This will equip supervisors to deal with the future evolution of Basel II in a constructive and coordinated way. I also foresee greater transparency surrounding the risks faced by banks, and in how banks are measuring and controlling them. In the future, I expect banking supervisors to place greater emphasis on the techniques of securities regulators by requiring more information to be disclosed to the markets and the public. We will likely place even greater reliance on market processes and corporate governance to ensure that banks are soundly managed and well capitalised. Sound precepts of risk management and prudential supervision While there will inevitably be ongoing challenges to the vision of capital adequacy embodied in the new framework, particularly to its more technical aspects, I have no doubt that the sound precepts of risk management and prudential supervision that underpin the new framework will be an enduring feature of future versions regulatory capital requirements for banks. Alas, the requirements and modeling of certain types of risks may get excruciatingly complex. Indeed, for some of us, they have already reached that point. But in selecting and imposing such requirements, supervisors will be practical, and will look to the best risk management practices of banks and other financial institutions as the basis for setting risk sensitive capital requirements. And as supervisors become confident that the risk management processes of an institution are appropriate to match its risk appetite and operations, minimum capital requirements will edge downward.
But with more autonomous units, an internationally-active and  BIS Review 42/2004  1  complex bank has to expend more effort to identify, measure, and control the risks arising from its diverse and far-flung activities. Traditional rules of thumb used by management and supervisors to assess risks and to ensure the adequacy of capital to buffer risks are no longer adequate. And continuing financial success depends critically on how a bank responds to the risk management challenges. In response to these challenges, the successful banks have developed enhanced tools for measuring risks. These can be grouped into two broad categories. The first category of tools are those that give a bank the ability to discriminate among risks by differentiating the riskiness of customers, and of various banking facilities and products. The second category of tools includes those that give a bank an enhanced capability to quantify risks. The end of the road for Basel I In and of itself, the enhanced capability of institutions to differentiate and measure risks has been a welcome development. But, the increasing sophistication of institutions in risk management meant that the crude system of risk weights under Basel I became less meaningful in ensuring the adequate capitalisation of large, complex banking institutions. By the mid-1990s, less than five years from the official implementation of Basel I,1 it was apparent that Basel I was becoming less relevant for some banking institutions.