In the past decade major headway has been made in many countries in areas such as the downsizing of the public sector, the efficiency of the tax system and, more unevenly, the workings of markets. That should not prevent us from acknowledging the weaknesses the European economy still exhibits. In particular, in a more competitive international environment, the continuing rigidities in goods and labour markets and the absence of sufficient incentives for innovation and the incorporation of new  2  BIS Review 39/2004  technologies are inhibiting investment in Europe, to the beneft of other more dynamic geographical areas. As a result, growth potential is being significantly impaired. Likewise, population trends in Europe are exerting growing pressure on the financial viability of the current public arrangements for social security and health-care. That tends to make those aspects of labour regulation and tax systems that act as a barrier to joining the labour market and to the reduction of the dependency ratio even more onerous. It may thus be the case in the current circumstances that agents perceive more clearly the potentially negative influence on their future income of structural deficiencies, and that this is inhibiting their propensity to spend. Accordingly, defining and boosting the reform agenda, in line with the commitments made at the Lisbon and Barcelona Summits, is not just necessary for ensuring greater sustainable growth in the medium tend; it is also a crucial requirement for improving agents’ confidence and, thereby, contributing to the dynamism of activity, likewise in the more immediate term.

It is, moreover, a model for regulation based on the introduction of the incentives needed to stimulate prudent and responsible action by the institutions. These incentives will promote the establishment of appropriate risk measurement and management systems, such that the better they are, the lower the capital requirements applied to the institutions in recognition of this superiority. The desire to offer alternatives and incentives is clear in the design of the Accord. For example, it proposes that institutions should have various alternatives for calculating their regulatory capital, ranging from the simplest possibilities based on the use of external rating systems, to other more complex ones based on internal rating systems designed by the institutions themselves. The requirements to gain access to the most advanced methodologies are, undoubtedly, considerably more demanding. That said, it is up to the institutions themselves to decide, on the basis of their specific operations and of their needs in general, which methodology they wish to apply. In fact, it is not clear that small and medium-sized institutions should opt, at least initially, to use the most advanced approaches. In particular, the Banco de España foresees that, both on account of the type of operations carried out by Spanish institutions and owing to the minimum requirements for access to the different methodologies, the number of those adopting the most sophisticated methods (i.e. the advanced IRS approach) will be limited and will be the result of a gradual process over time.