Serious measures to ensure relevant competencies and independence will greatly enhance boards’ effectiveness and go a long way toward ensuring they perform their increasingly critical role in overseeing the decisions of senior management. The role of senior management, in turn, is to set the business strategy, oversee day-to-day decisions made within the organization, and ensure their consistency with long-term objectives and policies as determined by the board. There are several aspects to effective bank-level management. First, I would underscore the importance of good corporate governance, the basic elements of which include: •  Independent and competent outside directors, as I mentioned a moment ago;  •  Capable and experienced management;  •  A coherent corporate strategy and business plan; and,  •  Clear lines of responsibility and accountability. Together, these elements contribute to an overall operating process conducive to long-term health and prosperity. A tightly run ship with a disciplined crew led by an experienced and competent cadre of officers is far better able to survive a long journey that will inevitably confront sudden storms. Closely related to good corporate governance and critical to any banking institution’s well-being is a rigorous internal control apparatus. Of course, effective internal control systems have always been centrally important to sound banking.
7  BIS Review 75/2000  At the same time, the respondents raised a number of important concerns and questions that the Committee is reviewing and considering carefully. The comments offered by emerging market and other “non-G10” countries have figured prominently into the Committee’s review of its initial proposal, and Claes Norgren, who is chairing the next session, will provide an update on the Committee’s thinking regarding these points. I’d like to take a few minutes to update you on our efforts, focusing on a few topics of special interest. Given the progress we have already made, it is clear to me that the Committee is well positioned to continue its momentum and to release a revised Consultative Paper early next year. Internal ratings-based approach The centerpiece of the new Accord is likely to be the internal ratings-based approach to credit risk. We envision that the internal ratings method will be applicable to those institutions that have in place strong internal rating systems accompanied by robust internal controls. Naturally, our new standards will also encompass guidance on supervisory oversight and provide for ample disclosure. The Committee is looking to establish standards that are rigorous and yet permit institutions willing to make the necessary investments to use the approach. I think that it is fair to say that the Committee now expects that many sophisticated institutions will seek to use the internal ratings-based approach. How will an internal ratings-based approach work? Simply described, there are three components to the internal ratings-based approach being developed by the Committee.