Encourage banks to improve their management of risk  We’ve also attained the third goal: to go beyond a rules-based structure and instead encourage banks themselves to improve their abilities to identify, measure, and manage their risks appropriately. As you know, the most sophisticated approaches to credit or operational risk in the New Accord will permit banks to rely increasingly on their internal assessments of risk when determining how much capital to hold. At the same time, the New Accord will be flexible enough for banks to build their risk management functions on the best practices available in the industry, even as those practices evolve in the future. By promoting the improvement of the management of risk across the industry, I believe that we are laying a foundation for more stable markets. The milestones achieved square with banks’ and supervisors’ long-standing efforts All of us can take great pride in meeting the goals that the Committee set out to embrace: the three pillars of capital adequacy, enhancing the risk-sensitivity of the capital framework, and creating incentives for banks to improve their management of risk. And we should recognize that these proposed revisions square well with the efforts that banks and supervisors themselves have undertaken, independent of the Committee’s work. The banking industry has done much over the years to adopt a forward-looking approach to risk management – one that emphasizes flexibility in, and improvements to, the measurement and management of risk over time.
Naturally, as prudent supervisors, the members of the Committee know that it is easier to enforce a simple rule than a more complicated one. Wherever possible, the Committee has sought to provide simple alternatives that can be applied in many markets and settings. Consultations helped us to simplify or remove a good number of rules thought to be unnecessarily complicated. However, it’s important to recognize that we intend to apply the New Accord especially to large, internationally active banks, all of which are highly developed and complex institutions. One blanket won’t cover a mountain range. In fact, the New Accord’s complexity stems partly from the options it provides to address the wide range of risk profiles, strategies, and systems that banks maintain. Many options were created precisely because some banks felt disadvantaged under a proposed blanket rule. Yet each new option alters the balance between simplicity and complexity. I think the best example of finding that balance lies in the treatment we’ve proposed for exposures to small and medium-sized enterprises. Equating loans to small and medium-sized businesses with loans to large corporations ignores critical aspects of the risks associated with each type of lending; it also could lead to results that seem unfair to banks that lend primarily to smaller businesses. So the Committee developed a special capital treatment for exposures to small and medium-sized enterprises that recognizes the unique characteristics of that form of lending, but admittedly makes the rules more complicated, and perhaps a page or two longer.