It also makes greater supervisory cooperation essential, in order to ensure consistent implementation. One concern which has been expressed many times is that excessive reliance is placed on External Credit Agencies for those banks that do not have sufficiently robust internal rating systems. The Committee has been mindful of this concern and if supervisors are uncomfortable with external ratings in their countries, there is an option whereby all corporate claims are weighted at 100% and sovereigns and banks can be risk weighted according to the risk scores of export credit agencies, in which case there need not be any reliance on external credit agencies at all. Indeed, our discussions with colleagues and counterparts from countries outside the Committee have been instrumental in revising the capital framework. Thanks to our consultations, we have endeavoured to address several broad issues in the new framework, which I will set out now. Complexity One inevitable by-product of designing a comprehensive three-pillar framework with built-in options to suit different circumstances is increased complexity. The members of the Basel Committee certainly recognise that complexity is not a virtue for supervisory guidelines. It is far easier to enforce a simple rule than a complicated one. However, achieving a balance between simplicity and comparability, and also between simplicity and risk sensitivity is particularly difficult in an industry like banking, where a culture of constant innovation makes it a tall order for regulators to develop simple rules that fit all banking products and services in all their permutations.

The Basel Committee, its member agencies, and the Financial Stability Institute of the Bank for International Settlements have long participated in regional training initiatives that are intended to help promote supervisors’ understanding of international banking standards such as the new capital framework. The Committee’s Accord Implementation Group likewise engages in outreach to supervisors in non-member countries, including through the Core Principles Liaison Group. I chaired a special session of such a discussion earlier this year because I am personally committed to improving that dialogue. 8  BIS Review 33/2004  We look forward to working with other institutions, including the World Bank and the International Monetary Fund, to assist other supervisors in their journeys as they come to their own crossroads for banking supervision. Conclusion In my remarks this morning, my intention was to offer more insight into why the Basel Committee believes that Basel II is such an important step in embracing a new, incentives-based approach to supervision. I also wanted to discuss how it will keep our supervisory framework up-to-date with the latest advances in risk measurement techniques and risk management practices. In my answers to the sensitive questions that I have heard from bankers and policymakers in other countries, I have sought to emphasise that the Basel Committee seeks the appropriate balance for Basel II between developing simple rules while maintaining their sensitivity to a bank’s actual underlying risks. We intend to align Basel II’s capital requirements more closely to banks’ actual economic capital needs.