However, for large banking institutions with businesses which are highly complex, the more advanced approaches, that is, the foundation or advanced internal rating based (IRB) approach may be more appropriate to reflect their actual risk profile. Similarly, there are three alternative approaches that may be adopted in allocating capital for operational risks, that is the basic indicator approach, the standardised approach and the advanced measurement approach. The objective of the new framework is to emphasise on the need for refined measurement of risks, more efficient capital management and the adoption of sound risk management practices that will ultimately contribute to greater financial stability. This will be complemented with efforts to enhance the corporate governance framework, the robustness of the internal control systems, and to introduce greater transparency and market discipline. Within the context of these developments is the importance of the ability of the board members and top management of banking institutions to assess risk from a broader perspective and its strategic impact on the institution. In view of the significant implications of this new capital framework, Bank Negara Malaysia has been directly involved in the consultative process through regional forums to ensure that issues and concerns of the emerging markets are considered by the BIS in designing the new accord. We are pleased to note that many of these issues have been taken into consideration. Motivation for migration to the new accord The adoption of the new accord is consistent with building strong risk management capability.

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.