Having worked on both sides of this argument, I am more than aware of the anxieties - and indeed disagreements - which have arisen during the long debate that has got us to where we are. But the direction seems clear even though storm clouds may appear from time to time. But what I would like to do today is to look beyond today's situation a little, and to share with you a few reflections both on the Basel process itself, and, looking forward, on some related issues. Importance of all three pillars in the new Accord Firstly a couple of observations on the Accord itself. One is to remind ourselves that the Accord has three pillars - not just one. Pillar one has had most of the attention hitherto. The challenge of producing greater risk sensitivity has been considerable. Technical experts from all areas of the business, model builders, and others, have been involved. This has generated a tendency to seek greater and greater granularity and has resulted, perhaps inevitably, in considerable complexity. Striking a balance between risk sensitivity and detail has not been easy. But faced with the detail of pillar one, the challenge going forward is not to lose sight of the other two pillars, and the role they can play in mitigating complexity. Pillar two Pillar two, it should be remembered, was designed to alleviate the need for excessive detail. Supervisory oversight was felt to be a better way to address the many complexities than detailed rules.
At the moment, although the European and US government bond markets are of comparable size, the non-government bond market in Europe is ‘only’ a third to half the size of that in the US; and much of that is bank issued debt. I would expect the euro corporate bond market to develop significantly in the medium term. And with it, I would expect to see other product markets develop, as they have elsewhere (in the UK, but especially in the US) – for instance markets for asset backed securities and commercial paper. As part of this I think we will see a trend to greater issuance at the lower credit end of the market (or ‘high yield’, as it is politely named). In the euro area around 70% or corporate bond issuance is by issuers  3  BIS Review 43/1999  rated Aa2 and above. In the US, it is around 30%. I would expect that gap to close a bit, and I think there are already signs of life in the European high yield market. While I am on the subject of European bond markets, I would like to make just a few remarks about the proposed EU withholding tax. The stated objectives of the scheme – reducing tax evasion and reducing structural unemployment – are clearly desirable ones. But in thinking about any kind of withholding tax a judgement has to be made about the trade off between the efficiency of tax collection and the efficiency of capital markets.