I am not denying that a capital regime to cover market risk is necessary, particularly for those countries like the United States whose banks are heavily involved in trading activities. We are intending to introduce the regime in Hong Kong by the end of this year, and a number of countries in the Asian region are intending to do the same. However, they are doing so largely to be seen to be adhering to international standards, rather than because their banks are running substantial trading risks. Even in Hong Kong, which has the fifth largest foreign exchange  BIS Review 55/1997  -3-  market in the world and the seventh largest derivatives market, the incorporation of market risk will have only a minor impact on most banks’ capital adequacy ratios. The concentration on market risk has perhaps led to other supervisory areas not receiving the attention which they deserve. In particular, credit risk still remains the main risk facing most banks, and it is therefore disappointing that there are still no internationally agreed guidelines in areas such as loan classification, bad debt provisioning and non-accrual of interest on non- performing loans. Most countries in Asia, including Hong Kong, do have their own rules in these areas but the lack of an agreed standard makes it difficult to undertake cross-country comparisons of asset quality. I hope, therefore, that this is an area which can be addressed by the Basle Committee in the near future.
Second, when trying to enforce new supervisory guidelines and rules on our local banks, one of the first questions they will ask is what is being done elsewhere. It is thus very helpful to be able to point to the relevant international standard in order to confer legitimacy on what we are trying to achieve. Of course, this presupposes that international standards are relevant to individual countries and territories. The Basle Committee on Banking Supervision has played a major role in setting standards which do have such relevance. In particular, the Basle capital adequacy ratio, which is still called the “Cooke ratio” in parts of Asia in deference to our chairman here today, has become the de facto capital standard in most supervisory systems around the world despite the fact that it was originally intended to apply only to internationally active banks. Despite this enormous achievement, however, it can be argued that the subsequent work of the Committee did become somewhat too narrowly focused on issues which are of principal interest to supervisors from G-10 countries. This is only natural since these are the people who comprise the Basle Committee but it perhaps left something of a vacuum in the setting and promulgation of standards with more global relevance. In particular, much of the work of the Basle Committee has been dominated in recent years by the formulation of its recommendations to extend the capital adequacy regime to cover the market risk arising from trading in derivatives and other financial instruments.