The Committee also continues to consult actively with banking industry representatives and organizations through holding seminars, inviting presentations at working meetings, and conducting surveys on various topics. The Consultative Paper represents an evolution in the Basel Committee’s approach to capital adequacy. In addition to establishing minimum capital requirements, the paper places an increased emphasis on the supervisory review of capital adequacy and the role of market discipline. We refer to these elements as the “three pillars” of our proposed capital adequacy framework, which together promote safety and soundness. This evolution in the Committee’s thinking about capital follows from much of our recent work on risk management and the surveys we have conducted on banks’ disclosure practices. In our view, the three pillars to assess capital adequacy are mutually reinforcing, each addressing the challenge of aligning capital relative to risk in banking organizations somewhat differently. The Committee’s belief is that by combining the approaches of the three pillars, we can better achieve our overall objective of ensuring an adequate capital cushion across the banking system that at the same time recognizes and encourages prudent risk management. BIS Review 126/1999  4  Let me highlight briefly each of the three pillars and provide some perspective on the key challenges that the Committee faces in relation to each. The first pillar has to do with minimum capital requirements. The 1988 Capital Accord allowed supervisors in the G10 countries for the first time to use a common yardstick for measuring the capital adequacy of banks.
Moreover, as transactions that shift risk become more common and complex, disclosing the associated residual exposures takes on added importance. Such reporting, in turn, requires that banks have in place the appropriate systems to identify and measure these risks so that the risks can be documented for the marketplace. Finally, as we move toward improved disclosure, we must keep in mind that the goal is useful and reliable information - not simply a large volume of information. More is not necessarily better. In the area of disclosure, I should also mention that my colleague, Peter Fisher, is chairing a Multidisciplinary Working Group on Enhanced Disclosure, comprised of representatives from the banking, securities, and insurance industries in a pilot effort to formulate a set of public disclosure guidelines that make sense for an increasingly integrated financial market. The working group will assess the extent to which the pilot data can provide a meaningful basis for comparing risk management practices as well as the level and types of risk across institutions and across countries. The Basel Committee supports this pilot approach. It limits the burden on the banking industry and at the same time makes clear that the private sector has a key role to play in improving disclosure and enhancing market discipline. Firms participating in this program will have the opportunity to shape the exercise and influence the interpretation of its results. Through their participation, these firms will be sending a clear signal about their willingness to improve market discipline.