Senior management, and, to a significant extent, the board of directors, will have to have a good understanding of various key elements of the organization’s ratings process - the design of the rating system, the methods of assigning and reviewing ratings, the process of developing and using the necessary data, the approach to developing reliable quantitative estimates, and ultimately the consistency of the system with Basel standards. Understanding these various elements will be important in assessing the appropriateness and reliability of the measures of credit risk that are developed - measures that are in turn needed for senior management and the board to make more informed strategic decisions. Operational risk is another area where the Basel Committee has developed a new regulatory capital approach. In this area, as with credit risk, the Committee not only attempts to build on banks’ rapidly developing internal assessment techniques, but seeks to provide incentives for banks to improve those techniques, and more broadly, their management of risk, over time. This is particularly true of the Advanced Measurement Approaches to Operational Risk, or AMA. Under the AMA, banks would be able to use their internal methodologies to assess their exposure to operational risk - subject to a series of qualitative and quantitative supervisory parameters that are intended to ensure that the approach used is comprehensive and that it is implemented with integrity. Moreover, the AMA is intended to be sufficiently flexible so as to accommodate the rapid evolution in operational risk management practices we expect to see over the coming years.

I expect that much of the cost to banks of adopting the advanced approaches of Basel II will come from pushing ahead on precisely these types of initiatives. This is not to minimize the costs involved in coming into full Basel compliance, but rather to emphasize the extent to which bank risk management and supervisory capital requirements share common objectives in pursuit of the benefits that Sir Andrew described. Those benefits - both to individual banks and to the financial services sector more generally - are real and valuable. We know all too well the costs to society of bank weakness and failures. As the largest banks continue to grow, to prosper and to pursue new opportunities, they must simultaneously make the investments required to understand and manage their existing risks more fully, and to address any new risks appropriately. Likewise, the new framework is providing supervisors with both opportunities and incentives to enhance their ability to identify and respond to risk in the banks they supervise. I will discuss the challenges for individual supervisors in a moment, but let me offer a few thoughts now on the challenges for supervisors to collaborate more effectively with one another. More effective collaboration was of course a key reason for the establishment of the Basel Committee. The Committee provides an excellent forum for open and constructive dialogue among banking supervisors. This spirit of communication will be more crucial than ever as the new framework is adopted across national jurisdictions.