The new rules will remove these incentives for short-term lending - a form of lending that can be especially destabilizing to emerging markets during financial stress. The adoption of Basel II internationally will have the benefit of spreading stronger risk management practices to all countries, including emerging market nations. This is not to say that Basel II is the right answer for all banks or all countries at this time, but rather that all countries should work to adopt various of its underlying principles in assessing banks’ risk management systems and in promoting transparency and disclosure. Investors and rating agencies would then have a better understanding of the risk profile of emerging market banks, which could result in a reduction of the risk premium currently applied to some emerging market lending. Conclusion In wrapping up, I would emphasize that implementation of Basel II should help supervisors and market participants better detect increases in risk in individual institutions and across the financial system through a more risk sensitive capital measure. Basel II also promises to reinforce and accelerate improvements in bank risk management globally, as well as promote future innovations through its reliance on banks’ internal methodologies. How well these improvements unfold will depend critically on the actions of supervisors in integrating the new regulatory capital requirements with their overall supervisory and regulatory approach. Thank you very much. BIS Review 35/2005  5
So how do our actions support economic activity? Buying assets and extending interest rate guidance puts downward pressure on longer-term interest rates, so they are lower than they would otherwise be for any given economic outlook. This supports the price of assets such as equities and homes. Buying mortgage-backed securities has the additional effect of  BIS central bankers’ speeches  5  narrowing the interest rate spread between these assets and Treasuries, which further reduces mortgage rates. Moreover, to the extent that our actions are seen as supporting the recovery and providing some insurance against adverse shocks, confidence in the mediumterm economic outlook should also increase, making businesses and households more willing to invest, hire and spend. If we are successful, long-term Treasury yields could actually rise as confidence in a sustainable recovery increases. At the same time, the expected returns on private assets should rise and risk premia decline. This matters because such shifts would provide support to the economic recovery. Now it is true that some of the channels through which monetary policy affects the economy may be partially impaired at the moment. For example, because of ongoing restrictions in the supply of mortgage credit to customers with less than perfect credit records, the impact of lower mortgage rates on housing is probably less powerful than normal. While this restraint should slowly ease as house prices stabilize, the difficulties of households with lower credit scores in obtaining mortgage credit warrants ongoing attention.