. explicitly or implicitly, we now need to make judgments regarding the respective correlations of different risks. are they additive or independent and to what degree? can the same capital cover all of them, or do banks need capital for each one? similar issues arise with risk mitigation and the proper treatment of collateral, guarantees, and other risk - reducing steps. though these practices are important in measuring a bank's effective risk, their value, in principle, is reflected implicitly in the 8 percent charge, as part of the " on average " nature of the current accord. again, in principle, without such traditional cautionary efforts by banks to reduce risks, in 1988 the current regulatory capital minimum would have been set higher than 8 percent. the difficulty, of course, is quantifying precisely the importance of each risk and of each risk - mitigating effort, and how they all fit together. taking industry's lead when developing new regulatory standards, bank supervisors traditionally look first to common or " best " business practices within the industry to serve as a guide. for credit risk, however, we have found that though many banks are beginning to adopt more formal quantitative approaches and the systems of some banks are quite advanced, virtually no bank follows best practices in all areas of credit risk measurement and management. this is so even though, i hasten to add, the proposed irb framework draws heavily from concepts and systems developed by leading - edge institutions. for once, supervisors seem to be ahead of – or at least even with – the curve rather than behind it. the lag in application reflects, i think, the reality that measuring credit and operating risk is more difficult than measuring market risk. in trading activities transactions are marked to market daily, and long series of data are readily available for measuring rate and price volatility. once developed, valueat - risk and various stress - measurement techniques also spread throughout the industry, at least among the relevant institutions. with credit risk, we find a greater range of practices and of riskmeasurement skills. as noted, the economic capital models used by some banks have been of great help in structuring the proposed framework and showing the way. nonetheless, the work done to develop this proposal makes clear that there is room for much improvement in certain business practices and in the internal use of model output in evaluating capital adequacy. given the difficulty of developing, maintaining, and validating measures of credit risk, supervisors will need

of options provide sufficient flexibility to meet the needs of countries with varying supervisory capabilities? will the new accord be implemented consistently within a country and across countries? this is an issue precisely because the new proposal offers greater discretion to banks, and implicitly to supervisors, and therefore could lead to greater variation in capital among banks and countries. the issue is also important in the united states, since two agencies supervise large, internationally active banks : the federal reserve and the occ. these agencies must uniformly implement the new proposal to preserve competitive equity among u. s. banks. fortunately, the fed and the occ have worked closely during the development of the new proposal. and, even more to the point, we have already begun to work closely to develop jointly procedures to validate banks'internal riskmeasurement methodologies. the question remains, however, how uniform will implementation be around the world? the proposal relies heavily on supervisory oversight and market discipline to promote consistency. supervisors will be responsible for validating banks'internal methodologies, ensuring ongoing compliance with sound practices, and providing oversight of the economic capital process. the importance of these qualification standards is precisely why the new proposal makes them a requirement for any bank permitted to operate under an irb option. these requirements are therefore an integral part of pillar 1. even countries without supervisory authority can impose these qualifications as a requirement for the preferential capital treatment offered under pillar 1. carrying out this validation and overseeing compliance on an ongoing basis will be a considerable challenge everywhere, including the united states. as i noted, this challenge will be particularly pronounced in countries where the supervisory tradition has not emphasized the types of on - site review needed to validate a bank's irb implementation. i have been impressed that those members of the committee with such a tradition have been very explicit about the need to obtain the resources to carry out the necessary supervisory review. there is also general agreement that ongoing structured exchanges of our experiences will occur among committee members as part of the process of assessing the degree of uniformity in implementation. nonetheless, your comments about expected or evolving problems with consistency issues would be quite helpful. even if supervisory resources are adequate, market discipline must also play an important role in ensuring uniformity in implementing the proposed basel standard among banks. of course, banks don't all have to make the same choice with respect to capital levels, but they should pay the appropriate price in the market for lower levels of capital relative to risk. at any rate, it is