valuable policy tool. that is why basel ii is so important. but systemic crises do not always emanate from capital inadequacy. the first indication of trouble ahead may well come from a completely different area. what i am talking about is the question of liquidity. and my observation here is that we would be advised to give more thought to the underlying issues, risks, and mitigants which could be ingredients in liquidity problems. what are the drivers? what may cause liquidity to be withdrawn? to what extent could uncertainties, referred to a few moments ago, impact liquidity in unpredictable ways? what machinery / measures can best be devised to ensure that liquidity will continue to be available in times of stress? and, in the face of attempts to improve the resilience and efficiency of market infrastructure ( for example, clearing and settlement ), how will changing practices and perceptions affect the drivers of liquidity? this is, i feel, an area where standards and principles could be further developed which engender both the best practice understandings of the private participants on the one hand, and the interface with public policy imperatives on the other. conclusion basel ii has been steered to this point of take - off for the hugely critical area of capital adequacy. i would identify four challenges for the next stage. first, to achieve the successful implementation of basel ii by banks and regulators across the globe. second, to ensure that mechanisms exist to update it in the light of evolving best practice. third, to give thought to whether analogous agreements would be appropriate in securities and insurance. and, fourth, to ensure that the scale of work on capital adequacy issues does not cause us to overlook the importance, either of liquidity management, or the development of a more robust market infrastructure in the maintenance of financial stability.

rate can take place over time. time is, after all, a major help in this respect. implementing systems changed as part of the software obsolescence cycle may involve only modest marginal cost. more immediate and discrete changes are always going to be more costly. these issues will clearly need further discussion. in the eu context, however, it is particularly important that the arrangements for revising any directive reflect, if not the letter, at least the spirit of lamfalussy. it would be wholly inappropriate to try to hard code all the detail of the pillar one rules in an eu directive, as if these can necessarily stand for a long period of time. i should say that the costs of implementing basel ii will not fall on banks alone - nor will the challenges. in most jurisdictions, regulators too will both face challenges and need to incur costs in expanding staff numbers, in training and in implementing systems. this will be important for them to handle the new approach. after all, it calls for a significantly greater level of expertise on the part of line supervisors than has the existing basel accord. and whilst the uk, and a few other jurisdictions, do have that expertise, we need to remember that we are looking at a global market place. and at a global level i detect a deficit of expertise which will require to be remedied. pillar three and disclosure i would also like to say a few words on pillar three. pillar three can, it seems to me, play two roles. first, of course, it can play a role within the basel ii context itself, by mitigating the need for complexity in pillar one. disclosure about the way organisations actually manage their risks can indeed help a better understanding of their risk profile, compared to a study of complex numbers on their own. for example, understanding how a firm conducts its stress testing, or how valuations might be sensitive to different assumptions, could be of real value. but, second, such disclosure could be of value in the general accounting context itself. this gets to the complexity versus disclosure debate in the search for a better way forward in that arena ; and should improve the ability of accounts to reflect changes in the underlying business. all of this is really to say that pillar three needs to be seen in a broader context. in today's'derivatised'world, the utilisation of derivatives and complex forms of contract, often with modelled valuation bases, is just about omnipresent. this is not