Most banks, and especially large and internationally active institutions, would understandably prefer to calculate the relevant capital requirements on a firm-wide basis. Their comments highlighted the technical and logistical constraints on developing an AMA, indicating that it is more difficult, from a modelling perspective, to estimate the potential for operational losses at even a medium-sized entity because of the need for a large body of data. Internationally active institutions in particular cited the practical challenges of developing, and seeking approval for, a separate model for each legal entity in every jurisdiction in which they operate. Many banks thought the New Accord should recognise fully the economic benefits they gain from operating across a diversified mix of business lines and entities, since they believe it unlikely that a large organisation would suffer high losses from operational failures in many businesses or entities at once. The Committee acknowledges the technical and practical challenges associated with developing and implementing AMAs for large, diversified firms. We are likewise working to reduce unnecessary burdens on banks adopting them. Still, the question of whether capital requirements could be allocated not just across legal entities, but also across national borders, raises difficult legal questions. The Committee must respect the legal mandate given to national supervisors in regulating locally chartered banks, branches, or subsidiaries. This usually includes the duty for the national supervisor to verify that local banking subsidiaries are adequately capitalised on a stand-alone basis.
Just as the application of information technology revolutionised the business of banking and risk management in the second half of the twentieth century, I expect that the increasing quantification of risk will drive tremendous advances in the first half of the twenty-first century. But, as prudent risk professionals and bank supervisors, you and I know that quantifying risk involves making assumptions. And no model, and no software package, no matter how sophisticated, can ever replace the skills of a trained, experienced, and conscientious risk manager. Banking, finance, and insurance are, at least in part, an art, not a science. We can and should supplement and enhance our judgement with the best technical tools available. Yet - against the backdrop of unpredictable markets and times it would be folly to derive business strategies purely from the projections of a mathematical model. And that is why the work of an organisation like GARP matters so much. GARP creates a forum for its 30,000 members to share ideas on new ways to approach risk or to share suggestions on ways to improve current practices. Furthermore, GARP and similar professional organisations encourage all of us to improve our own skills constantly and to probe and understand emerging issues in the market. So it is a particular pleasure for me to share some thoughts on the Basel Committee’s progress to develop regulatory capital standards that reflect the best practices in risk management today - and that recognise the importance of exercising prudence and sound judgement when taking on risk in banking.