However, while regulatory capital is important and may represent an overall constraint, research and discussions with banks actually suggest that, when determining the price of a loan, banks consider all of the economic risks associated with a particular borrower. It seems that factors such as “economic capital” and the level of competition are much more influential in individual loan pricing than regulatory capital. That finding should be no surprise to any banker or supervisor – banks that are managing their risks appropriately are already considering the risks that they face when they lend to higher-risk borrowers, and thus lower credit quality is already priced into a loan, even under the existing less risk-sensitive capital rules today. Furthermore, there are additional elements in Basel II that can contribute to alleviating concerns about the impact on capital flows to emerging markets. Let me mention the reduction in capital charges for retail lending, residential mortgages, small and medium enterprises (exposures below € 1 million) and well-provisioned past-due loans. Also, the recognition of credit risk mitigants, such as collateral and guarantees, is significantly better in the new framework of Basel II. If we take a medium or longer-term perspective, the different channels that I mentioned before will ensure better access to financial flows for the same risk.
It may be that Basel II raises new issues and requires a lot of work to be implemented. However, it is my view that Basel II cannot be assessed in a static way. BIS Review 8/2005  9  I believe that we will need some time to be able to fully judge the real benefits of Basel II. In my opinion, the main strengths of the framework do not come from its quantitative regulatory requirements, although these are certainly important. Neither do I believe that the most fundamental aspect is when exactly the new framework will be implemented in different countries. This will just be a transitional issue. One of the essential strengths of the incentive-based approach of Basel II is the dynamic way in which it will contribute to financial stability by promoting risk sensitivity and strong risk management practices across banks, reinforcing market discipline and enhancing cooperation. These are key elements, because, in the end, no regulation in itself can prevent problems in badly-managed banks. And Basel II represents a tremendous opportunity for banks themselves. By stimulating them to upgrade and improve their systems, business models, capital strategies, risk management systems and disclosure standards, Basel II should improve their overall efficiency and ability to compete globally. It is my view that, if supervisors and banks in 2046 look back at the evolution of financial regulation over the years, they may well think in terms of "before Basel II" and "after Basel II". 10  BIS Review 8/2005