Creating the right incentives, consistent with good market practices and sound risk management, appears to be an important way of promoting the safety and soundness of the financial system and therefore a good way of sustaining both the stability and growth of the economy. This is not only relevant for prudential regulation; other areas such as accounting should also be consistent with this broad perspective. This consideration underlines the importance of taking seriously certain concerns such as procyclicality. In my view Basel II goes in the right direction. I am convinced that when banking systems are adequately capitalised, well-managed and risks are correctly assessed within the appropriate time horizon and the financial system becomes more stable, less procyclical, better able to promote sustainable growth, and more resilient during periods of distress. My second reflection is that one of the most significant conclusions of the analysis of the recent economic and financial evolution of the world economy has been the resilience of banking systems in most countries. In my view, this resilience has been the result not just of the presence of sufficient capital in the system, but also of improvements in banks’ risk management systems. I think we owe the industry a special vote of congratulations with respect to the latter, but we also owe it a commitment on the part of supervisors to continue to support such developments. This is exactly what we are all trying to do with the proposals for a new Capital Accord, which I would like to address now.
As you will have gathered from my earlier summary, many comments have focused, as in the past, on the minimum requirements laid out in Pillar 1, but as we get closer to finalisation, comments about implementation are becoming more important. I would like to take a few minutes now to talk about these other aspects of the New Accord that deserve equal consideration. Let me address four specific issues: ·  Pillar 2 and consistency  ·  Home / host implementation issues on a world-wide basis  ·  Accounting Standards and Basel II  ·  The recognition of diversification  Pillar 2 and consistency On the first of these subjects, as you well know, the innovation of the New Accord does not rest solely on the refinements to the quantitative measures of risk. Another innovation, and one of the most beneficial, is the incorporation of supervisory review into the international framework. This represents a real breakthrough for all of us, since supervisors in each jurisdiction have until now found their own ways to evaluate the adequacy of a bank’s capital base. That is an unsatisfactory solution since it can lead to inconsistencies in the way that a global banking organisation’s operations are supervised at a local level. By incorporating into the New Basel Accord the requirement for supervisors to evaluate the internal processes behind a bank’s view of its need for capital, the Committee expects that bankers and supervisors will engage in a more focused discussion of risk management.