Aligning the capital charges in the standardized approach more closely with economic risk while retaining relative simplicity is an important goal, as the Committee wishes to ensure that all banks worldwide that look to the Accord as the benchmark can subscribe to the new framework. Credit risk mitigation techniques The Committee is also looking to allow for greater recognition of credit risk mitigation techniques, such as collateral, guarantees and credit derivatives, while at the same time addressing potential risks that remain from their use. As we finalize our proposals, we are working to ensure that there is a high degree of consistency between the treatment of risk mitigation techniques under the standardized and internal ratings-based approaches, though the two are likely to differ in some respects. Operational risk The Committee recognizes that in refining the measurement of credit risk, it is also important to consider the coverage of other important risks, such as operational risk. The announcement of our intention to incorporate an explicit capital charge for operational risk in the new capital framework has had a catalytic effect on the industry, which is striving to improve its measurement capabilities in this area. The Committee wants to maintain this momentum. It is working closely with the industry to develop an “evolutionary” approach to operational risk that would reward banks that improve their risk management and measurement capabilities. We intend to include this approach in the next Consultative Paper.

Effective bank-level management Primary responsibility for the safe and sound operation of a banking institution lies with its board of directors and senior management. Boards of directors should oversee the development of the overall strategy of the organization and the decisions made by senior management in pursuit of those strategic objectives. In effectively executing these responsibilities, boards make a critical contribution to the long-term success of the institution. This is a fundamental principal of banking that has not changed with technological advancement. Indeed, if anything, the greater complexity and sophistication of the  3  BIS Review 75/2000  modern financial services firm require more energy, effort and expertise from directors than ever before. I see two areas of board operation as being particularly crucial. First, banks and other financial institutions must ensure that specific skills and competencies, consistent with the institution’s strategic focus, are represented on their boards. Institutions that engage in complex credit or market activities, utilize sophisticated financial products, or expand their Internet or e-commerce capabilities, should include one or more board directors with pertinent expertise in such areas. Second, boards should establish clear guidelines regarding the independence of their directors. Generally, it is desirable for at least some directors, and perhaps a majority, to be independent and from outside the ranks of the management of the institution. Further, the board should set parameters regarding at what point, or under what circumstances, a director’s outside business interest becomes so significant as to raise questions of a possible conflict.