The common interest is to keep the Basle standards at a level sufficient to ensure financial soundness, a minimum above which banks will choose to operate. To achieve this, we must fashion a set of standards that does not greatly distort incentives. Supervisors acknowledge that the current regulations and ratios need to be updated to be more meaningful, given the full range of risks banks face today. Supervisors are always challenged to keep pace with financial innovation and improvements in risk management practices, and this suggests that we will need a frequent monitoring and maintenance program for the present and future Accord. In closing, I would like to summarize the key supervisory objectives that we are mindful of as we look to revise the Accord and enhance the overall capital framework. Our first objective, of course, is to promote the safety and soundness of the financial system. Our second is to enhance competitive equality, while allowing for differences among banks based on  5  BIS Review 32/1999  differences in their risk profiles. These were the original goals of the Accord. Our third is to develop standards that are fundamentally applicable to banks of varying levels of complexity and sophistication, including those in emerging market nations. In developing this capital framework over the next year, we plan to consult closely with the financial and supervisory community and communicate openly about our progress. By yearend, we hope to have made great strides in furthering our objectives.
Inevitably, this aspect takes on greater importance. For one reason, supervisors expect banks to operate above minimum regulatory capital ratios included in the Basle Accord – and prudent assessments can help to inform by how much. For another, supervisors seek to intervene early enough to prevent capital from falling below prudent levels – and bank assessments can provide another useful tool in identifying key issues before they become major problems. With these thoughts in mind, supervisors are tackling the challenge of developing a more systematic approach to the review of capital adequacy. Supervisors also are discussing ways to enhance market-based discipline. Most agree there should be a greater role for private-sector monitoring of banks. Of course, there already exists a fair amount of market-based monitoring; however, the collection and use of these kinds of information usually are not systematic or complete. The first goal is to improve information available to the market. With enhanced risk disclosure, supervisors will be more able to rely on the opinion of market investors. These opinions are reflected quickly in the price of bank debt and share prices, and the ease with which banks can access capital. By relying more on these market signals, supervisors will be better able to identify and address waning capital levels at problem institutions. To the extent banks develop disciplined internal approaches to evaluating capital adequacy and capital plans, and enhance disclosures, supervisors will be able to place greater reliance on all three pillars and meet the challenges of a more complex financial marketplace.