Efforts are now underway in a variety of contexts to try to secure better coordination in these various initiatives, but it has to be admitted that in an ideal world they would not be quite so clustered together. That said, I would be the first to acknowledge that Basel II requires heavy investment in risk management systems and IT infrastructure, as well as radical changes in the risk management culture at some banks. However, this is a healthy development. I suspect that banks would have in any case needed to make most of the so-called "Basel II-related" investment if they wanted to stay at the top of their game. By agreeing to accept banks' internal risk management systems as the basis for the calculation of regulatory capital requirements, the Basel Committee has provided a powerful incentive for banks to upgrade their risk management systems. But this is only what they otherwise would have needed to do to be able to compete with the best. There are, however, some quite specific challenges for Asian banks in using the more advanced approaches under Basel II. One of the most important is the availability of data. Historically, many Asian banks have not collected the data needed to develop the type of models needed for IRB purposes. Some are only now starting to do so, and it will be several years before they have sufficiently rich data that it can begin to inform their credit risk management processes.
Of course, the dialogue cannot be open-ended: at some point we will have to draw our conclusions and make our assessment. But those of you in IRB banks can expect us to show a different level of engagement, and a greater intensity of interest in, your risk management systems than we have previously shown. 2/5  Pillar 2 As I mentioned earlier, much of the focus on Basel II has been on IRB, and thus on Pillar 1. Now, credit risk remains, of course, one of the most fundamental risks in banking. However, we in the HKMA determined at an early stage in the Basel II process that it would be desirable to broaden the focus so as to bring into the equation the various "Pillar 2 risks." The case for this is, in our view, self-evident, as risks such as concentration risk, interest rate risk in the banking book, and liquidity funding risk can be every bit as devastating for the financial health of a bank as credit risk can be. In the run-up to final agreement on Basel II, therefore, we issued a series of guidance notes to give encouragement to AIs to upgrade their ability to manage these risks appropriately. We knew that for the coming few years AIs and their risk management specialists were likely to be preoccupied with Pillar 1 and thus we wanted to make sure that these "Pillar 2 risks" were adequately addressed as a priority, and not as an afterthought.