##ly regulatory requirements with internal risk measurement methodologies. it is important to recognize that the application of the new accord is principally intended for large international banks, which are complex institutions usually operating in developed countries. therefore, basel ii has often been questioned about its implications and appropriateness for banking in emerging market economies, and it is on this point that i would like to focus my remarks. in principle, the three - pillar structure of the new accord provides more precise directions to regulators to strengthen bank supervision and incentives to banks to become more sophisticated in risk management. implementation of basel ii eliminates “ one size fits all ” methodology to assess risks and offers instead a wide range of methods to evaluate risks based more on failure likelihood. but the supervisory authorities in several emerging markets and many developing economies are concerned that basel ii puts a challenge they cannot meet. probably our greatest concern relates to the need of the standardized approach to rely on external rating agencies for calculating minimum capital requirements. currently domestic rating agencies are totally absent in albania and not well developed as in many other non - oecd countries. on the other hand, in most of our economies many small enterprises cannot afford to be clients of international rating agencies. since borrowers unrated from rating agencies will be assigned a 100 % risk according to basel ii, initially most domestic credits may end up under this 100 % category. this could reduce risk sensitivity of the new system brining it close or similar to that of basel i. on the other hand, albanian banks hold a significant share of government treasury bills and notes. actually, under basel i to this exposure of the banking system denominated in local currency is assigned 0 % risk independently whether credit risk of the sovereign debt is rated or not. under basel ii, standardized approach, it is possible that sovereign debt is assigned a risk weight between 0 % to 150 %, most likely 100 % since it falls under unrated category. this means that banking system in albania may have to increase capital allocation to comply with the minimum level of the capital adequacy ratio. an important intention of basel ii is to strengthen market discipline by developing a set of information disclosure requirements. in our countries there is plenty of room for improvement in this respect to allow market participants to assess key information on risk exposure, risk assessment process, and hence capital adequacy. this is important since it increases public pressure on banks to have a better performance in assessing and monitoring risk. however, in short run information disclosure might also have some

adverse implication, say in albania. let me explain myself better on this issue. public is usually more sensitive to bad news than positive developments. in countries like albania, reactions between good or bad news are even more asymmetric than in mature market economies. public in albania is particularly over - reactive toward grim news on banking sector or on a certain bank while tend to ignore what falls in the positive side. this could be due to both historical factors, e. g. the crisis of financial system in 1997, and culture factors e. g. low level of bank business understanding, e. g. the overreaction of public to the introduction of the deposit insurance law in 2002. this means that enhanced information disclosure required by basle ii, could be problematic if not supported by a proper public understanding. that ’ s why i feel a bit concerned about the effectiveness and appropriateness of an immediate implementation of basle ii. therefore a more gradual approach may be necessary. this approach could take the form of an interim standard between basel i and basel ii that could offer banks in emerging market economies some of the benefits of basel ii without having to face a prohibitive cost. this means that basel ii adoption should not be made mandatory in financial assessments ( of wb, imf for example ) and countries should be left with the option to keep basel i. eu banking directives are mandatory for our countries that opt to join eu. as basel ii elements are embedded in eu directives, and as our countries are making progress toward integration in the eu, we shall be faced with the challenges of basle ii implementation. i ’ d like to point out three challenges in particular. albania as many other east european countries host a considerable number of foreign banks. these consist mostly of branches or subsidiaries of banks from eu countries which eventually may have to implement the new system including its most advanced elements if their head offices decide to adopt it throughout the network for consistency and competitiveness reasons. bearing in mind there is a high degree of standardization in the risk management practices of a banking group - which is, same risk management techniques being applied uniformly throughout the group - the host country banking supervision might choose to rely entirely on the validation conducted by the home country supervision, provided that the adequacy of the model fits local conditions. if this is not the case, the host country supervision will probably have to rely on its own assessment of internal ratings based ( irb ) models. however, the latter raises two other sensitive issues