In undertaking this challenge, banks and supervisors recognise that having adequate levels of capital is not enough to ensure success in banking - or even long-term survival. A bank’s long-term success is determined chiefly by the quality of its management and controls, which together make up its first line of defence. The New Basel Accord seeks to capture the relationship between the adequacy of capital and the quality of risk management by relying on three important and mutually reinforcing “pillars”. These consist of, first, the minimum capital requirements; second, supervisory review; and third, market discipline. The three pillars themselves reflect the trend among bank supervisors to embrace a balanced philosophy of regulation that provides incentives to banks to manage their risks appropriately. The first pillar, for example, seeks to align capital requirements more closely to the actual risks that banks face. But the minimum requirements provide economic incentives - in the form of lower capital charges - for those banks that develop better measures for their exposures to risk and better techniques for managing their risks. Banks with more traditional exposures and less complex operations will be better able to ensure that the their capital base is sufficient for the level of credit risk they face by aligning their capital requirements with external measures of their borrowers’ creditworthiness. The most sophisticated approaches to credit or operational risk will allow banks to rely increasingly on their own assessments of risk to determine how much capital to hold.

Indeed, the increase in global imbalances is not confined to current account positions. In addition to the growth in net international capital flows, the very sharp rise in gross positions in international portfolios, not exclusively but largely linked to the accumulation of foreign exchange reserves by the major emerging economies, is one of the most significant developments of the past few years. The striking synchronisation of the recent economic crisis across the major economies is certainly in large part a result of this. BIS central bankers’ speeches  1  In any case, the issue of the appropriate level for the supply of safe and liquid international assets and the international monetary and financial system best able to provide this has yet to be resolved. As you know, this issue is at the heart of France’s presidency of the G-20. The second major topic is international economic and financial coordination and I will briefly touch on its two main components. The first component concerns the Framework for Strong, Sustainable and Balanced Growth. This initiative has been given wide media coverage since its adoption at the G-20 summit in Pittsburgh in September 2009. However, I am inclined to think that it has sometimes been distorted and that its scope has been underestimated. This initiative is indeed a promising and ambitious one: promising as it could be the impetus for genuinely enhancing international economic cooperation through the combination of economic policies taking greater account of externalities and structural reforms, in order to achieve the jointly defined global objectives.