some banks began to manage their exposures to operational risk separately and as a comprehensive practice comparable to the management of credit or market risk. by the late 1990s, it became increasingly clear to leading banks and their supervisors that the original accord no longer provided meaningful measures of risk for the most sophisticated banking organisations. as a result, the basel committee and others began to discuss ways to revise the existing capital rules to account for these advances. supervisors sought more than a simple revision of the existing framework. we wanted to align our capital requirements more closely with the best measures of economic risks that banks actually face. we sought furthermore to fortify the stability of the banking sector so that banks could continue to serve as a source of credit through good years and bad. in our view, promoting financial stability will benefit not just banks, but also other businesses and consumers as well. to incorporate the latest advances in risk management, and to develop a more forward - looking approach to supervision, the committee embraced a “ three - pillar ” approach to capital requirements. rather than simply setting out a static minimum requirement for capital levels, the new capital framework will rely on three mutually reinforcing policy approaches. they consist of, first, risk - sensitive minimum requirements ; second, a more consistent system of supervisory review ; and, third, enhanced transparency and market discipline. each of these three pillars offers unique benefits on its own, but the real strength of the three pillars stems from their ability to complement each other. the first pillar - which specifies the minimum capital requirements - constitutes a very direct approach to supervision. by applying a uniform set of rules to banks, the first pillar adds transparency to the regulatory process. applying a shared set of rules to all banks makes it easier to compare organisations and get a sense of their relative degrees of solvency. on a technical level, the committee based the measures of risk on the advanced practices that banks are adopting. the rules reflect the evolution in credit risk management by allowing qualifying banks to rely partly on their own estimates of the drivers of credit risk to determine the amount of capital required against particular exposures. one such driver of credit risk might be the bank ’ s own estimate of a borrower ’ s probability of default. similarly, the new capital rules will reflect the advances in operational risk measurement by incorporating an explicit capital charge for such exposures to loss. so the minimum rules will align capital charges more closely to better measures of the actual underlying economic risks that the industry is developing. this is a clear

flexible and forward - looking approach to financial supervision that seeks to motivate prudent management - and thereby complete the “ virtuous circle ” by encouraging further advances in risk management. the reforms underway are especially evident in the banking world under the basel committee ’ s “ basel ii ” framework. i should add that the international association of insurance supervisors ( iais ), a fellow association of supervisors in the insurance area, is now discussing a supervisory framework that would apply to all insurance regulatory systems globally. evolution in risk management and the reform of financial supervision should complement and reinforce each other, and the progress in each area will be influenced by the work underway globally to revise accounting guidelines. the geneva association has taken a great interest in this topic, so i will conclude my remarks with some brief thoughts from my perspective on the convergence of accounting standards, advances in risk management, and supervision. ii. trends across financial services sector allow me to begin with an overview of recent trends in risk management. last year, a body representing major financial supervisory agencies conducted a study of 31 banks, securities firms, and insurance companies in 12 jurisdictions. this body - called the “ joint forum ” - consists of expert supervisors from member agencies of the basel committee, the international organisation of securities commissioners ( iosco ), and the iais. the joint forum seeks to identify best practices and develop guidance for activities across the financial services sector. in its report, which was published in august 2003, the joint forum identified two important and recent trends among large, complex firms engaged in banking, securities, or insurance, or in some mix of these activities. a. integration of the risk management function. one of the most notable advances in risk management across all three financial services sectors is the growing emphasis on developing a firm - wide assessment of risk. this constitutes the first trend in the joint forum ’ s report. improvements in technology and telecommunications have made it easier for firms to gather, collect, and analyse large amounts of data on their exposures and business activities efficiently and increasingly in near “ real time. ” to make the best use of firm - wide data, some organisations have established a dedicated risk management function to foster more highly integrated and systematic approaches to risk measurement and management. the risk management function typically promotes the use of common risk measures across business lines. it can then report the firm - wide risk data to senior management. reports may range from daily updates on “ value - at - risk ” trading positions to regular, if