The 21st century financial marketplace is too dynamic, too complex, and supervisors must work within the political realities of our respective nations. Instead, what I envision is a flexible, multi-faceted strategy that emphasizes prudence and prevention, compatibility with the market, and that fosters a close and cooperative partnership between the private and public sector. With these priorities in mind, I believe there are three essential elements of a modern supervision framework: •  effective bank-level management;  •  market discipline; and  •  official supervision. Let me discuss each of these in turn, noting that each should reinforce the others to effectively promote a safe and sound financial system. Effective bank-level management Primary responsibility for the safe and sound operation of a banking institution lies with its board of directors and senior management. The purpose of the board of directors is to oversee the development  3  BIS Review 27/2000  of the overall strategy of the organization and the decisions made by senior management in pursuit of those strategic objectives. The role of senior management, in turn, is to oversee day-to-day decisions made within the organization and to ensure their consistency with long-term objectives and policies as determined by the board. There are several aspects to effective bank-level management.
At this critical juncture in the Asian recovery process, I think it is worth reviewing just how important a stable banking and financial system is to the health and vitality of any market economy - and particularly emerging market economies - and the crucial role that supervision plays in achieving and preserving financial stability. Indeed, effective supervision represents a crucial cornerstone of financial stability, both locally and globally. It is also clear that, given the accelerating pace of change and innovation in the financial services industry, our notion of supervision must encompass discipline applied by the marketplace, as well as official supervision. With these thoughts in mind, and noting the critical role banks play in a market economy, in my remarks today I will discuss the nature and form of an effective supervisory framework for the 21st century, addressing the role to be played by banks themselves, the broader marketplace and official supervisors. On the subject of official supervision, I will address the Basel Committee’s Core Principles for Effective Supervision, and then conclude with a discussion of the Committee’s major initiative to revise and refine the 1988 Capital Accord. Banks’ role in a market economy Let me first discuss the crucial role banks play in a market economy. While specific arrangements may vary from country to country reflecting differences in history, custom and culture, the basic principles are common to nearly all market economies.