I believe that it will lead to a more optimal implementation of the new framework. Furthermore, possible concerns about competitive equality can be alleviated thanks to the existence of temporary capital floors. The third significant result of last week’s meeting is that the Committee agreed on the way forward for the implementation and evolution of Basel II. The framework and timetable have been agreed. Yet we have much hard work still ahead of us, as the implementation of the rules will be a challenging task and also because we have recognised that the Basel II approach is intended to be evolutionary. At our meeting, the members of the Committee discussed several implementation issues that we will “iron out” in consultation with other supervisors and the industry. This includes finding ways for home and host jurisdictions to coordinate and cooperate when applying the new rules to banking organisations that are active in multiple jurisdictions. More than ever before, supervisors will need to work together to reduce the regulatory burden on banks and to conserve supervisory resources. We also face some difficult technical matters. For example, the Committee’s press release noted that we must determine acceptable methods for banks to estimate a key driver of credit risk. Banks that adopt the advanced internal ratings-based approach to credit risk will be required to estimate how the loss-given-default parameter for borrowers may vary when the economy experiences a downturn.
Over the last few months we have completed significant changes in a number of important areas: we decided to calibrate regulatory capital to unexpected losses only; we have made significant improvements to the provisions relating to securitisation, credit risk mitigation and operational risk; we have clarified Pillar 2 and the calibration process; we have specified the treatment of revolving retail exposures, and we continue to make progress in preparations for the implementation of the Accord. Having reached consensus on the framework, the Basel II process is entering a new stage. Member authorities will now focus on transforming the text of the framework, which will be published at the end of June, into national rules. This will require national supervisors to conduct rule-making and adoption processes relevant to their jurisdictions, something that is well under way in many countries. In addition, the Committee agreed on the timetable for the implementation of the Accord in member countries. This is the second important development of last week’s meeting in my view. The Committee confirmed that the new framework will be implemented by year-end 2006 for those banks adopting the standardised and foundation approaches to risk. With regard to the most sophisticated approaches to risk measurement and management, the Committee considered the needs of national supervisors and of the industry and decided to provide an additional year.