Several options need to be explored, including the possibility of offering a choice of approaches to supervisors, or an evolutionary framework whereby the system could develop in sophistication over time. In principle, we would certainly like to see a system that a reasonably large number of banks could sensibly aspire to. There are only two caveats that I would make. First, of course, there are the implications for supervisory resources if a very large population of banks have to have their internal ratings systems approved. And secondly, even a simple framework has to observe certain minimum requirements. This means the ability to relate an internal rating to a quantifiable concept, such as loss-given-default or default probability; the ability to demonstrate that this relationship is historically valid, or - in the likely absence of long runs of data - at least plausible; and third, as I said before, a forward-looking dimension to the rating. Whilst the Bank of England is doing its best - I hope with some success - to help the economy avoid the booms and busts of previous decades, banking is likely to remain a cyclical industry, and to my mind it would be simply imprudent to base ratings and capital on a borrower’s position at the top of an economic cycle. Operational risk Use of internal ratings will of course raise many of the sorts of difficulties for testing and validation that were identified for credit risk modelling.
We also need, as a second step, a collective economic strategy in the euro area, which could be backed up with a euro area “Finance Minister”: growth and employment will be stronger in Europe if we combine more structural reforms where they are needed – such as in France and Italy – and more fiscal and/or wage support in those countries with room for manoeuvre – such as Germany. On that note, I wish you very fruitful discussions throughout this conference and I shall now leave the floor to the first session on measurement issues. Thank you for your attention. 3/3  BIS central bankers' speeches