Recognizing the clear need for a more risk-sensitive and flexible Basel Accord, the new framework is intended to more closely align regulatory capital requirements with underlying risks, and to provide banks and their supervisors with a range of options for the assessment of capital adequacy. There is more emphasis on banks’ own internal methodologies as well as other elements that are critical to ensuring the capital adequacy of banks, such as strong risk management and sufficient public disclosure of information. The Committee has also discarded the one-size-fits-all framework for the calculation of minimum capital requirements. Instead, the proposed framework provides a menu from which banks can choose, with the authorization of their supervisor and depending on the complexity of their business as well as the quality of their risk management. The Basel Committee is seeking comments on the proposed framework until the end of May and plans to finalize the new Accord well before the end of this year, during which time the Committee will pursue an active dialogue with non-G10 supervisors. It is envisioned that the revised Accord will be implemented in 2004. The role of a sound and stable macroeconomic environment A sound and stable macroeconomic environment is also crucial for financial stability, and more generally for promoting sustainable growth. The converse--macroeconomic overheating--raises the likelihood of an eventual crisis, first by promoting excessive, and eventually unsustainable, external and internal borrowing.

Vulnerabilities On a microeconomic level, the still-fragile condition of regional financial and corporate sector institutions remains a real threat to medium-term stability. Notwithstanding significant official rescue efforts, regional financial sectors remain burdened by a high level of problem loans, and require further substantive bolstering of capital and reserves. Authorities, by and large, have yet to articulate a program for reprivatizing banks and liquidating purchased assets. Improvements in the financial system infrastructure depend critically on follow-through on these issues, a long-term process. Corporate sectors similarly remain fragile: recent debt restructurings have involved a high degree of debt rescheduling, and firms across the region remain burdened with significant amounts of debt. The relatively limited restructuring of corporate operations to date across the region raises questions about the medium-term sustainability of recent improvements in bank asset quality. The relative lack of breadth in the region’s recovery also creates vulnerabilities. Asia’s export orientation has long been a key focal point of strength, to which the recent recovery attests. However, too great a dependence on export-driven growth brings increased vulnerability to external shocks. Asia, in particular, will feel the negative effects of a worldwide slowing from last year’s strong rate of growth. Moreover, domestic demand has not recovered sufficiently from the crisis to sustain the region’s economies. With fiscal policy constrained to varying degrees by heavy public sector debt burdens, regional central banks, in some cases with new-found independence, will need to maintain their stimulative policies to support the recovery.