And many commentators have expressed worry about the possible role that the current, uniformly rather low, capital requirements for short-term interbank lending played in the massive build up of capital flows to Asian countries prior to the 1997/98 crisis. BIS Review 29/2001  1  In several developed countries, of course, the risk insensitivity of the capital requirements has led to a whole industry of capital arbitrage, which has swelled to enormous proportions over the past 10 years or so. It has been estimated that by March 1998, non-mortgage securitisations by the 10 largest US bank holding companies amounted to around $ or more than 25% of these banks' risk-weighted loans. A combination of conscientious supervisors, market discipline and relatively benign economic conditions for much of the past decade has, of course, meant that such arbitrage has not so far led to any major problems in developed countries, but the issue is not one that the authorities can afford to ignore. Ultimately, capital arbitrage and capital requirements that do not capture accurately the risks that banks are actually running mean that we risk tolerating unsound banks and jeopardising financial stability. Getting the level of capital requirements right So the move to introduce greater risk sensitivity is right. But determining the optimum level of risk sensitivity for a common set of rules intended to apply to banks in a wide range of different markets, countries and businesses is more difficult. And so there are two questions I want to go on to explore.
Capital adequacy and liquidity regulation are thus two sides of the same coin. Just as it would be impossible or uneconomic to require banks to operate without risk to provide total certainty of solvency, so liquidity regulation is needed as a form of insurance. The issue is discussed in an article in the December edition of the Bank's Financial Stability Review. The Basel Supervisors' Committee has done valuable work in examining issues and techniques in liquidity management and this work deserves to be carried forward further. For those of you who have already digested the 500 pages of the new Basel Accord we are discussing today and are looking for some more recreational reading, over the Easter holiday, I thoroughly recommend a re-read of the update the Basel Committee published last year of its sound practices for managing liquidity risk. In the meantime, thank you for allowing me to address you this morning. BIS Review 29/2001  5