whether the committee would be right in aiming to replicate this under the new accord. is this a reasonable objective? or are we being too conservative? clearly there are types of banking exposures for which too much capital is being demanded, such as lending to very high quality corporates. this has led to some exposures being moved outside the banking system, through disintermediation or regulatory arbitrage. this problem is one of the main drivers behind the basel committee ’ s current review of risk measures. however, there are equally transactions for which the basel minimum is severely inadequate, such as lending to some oecd countries. but the question is really whether on average the regulatory requirement produces the right level of protection. given the bank of england ’ s general concern for systemic risk, we would tend to evaluate this question in terms of whether the existing cushion of capital has given the right level of protection to the system, ie have we established the right level of tolerance towards banking crises. individual bank failures do not prove inadequacy of the framework - although a complete absence of bank failures would suggest severe overprotectionism. it is very difficult to answer this question definitively, given that bank failures and banking crises tend to have their roots in a number of different causes, not just inadequate capital. it is difficult to say therefore how much difference extra capital would have made, or how many more crises would have resulted had the regulatory capital demand been lower. nevertheless the frequency of crises, even in developed countries since the basel accord was implemented, is not so low as to make us feel that the regulatory demand for capital is overstated. using imf data on banking crises, we find that during the 1990s four out of 11 g10 countries have suffered a banking crisis - a statistic which i do not find particularly comforting. and, although developed countries tend to escape the twin plague of a banking crisis combined with a currency crisis, we should not suppose that this rather high incidence of crisis in developed countries is mitigated by the costs of the so called crises being noticeably low. i hesitate to put precise numbers on costs, because they do vary quite considerably. however, as bank of england research which is to be presented later to this conference indicates, both the fiscal and welfare costs on all the measures used are very significant indeed. on some measures, in fact, the output costs of banking crises in developed countries tend to be higher than in emerging markets, largely because the length of crises

of this consisting of tier 1 capital. what changes will the new accord make to these elements? the work has to date been heavily focused on the first element of the framework, the method for measuring risk. there will be substantial changes here, with the aim of introducing more risk sensitivity to the existing crude measures and to widen the coverage of the measures beyond just credit risk and market risk which was addressed in the previous review of the accord. the direction of the changes was laid out in the committee ’ s consultative paper of june last year and i do not intend to go into a description here. on the second aspect, the committee has stated that “ with respect to the definition of regulatory capital, the committee will maintain at this stage the existing rules set out in the 1988 accord. ” in other words, they will not at this stage be revising their definition of capital. just to remind you, this definition of capital broadly divided capital into two tiers, of which tier 1 mainly consists of shareholders equity and reserves and tier 2 of certain subordinated debt instruments and an element of general provisions. there have been some modifications to the definition since 1988, for instance to introduce another layer of less permanent capital to back short term trading risks, and more recently to accommodate some more innovative types of issues which can be aligned with tier 1 for capital purposes ( but with debt for tax purposes - an outcome which i believe is technically described as “ having one ’ s cake and eating it ”! ). it would of course be intellectually more satisfying to be reviewing the whole framework together, but the committee ’ s decision not to revisit this definition at this time is, i believe, a defensible pragmatic one : modernising the denominator is proving quite difficult and contentious enough without involving the numerator as well. that said, there is a discussion which needs to take place at some point as to whether the definition has achieved the right composition of elements and emphasis on those elements. how much capital does the system need it is on the third aspect of the framework that i mainly wish to offer some thoughts today, that is, on the level of capital that should come out of the framework. here again, the committee has signalled a “ no change ” or at least a “ no change in aggregate ” intention, by saying that “ the committee believes that the new framework should at least maintain the overall level of capital currently in the banking system. ” we should of course be under no