Preparing for the New Accord Let me get into more detail now on what both banks and supervisors will need to do to prepare for the Accord, by describing what we are doing in the United States. I am sure our experience will have parallels in the UK and elsewhere. Challenges for banks To begin with, we have looked to get our arms around where the major firms actually stand in preparing for Basel II, and to pinpoint the major challenges that lie ahead for them as they look towards implementing the advanced approaches to credit and operational risk. Importantly, our dialogue with the banks has focused on where they stand in meeting the minimum standards for entry to, and on-going use of, the IRB approach. Our strong sense is that banks have both the desire and the commitment to continue to develop their internal ratings systems in a manner consistent with the requirements of the IRB framework. The discussions with the industry have, however, highlighted various areas where banks may need to expand their efforts in preparing for implementation. I will offer comments on four areas where more work is needed: a.  the design and structure of rating systems;  b.  the necessary controls to ensure that ratings are accurate and up to date;  2  BIS Review 15/2003  c.  the availability and quality of credit data; and, finally  d.  the overall corporate governance approach  a.
The net value of non-performing loans for the last 12 months decreased by over BGN 660 million. Their share represents 2.66% of the total net value of loans and advances, and their amount is fully covered by the capital surplus above the regulatory requirements and buffers; Profitability, measured by the amount of profit of BGN 1.7 billion, guarantees a return on assets and capital, and is a serious source of internal support for balance sheets if necessary. In this context, the main challenges facing the banking sector to date can be summarised along three lines: the dynamics of the macroeconomic environment, the pro-cyclical behaviour of banks, and the potential risks to their profitability. The macroeconomic environment, as I noted at the beginning, is characterised by high uncertainty and the potential for escalation of risk scenarios. This implies the continuation of stress tests for the banking sector with various hypothetical negative scenarios. The banks' pro-cyclical behaviour is associated with continued credit growth. Under upward credit dynamics, the capacity of borrowers to service their obligations is sometimes overestimated. That is why the supervisory policy will continue to aim at ensuring that credit institutions act conservatively. 3/5  BIS - Central bankers' speeches  The profitability of the banks is put at risk along two lines simultaneously. First, due to the need to set aside additional provisions under a growing probability of non-performing loans; and secondly, due to limitation of the banks' scope to generate income from core activities.