Extraordinary growth in practices such as securitisation and in the use of sophisticated derivative products allowed banks to transfer credit risk in ways that the 1988 Accord does not capture. In addition, some banks began to manage their exposures to operational risk separately and as a comprehensive practice comparable to the management of credit or market risk. By the late 1990s, it became increasingly clear to leading banks and their supervisors that the original Accord no longer provided meaningful measures of risk for the most sophisticated banking organisations. As a result, the Basel Committee and others began to discuss ways to revise the existing capital rules to account for these advances. Supervisors sought more than a simple revision of the existing framework. We wanted to align our capital requirements more closely with the best measures of economic risks that banks actually face. We sought furthermore to fortify the stability of the banking sector so that banks could continue to serve as a source of credit through good years and bad. In our view, promoting financial stability will benefit not just banks, but also other businesses and consumers as well. To incorporate the latest advances in risk management, and to develop a more forward-looking approach to supervision, the Committee embraced a “three-pillar” approach to capital requirements. Rather than simply setting out a static minimum requirement for capital levels, the new capital framework will rely on three mutually reinforcing policy approaches.
On the downside, the speed of the recovery in the world economy may be held back by a number of factors, including the large outstanding debt position of corporate and household sectors; investment in the UK might remain subdued; or the weakness in pricing pressures we have seen over the past year or so may persist. But on the upside, the US might bounce back more rapidly than anticipated; consumption growth might remain robust; or the sterling exchange rate might begin to adjust downwards. Against this background of risks, it is quite possible we may see rates at current levels for some time until the way ahead is clearer. But, as you know, economic events have a habit of developing quite rapidly, so even short term predictions are never easy. For our part, we will continue to assess the case for interest rate changes on a month-by-month basis. In carrying out our task, the MPC relies heavily on having the very best information at our disposal, and in that we are enormously assisted by our network of regional Agencies. Each month, our Agents drive thousands of miles, eat hundreds of rushed sandwich lunches and, on occasion, no doubt push your goodwill to the limit as they seek out the latest news on developments in your businesses. Nigel Falls, our local Agent, is here with me tonight, and for those of you who have not already met him I really do encourage you to do so after the dinner.