The ESCB Banking Supervision Committee has long been working as the interface between the EU central banks and banking supervisory authorities. It combines the macro-level perspective of central banks, which are best placed to monitor ongoing developments in the financial system, with the equally important micro-level approach of the supervisory authorities to provide a joint and comprehensive assessment of the stability of the EU banking sector. Let me also note the importance of having appropriate arrangements at EU level for financial crisis management. Good progress has been made as a result of the recommendations of the Brouwer report. Notably, the Banking Supervision Committee has concluded a Memorandum of Understanding on cooperation and information-sharing in crisis management situations between all central banks and banking supervisors of the EU. Global issues At international level, examples of how effective crisis management and resolution is hindered by the absence of a common legal framework are well documented. However, a common legal framework is only one important element required for the orderly pursuit of international finance. Another would be a  BIS Review 53/2003  5  concrete enforcement mechanism, but this is possibly inconceivable in the context of sovereign states. Indeed, contractual arrangements are increasingly aimed at compensating for the lack of a common regulatory and enforcement framework. The response of the international community to coordination problems includes efforts in crisis prevention and crisis resolution. In the context of crisis prevention, the promotion of international standards and codes is a promising avenue.

As a consequence, the need to reform the existing Accord is widely recognised and supervisors are working very hard to shape the new Accord in close consultation with the private sector. The Basel II Accord is aimed at bringing the capital requirements closer to the true economic risks in banks’ portfolios and at offering a wide range of options and approaches to respond to the increased complexity of financial instruments. Basel II is achieving all of this basically by relying more on banks’ internal models in the supervisory process. An important by-product is, therefore, that there is a lot of pressure on banks to improve their risk management systems. Improvements are already visible. It seems clear to me that more supervisory efforts, similar to those in the banking sector, may also be needed in the other sectors of financial institutions, for example in insurance. The ECB has drawn attention since the early stages of the Basel II process and the implementation of the framework in the EU to macro-prudential implications and to the possibility of increased procyclicality of certain provisions. When bank capital is largely based on risk and risk increases in a recession, macroeconomic consequences might arise through a procyclical reduced ability of banks to lend. These concerns have been appropriately addressed in the revised proposals submitted for consultation by the Basel Committee and the European Commission. Pro-cyclicality concerns are substantially mitigated and a good balance can be found between risk-sensitivity and macroeconomic stability.