banking system. since capital is the last line of defence against bank insolvency, regulatory capital requirements are one of the fundamental elements of banking supervision. this is why the basel committee has devoted so much effort to developing the so - called basel ii capital framework, which was released in june 2004. the new capital framework is built on three mutually reinforcing pillars. the first pillar aligns minimum capital requirements more closely with banks ’ actual underlying risks. the menu - based approach means that qualifying banks may also rely partly on their own measures of those risks, which will help to create economic incentives to improve those measures. in concept the first pillar is similar to the existing “ basel i ” capital framework in that it provides a measure of capital relative to risk. what is new are the second and third pillars. the second pillar – supervisory review – allows supervisors to evaluate a bank ’ s assessment of its own risks and determine whether that assessment seems reasonable. it is not enough for a bank or its supervisors to rely on the calculation of minimum capital under the first pillar. supervisors should provide an extra set of eyes to verify that the bank understands its risk profile and is sufficiently capitalised against its risks. the third pillar – market discipline – ensures that the market provides yet another set of eyes. the third pillar is intended to strengthen incentives for prudent risk management. greater transparency in banks ’ financial reporting should allow marketplace participants to better reward well - managed banks and penalise poorly - managed ones. basel ii, in my view, is fundamentally about better risk management and corporate governance on the part of banks, as well as improved banking supervision and greater transparency. thereby, it is also about increasing the stability of the global financial system, to the benefit not only of banks, but also consumers and businesses. this is especially critical in markets where banks are the primary source of funding and therefore key drivers of sustainable development. how will basel ii contribute to financial stability? allow me then to take a few minutes to elaborate on several areas where i believe basel ii will foster financial stability. first, i believe that basel ii is a major step forward in strengthening the incentives for the ongoing improvement of banks ’ risk measurement and management systems. the new capital framework is both incentive - based and risk - based. it therefore offers us the opportunity to ensure that supervision and regulation takes a forward - looking view on risk, that it remains up - to - date with sound practices in the industry and that our supervisory framework motivates responsible

miguel fernandez ordonez : recent developments in the spanish economy testimony by mr miguel fernandez ordonez, governor of the bank of spain, before the senate budgetary committee, madrid, 23 november 2009. * * * ladies and gentlemen, i appear before this committee as part of the parliamentary discussion of the state budget for 2010, at a time when the deep international financial and economic crisis is giving way to a recovery, albeit one that is expected to be slow and not free from uncertainty. following the successive downward revisions to growth projections during the summer of 2007, the outlook has begun to improve in recent months. indeed, many countries are posting positive growth rates for the third quarter of 2009. yet we must acknowledge that this improvement is largely the outcome of the extraordinary large - scale measures adopted globally to boost demand and support the financial system. we still do not know whether the incipient world recovery is sufficiently self - sustaining for the exceptional stimuli to begin to be withdrawn without the risk of economic activity falling again. in the case of the spanish economy, the situation is more complex. while there has been a similar or even lesser decline in output than in other developed countries. however, the effects in terms of employment and public finances have been sharper. hence the role economic policies must play to consolidate the recovery is essential. we are thus at a crossroads where it is vital to make the right diagnosis and select the right economic policy tools. as my appearance is part of the parliamentary discussion of the budget, i shall be analysing the spanish fiscal policy situation. allow me, however, to refer also to other policies i consider essential to resume the path of budgetary stability and to emerge from this crisis in the best possible condition. first, though, i would like to briefly assess the international setting and the economic outlook for the euro area which, as is well known, determines monetary policy. projections from various international institutions ( such as the imf and, more recently, the european commission and the oecd ) suggest we will resume positive growth rates in most countries in 2010 and 2011. but they constantly stress that these estimates are shrouded in greater - than - usual uncertainty, since the take - off of productive activity needs a sound financial basis, which in turn requires that the normal functioning of intermediaries and financial markets be fully restored. in these circumstances, one of the main difficulties governments and central banks face is to identify the right time to disengage the extraordinary measures adopted in