As banks enter new markets, create ever more complex products, and pursue customers near and far, the challenge for all of us is, first, to understand how our risk profiles are changing and, next, to find responsible ways to manage them. Whether they compete on a national, regional, or global level, banks have developed countless new tools and processes that promote their competitiveness, strengthen their returns, and control their exposures to credit, market, operational, and other risks. In turn, supervisors must review periodically the tools and processes at our disposal to ensure that our regulations and practices accommodate changes in market trends, the introduction of innovative products and services, and advances in the art of risk management. The current efforts to reform the international guidelines on capital adequacy represent a critical review of the cornerstone of bank supervision. The members of the Basel Committee have devoted substantial resources to this reform because we believe that, when banks are adequately capitalised and well managed, they become more stable and better able to withstand periods of financial distress. But more importantly, when all banks have the proper incentives to manage their risks appropriately and hold adequate levels of capital, we believe that the entire financial sector becomes more resilient, less sensitive to the ups and downs of the business cycles, and better able to serve as a source for the sustainable growth of the broader economy. That is our motivation for proposing the adoption of a New Basel Accord, which I will discuss this morning.

This has sometimes resulted in an inconsistent application of the minimum requirements and the adoption of different expectations across countries and an increase in regulatory burden on banks. Incorporating supervisory review into the international guidelines represents a genuine breakthrough for all of us. By developing guidelines for the supervisor’s evaluation of a bank’s internal capital allocation process, the Committee believes that supervisors and banks will engage in more focused, more consistent, and less burdensome discussions of the risks that banks face and the responses they adopt. The Committee recognises that national laws and regulations provide different avenues through which supervisors may conduct such reviews, and consequently Pillar 2 affords each jurisdiction the flexibility to accommodate those differences. The topic of supervisory review must also be considered in the context of the level playing field, one of the themes I mentioned earlier that came out clearly in the comment letters. As the members of the BBA and the London Investment Banking Association expressed in their joint comment letter, for example, the way in which the New Accord is applied and supervisory review is conducted across countries matters critically to the daily operations of internationally active banking organisations. Your letter noted the importance of consistency in standards and consistency in the interpretation of the new framework, as well as the challenges that even limited areas of national discretion can create. BIS Review 42/2003  3  These concerns go the very heart of the Committee’s mission.