An essential component of these standards is the so-called “use test” that requires a system of internal ratings to be an integral part of a bank’s risk management and own assessment of capital adequacy. The internal reliance on these risk ratings will not only help supervisors gain confidence in the accuracy of a bank’s ratings system, but will also provide a key link to the proposed second pillar of the Accord, supervisory review. Other work on minimum capital requirements While the focus of my remarks has been on the internal ratings-based approach, the Committee also is working on other key aspects of the new framework, including revising the standardized approach, developing an expanded treatment of credit risk mitigation techniques and assessing a capital charge for operational risk. BIS Review 75/2000  8  Standardized approach The Basel Committee remains dedicated to revising the standardized approach as banks and supervisors in some countries may not yet have the necessary resources to implement an internal ratings-based method. To improve the risk sensitivity of the standardized approach, the Committee sought to establish capital requirements that recognized some differences in the probability of default between borrowers. At the same time, the Committee sought to be attentive to the views of many bankers and supervisors who wanted the standardized approach to remain simple so that banks of all sizes and levels of sophistication could implement it.
I’d like to begin by addressing the profound impact of today’s technology on banking and the financial markets, then move on to the implications of that impact for effective supervision in the twenty-first century. On the subject of official supervision, I will discuss the Basel Committee’s Core Principles for Effective Supervision, and then conclude with an update on the Committee’s major initiative to revise and refine the 1988 Capital Accord. 1  BIS Review 75/2000  Technology changing the world, banking and supervision It’s been said that information is power. Whoever said that surely never had to deal with the flood of e-mail most of us receive each day. Indeed, with increasing frequency, the complaint nowadays is about “information overload.” With wireless communications enabling us to conduct business anytime, anywhere, I sometimes feel, as I’m sure many of you do, that no matter where I am in the world, I’m expected to be awake and working. For those who occasionally feel overwhelmed by technology’s marvels, it’s worth remembering that there was a time, and not so long ago, when reliable market information was decidedly scarce and concentrated in the hands of a privileged few. The Rothschilds built an international banking empire on the wings of carrier pigeons, whose messages enabled the brothers to buy and sell on information about investment opportunities or financial disasters in distant places long before their competitors heard the news.