material effect on the flow of capital. basel ii seeks to align capital regulations more closely to banks ’ current practices – it will not change the way that banks actually evaluate risk to decide whether to invest in emerging market economies. to understand this answer, we must first understand the issue that may have triggered this debate. one of the valid criticisms of the 1988 accord concerns its rather arbitrary treatment of country risk. the 1988 accord assigns risk weights, and hence capital charges, to sovereign governments and related borrowers, as well as to banking organisations, based on whether the country in question is a member of the organisation for economic cooperation and development. the “ oecd club rule, ” as it has become known, assigned a zero percent risk weight to exposures to sovereign government borrowers that were members of the oecd, which means that no capital had to be held against such sovereign exposures. in contrast, exposures to all other countries were assigned the standard 100 % risk weight, which is equivalent to an 8 % capital charge. the club rule was meant to help distinguish between higher and lower risk sovereign borrowers and their banks. in retrospect, it seems to be an unfair way to divide the world. indeed, some oecd member governments have experienced serious economic shocks that threatened their repayment abilities, while several non - oecd member governments have performed extremely well in the international debt markets. when the committee set out to revise the 1988 accord, we wanted to resolve the arbitrary treatment of country risk that the club rule introduced. our solution in basel ii was to assign risk weights, and hence capital charges, to exposures to sovereign borrowers and to banks that reflected a measure of their credit risk. banks on the standardised approach to credit risk will determine the risk weights on their exposures to sovereigns and to banks based on those borrowers ’ external credit ratings. banks adopting the internal ratings - based approach to credit risk will rely on their own sense of the credit risk involved. basel ii eliminates the arbitrary distinctions imposed by the club rule and sets capital requirements based on external or internal measures of credit risk. yet some observers have assumed that a more risk - sensitive approach might drive up not just capital requirements, but also the pricing of credit for loans to emerging market countries and banks. this assumption is where the debate breaks down. indeed, the arguments suggesting that basel ii will reduce flows of capital into emerging markets requires us to accept the view that regulatory capital drives loan

individual digital markets rather than one single digital market. this is holding back innovation, growth and, ultimately, jobs. studies 7 suggest that establishing a harmonised and well - regulated digital single market holds the same potential as the introduction of the original one, raising gdp by as much as 4 %. in germany, for example, this could imply an additional 427, 000 jobs over the period 2015 to 2020. some steps have already been taken towards a true single market for the digital economy, but we are not there yet. continuing to the end would provide a major boost to european competitiveness. it is therefore more than worth the effort. ladies and gentlemen, the field of policy which has seen the most far - reaching centralisation in europe is clearly the field of monetary policy, at least for the 18 member states of the euro area. but the mutualisation of monetary policy is not only an issue for the euro - area member states but for all european countries. our extensive trade links imply that developments in the monetary union reverberate in the non - euro - area countries as well, as the crisis has shown very forcefully. the euro area teams up one common monetary policy with 18 national fiscal and economic policies. this approach reflects a currency area composed of sovereign member states. it grants member states sufficient leeway to preserve their diversity, that is, to establish their own business models or to tailor institutions and policies to their own national preferences. at the same time, it leaves the consequences of such decisions with the respective member state and consistently rules out the option of mutualising public debt with other euro - area states. but this set - up also creates vulnerabilities. first, a combination of this kind gives rise to a deficit bias, as it allows the costs of fiscal imprudence to be shifted partially on to others. an unsustainable fiscal situation in one country has repercussions for monetary union as a whole. you can compare this to what economists call the “ tragedy of the commons ”. just as overfishing creates negative externalities for other countries, excessive public debt harms the euro area as a whole. excessive debt in one member state drives up longer - term interest rates for all euro - area countries. and second, each member state issues debt in a currency it cannot create. hence, a high level of fiscal discipline is needed to ensure that solvency concerns do not spiral out of control. for monetary policymakers focussing on maintaining price stability,