In doing so, we have endeavored to ensure that the “New Basel Accord” is not merely another set of rules, but rather a framework that recognizes the important innovations in risk management that banks have achieved and encourages continued improvement over time. In my remarks today, I’d like to share with you some thoughts on how bank supervisors have worked to embrace and encourage those developments. My remarks will cover three related areas. I’ll begin with thoughts on how enhancements in banks’ risk management processes, driven by business imperatives, have concurrently led supervisors to move to a more process-oriented, risk-focused approach to supervision. Next, I’ll spend a few moments discussing how provisions in the New Basel Accord - or “Basel II” - support further changes in our supervisory approach, and promote further enhancements in risk management. Finally, I will describe how these developments will be coming together in our supervisory approach going forward - particularly in terms of our supervisory expectations for management of market risk, credit risk, and operational risk by large banking organizations. While I will offer my views as a former banker and now as a bank supervisor, I believe that many of the themes offer insight for other sectors of the financial services industry as well. BIS Review 5/2003  1  Complementary effort by Banks and Supervisors to Assess Risk Let me begin by sharing some thoughts on the efforts banks themselves have undertaken to develop a more forward-looking approach to risk management.

The Committee seeks to align minimum capital requirements more closely with the best industry risk management practices available. This goal is accomplished by giving banks a range of increasingly sophisticated options for calculating capital charges. Banks will be expected to employ the capital adequacy method most appropriate to the sophistication and complexity of their operations and risk profiles. For credit risk, the range of options begins with the standardized approach and extends to the internal ratings-based (“IRB”) approach. The standardized approach is similar to the current Accord. Banks will be expected to allocate capital to their assets based on the risk weights assigned to various exposures. It improves on the original Accord by weighting those exposures based on each borrower’s external credit risk rating. Without question, the IRB approach is a major innovation of the New Accord. For the first time, banks will be permitted to rely on their own assessments of a borrower’s credit risk. The close alignment between the inputs to the regulatory capital calculations and banks’ internal risk assessments will facilitate a more risk-sensitive approach to minimum capital. Changes in a borrower’s credit quality will be directly reflected in the amount of capital held by banks. How will the New Basel Accord promote better corporate governance and strengthened risk management practices? Here, I will limit myself to emphasizing two key points. First, the Basel Committee has expressly designed the New Accord to provide tangible economic incentives for banks to adopt increasingly sophisticated risk management practices.