We might view the entire three-pillar structure of Basel II as a series of built-in reality checks for management’s decision-making. In this regard, the three pillars of Basel II are intended to make sure that management assesses and controls its risks carefully and that it takes the steps necessary to allocate the appropriate capital. As you know, in the first pillar, the minimum capital requirements focus management’s attention on identifying, assessing and quantifying risk within a specified framework. This puts the onus of analysis and decision-making on the right set of shoulders: bank managers are in the best position to evaluate their risks and are ultimately responsible for responding to them. When banks consider their risks more comprehensively and work to evaluate rigorously the magnitude of losses that they may face, they are improving the quality of the information at their disposal. That, in turn, should improve their ability to arrive at sound decisions regarding the amount of capital that they may need to weather potential losses in the future. Considerable attention has been paid to some of the formulas and techniques that we have adopted in Pillar 1 to help quantify the potential for losses related to credit and operational risk exposures. We  BIS Review 66/2004  1  must remember that these formulas are not revolutionary.
•  And we need to better understand the interactions of monetary, microprudential and macroprudential policies, and how they influence price and financial stability. Henry Kissinger once asked Zhou Enlai – the late Premier of China – what he thought of the implications of the French Revolution. Zhou replied, “It is too early to tell.” We are living in interesting times. •  It has been a period of bold experimentation in both monetary and regulatory policies. •  It is too early to tell what the implications of these experiments are. •  We need much more research, experience, and the passage of time before we can draw firm conclusions on some of the issues that I have raised. •  In the meantime, let us pray for the wisdom to do the best we can. And be humble. 8  BIS central bankers’ speeches  Thank you. BIS central bankers’ speeches  9