Since it appears unlikely that a large organisation would suffer high losses  BIS Review 45/2003  3  from operational failures in many businesses or entities at once, some banks argue that capital requirements for a large and diversified firm as a whole might be less than the sum of capital requirements calculated for each individual entity. The Committee acknowledges the technical and practical challenges associated with developing and implementing AMAs for large, diversified firms. We are working to reduce unnecessary burdens on banks adopting them. While we have not made any decisions yet, this is an issue that we are still discussing actively with the industry. But we face even tougher questions if we consider the allocation of capital across not just legal entities, but also across national borders, as some have requested. This is a very difficult question to address in the Basel context. The Committee must respect the legal responsibilities charged to national supervisors in regulating locally chartered banks, branches, or subsidiaries. All bank supervisors must have access to sufficient, comprehensive and detailed information on a bank’s operational risk control structure, including its AMA, to evaluate the quality of risk management at banks they supervise. That may include a need for banks and other supervised entities to demonstrate the adequacy of their capital resources on a stand-alone basis. We are giving significant thought to the international implications of this issue, but I should caution that we may not be able to find a completely satisfactory solution at the Committee’s level.

Those small countries in particular had to accept the new economic reality of lower demand, higher unemployment and forced fiscal consolidation due to a fall in tax income or borrowing difficulties. The other group consists of bigger or more closed economies that were relying on domestic demand. They were able to smooth the initial impact of the crisis with more extensive government support measures. There was also the expectation that the crisis would be temporary. With the benefit of hindsight we know that we were not facing a temporary bump on the road, but a more fundamental need for adjustment. The initial smoothing of the shock may have been even more costly as it resulted in a higher level of public debt. Secondly, the required policy adjustment involves a dimension which we now consider critical: the speed of reacting and the decisiveness of policy actions. The Baltic countries have learned it firsthand through their experience, which of course is the hard way. There are few economists today that would fundamentally question the need for fiscal consolidation and structural reforms in Europe, as the crisis has clearly turned out not to be temporary. However, we all know it is politically difficult to cut government spending and implement reforms fast. The natural tendency for most politicians is to favour gradual adjustment. “Gradualists” say that in case of fast changes the risk of possible policy mistakes is higher, leading to losses in physical and human capital. Opponents of that view, including myself, certainly acknowledge those risks.