basel ii has only been fully implemented in europe since the beginning of this year. the us is rolling it out more slowly. even so, there is already strong agreement that basel ii will improve incentives for risk management and market disclosure and enhance capital regulation and supervision. let me point out some key enhancements relevant to the current crisis. among other things, basel ii will deliver better risk differentiation. banks that enter upon more risky lending practices will need to strengthen their capital base accordingly. moreover, under the new capital regime all exposures will be subject to regulatory capital charges, whether on or off the balance sheet. basel ii will also create more neutral incentives between retaining exposures on the balance sheet and transferring them to the capital markets through securitisations. it will reinforce capital requirements for banks ’ trading books, which are rapidly growing. and last, basel ii will enhance disclosures of banks ’ risk profiles, notably with regard to structured credit and securitisation activities. given that basel ii is a risk - sensitive framework, there is some concern that it may turn out to be too procyclical. however, to achieve more risk sensitivity in minimum capital, there has to be some fluctuation in that requirement over the cycle. the basel committee has tried to balance the objectives of risk sensitivity and capital adequacy over the cycle. for instance, banks are required to perform forward - looking stress tests to make sure that they hold enough cushions above the minimum. basel ii will also require much stronger firm - wide aggregation and management of risk exposures. and banks that take on more risk will be required to hold more capital in the first place, helping to prevent the build - up and underpricing of risk. we will also be tracking the framework over time and make any necessary adjustments based on our findings. so, it is safe to say that the basel ii framework is a major improvement. but it is not the ultimate answer to the financial markets problems of today and tomorrow. in december 2006, the basel committee had already identified “ pressure points ” and weak spots in the regulatory and supervisory regime that should be addressed. fortunately, the framework is flexible enough to evolve over time. in light of recent developments, the basel committee has already begun to evaluate certain aspects of the framework. these include issues such as the securitisation of complex products, reputational risk and disclosure. but strong capital, though essential, is only one aspect of a stable banking and financial system. sound risk

different colleges to preserve a level playing field for the industry as a whole. the second step towards more effective and efficient cross - border supervision concerns the decision - making process in colleges of supervisors. whereas decision - making in existing examples of colleges is entirely on a consensus basis, i believe that the role of the lead supervisor or consolidated supervisor should be strengthened in order to avoid stalemates. both for efficacy and efficiency reasons, decision making in colleges should resemble the clauses on internal model validation in the capital requirements directive. these call on home and host supervisors to agree but ultimately, if consensus is not reached, allow the home supervisor to decide. let me emphasise that the lead supervisor model requires a close working relationship between the host and the home supervisor, in which the host supervisor is taken seriously. in practice, a distinction could be made between general colleges with broad information sharing, and core colleges with high frequency meetings particularly during periods of stress. a formal mediation mechanism could be considered to provide host supervisors a way to appeal against decision - making by the college or the lead supervisor. besides more effective supervision, lead supervision will also promote greater efficiency. the financial sector ’ s strong support for this supervisory model underscores this. ensuring effective interplay between supervisors and central banks besides effective and efficient cross - border supervision, another challenge is to ensure an effective interplay between banking supervisors and central banks. as european banks have clearly grown in prominence and wholesale markets have become closely integrated, problems at individual banks are more likely to have systemic effects. consequently, it is difficult to draw a line, in practice, between the responsibility for systemic stability, including the function of lender - of - last - resort, and that for prudential supervision of large banks. indeed, in today ’ s increasingly market - based financial system, disturbances are likely to affect core market mechanisms. in my view, there are two necessary conditions for effective cooperation between central banks and banking supervisors. first, a cooperative and open mindset is required. second, close and continuous information sharing is necessary. for the execution of central bank functions, timely access to micro - prudential information on individual banks is relevant. in the financial turbulence, information on the liquidity arrangements of counterparties, their sources of funding, and on their financial position has proven to be essential to obtaining a clear picture of the liquidity pressures influencing banks. conversely, the information central bankers have on the functioning of money and credit markets is indispensable for prudential