Our goal for Basel II should instead be to facilitate the application of minimum standards and to work together, across borders, to promote a more consistent implementation and application of the new framework. With or without Basel II supervisors need to enhance co-operation in a world that moves towards larger scale cross-border activities and a greater presence of systemic foreign banks in domestic economies. This enhanced co-operation is a process that will promote consistency and convergence of supervisory practices. It will help to avoid performing redundant and unco-ordinated approval and validation work in order to reduce the implementation burden on the banks and conserve supervisory resources, and will therefore contribute to a more level playing field for internationally active banks. In this regard, the Committee’s Accord Implementation Group continues to encourage practical work among supervisors on applying Basel II effectively and efficiently to internationally active banking organisations. Chaired by Nick Le Pan, the Superintendent of Financial Institutions in Canada, the AIG is currently working with supervisors in non-member countries as well to conduct a number of “real case” studies to gain better insight into the practicalities of co-operation between home and host supervisors that will be essential for Basel II’s successful implementation. So far, the AIG has identified at least two findings that are relevant to banks interested in the cross-border application of the new framework.
We might view the entire three-pillar structure of Basel II as a series of built-in reality checks for management’s decision-making. In this regard, the three pillars of Basel II are intended to make sure that management assesses and controls its risks carefully and that it takes the steps necessary to allocate the appropriate capital. As you know, in the first pillar, the minimum capital requirements focus management’s attention on identifying, assessing and quantifying risk within a specified framework. This puts the onus of analysis and decision-making on the right set of shoulders: bank managers are in the best position to evaluate their risks and are ultimately responsible for responding to them. When banks consider their risks more comprehensively and work to evaluate rigorously the magnitude of losses that they may face, they are improving the quality of the information at their disposal. That, in turn, should improve their ability to arrive at sound decisions regarding the amount of capital that they may need to weather potential losses in the future. Considerable attention has been paid to some of the formulas and techniques that we have adopted in Pillar 1 to help quantify the potential for losses related to credit and operational risk exposures. We  BIS Review 66/2004  1  must remember that these formulas are not revolutionary.