•  First, we intended to develop a framework that encompasses the "three pillars" necessary to support an effective system of regulatory capital: the appropriate measurement and minimum requirements, supervisory review, and market discipline. •  Second, we wanted to align the minimum requirements more closely with the actual underlying economic risks to which banks are exposed, which should help allocate capital resources effectively. •  A third goal was to encourage banks to refine their measurement and management of risk over time. By creating incentives in the New Accord for banks to re-evaluate and enhance their tools constantly, we expect that banks themselves will adopt a forward-looking perspective on risk. I’m pleased to say that, through the Committee’s efforts and the cooperation and support of other supervisors and the industry, it appears that the proposed framework will attain each goal. We can now count them among the milestones we've achieved. 1. Encompass the "three pillars" of capital adequacy  With regard to the first goal, the new framework will recognize the important roles that supervisors and markets can play in motivating the prudent management of risk and capital. Indeed, it is the Committee’s view that it would be insufficient for any country to simply adopt the new minimum capital requirements and ignore the remaining two pillars.
Nonetheless, we believe that this treatment helps to align regulatory capital more closely with the underlying risks. Procyclicality Another general concern expressed is that the New Accord’s increased sensitivity to risk will reinforce behavioral patterns in banking organizations that may increase the cost of credit precisely at times when its supply is falling, namely during downturns in the business cycle. While we are working to address this concern about procyclicality, it is not a reason to shy away from creating better risk management tools. Here, supervisors must articulate the need for banks to assess risks on the horizon. If banks fail to develop and manage to reasonable expectations about how their risk profiles may change over time, they may take on excess exposures today that they cannot administer responsibly tomorrow. At the same time, we should remember that the New Accord sets out the minimum amount of capital necessary to comply with banking regulations. All supervisors expect their banks to operate at levels above the regulatory minima, and nearly all banks manage to their economic capital needs, not to their regulatory capital requirements. So although deteriorating credit quality might drive up the minimum capital requirement, a bank should already be operating above that level, which should dampen the effects of a sudden downturn in business conditions and asset quality. Along those lines, the Committee recently agreed that banks adopting the "internal ratings based" approach to credit risk will be required under Pillar 2 to conduct meaningfully conservative credit risk stress testing.