, we will certainly consider making adjustments. substantial work remains to be accomplished before basel ii can " go live. " as you are aware, several areas in particular will require special efforts. data collection and validation are examples. while supervisors are working diligently to provide guidance on what is expected for data warehouses and validation methods, financial institutions are responsible for collecting the data they will need for the advanced approaches. similarly, validation starts with institutions ’ own independent checks on the adequacy of risk management and internal control processes. accordingly, those institutions considering adoption of the advanced approaches at the earliest possible date should now be defining the details of their own implementation plans, including a self - assessment, gap analysis and a remediation plan. the recently issued interagency statement on qualification describes some steps that banking organizations should follow if they wish to be positioned to adopt the final rules at the earliest possible implementation date. the focus on enhanced risk management in basel ii means that banking organizations should not view basel ii preparations with a checklist mentality. rather, they should be moving ahead on many fronts, looking at how to make the fundamental changes needed for better risk identification, measurement, management, and control. by doing so, banking organizations can position themselves to succeed in implementing the accord on a timely basis. we do, however, recognize that a certain time constraint exists for institutions wishing to implement the new framework : on the one hand, those institutions are encouraged to start preparations as soon as possible ; on the other hand, we leave open the possibility that elements of the framework are subject to change. i will not try to pretend that this is a trivial matter. as a former banker, i sympathize with the challenges you face in deciding on investments and upgrades to your systems and personnel. when it comes to basel ii, we recognize that certain details relating to systems and processes will depend on what the final u. s. rule and guidance contain. accordingly, we are available to discuss your implementation efforts at any time and we desire to hear specifics about which elements of the proposal, from your perspective, will demand the greatest investments or appear to generate the greatest uncertainty. using that information, the agencies can then understand where to target resources to assist institutions during the transition to basel ii. we certainly hope that many upgrades made for basel ii are those that would have been made anyway. i would like to say a few words directly to the potential " opt - in " institutions. an institution that does not

##management of financial institutions. dealing with this falls within the province of supervision, and i will not here go into the question of supervision of the financial markets, except to say that a mechanism for proper coordination between the various supervisory authorities in israel ’ s economy is sorely needed, and it is a pity that it has not yet been activated. the second is artificial restrictions that were imposed by the authorities at some time or other on the mechanism of the market. the removal of such restrictions is essential if financial crises are to be avoided. the major ones are : 1. earmarked bonds the arrangement regarding bonds earmarked for the pension funds provides the clearest example of such restrictions on the market mechanism. this arrangement systematically destroys the market for tradable government bonds, the existence of which is one of the preconditions for a market for private bonds, providing the banking system with a basis for pricing for the system of medium - and long - term deposits and credit. this phenomenon of earmarked bonds will spread even more quickly · if the required tax reform assigning the tax benefits on pension savings mainly to savings for retirement is introduced ; · if the budget constraint on tax relief requires a distinction to be made between savings which entitle the member to a pension and lump sum savings for retirement ; · if the move from unfunded to funded pensions follows the planned path ; · and if a compulsory pension law is passed incorporating the rules which apply currently to the pension funds. the best way out of the earmarked bonds arrangement is similar to the method used in the life insurance field in the transition from guaranteed yield life insurance schemes to profit - sharing schemes. that is : · not to change the rules in the existing new pension funds, but to close them to new members ; · to ensure that pension funds established from now on are based only on the market. if the government can support pension savings and wishes to do so beyond granting tax benefits, it would better do so directly vis - a - vis pensioners, and on a means tested basis. 2. the crawling exchange - rate band the band is intended to contain, currently within fairly wide limits, possible fluctuations of the rate of exchange. it is well known that the conditions which brought about the creation of the band disappeared long ago : · initially the band served as an advanced version of the exchange rate, as a nominal anchor for inflation. the exchange rate has not had this role to play for many years ; · then