Some of these banks rely on capital allocation methodologies typically used for pricing and performance measurement across business and product lines as a basis for their analysis. These methodologies frequently incorporate different kinds of volatility-based measures that include a view of unexpected loss, along with more subjective measures of risk. While many of these systems and methodologies are still in their early stages  3  BIS Review 32/1999  and require refinement, I am encouraged by their development, and hope that the assessment of capital adequacy will continue to be a primary focus of risk management at banking institutions. The senior management of banks can take this further by evaluating not only the adequacy of their current capital levels, but also the appropriateness of their capital structure. Ideally, this analysis would lead to a process that integrates decisions about business strategy, risk profile and future capital needs. As banks become better at identifying and quantifying their risks, they should be well positioned to enhance risk disclosures and inform investors more fully. While bank investors ultimately bear the risks of the institution, too frequently they are not in a good position to make knowledgeable business decisions about a bank’s prospects. Certainly, investors are less well informed than bank management. In many countries, accounting and disclosure standards do not provide users of financial statements with the necessary information to appropriately assess risks and determine soundness. A lack of transparency discourages capital from flowing efficiently and, in effect, reduces or even destroys value.

This will require banks and supervisors to undergo extensive trainings to learn these new concepts and techniques;  2  BIS central bankers’ speeches    Fifthly, given the scarce availability of qualified human resources, banks and supervisors will face the challenge of attracting and retaining staff with appropriate skill sets;    Sixthly, meeting the additional regulatory requirements relating to Basel III implementation will require banks to reassess their existing regulatory reporting and compliance structure to ensure its adequacy. This is important given the extended transitional timeline for implementation, during which some banks are required to participate in quantitative impact studies while others will have to prepare for full implementation within specified timeline. We also have to keep in mind that new rules are still evolving in certain areas based on the results of quantitative impact studies and thus may require further adjustments in the current regulatory requirements;    Lastly, and the most important step to be taken by banks, is adopting the robust governance structure that best suits their business model and risk profile. The Board of Directors should have a clear understanding of their role in corporate governance and be able to exercise sound and objective judgment about the affairs of the bank. The senior management should ensure that the bank’s activities are consistent with the business strategy, risk tolerance/appetite and policies approved by the board. This is the cornerstone on which any effective risk management framework, sound incentive structure and robust governance arrangements must be built.