are pursuing a methodology that would require a capital charge only for so - called “ outlier ” banks whose interest rate risk is significantly above average. the envisioned framework for determining “ outlier ” banks for interest rate risk is similar to the general framework for credit risk - the most sophisticated banks would use internal measurement systems for assigning capital, while banks without sufficiently robust internal systems would use a simple standardized approach. the committee is still working out a number of issues on this topic, including the definition of an “ outlier ” bank and supervisory assumptions that would need to be built into the standardized approach. the committee, through its risk management group, also is engaged in the development of a capital requirement for other risks, in particular operational risk. over the past year, it has met with numerous banks and industry associations including the british bankers ’ association. these meetings have allowed us to better understand the range of practices currently in use. over the next year, the risk management group will work with the industry to develop an evolutionary framework comprised of approaches of varying sophistication, ranging from a simple to an internal - based method. we are particularly interested in creating the right incentives through a set of robust criteria that will enable banks, subject to supervisory approval, to employ increasingly sophisticated approaches for setting capital requirements for other risks. second and third pillars let me also briefly touch upon the two other pillars of the revised capital adequacy framework supervisory review and market discipline. these topics are certainly familiar and important ones to all of you. supervisory review of capital is a critical complement to minimum capital requirements. the consultative paper proposes that supervisors should ensure that each bank has sound internal processes in place to assess the adequacy of its capital, based on a thorough evaluation of its risks. i want to stress that this proposed approach in no way intends to replace the judgement and expertise of bank management, or to shift responsibility for capital adequacy to supervisors. on the contrary, it is well understood that bank managers have the most complete understanding of the risks their institutions face, and it is they and the bank ’ s board of directors who have primary responsibility for managing those risks. the task for supervisors in this framework is to evaluate how well banks are assessing their capital needs relative to their risks, including whether banks are appropriately addressing the relationship between different types of risks. most importantly, in proposing this second pillar the committee intends to foster a more active dialogue between banks and their supervisors, such that when deficiencies develop,

william j mcdonough : update on the major initiative to revise the 1988 capital accord speech by mr william j mcdonough, president and chief executive officer of the federal reserve bank of new york, before the 4th annual supervision conference of the british bankers association, held in london, on 19 june 2000. * * * i am pleased to be with you to provide an update on the major initiative to revise the 1988 capital accord. last june the basel committee on banking supervision, which i have the privilege of chairing, released a consultative paper proposing a new capital adequacy framework. my comments today will focus on the industry ’ s response to the proposal and the areas that will require the committee ’ s attention going forward. given the progress already achieved, it is my belief that the committee will be prepared to release a second consultative paper early next year. i will also briefly discuss three essential aspects of the safe and sound operation of any banking organization - good corporate governance, rigorous internal controls and effective risk management. i will conclude with some thoughts on the critical role of banks ’ board of directors and senior management. current accord the primary tool of capital regulation currently is the set of minimum ratios that were devised in 1988 by the basel committee. the 1988 capital accord has truly become a global standard for banks worldwide. its adoption by over 100 countries has helped to strengthen the safety and soundness of the international banking system and has contributed to the achievement of competitive equality. however, the financial world has changed dramatically over the past dozen years, to the point that the accord ’ s efficacy has eroded considerably. its broad brush approach to differentiating credit risk encouraged banks to undertake regulatory arbitrage transactions. furthermore, as banks have developed innovative techniques for managing and mitigating risk, credit risk now exists in more complicated, less conventional forms than is recognized by the 1988 accord, thus rendering capital ratios, as presently calculated, less useful to banking supervisors. today ’ s marketplace also provides an imperative for revising the 1988 accord. the rapid pace of technological change places information that was once largely the domain of analysts and institutional investors into the hands of millions of individual investors and consumers. market participants, armed with timely and meaningful information, reward sound risk management practices and penalize those banks that are found deficient in this area. a bank ’ s regulatory capital position can be a strong indicator of how it supports its risk, and if markets are to impose an optimal level of discipline on banks, we must ensure