and banking industry landscape. in several important respects, we are now far removed from the environment of the late eighties. for one thing, the complexity of risks now faced by credit institutions operating in an increasingly globalised environment has increased significantly and, as a result, both risk - management and supervision have become much more difficult tasks. for another, some recent developments have also increased the opportunities to manage risks. the impressive advances in technology that have enhanced the industry ’ s ability to collect and process large amounts of information in real time could hardly have been suspected 20 years ago. collecting risk data across many business lines has catalysed further efforts to aggregate those measures of risk by quantifying them in a more rigorous and more consistent fashion. the “ ultimate expression ” of risk aggregation is the summation of many types of risk into a single measure based on the concept of economic capital, which estimates the amount of capital a firm requires to protect itself against these risks with a certain degree of confidence. using the concept of economic capital, banks can develop sound policies for monitoring exposure limits, risk - adjusted pricing policies and sound provisioning practices based on the inherent risks of the portfolios. they can also measure returns and assign capital on a risk - adjusted basis. likewise, the progressive widening and deepening of financial markets and the continuous creation of new assets has enlarged the menu of choices available for banks to manage, share and transfer risks. the basel ii process started, more than 6 years ago, against this background of increasingly sophisticated risk management practices, heightened complexity in the financial markets and stronger interaction between the real and the financial economy. rather than simply resetting the quantitative standards, we sought to develop a new forward - looking approach that would be more sensitive to the actual risks that banks take on. the new framework is a significant step towards achieving a more comprehensive and risk - sensitive supervisory approach. it seeks to provide banks with stronger incentives to employ the most advanced techniques to calculate risk exposures and, hence, to push risk - management towards the best available practices. specifically, basel ii makes these general principles operative by building on three complementary pillars. the first pillar is intended to achieve a more precise and sensitive mapping between banks ’ actual risks and the minimum regulatory capital requirements. under the new framework, banks are allowed and, indeed, encouraged to rely on their own measures of certain risk parameters, thus fostering a wider usage of the best available techniques and tools for that purpose. the committee firmly believes that a better alignment between

occur in a poorly provisioned and poorly capitalised bank with inadequate risk management. in a downturn this bank will most likely encounter unpleasant surprises stemming from mismanaged risks and, lacking appropriate shock absorbers ( provisions and capital ), it will have little room for manoeuvre. the most likely outcome is an abrupt cut - back on lending, therefore contributing to exacerbating the cycle. i mentioned before the importance of risk awareness and early detection and reaction by banks. i will just emphasise here that these are also important elements for restraining procyclicality. on the supply side, i have already commented on the beneficial effects of higher transparency in the information released by banks, especially after accounting for the fact that lender - investor informational asymmetries could result in a lower - than - optimal level of funds available for bank lending. pillar 3 will thus grease the wheels of the market for bank capital, building up capital providers ’ and depositors ’ confidence about the efficient use of their resources and easing the conditions under which banks may gain additional funding if required. this observation is of special relevance precisely in times of crisis, when some bank managers may be more tempted to pursue “ gambling for resurrection ” strategies. likewise, as market participants understand that banks will have stronger motivation to employ better technologies for risk management, one would naturally expect the industry to move to a safer plateau, with its capital, therefore, enjoying a lower risk premium, all other things being equal. to summarise, while i think that a reasonable degree of procyclicality of the supply of loans is a logical feature of the credit market, i sympathise with the idea that all kinds of regulations affecting banks, from accounting to prudential ones, should try to minimise or compensate for the risk of excessive sensitivity of bank lending policy to cyclical conditions. indeed, the latter would normally appear when banks are poorly capitalised and lending decisions are based on inadequate risk assessments and driven only by current market conditions, a natural terrain for unplanned drastic swings in credit policies. i believe that all investment in technology and human capital, enhanced transparency, and better and pre - emptive risk management based on improved control structures and corporate governance will entail significant improvements not only to the stability and soundness of the financial system, but also to its efficiency in the allocation of resources. this, in my view, should benefit the cyclical behaviour of the banking system and also,