A set of principles has been outlined for the cross-border application of the New Accord to promote closer practical co-operation and information exchange among supervisors. These implementation issues are very important to promote consistency and to reduce the burden on internationally active banks. There are, however, other areas that we can already identify as part of our future work plan to advance risk management, to promote greater transparency, and to strengthen the stability of the financial sector. Given that I have mentioned in this presentation the benefits of utilising the diversification effects of different approaches in the search for an efficient frontier, I’d like to conclude with just one of the potential items on our agenda for future work once the New Accord is implemented. This item would be to consider the benefits of full credit risk models in the calculation of minimum capital requirements. In theory, a bank’s capital requirements would then reflect to the greatest degree the economic benefits of diversification in its balance sheet. In fact, the Committee did at one point evaluate whether advanced banks should be permitted to estimate the degree to which their assets might behave similarly or default together in the New Basel Accord. As you know, we decided that we are not quite there yet. We know that some banks are making commendable progress in thinking about ways to estimate the value of diversification. Nonetheless, we remain concerned about the degree of confidence one might have in those estimates, given the relative lack of data available.
For example, in 2001 - the most recent date for which comparative global information is available - the most prevalent disclosures covered accounting and presentation policies, on a bank’s capital structure and its measures of capital adequacy, and, for those that had them, on the kind of market risk models the bank used. Few banks disclosed much about their credit risk models, the types of credit risk mitigation techniques that they employed, or even the external or internal ratings assigned to their credit exposures. The relative paucity of data available publicly on a typical bank’s credit risk profile appears inconsistent with the fact that, for most banks, credit risk remains the single most important source of potential losses. At present, market participants seem to know only little about the extent of most banks’ exposure to credit risk. One could conclude that it seems unrealistic today to assume that they have enough knowledge of a bank’s position to exercise properly a benign influence on its handling of credit risk. Disclosure practices do not seem to have kept pace with the very rapid evolution in the ways that banks take on, measure, and ultimately manage their risk positions. BIS Review 47/2003  3  Incorporating Market Discipline into the New Basel Accord To improve the ability of markets to contribute to greater stability in the banking sector, the New Accord will contain a series of disclosure requirements.