A fundamental change within the first Pillar - capital levels - compared to the original Accord is that improved risk management in banks has allowed the proposed new Accord to incorporate greater sensitivity of credit risk capital charges. There will be a menu of approaches, depending on the sophistication of the bank. A 'standard' approach differentiates between credit exposures on the basis of external ratings. A 'foundation' internal ratings based approach will allow banks to differentiate between credit exposures on the basis of their internal estimates of borrower default probabilities; and an 'advanced' approach allows other inputs required to assess credit risk also to be provided by the bank, rather than the regulator. In addition to all this, there will be for the first time an explicit capital charge for operational risk. Systemic Implications of the Revised Accord What I have described so far is how the Accord is intended to be applied to individual banks. But given the Bank of England's responsibilities for the stability of the financial system as a whole, our principal concern is with the overall impact on the system. The Basel Committee has said that the new Accord is intended broadly to deliver the same level of bank capital on average across banks as at present. How should we assess the adequacy of this from the viewpoint of overall financial stability? As I suggested earlier, the role of bank capital is to provide a buffer sufficient to cover unexpected losses.
Of equal importance is also to integrate the domestic Islamic financial system with the international financial system. For more than two decades, we have witnessed the success of the development of each of these respective components that has contributed to the rapid expansion in Malaysia's Islamic financial services industry. Indeed, we have seen the development of a comprehensive Islamic financial system. This has placed the Malaysian Islamic financial system at the forefront of the global Islamic financial system. Notwithstanding this, there have been imbalances in the pace of the growth of the components of the financial system. While Islamic banking, being the core component, has recorded significant progress, more efforts need to be directed to promote the growth of takaful and the financial markets. My remarks today will focus on measures to accelerate the growth of the Islamic financial markets by strengthening its required linkages. Of most importance is the development of a wider range of Islamic financial instruments, developing the relevant indicators to support benchmarking and an efficient pricing mechanism as well as to actively promote the role of the market players. Development of a wider range of Islamic financial instruments For Islamic financial institutions to effectively manage its funds, there is a need to have diversity in the type and the maturity of the Islamic financial instruments. This is one area in Islamic finance that offers formidable challenges and opportunities to market participants in Malaysia. A broader range of products and services is vital in this fast changing global financial landscape.