By deepening our insight into a bank’s risk management, we gain a much better understanding of its strategies and controls. We learn what risks the bank believes are ahead and what measures it takes to mitigate them. We also develop a more refined sense of a bank’s sensitivity and ability to adapt to potential conditions in the future. This first trend of adopting a more “risk-focused” approach to banking supervision has a positive effect on banks as well. When we examine the quality of a bank’s risk management, we demonstrate to management the importance that we ascribe to developing and maintaining safe and sound control structures. A risk-focused approach thereby creates implicit incentives for bank management to understand and to find better ways to control its risks. What results is not just a more proactive risk management function, but also a greater commitment to sound corporate governance across the bank. 2.2  Second trend: incorporate incentives into supervision  Basel II recognises this result and goes one step further by creating not just implicit but also explicit economic incentives for banks to improve the quality of their risk management. The inclusion of incentives directly in the regulatory framework represents the second important trend in supervision. The proper use of incentives can help to align a bank’s objectives more closely with public policy goals of safety and soundness.
Finally, a third proposal - and this is actually one I myself suggested at the IMF and World Bank annual meetings in Washington in September 2002 - currently being studied by the Group of Twenty is to have a so-called Code of Good Conduct, which would set out best practices and guidelines for borrowers, lenders and the international community. The Group of Twenty consists of the G7 major industrialised countries, the largest emerging market economics and also the EU presidency, ECB, IMF and the World Bank, as well as the chairpersons of the International Monetary and Financial Committee and the Development Committee. Although these best practices would be non-binding, they could improve the process of crisis resolution. In particular, the Code would spell out general principles for all parties involved and would also offer a “toolbox” of agreed instruments and best practices to be used by interested parties depending on the circumstances. The Code would also include CACs in the set of instruments to be recommended. In the October meeting, the Group of Twenty decided to encourage a group of issuers and market participants to engage in further discussion. D.  Concluding remarks  In conclusion, the issues generated by the fast evolution of the financial system I have been speaking about today are very complex and demanding for public authorities. I hope that I have been able to demonstrate that some elements of the necessary public response are very encouraging, while others will require renewed efforts.