In Asia, and in many emerging market economies, meaningful headway has been made toward recapitalizing banking systems, ridding banks’ balance sheets of problem assets, and improving supervisory and regulatory frameworks. As a result, economies are growing again, equity markets have rebounded, and foreign capital has begun to return. What a difference two years of hard work can make. When I last addressed this conference in October of 1998, I said that bank supervisors have a special role in maintaining financial stability, and that our special role has two components: facilitating the resolution of problems when they occur, and taking the necessary steps to lower the risk of problems occurring. Two years ago we were busy with the first component – crisis management and resolution. Today, as we stand on the threshold of a new century, we have the opportunity to focus on the second – prevention. With that in mind, it is my view that the greatest challenge to the long-term goal of financial stability, both locally and globally, is the accelerating pace of change and financial innovation, driven by the steady march of technological advancement. To be sure, such rapid change has created unprecedented opportunities for both producers and consumers of financial products and services. But it must also be acknowledged that with such remarkable progress has come new, more complex and potentially farreaching risks.
7  BIS Review 75/2000  At the same time, the respondents raised a number of important concerns and questions that the Committee is reviewing and considering carefully. The comments offered by emerging market and other “non-G10” countries have figured prominently into the Committee’s review of its initial proposal, and Claes Norgren, who is chairing the next session, will provide an update on the Committee’s thinking regarding these points. I’d like to take a few minutes to update you on our efforts, focusing on a few topics of special interest. Given the progress we have already made, it is clear to me that the Committee is well positioned to continue its momentum and to release a revised Consultative Paper early next year. Internal ratings-based approach The centerpiece of the new Accord is likely to be the internal ratings-based approach to credit risk. We envision that the internal ratings method will be applicable to those institutions that have in place strong internal rating systems accompanied by robust internal controls. Naturally, our new standards will also encompass guidance on supervisory oversight and provide for ample disclosure. The Committee is looking to establish standards that are rigorous and yet permit institutions willing to make the necessary investments to use the approach. I think that it is fair to say that the Committee now expects that many sophisticated institutions will seek to use the internal ratings-based approach. How will an internal ratings-based approach work? Simply described, there are three components to the internal ratings-based approach being developed by the Committee.