To that end, the Basle Capital Accord’s market risk amendment, which went into effect at year-end 1997, represents a significant shift in capital supervision, moving away for the first time from the prevailing approach of a mandated and rigid regulatory formula or ratio. The amendment also represents a major step toward a more market-based approach to supervision that draws on banks’ internal methodologies for risk measurement, places greater emphasis on promoting sound risk management and control processes, and encourages further innovation and improvement in the banks’ internal models. While the market risk amendment is a major step in the right direction, we need to begin thinking now about a conceptual framework for the next generation of capital rules, particularly given the long lead times involved. The original Basle Capital Accord took about five years to develop, and almost seven more years were required to reach agreement on the market risk amendment. I intend to do whatever I can as chairman of the Banking Supervision Committee to raise the relevant issues and promote the development of new approaches to capital adequacy as early as possible. In discussing the challenges ahead, I should also note some recent accomplishments, particularly the work of the BIS Committee on Payments and Settlements Systems, of which I was the former chair, on reducing Herstatt risk in foreign exchange settlements.

Authorities have been tested and have established more effective mechanisms for addressing problem bank situations. Financial institutions have undertaken a range of measures themselves to improve risk management practices, operational controls, and core profitability. Some institutions have attempted to comply with international standards, notwithstanding lower domestic requirements. These reforms are especially important in light of the fact that the obligation to promote financial soundness rests mainly with financial institutions themselves. Taken together, these reforms indicate progress toward reduced systemic risk, heightened competition, increased banking services provided to the domestic population, and higher standards of conduct better approximating international standards. Work Ahead Notwithstanding this progress, much work remains ahead. While crises have motivated a great deal of reform in individual countries, and standards are approaching international norms, the international financial system remains a patchwork of varying standards and guidelines. While international disclosure standards have improved markedly in recent years, greater disclosure still is required, particularly with respect to bank asset quality, both in emerging and industrial countries alike. In seeking to make these improvements, however, we should avoid a “checklist” approach which may not address the risks of a given country and may soon become outdated. Improved disclosure will require more than a comprehensive framework. Accounting standards also need to be upgraded to reflect innovations in financial products and risk management techniques. The process of upgrading accounting standards, in turn, would benefit from greater harmonization of accounting standards that would facilitate comparison of global financial institutions and result in more uniform capital standards across countries.