Likewise, adopting Basel II now will maintain banks’ momentum in innovating and in strengthening their products and processes so that they can better serve as sources of credit and growth to businesses and consumers tomorrow. Incentive-based approach It is clear then that Basel II is about much more than just setting better quantitative minimum capital requirements. It is about establishing incentive-based approaches to risk and capital adequacy management, within the framework of the three mutually supporting pillars. On a micro level, the new approach will promote better risk management, adequate capitalization and transparency. On a macro level, it will contribute to financial stability and the resilience of the banking system. Let me expand a little on the latter point. I am convinced that when banks have the right incentives to manage their risks appropriately, to hold sufficient capital and to improve transparency, the banking system will become more resilient, more stable and better able to serve as a source for credit and growth. Those characteristics matter greatly to the livelihood of our citizens, to the outlook for commerce and business, and more generally to the health of our economy as a whole. In order to reinforce its relevance as a macro standard, the new framework incorporates a number of elements such as the requirement to use longer time horizons in the design of internal rating systems and in the average calculations of key variables, and also the need to carry out stress tests and conduct calculations in downturn conditions.

All these elements will ensure that bank managers are conscious of how risk-drivers change through the cycle and in stress conditions, and that they incorporate these elements into their decision-taking processes and capital strategies. Let me move now to the work under way to implement the new framework. I’d like to highlight two areas in this respect. 3. Catalytic role in promoting supervisory co-ordination and convergence  The effective implementation of Basel II will depend to a large extent on the ability of “home supervisors” and “host supervisors” of internationally active banks to co-operate efficiently. Certainly one of the goals for any international framework is to foster a more level playing field for internationally active competitors. The Basel Committee wishes to ensure that competition between internationally active banks is driven by each bank’s individual strengths, rather than by differences in each country’s rules. Basel II is intended to promote a more level playing field for internationally active banks. Yet Basel II cannot and should not be expected to create perfect harmonisation across all jurisdictions. Differences in legal systems, market practices and business environments in each country make it an extremely difficult task - and, indeed, an impossible one - to even out all distinctions across all borders. Our goal should instead be to facilitate the application of minimum standards and to work together, across borders, to promote a more consistent implementation and application of the new framework. This enhanced co-operation is a process that will promote consistency and convergence of supervisory practices.