As Mr Clementi points out, any capital incentive to progress to risk-sensitive measurement has to be balanced against the objective of roughly maintaining the overall amount of capital in the financial system. It would be dangerous to financial stability if we gave so large a capital carrot to banks to use the internal ratings based approach that many of the world's most important financial institutions, which account for the vast bulk of global and G10 domestic banking activity, saw a significant reduction of their regulatory capital requirement. It is the need to balance incentives with the maintenance of overall capital levels which makes this issue a difficult one. With this in mind, the Basel Supervisors Committee has set in train a quantitative impact study, co-ordinated by the Bank of England, to calibrate the impact of the New Accord on individual institutions and on the system as a whole. Mr Clementi also addresses the question of procyclicality and the possibility that risk-sensitive capital requirements will exacerbate economic downturns.
Ratings ought to be forward-looking and robust to the normal ups and downs of economic activity.
Finally he notes that capital is only one component of banking stability. The Second Consultative Package on the New Accord was published in January. The New Accord is due to be published in final around the end of 2001 for implementation in 2004. The Bank of England and the FSA are both represented on the Basel Committee on Banking Supervision which is responsible for drawing up the Basel Accord.