Consistency in application of AMA standards The challenges of implementing the New Accord across borders raise concerns as well about consistency in the application of AMA standards. These concerns also address more broadly competition between AMA banks, which is the final theme I’d like to mention today. While many banks welcome the flexibility to use their own methodologies under the AMA, some are concerned that too much flexibility might allow competitors at home or abroad to employ methods that are subject to less rigorous supervision. Ensuring the consistent application of the New Accord in its entirety is a critical concern for the Committee. The minimum standards were developed to help ensure that global competition in banking markets will be driven by each bank’s strengths, rather than by differences in each country’s rules. Moreover, Pillars Two and Three were created to a great degree to promote a more level playing field for banks. For example, incorporating supervisory review - or Pillar Two - into the international guidelines represents a genuine breakthrough for all of us. By developing guidelines for the supervisor’s evaluation of a bank’s internal capital allocation process, the Committee believes that supervisors and banks will engage in more focused, more consistent, and less burdensome discussions of the risks that banks face and the responses they adopt. National laws and regulations provide different avenues through which supervisors may conduct such reviews, and consequently Pillar 2 affords each jurisdiction the flexibility to accommodate those differences.

Since it appears unlikely that a large organisation would suffer high losses  BIS Review 45/2003  3  from operational failures in many businesses or entities at once, some banks argue that capital requirements for a large and diversified firm as a whole might be less than the sum of capital requirements calculated for each individual entity. The Committee acknowledges the technical and practical challenges associated with developing and implementing AMAs for large, diversified firms. We are working to reduce unnecessary burdens on banks adopting them. While we have not made any decisions yet, this is an issue that we are still discussing actively with the industry. But we face even tougher questions if we consider the allocation of capital across not just legal entities, but also across national borders, as some have requested. This is a very difficult question to address in the Basel context. The Committee must respect the legal responsibilities charged to national supervisors in regulating locally chartered banks, branches, or subsidiaries. All bank supervisors must have access to sufficient, comprehensive and detailed information on a bank’s operational risk control structure, including its AMA, to evaluate the quality of risk management at banks they supervise. That may include a need for banks and other supervised entities to demonstrate the adequacy of their capital resources on a stand-alone basis. We are giving significant thought to the international implications of this issue, but I should caution that we may not be able to find a completely satisfactory solution at the Committee’s level.