As a first key step in developing these approaches, the Basel Committee gathered information about banks’ internal ratings systems. Our findings indicate that there is presently no single standard for the design and operation of such a system. Thus, I see the importance of establishing appropriate guidelines for the use of internal ratings systems. These guidelines should ensure that internal ratings appropriately reflect the credit risk in each category of exposure. Additionally, it is important that we develop robust disclosure guidelines for internal ratings information to ensure that capital requirements are comparable across banks and countries. Standardized approach A revised standardized approach is still very important to us at the Basel Committee, as some banks may not have the internal resources to implement an internal ratings-based approach, and some supervisors have indicated that implementation of this approach would create resource strains for them. Further, we want to ensure that those banks that look to the Accord as the common standard many of which are located in emerging market countries - can subscribe to the revised framework. In order to improve the risk sensitivity of the standardized approach without becoming overly complex, the Committee has proposed the use of external credit assessments, such as credit ratings. Many comments noted drawbacks to this approach, but those that have seriously considered the trade-off between simplicity and risk sensitivity generally have agreed with the Committee’s decision to make use of external credit assessments.

It is imperative that we stay on track in our goal to release a new capital adequacy framework by early next year, with a comment period and industry implementation to follow shortly thereafter. BIS Review 50/2000  4  Corporate governance My remarks thus far have focused on the need for a more risk-reflective capital framework. Clearly, a strong capital position is crucial to the sound operation of any banking organization. It allows banks’ board of directors and senior management to focus on strategic objectives and growth opportunities, supports the business activities of the organization, and provides the financial strength necessary to sustain the occasional losses that are inevitable in a business of taking calculated risks. In this latter sense, capital represents the last line of defense against potential loss-creating problems. But, I want to briefly address the first line of defense - effective bank management, which increasingly is an important element of today’s supervisory framework as banks’ activities and their associated risks become ever more complex. There are several aspects to effective bank management. The importance of good corporate governance cannot be overemphasized. Broadly speaking, corporate governance refers to the organizational infrastructure necessary to achieve a workable corporate strategy, to effectively implement that strategy, and to continually evaluate its risks and benefits to the organization. These basic infrastructural elements include: –  independent and competent outside directors;  –  capable and experienced management;  –  a coherent corporate strategy and business plan; and,  –  clear lines of responsibility and accountability.