roger w ferguson, jr : concerns and considerations for the practical implementation of the new basel accord remarks by mr roger w ferguson, jr, vice chairman of the board of governors of the us federal reserve system, at the icbi risk management 2003 conference, geneva, switzerland, 2 december 2003. * * * i am pleased to participate in this conference on such an important subject as the proposed new basel accord. your topical agenda and the expertise of your speakers are impressive, and i am sure that the discussions will provide new insights. i have been asked to talk today about some of the issues associated with the practical implementation of basel ii. before i start, let me reiterate that i remain optimistic that a new accord will emerge from the basel committee in a timely fashion, so that national review procedures can go forward. although i will discuss concerns and considerations, these will not, in my judgment, threaten the basic momentum of the process. basel i there is no better place to begin a discussion of some of the practical concerns and considerations of the new accord than at the beginning - with basel i. many have forgotten that the first accord had its origins in complaints that the globalization of banking had distorted competitive balance. banks domiciled in jurisdictions whose supervisors required a more prudent level of capital perceived that they were disadvantaged, certainly in their home markets, by banks whose home supervisors were less aggressive in their minimum capital standards. basel i was intended to level the playing field for banks that operated across national boundaries by establishing consistent standards on how minimum regulatory capital was to be determined in individual countries and what was to constitute capital. we should not lose sight of the continuing imperative, both economic and political, to ensure that a revised accord is perceived by all to maintain a level playing field for banks operating not only across national boundaries but also domestically. i will return to this issue later. basel i - on which the world ’ s regulatory capital regime has been based for more than ten years - was a genuine step forward for most countries ’ capital rules and a watershed for international cooperation among the world ’ s supervisors. but it is certainly clear to those of you at this meeting that globalization, technology, and innovation have accelerated so dramatically that basel i cannot provide the industrial world ’ s largest and most - complex banking organizations with a regulatory capital requirement that reflects their underlying risk exposures. basel i, with its modest risk sensitivity, treats most loans as if they come from one quality category. it ignores techniques that the largest banks

very reluctant to take. the period after the second world war during which debt management imposed requirements upon monetary policy was marked by strains between the treasury and the fed and less than full independence for monetary policy. while current institutional arrangements may be imperfect, history suggests a need for caution before allowing these two policies to become entangled once again. thanks again, and i look forward to our conversation. bis central bankers ’ speeches