The world economic slowdown, with the attendant rise in credit risks, the deepening problems in Argentina spreading to its banking system, and the events of 11 September, creating temporary liquidity strains in New York and elsewhere, have all posed serious risks to the stability of the international financial system. So far, the response has been encouraging. The capital position of many of the larger financial players is stronger than in previous cycles. There seems to be a more sophisticated approach to differentiating between sovereign risks in the emerging markets. And the hugely impressive efforts of staff, together with the largely successful operation of contingency plans, and the flexibility of the US monetary authorities, saw us through the worst of the aftermath to last autumn's attacks without a serious crisis emerging. The latest topic of discussion in financial circles is, of course, the implications of the collapse of Enron. The case raises a host of issues for firms and policy makers. Some of these relate to accounting standards; some relate to the way in which the auditing profession organises itself; and some relate to corporate governance issues more generally. There are also some issues about the scope and operation of the financial regulation net. There have also been questions raised about the implications of the collapse for health of the financial system as a whole, which is very much of interest to the Bank, given our responsibility for systemic risk. From the current perspective, these implications appear limited, however.
Now I have the privilege of working with leaders like Roger Ferguson, the Vice Chairman of the Federal Reserve, and Jerry Hawke, the U.S. Comptroller of the Currency. Their hard work, and the hard work of the other supervisors participating in the discussions, have strengthened the quality of the capital rules. They and others have helped to ensure that the New Accord will be flexible, forward-looking, and fit for the service of twenty-first century banking. The process of revising the rules has involved formidable challenges. That should come as no surprise. Capital requirements make up the foundation of the regulatory framework. Even more importantly, capital is a key ingredient to the health of the banking sector. The changes we are proposing to ensure that banks hold adequate capital will have broad implications not just for the banking sector, but also for financial markets and the broader economy. But the new Basel Accord is about more than just capital, it is also about keeping a level playing field and about reinforcing incentives to foster sound risk management though three reinforcing pillars: risk sensitive minimum capital requirements, coordinated supervisory review, and enhanced market discipline through greater transparency. Supervisors and risk managers know that a bank’s management and controls make up its first and most important line of defence. The New Basel Accord seeks to capture the relationship between capital adequacy and risk management.