risk - taking and prudent behaviour in our markets. improved and more formalised risk management will bring better assessment, better quantification and greater awareness of risks. to the extent that risk assessment and control methods become more formalised and rigorous, this will lessen the likelihood of making bad decisions and will improve riskadjusted pricing policies. it will also contribute to the prompt detection of errors and deviations from targets, allowing banks to implement corrective measures at an early stage. increased awareness of the risks and early reaction to problems is likely to lead to a smoother adjustment to new conditions or to the correction of mistakes, making decisions less abrupt. basel ii is built on the expectation that a country ’ s banks should be able to manage their risks today and respond to challenges tomorrow. the second reason i believe basel ii will enhance financial stability is that it promotes more effective corporate governance. a bank can have the most sophisticated measurement tools in the world, but if it is poorly governed, it will be vulnerable to financial and operational weaknesses. while much attention has been paid to some of the more complex quantitative aspects of basel ii, i believe the most important aspects are those that address how the bank ’ s risk management framework is governed. banks that adopt basel ii will be expected to have a comprehensive and sound planning and governance system to oversee all aspects of their risk measurement and management process. the board of directors, senior management, and audit and other control functions will be expected to exercise their duties in a rigorous manner. i believe that better managed banks under basel ii will be safer, sounder, and more resilient. i should also add that the basel committee last month published a paper on sound corporate governance practices for banks, which i believe will be useful for all countries, whether they are ready or not to adopt basel ii. the third reason i believe that basel ii will promote financial stability is that it reinforces the need to implement sound policies in both capital and provisioning. i have already mentioned that no bank can maintain public trust for long if it lacks sufficient capital. one of the fundamental tenets of risk management and banking supervision is that banks need to create provisions to absorb expected losses and to have sufficient capital to absorb unexpected losses. let me add here that given the unique positions of banks at the crossroads of businesses and consumers in every economy – and their special role as intermediaries of credit to both – nothing threatens financial stability more than the presence of poorly managed and poorly capitalised

and provisioned banking institutions. i believe that basel ii will contribute to a more resilient and stable banking system that is capable of promoting sustainable economic growth. adoption of basel ii : who and when? let me turn now to my second point, which is the timing of adoption of the new framework in different countries. whenever i speak with colleagues from other countries, i stress that only national authorities can decide when to adopt basel ii. while the committee believes that the framework is appropriate for all economies and banks, no country should adopt basel ii until it is ready. this view has been expressed consistently by not only the basel committee, but by the imf and world bank as well. we are all in agreement that if a country decides to adopt basel ii, the timing should be determined by its own circumstances, not the timetable for basel committee members. unlike the 1988 accord, which was relatively simple to adopt, basel ii is more complex and demands more of banks and supervisors. therefore, we don ’ t expect basel ii to be adopted as widely and quickly as the 1988 accord, at least at the outset. however, we expect and hope that the number of countries that adopt the new framework will grow over time. we believe that countries should adopt the options and approaches contained within the framework that are most appropriate for the state of their markets, their banking systems, and their supervisory structures. basel ii is not a “ one size fits all ” framework. supervisors can adopt the framework on an evolutionary basis and use elements of national discretion to adapt it to their needs. for any country that is considering adopting basel ii but may not yet be ready, i like to suggest a three - stage approach towards building a foundation for the new framework : ( 1 ) strengthening the supervisory infrastructure ; ( 2 ) introducing or reinforcing the three pillars ; and then ( 3 ) making the transition from the 1988 accord to basel ii. the first stage is strengthening the supervisory infrastructure. basel ii is not intended simply to ensure compliance with a new set of capital rules. rather, it is intended to enhance the quality of risk management and supervision. one of the things that i strongly encourage for all countries is a review of implementation of the basel committee ’ s core principles for effective banking supervision. these principles are key to laying a successful supervisory foundation. likewise, sound accounting and provisioning standards are critical to ensuring that the capital ratios, however calculated, meaningfully reflect the bank ’ s ability to absorb losses. this brings me to the