It consequently proposed the use of external credit assessments, such as credit ratings, as a means for helping to assign risk weights, and hence capital charges, on claims. We were pleased that on the whole respondents agreed with the goal of increasing the sensitivity of the standardized approach to credit risk. Nonetheless, given the difficulty of achieving the right balance between sensitivity and simplicity, the proposal to base the standardized approach on external credit rating agencies’ ratings has raised real concerns. Some have noted that, especially in emerging market countries, very few borrowers have credit ratings, and the new framework might then not be able to differentiate credit risk substantially between borrowers. Some also raised questions about the performance record of some ratings agencies, particularly in the context of various regional financial crises around the world. Unfortunately, few alternatives were suggested during the comment period. Still, we remain open to fresh ideas and are working hard to address the concerns noted. For example, we are exploring the use of other indicators of a borrower’s credit quality to differentiate between risk exposures in a way that could be applied by any bank. Moreover, in response to suggestions made by commentators that the standardized approach could be expanded to allow for even greater risk differentiation, the Committee is actively evaluating whether it would be feasible to incorporate additional risk weights, particularly for corporate claims and the riskiest assets held by banks.

Today, information of all kinds is transmitted easily, inexpensively and instantaneously around the world, providing finger-tip access to anyone with a laptop computer, cellular phone or palm pilot. As but one example, I’d mention that, as of last month, the most popular items on the Federal Reserve’s public web site – including statistical reports on foreign exchange rates, selected interest rates, consumer credit and industrial production, along with press releases and Federal Open Market Committee announcements – are accessible by wireless remote. If information is power, and it surely is, then a profound and irreversible transfer of power is underway in the global financial marketplace – from providers of products and services to consumers. For example, the Internet – something most of us had never heard of five years ago – is changing how consumers shop for financial products and services, the prices they pay, and with which providers they establish relationships. In response, financial institutions, who once viewed technology mainly as a cost center, now see the Internet and other technological capacities as strategic tools for enhancing the value of customer relationship through cross-selling and improved customization. A recent survey of bank managers in the United States reported that, for the first time, investment in Internet technology was cited as the top budgetary priority, ahead of items such as investments in call-centers and brick-and-mortar branches. The growing importance of the Internet as a distribution channel is also eroding traditional barriers between financial service providers and technology firms.