On the contrary, it is well understood that bank managers have the most complete understanding of the risks their institutions face, and it is they and the bank’s directors who have primary responsibility for overseeing those risks. The task for supervisors in this framework is to evaluate how well banks are assessing their capital needs relative to their risks, including whether banks are appropriately addressing the relationship between different types of risks. Most importantly, in proposing this second pillar the Basel Committee intends to foster a more active dialogue between banks and their supervisors. The third element in the proposed new capital adequacy framework is market discipline. As I discussed earlier, more extensive disclosure and a greater dependence on market discipline complements improvements in bank-level management, official supervision and minimum capital standards. Some areas that we at the Federal Reserve believe are good candidates for greater disclosure would include components of regulatory capital, risk concentrations and transactions involving recourse, such as securitizations. To the extent that banks develop disciplined internal approaches to evaluating capital adequacy, and greater disclosure enhances market discipline, supervisors will be able to place greater reliance on all three pillars and reduce regulatory inconsistencies. The common interest is to keep the Basel standards as a floor sufficient to ensure financial soundness, but above which banks themselves will choose to operate. Conclusion In conclusion, we clearly have an ambitious agenda for perfecting and refining the supervisory framework for the twenty-first century.

Distinguished Guests, Ongoing deterioration in the global risk appetite, which started in August, has led to excessive depreciation of the Turkish lira. The accumulated depreciation of 30 percent since November 2010 started to pose risks on the inflation outlook. Moreover, in October, adjustments made to administered prices, which were far beyond the assumptions of the July Inflation Report, necessitated a sizeable upward revision of short-term inflation forecasts. At this point, I would like to underline that we would not allow the medium-term inflation expectations and outlook to be affected by these developments, and we will take all necessary policy measures. The policy measures that I mentioned earlier in my speech and the Committee decision of October stipulating a significant increase in the overnight lending rate should be viewed from this perspective (Chart 6). 4  BIS central bankers’ speeches  2. Inflation and monetary policy outlook  Distinguished Members of the Press, I would now like to discuss the macroeconomic outlook and the assumptions underlying our forecasts. First of all, I will summarize the recent inflation developments and then I will compare the short-term forecasts we announced in July with data realizations in the third quarter. In the third quarter, prices of core goods posted a more-than-envisaged increase amid excessive depreciation of the Turkish lira. The annual rate of change in food prices declined significantly due to the base effect in unprocessed food prices.