and the rapid innovations they enable, and in pursuing the objective of a modern, flexible yet stable financial system, we must acknowledge that both the public and private sectors have a critical role to play. while the perspectives of market participants and official supervisors may differ from time to time, our objective is the same – to maintain a strong and vibrant financial system. indeed, it is evident to me, as a former commercial banker and now as a supervisor, that only if we work together, each meeting our responsibilities and reinforcing the other, will we be able to successfully manage a rapidly evolving, ever - more complex financial services industry.

loan characteristics, while under the advanced approach, they could make use of their own analysis. the third step is to derive the bank ’ s capital requirement. the committee will set out the risk weights that correspond to different estimated probabilities of default and loss - given - default. these risk weights are being developed by the committee as a measure of unexpected loss, reflecting the amount of potential credit loss for each loan. a key aspect of the internal ratings - based approach is the development of rigorous supervisory standards for the assignment and quantification of internal ratings. an essential component of these standards is the so - called “ use test ” that requires a system of internal ratings to be an integral part of a bank ’ s risk management and own assessment of capital adequacy. the internal reliance on these risk ratings will not only help supervisors gain confidence in the accuracy of a bank ’ s ratings system, but will also provide a key link to the proposed second pillar of the accord, supervisory review. other work on minimum capital requirements while the focus of my remarks has been on the internal ratings - based approach, the committee also is working on other key aspects of the new framework, including revising the standardized approach, developing an expanded treatment of credit risk mitigation techniques and assessing a capital charge for operational risk. standardized approach the basel committee remains dedicated to revising the standardized approach as banks and supervisors in some countries may not yet have the necessary resources to implement an internal ratings - based method. to improve the risk sensitivity of the standardized approach, the committee sought to establish capital requirements that recognized some differences in the probability of default between borrowers. at the same time, the committee sought to be attentive to the views of many bankers and supervisors who wanted the standardized approach to remain simple so that banks of all sizes and levels of sophistication could implement it. it consequently proposed the use of external credit assessments, such as credit ratings, as a means for helping to assign risk weights, and hence capital charges, on claims. we were pleased that on the whole respondents agreed with the goal of increasing the sensitivity of the standardized approach to credit risk. nonetheless, given the difficulty of achieving the right balance between sensitivity and simplicity, the proposal to base the standardized approach on external credit rating agencies ’ ratings has raised real concerns. some have noted that, especially in emerging market countries, very few borrowers have credit ratings, and the new framework might then not be able to differentiate credit risk substantially between borrow