william l rutledge : implementing the new basel accord speech by mr william l rutledge, executive vice president of the federal reserve bank of new york, at the british banker ’ s association basel 2 / cad 3 half day conference, london, uk, 13 march 2003. * * * introduction thank you and good morning. it is a great pleasure for me to be here today to offer some thoughts on basel implementation issues - thoughts that will reflect partly my role as the head of bank supervision at the federal reserve bank of new york, and partly my role as a member of the basel committee. in that latter capacity, i ’ d like to begin by offering my thanks for all of the extremely helpful and constructive comments that the bba has provided throughout the basel consultative process. in my experience, having a candid dialogue between the industry and the supervisory community is the best way to develop well informed regulatory policy. given our desire for basel ii to be consistent with the best existing and emerging risk measurement and management practices, getting specific feedback from the industry is particularly critical. it is also critical that we understand calibration issues so that we set appropriate numerical standards ; in that connection, i ’ d like to offer my further thanks to all of the banks represented here that participated in the latest quantitative impact survey. i know that gathering all the necessary data and providing it in the prescribed format was a daunting task. just know that our task - analyzing the results of the exercise with data from nearly 50 countries and over 250 institutions - is quite a challenge as well. i expect that patricia jackson of the bank of england, who has led that effort, will comment on the qis results later on today. in his remarks, sir andrew shared some observations on the objectives of the new basel accord. my focus will be on how we expect to achieve some of those goals, through addressing various challenges that lie ahead to implementing the new accord. first, i will offer some broad observations on implementation issues, including some thoughts on the challenges of applying it across jurisdictions. then, i will get into more specific detail on the preparations banks and supervisors are making to implement the new framework. i will be drawing on the united states ’ experience to highlight the kinds of preparations that will be needed generally. implementation of the new accord overview as you know, the basel committee is quite close to finalizing the new capital framework after a number of years of work. issuance of the next consultative paper will be a tremendously

downward moves in asset prices on demand may be larger due to the greater negative impact of deflation on the net worth of borrowers — witness the united states in the 1930s or japan in the 1990s, the case for adjusting monetary policy in response to negative asset price shocks is commonly considered more compelling than in the alternative context. but this does not mean that monetary policy should generally ignore the effects of increases and only respond to observed declines in asset prices. the test should be the size and circumstances of the asset price moves and their impact on the forecast relative to the central banks ’ objectives, not the direction of the asset price move. different considerations apply in the circumstances where the central bank is considering how a potential future move in asset prices may affect the forecast. these circumstances call for even greater caution and care. here is it very important that the forecasts central banks consider in making monetary policy decisions are explicit about assumptions for future asset price movements, the uncertainty that surrounds them, the sensitivity of the forecast to alternative assumptions, and the costs and consequences of alternative paths for monetary policy. even in circumstances where asset prices may appear to have moved away from fundamentals, and it seems reasonable to consider the implications of some deceleration in the pace of future increase or some decline, central banks need to be very cautious about adjusting policy in anticipation of that event, much less directing policy at inducing it. the substantial uncertainty about the path of asset price movements going forward necessarily reduces the case for altering policy in advance of the move. consider the case in which it seems prudent for the central bank to incorporate an assumption for a significant move in the rate of change in future asset prices into its forecasts for output and inflation. if the central bank ’ s assumption is that asset prices are likely to fall over the forecast horizon, perhaps in the wake of a sustained rise in those prices, then it might in turn forecast a softer path for aggregate demand. these changes in the outlook might imply a lower expected path for the target rate than would have been implied by a different assumed path for the behavior of asset prices. if it turns out that the anticipated fall in asset prices does not materialize, the policy constructed under the assumption of a decline will likely have been too easy, and that might itself contribute to further rises in asset prices. this might sound like a more or less generic statement about the perils of having to make policy based on forecasts, but there is a sense in which the forecasting of asset prices