The Basel Committee, its member agencies, and the Financial Stability Institute of the Bank for International Settlements have long participated in regional training initiatives that are intended to help promote supervisors’ understanding of international banking standards such as the new capital framework. The Committee’s Accord Implementation Group likewise engages in outreach to supervisors in non-member countries, including through the Core Principles Liaison Group. I chaired a special session of such a discussion earlier this year because I am personally committed to improving that dialogue. 8  BIS Review 33/2004  We look forward to working with other institutions, including the World Bank and the International Monetary Fund, to assist other supervisors in their journeys as they come to their own crossroads for banking supervision. Conclusion In my remarks this morning, my intention was to offer more insight into why the Basel Committee believes that Basel II is such an important step in embracing a new, incentives-based approach to supervision. I also wanted to discuss how it will keep our supervisory framework up-to-date with the latest advances in risk measurement techniques and risk management practices. In my answers to the sensitive questions that I have heard from bankers and policymakers in other countries, I have sought to emphasise that the Basel Committee seeks the appropriate balance for Basel II between developing simple rules while maintaining their sensitivity to a bank’s actual underlying risks. We intend to align Basel II’s capital requirements more closely to banks’ actual economic capital needs.

•  Do regulatory policies – either the microprudential or macroprudential variety – have an impact on market liquidity or short-term interest rates? The BIS recently convened a working group to assess the impact of microprudential policy on the efficacy of monetary policy. The report concluded that it was difficult to draw firm conclusions. But there were some interesting observations. •  The lending activity of less well-capitalised, higher risk-taking or less liquid banks appears more responsive to a tightening of monetary policy. •  This would seem to suggest that more stringent regulations tend to weaken the transmission of monetary impulses. •  And the transmission of policy rate changes to other interest rates and asset prices may be altered if debt markets become less liquid as a result of regulatory changes. Conclusion Let me conclude by drawing together the main points. •  Microprudential policies are critically important for financial stability and we must get them right. •  But the ability of microprudential policies to achieve financial stability may be dampened by credit cycles that have their roots in broader macro forces. •  Monetary policy matters for financial stability because it affects the credit cycle. To what extent monetary policy should therefore take account of financial stability remains an unresolved matter. •  Macroprudential policy potentially offers a way out by targeting the macro sources of financial instability, leaving monetary policy to focus on price stability. •  But macroprudential policy is neither a panacea nor without cost or distortion.