##s, or climate change, for which there are few precedents. because the samples of such events are so small, as we learn about these processes our assessment of their likelihood will change, possibly sharply. second, even systems that are deterministic rather than stochastic can be very unpredictable. small differences in starting conditions can imply very different outcomes. weather systems display chaotic dynamics, so that small initial forecast errors may lead to large revisions to the forecast further out. economists, in contrast, often rely on simple linear models, but with additive stochastic errors. in modelling any phenomenon there is a choice, and among the experts in the area often a live debate, about whether it is more useful to use deterministic but chaotic or stochastic models. 1 but the motivation in both cases is to bring out the importance of unpredictability. another feature that hinders predictability is that a priori indistinguishable shocks can have very different effects in some systems. if you drop a grain of sand randomly on a sand pile, drop a lit match at random in a forest, or infect a random person with a disease, it may have very minimal, localised effects or may lead respectively to an avalanche, wildfire or epidemic. the outcome depends on the state of the system when the shock hits ( the steepness of the sand pile, dryness of the forest, or density of the population ) and the precise point at which the system is hit. 2 third, systems can be subject to sudden transitions between locally stable states. in both economics and science, we can find examples of systems that have multiple stable states. and switches between these may be hard to predict. models of the circulation pattern in the north atlantic ocean suggest that it can either be vigorous, helping to warm the northern hemisphere as water is transported from lower latitudes, or can shut down almost entirely. the magnetic properties of iron provide another example of a system with different stable states. when exposed temporarily to an external magnetic field, iron retains its magnetism even when the external field is removed : the same external conditions are consistent with see, for example, sugihara and may ( 1990 ). in relation to the latter, key nodes or players may be instrumental in the spreading of shocks ( anderson and may, 1991 ). this thinking has been applied to the financial system showing that a priori identical shocks can have differing effects depending on where the shock hits. and, inspired by

period of time will also allow us to take careful note of valuable information coming from domestic consultations under way in some jurisdictions, including the process for the advance notice of proposed rulemaking in the united states. the committee also discussed the importance of ensuring that the calibration of the new accord achieves its objectives. accordingly, prior to implementation, a further review of the calibration will be conducted on the basis of additional information, such as further impact assessments in some jurisdictions and the monitoring of banks ’ parallel calculations. in terms of specific issues, a number of areas were identified where major improvements were possible : the expected versus unexpected losses calibration issue, securitisation, credit cards commitments and risk mitigation techniques. at present, we have offered for public review a proposal to resolve a fundamental concern raised by the industry on the treatment of expected versus unexpected losses. i would encourage those interested to read the statement outlining our proposed revision on our website and to share any thoughts you may have by the end of this year. we have also simplified the proposals for securitisation exposures, as we decided to replace the “ supervisory formula ” approach to unrated tranches with a simpler rule. also, as we draw closer to finalisation, the committee has intensified its efforts to facilitate a consistent implementation of the new accord. a set of principles has been outlined for the cross - border application of the new accord to promote closer practical co - operation and information exchange among supervisors. these implementation issues are very important to promote consistency and to reduce the burden on internationally active banks. there are, however, other areas that we can already identify as part of our future work plan to advance risk management, to promote greater transparency, and to strengthen the stability of the financial sector. given that i have mentioned in this presentation the benefits of utilising the diversification effects of different approaches in the search for an efficient frontier, i ’ d like to conclude with just one of the potential items on our agenda for future work once the new accord is implemented. this item would be to consider the benefits of full credit risk models in the calculation of minimum capital requirements. in theory, a bank ’ s capital requirements would then reflect to the greatest degree the economic benefits of diversification in its balance sheet. in fact, the committee did at one point evaluate whether advanced banks should be permitted to estimate the degree to which their assets might behave similarly or default together in the new basel accord. as you know,