This is a clear example of how we are harnessing the advances made by the leading institutions within the industry. Furthermore, to encourage those institutions which are not at the leading edge in this field to make enhancements in their internal controls and risk management processes, the New Accord will offer explicit economic incentives to adopt - over time - more accurate measures of risk and more sophisticated means for controlling their exposures to such risks. However, the Basel Committee recognised that relying on uniform rules alone would have introduced certain drawbacks. Rules tend to be inflexible and therefore might preclude or ignore innovation. Applying uniform rules may also fail to account for a bank’s unusual businesses or risk profiles. Consequently, our second pillar, supervisory review, addresses some of those drawbacks. It introduces judgement into the policy mix. Banks and supervisors will exercise discretion in determining capital needs relevant to their particular businesses and risk profiles. That degree of discretion makes the supervisory framework more flexible and better able to adapt to change and innovation. Finally, the third pillar, market discipline, adds greater transparency to the process. When a bank discloses information that offers meaningful insight into its risk positions and exposures, marketplace participants are better able to assess its financial health. Counterparties, investors, rating agencies, and even customers can reward banks that manage their risks properly and penalise those that hold unrealistically low amounts of capital for their risk.
V.  Conclusion  This morning, I have shared some of my views on the need for risk management and supervision to evolve together and to reinforce each other. All of us recognise that both areas must keep pace with changes in accounting practices, and I think you would agree that the work we have to undertake in all three areas - risk management, supervision, and accounting - is quite demanding. To develop new ways of thinking about risk and about the techniques for measuring it, we will require hard research and significant resources. We must gather and pour over large amounts of data to sharpen our understanding of various risks and their relationships to each other. We must dedicate our talent, staff, and indeed funds to undertake this work. I would argue that is equally demanding to develop a supervisory structure that capitalises on and further encourages those advances, especially when we are trying to implement a shared framework across many jurisdictions. But the benefits are many. On a microeconomic level, the virtuous circle I have described should help individual firms to improve the quality of their controls in the short run and strengthen their competitiveness in the long run. Yet supervisors are especially motivated by the benefits we expect at the macro level. We believe that, when all financial institutions have the right incentives to pursue profits responsibly, the financial services sector becomes better managed, more resilient, and better able to serve as a source for sustainable growth for the economy.