And capital adequacy is of course only one aspect of prudential regulation, with other aspects of risk management such as liquidity management and systems and controls also being vitally important. The Basel Committee has now of course explicitly recognised that the formal regulatory minimum capital framework is only one pillar in the edifice of bank soundness. It has to be complemented by supervisors individually reviewing the capital adequacy of banks in the light of a wide range of risk factors - the second pillar of the proposed new Accord - and by market discipline on banks, the third pillar. On the question of why we focus on banks, it would be difficult to overstate the importance of a stable banking system to economic health and growth. Banks play a crucial role in intermediating savings and credit and they are at the heart of the payments system. Most firms in most economies remain heavily reliant on banks for finance, and even in economies where a significant number of firms can turn to the capital markets for finance, banks retain important roles as providers of payment facilities, short-term credit, and backup liquidity. In less advanced economies, their role is even more dominant, to the extent that a number of full-blown macro-economic crises have had their roots in weak banking systems. Changes to the Basel Accord As I have said, the capital framework for banks is currently under review by the Basel Committee. It is worth reminding ourselves what this framework consists of.
Distinguished ladies and gentlemen, I dedicated most of my last year’s speech arguing that the stable Denar exchange rate is still the best solution for the Macedonian economy. In the public debate concerning this issue last year, on many occasions, I presented additional arguments that underpin my view. On this occasion I will discuss the two theses recently presented by the advocates of floating Denar exchange rate. The first thesis is that the floating exchange rate will ensure more relaxed monetary policy, and accordingly, higher economic growth. The second thesis is that the Denar exchange rate is not realistic, i.e. it is overrated. Yet, so far, I still have not heard any explanation of how would the floating exchange rate relax the monetary policy, nor arguments supporting the view that the Denar is overrated. Considering the first thesis, note that the exchange rate regime does not determine whether the monetary policy will be restrictive or relaxed. You could have floating rate and restrictive monetary policy, or fixed exchange rate and relaxed monetary policy. What is important for the monetary policy is whether there are imbalances in the economy or not. Just because of the absence of imbalances in the Macedonian economy, as I elaborated at the beginning, we can afford relaxed monetary policy. Conversely, due to the nature of our economy, the floating exchange rate would fuel uncertainty and create imbalances and high inflation, the alleviation of which would require extremely restrictive monetary policy.