As to the more advanced features under Basel II (such as the internal ratings-based systems), there is occasionally an excessively mechanistic view of what is entailed. This is not a more complicated formula for calculating capital requirements. What the more advanced approaches under Basel demand, and recognise, are more sophisticated internal risk-management systems. Hence, and as the word “management” indicates, the systems should be effectively used and integrated into the bank’s everyday analysis and decision-making at all levels. Capital requirements calculated in a more sophisticated manner, and which encourage better riskmanagement techniques, should be underpinned by a suitable policy for capital. It does not suffice to have a sufficient and even comfortable overall volume of capital: what is needed is a strategy for capital that takes into account factors such as the permanence and quality of capital, market accessibility and the balance between shareholder remuneration and the institution’s capitalisation. Too often, formulas for increasing capital through the use of subordinated debt or hybrid instruments to finance business expansion are resorted to, while at the same time the build-up in reserves from retained earnings slows. It is crucial for banking institutions to evaluate decisions on the level and composition of capital from a strategic and medium-term perspective. These thoughts on the challenges to be faced would be incomplete without addressing the corporate governance of credit institutions. The Banco de España has a particular interest in this area as it considers it a basis for sound risk-management.
The euro area In an international setting, as described, of a moderately expanding world economy and heightened geopolitical tension, the pace of growth in the euro area in 2002 was markedly weak. At 0.8%, it was far lower than had been expected at the end of the previous year. This performance has highlighted  2  BIS Review 31/2003  the considerable exposure of the euro area to global shocks and the burden the structural deficiencies still beleaguering the area entail for it. However, although economic buoyancy has diminished across the board, there have been considerable differences in the growth of the different Member States. In particular, among the four major countries in the area, only Spain has remained moderately dynamic in this unfavourable setting, while the biggest economy, Germany, has deteriorated markedly. Thus, while high and growing synchrony has been observed over the past decade, this still remains below what should be the case for a fully integrated economic area. Persisting divergences underscore the need to refine the single market and reaffirm the role to be played by national policies when it comes to ensuring the proper functioning of each of the member economies. It is also significant that the scant growth in the euro area in 2002 was mostly based on the contribution of the external sector. As a result, the shocks buffeting the European economy had a particular influence on internal demand, which was considerably slack throughout the year.