approaches in basel ii in talking about the benefits of basel ii, i would like to turn to the second half of my remarks to share my thoughts on how transparency contributes to stability. supervisors seek to achieve much more than simply a revision of the existing rules to calculate regulatory capital. by aligning capital requirements more closely to economic risk, we expect that, on a microeconomic scale, basel ii will encourage individual banks to improve the quality of their risk management. but the rewards of basel ii are more notable on a macro scale. when banks have the right incentives to improve their management of risk and they are well capitalize, we believe that the banking sector becomes more resilient, less sensitive to the business cycle, and better able to serve as a source for credit and sustainable growth of the economy. this workshop explores the role of transparency in promoting the resilience and stability that basel ii has as its overarching goal. the basel committee certainly agrees that markets can serve as powerful allies of official supervision. we recognise that, in some cases, market discipline can exercise a more binding constraint on banks ’ activities than regulations do. but i would emphasise that transparency does only part of the job. for transparency to promote stability, it must be combined with other policy approaches to achieve a goal that is as far - reaching and as significant as greater financial stability. certainly, the committee would agree that, when banks disclose sufficient information about their activities and controls, marketplace participants can create strong incentives for prudent behaviour. markets can reward banks that manage their risks properly and penalise those that hold unrealistically low amounts of capital for their risk. so there is a great deal of merit in a markets - based approach. but we must remember that markets can behave inefficiently. they may overreact to minor events yet ignore significant indicators of risk, or they may be too short - sighted. likewise, markets may not capture external concerns : they may focus on the immediate needs of direct participants rather than those of depositors, customers, or the public. that is why transparency is one “ pillar ” of basel ii ’ s three - pillar approach. the pillars we selected are meant to complement and to supplement each other. the first pillar - which specifies the minimum capital requirements - constitutes a very direct approach to supervision. by applying a uniform set of rules to banks, the first pillar adds transparency to the regulatory process and makes it easier to compare banks to gain a sense of their relative

the multiplier is easy to obtain, transparent ( as depends on a reliable macro variable ), it has a low implementation cost and, finally, it would be of a uniform and wide applicability. among its drawbacks we found that, first, it implies undertaking an external modification on the capital requirement figure and, second, that the multiplier is built using a domestic variable, which may make international comparison very difficult. no matter what the result of the previous debate is, either the use of counter - cyclical risk estimations or the use of a capital multiplier, we should explore the use of complementary measures to attain our final goal of financial stability and to minimise the social costs of procyclicality ; for example, dynamic provisions. as most of you already know, this type of provision uses historical information on credit losses to estimate a general provision for homogenous loan portfolios. it reflects a collective assessment of credit losses at the balance sheet date ( i. e. it covers incurred losses not yet identified in specific individual loans ). this provision builds up a buffer during the benign part of the cycle, which starts to be released when recession comes knocking on banks ’ doors. counter - cyclicality is intrinsic to dynamic provisions and part of its usefulness can be seen in the resilience shown so far by spanish banks in the current crisis. furthermore, its direct impact on the profit and loss account ( reflecting losses at a time when these losses are really being built up in balance sheets ) constitutes a way to make banks more aware of how credit must be priced, reducing the underestimation of loans risk premia and, to some extent, compensating the relaxation of credit granting standards in good times. it also delivers the right information to investors about the financial position of the bank. in all, dynamic provisioning allows a proper recognition of credit risk. i must also admit that there are voices raised by some institutions that do not agree with this view, and particularly, accounting standard setters. in this respect, we should call for further dialogue between accounting rule setters and supervisors as well as a clarification regarding roles and objectives of each of them. i really think that our objectives are compatible and that delivering the relevant information to investors should not be an impediment for supervisors to ensure the stability of the banking sector by promoting the most adequate measures that experience and results have proved to be useful. very much in line with dynamic