We run the risk of ending up with international banking groups in which the advanced approaches tend to be used almost exclusively by the parent company. I think that this outcome is neither optimal nor desirable, and falls short of the goals of improving the stability and efficiency of the international financial system, to which Basel II can make a much more effective contribution if it is applied appropriately. Problems also arise over how to consolidate the capital of these subsidiaries. Take, for example, a bank applying an advanced approach at group level with subsidiaries outside the home country that use a standard approach. This bank will have to perform a double calculation: first, using the method applicable under the approaches adopted by its subsidiaries; then, it must recalculate those same subsidiaries’ requirements using the approach for the group as a whole, ie that of the parent company in the home country, for consolidation purposes in order to calculate the overall capital requirement. This double calculation can impose a heavy burden - although a necessary one in some instances and will in any case require close collaboration between home and host supervisors to ensure that the entity’s overall system adequately takes account of the characteristics and sensitivity of the local market. The AIG is attempting to pinpoint which criteria would be acceptable at the consolidated level, assuming the - fairly frequent - scenario of a bank with subsidiaries governed by local requirements that differ from those of Basel II.
It had to include both monetary and economic analysis – the ECB’s famous two pillar strategy. By explicitly taking into account the development of  Page 2/4  money and credit in its monetary policy strategy, the ECB was unique in the world of central banking. However, the ECB’s monetary policy strategy was questioned by some academics. They favoured inflation targeting. Otmar never shied away from his critics and their arguments. Consequently, he launched the ECB and Its Watchers Conference. Academics, journalists and market participants were invited. There were lively debates about the role of money in the ECB’s strategy. In his last contribution to the ECB and Its Watchers Conference in 2006, Otmar reviewed the active discussion about the role of money in the ECB’s monetary policy strategy over the previous eight years. Otmar reminded the audience how some had argued that the role of money was too large. For others it was too small. Otmar pointed out that his typical response had been that it was ‘just right’. This reminds me of a scene in the film ‘Amadeus’. Mozart, Otmar’s favourite composer, asks the emperor whether he likes his new piece, the Abduction from the Seraglio. The emperor answers, hesitantly, that he does, but adds that occasionally the piece seems to have too many notes. ‘I don't understand’, Mozart replies. ‘There are just as many notes, Majesty, as are required.