I entirely agree with Howard Davies that it is essential that the Basel framework, if it is to remain a global standard, continues to encompass a menu of options which accommodate different needs. I also do not wish to gloss over the fact that there are some very knotty areas in the proposals that have to be tackled before the Basel Committee can deliver on its objectives of greater risk sensitivity and comprehensiveness. The FSA is today going to tackle four of the most difficult, namely credit risk mitigation, operational risk, internal ratings, and interest rate risk in the banking book. I would like to take this opportunity to make a few observations on those areas that are of particular interest to us. Use of internal credit ratings The Bank has, as some of you may know, been devoting considerable thought to development of the internal ratings based approach to setting capital for credit risk. This is in part because we have been able to utilise the expertise we have built up in the course of our work on credit risk modelling, on which the Bank and the FSA held a joint conference last year. But more importantly, it is also because we consider this part of the Basel proposals to be of the utmost importance to achieving a balanced and stable framework. In particular, the availability of this approach is a very important safety valve for the market pressures and distortions that could otherwise arise from the use of external ratings.
Mr Chairman, I have discussed the current international conjuncture at some length to illustrate that even though we all have broadly common economic objectives, that does not make them easy to achieve. We all face our own domestic uncertainties and are exposed to the international repercussions of developments elsewhere. Financial stability One of the greatest difficulties we face is the problem of how to cope with movements in financial asset prices, including exchange rates. That problem has become an increasing preoccupation with increasing financial wealth in our economies and with global financial integration. In the context of macro-economic stabilisation we can, and of course do, take account of asset prices as best we can in both our projections and our policy decisions. The strength and subsequent weakening of stock markets in all our economies, for example, will have been one of the factors influencing both investment and consumer demand to varying degrees for all of us; and the behaviour of exchange rates is clearly a factor influencing inflationary pressures in our respective economies, both through its direct effect on prices and indirectly through its impact on net external demand. But while we can try to make allowance for these effects we cannot predict future asset price movements and we certainly cannot seek to control them. They remain a major source of uncertainty. They also, of course, represent a major potential threat to financial stability which is a necessary concomitant to monetary stability.