And, in turn, it could mean a reduction in the costs of risk transfer through securitisation or credit derivatives, with beneficial effects on banks' balance sheets and liquidity. However for this to happen, banks' internal ratings will need to carry credibility in the market and, for this, transparency is essential. The transparency proposals from the Basel Committee have come under a certain amount of fire for their volume and detail. But I would like the critics to dwell for a  BIS Review 15/2001  3  moment on the alternative: a world in which banks effectively set their own capital, with no assurance of consistency or comparability from one bank to another. This is an important debate and we are keen to listen to others' views before the proposals are finalised. Turning to the possible effect of Basel on capital flows more generally, including bank lending, undoubtedly the new risk sensitivity will tend towards changing conditions for certain borrowers and issuers. This is particularly marked in the sovereign context, where, based on current ratings, approximately twenty seven sovereign borrowers will incur a lower bank capital charge versus eleven incurring a higher one. Again I would stress that the cushion of capital which most banks maintain over and above their regulatory minimum will blur the impact of the Basel changes, since in these circumstances banks' lending and pricing decisions will not be constrained by the regulatory standard.
So we also have to take a close interest in developments in overseas and international financial markets. The international bond market is of course a key example. We try to analyse the information in market prices and other data. But the real understanding of the latest developments comes from talking to market participants. Credit risk transfer markets This is particularly important when it comes to financial innovation. In recent years, instruments and markets for the transfer of credit risk have been a particular focus of change. New ways have been found to securitise cashflows which could not previously be traded, to unbundle the credit risk from loans and bonds, and to re-bundle credit exposures in different ways to create securities with different pay-offs. BIS Review 15/2001  1  The distinction between a loan and a bond is becoming increasingly blurred. Individual loans are sold into the secondary loan market, although some companies remain reluctant to see their debt traded in this way. And portfolios of loans and other cash flows, ranging from mortgage payments to recording royalties, are sold to special purpose vehicles for securitisation into tranches with different risk characteristics and maturities, from AAA to junk, and from commercial paper to long-term bonds. Portfolios of bonds are also repackaged, sliced and diced in a similar way to create collateralised bond obligations. The new area of growth at present, however, is not in these sales of assets to remove them from the balance sheet.