However, on a positive note, I am encouraged by progress in numerous countries to promote disclosure and transparency, for instance with regard to non-performing loans. The Basle Committee on Banking Supervision, the Committee on the Global Financial System, the International Accounting Standards Committee and other organizations have put forth initiatives to enhance the relevance, reliability and comparability of information disclosed by the financial sector. The most important initiatives will be those of national governments to apply these accounting and transparency frameworks, as well as the voluntary disclosures of financial institutions. Now that I have discussed the changing risk environment and how banks are responding to that challenge, let me turn to what this means for the current regulatory capital regime. Today, a major challenge for regulators is to develop capital standards that address more comprehensively the full range of risks to which banking institutions are exposed. These standards must also improve the differentiation among high-risk and low-risk exposures and between weak and strong institutions. Additionally, they must be flexible enough to accommodate the risks of newer and emerging activities, some that I have mentioned today. As you know, the primary tool of capital regulation currently is the set of minimum capital ratios that were devised in 1988 by the Basle Committee on Banking Supervision. They were set forth in an agreement known as the Basle Accord, and were adopted, among other reasons, to address the slide in international capital levels that was occurring over a decade ago.
A bank must hold enough capital to cushion both depositors and senior lenders against losses, while leaving the bank able to meet the needs of its customers. Banks must maintain capital commensurate with the amount of risks that they take and hold enough to weather financial storms, which can at times be severe and of considerable duration. Banks with low equity capital ratios and a high variability of operating earnings have proven particularly vulnerable to financial distress. However, banks do not just hold capital to overcome distress, but also because it provides them with financial flexibility. Banks that are strongly capitalized can take advantage of growth opportunities. Also, strongly capitalized banks are better able to promote innovation, whether in the form of new products, new services or new distribution channels. This is not just a capital resource issue, but a human resource issue. Bank managers who are able to focus on the business of banking, strategy and competition, rather than on financial difficulties, can create and innovate and, therefore, add value for shareholders. Banks also hold capital as a sign of strength to their customers. Clearly we know this to be true with depositors on the retail side, but it is equally true on the wholesale side. When an institution or corporation enters into letter of credit guarantees or swap contracts, it needs to be confident that its bank will be around in three or five years, at the maturity of the contract.