For these situations, the members of the Committee have long expressed their views that those banks and supervisors should concentrate on the fundamentals first. Banks in those countries should work toward developing an adequate understanding of the risks they face and a sense of the best practices in use worldwide. For example, banks should develop their understanding of the credit underwriting cycle, skill at credit analysis, and insight into the dangers posed by operational risks. They should nurture a healthy environment for corporate governance, such as by strengthening their systems of internal controls, by promoting robust internal and external audit processes, and by adopting sound standards for accounting, loan analysis and classification, provisioning and reporting. In turn, supervisors who are still fortifying the foundation of their banking systems may consider a variety of approaches to capital regulation. For some countries, the application of the simplest approaches from the New Accord may be appropriate. But others may feel that their banks are not yet ready and may decide, after careful review, that it would continue to apply the 1988 Basel Accord for several more years as banks continue to strengthen their risk management capabilities. I want to emphasise that the Basel Committee supports the decisions of those supervisors who believe that their markets may not yet be ready. We would encourage those countries that choose to remain on the 1988 Accord to look to the principles of the New Accord, and especially to strengthen the second and third pillars.
This leads to the final topic I’d like to discuss, namely the issues related with the transition to the New Accord across the world. Broad application of the New Accord around the world, transition to Basel II In drafting a replacement for the 1988 Accord, the members of the Committee sought to ensure that the capital guidelines could be applied around the world to many kinds of banks. This means that our rules must build on the best practices, yet remain relevant to conventional banks in more traditional markets. The New Accord provides a “menu” of options for measuring risk, thereby offering the degree of flexibility necessary for banks of various sizes and strategic orientiations to adopt the new framework. Now that the New Basel Accord is moving away from a “one-size-fits-all” approach to capital, supervisors in every jurisdictions have the opportunity to evaluate what would be most appropriate for banks that are not large, complex, or internationally active. At the same time, we could say that Basel has moved away from a “one-schedule-fits-all” approach to implementing the new rules worldwide. Or, if you prefer, the Committee is saying to each country, “pick flowers when flowers bloom”. This suggestion is particularly crucial for supervisors who have adopted the 1988 Accord only recently. Some supervisors believe that their banks may still be strengthening their credit risk management functions and consequently would not benefit substantially from the New Accord at the moment.