First, have the proposals achieved enough risk sensitivity? And second, do they achieve too much risk sensitivity, particularly in the context of the debate about whether ratings amplify procyclicality? As I said earlier, the new Accord has been designed to incorporate some real-world pragmatism. A major achievement of the existing 1988 Accord, and one that we would like to see preserved, has been its near-universal worldwide acceptance as the minimum standard for banking stability. So, if this huge advantage is not to be lost, it means that the new Accord has to be adaptable to a wide range of situations, to accommodate not only differing levels of sophistication amongst banks but also differing levels of expertise amongst supervisors. The answer, unsurprisingly, is a menu approach. For credit risk, alongside the greatly more risk sensitive internal ratings based approach, we have the option of a revised standard approach. This is certainly a step forward from the existing approach, but it remains a relatively simple framework. In its implementation, for many banks it may prove very simple indeed, since the large bulk of their loans are likely to have no ratings and so fall into the unrated bucket. The result will be little change on the existing Accord. I think this is inevitable.
In the UK, moves have recently been made to improve the competitiveness of SME finance; I believe that the new Basel framework could in turn be a positive contribution to banking stability but we stand ready to monitor developments. Although this conference is essentially about the issue of banking capital, I would like to end by emphasising that capital is only one component of banking stability; many other factors also come into play. In the field of prudential regulation, I would like to highlight two: valuation and provisioning frameworks, and liquidity management and regulation. There will be little point to all the Committee's work on risk sensitive capital measures if this is not underpinned by adequate loan valuation and provisioning practices - preferably ones which incorporate a forward-looking view of risk and deterioration in loans. A lot of valuable work has been done on loan provisioning by the Basel Committee and other bodies, and I welcome the debate that is currently being sponsored by the IASC on valuation frameworks. 4  BIS Review 29/2001  Secondly, adequate liquidity is a vital counterpoint to capital for banks; the regulation of capital adequacy and liquidity are interrelated. Rationally, solvency ought to be a guarantee against funding problems, with customers happy to roll over deposits where they are confident that a bank is soundly capitalised. But reason does not always prevail, in part because solvency is sometimes hard to ascertain, more often because, swept along by animal spirits, markets can behave emotionally and perversely.