faced by the banks in the next few years, are the IT, skills development and training that are required to implement the more advanced approach which relies heavily on quantitative techniques. It is imperative, therefore, that banks start getting ready for this eventuality sooner, than later. Basel II should not be looked at as an exercise in compliance but as an impetus to more efficient risk management across the banking sector. Its benefits would be seen in the ability of the financial system, to promote sustainable economic growth which would be beneficial to the banks, the central bank and to the consumers of banking business.