But it has been evolving to something which increasingly goes in the direction of recognising and harnessing the best risk management practices of the industry itself, and encouraging institutions to further improve their own risk management practices. As I have already mentioned, Basel II includes explicit economic incentives for institutions to adopt more sophisticated risk measurement and management systems. And to the extent that it is based on institutions’ own capital evaluation processes, it brings regulatory capital closer to economic capital. Such an approach means that regulation becomes less of a separate cost for institutions, which can use the same systems for both business and regulatory purposes. What’s more, such regulation can have business benefits, because improved risk management also makes good business sense. I think the same philosophy is applicable to regulatory reporting. In my view, regulatory reporting requirements should, to the extent possible, be based on internal data used by managers to run their business, and should encourage the effective collection, generation and use of this information for  BIS Review 47/2006  3  internal risk management purposes. There is clearly a cost in asking for information that is not used within the business. But more than this, it may well be that internal information is of better quality, more reliable and more accurate than information generated for “external purposes”. To the extent that Basel II recognises internal risk management systems, the resulting reporting requirements should naturally be based more on the internal information produced by those systems.
If the national economy goes into recession, if budget deficits soar and public debt rises, this has immediate repercussions for the banks. European banking is not yet sufficiently diversified geographically. More consolidation, more cross-border holdings between banks from different countries, is needed. There is a need for more geographical diversification within the European Union. Smaller, local banks are also necessary to provide financial services to households and firms in a diversified banking landscape. ITALY We have seen very large market movements, following political declarations that unsettled market confidence. After political campaigns, it is normal that more precise government programmes are set out, and we now have to wait for more information about the fiscal plans of the new government. 4/4  BIS central bankers' speeches