4  BIS Review 21/2004  In Phase I, Bank Negara Malaysia may also allow banking institutions to remain on the current accord if they intend to adopt the Foundation Internal Rating Based (FIRB) approach, instead of the standardized approach. However, Bank Negara Malaysia would require a submission of business case justification as well as a blueprint for implementation that has been approved by the Board of Directors of the banking institutions concerned. These banking institutions would be expected to have undertaken a comprehensive gap and business impact studies to justify their roll-out plans. In this regard, a broad guideline on the required processes and expectations will be issued to facilitate the process. Banking institutions intending to adopt the FIRB approach are expected to do so by January 2010. This is when the second phase of implementation will commence. These institutions will be required to submit to Bank Negara Malaysia parallel calculation of capital adequacy on a monthly basis for one year prior to implementation. However, during the second phase, banks on the standardized approach will not be mandated to migrate to the FIRB approach. For purposes of regulatory validation and approval, Bank Negara Malaysia would expect that all parameters and assumptions used for the FIRB approach will be based on local data inputs. Conclusion - capital is key, but not the sole factor to ensure soundness Ladies and Gentlemen, Despite the increased sophistication of the regulatory capital framework and internal economic capital model in banks, capital remains the last line of defence.

Similarly, the advances in financial engineering and improved expertise have allowed the introduction of new hedging instruments to facilitate risk management. Significant enhancements have been achieved in the measurement of market risk where the use of internal value-at-risk models is fast becoming the industry standard. The advances in the quantitative approach to the management of market risks have also expanded to the areas of credit as well as operational risks. Despite the significant data constraints, new research has strengthened the theoretical foundation for internal credit and operational risk modeling. The development of new hedging instruments such as credit derivatives has also increased the use of credit risk transfer mechanisms within the financial system, thus promoting more active credit portfolio risk management. Key developments have also taken place in the area of operational risk. The  BIS Review 21/2004  1  experience of large corporate failures due to fraud and lapses in internal controls has focused greater attention on improving operational risk management in banking institutions. This has prompted the need for banking institutions to provide capital for operational risk and to put in place a more integrated risk management framework on an enterprise-wide basis. The essence of the new accord Ladies and Gentlemen, The efforts of the BIS to introduce an enhanced framework for capital adequacy regulation through Basel II is in the context of these developments. The accord seeks to bring into greater alignment the more advanced concept of capital management into the regulatory equation.