risk and allocate capital. the new accord should go some way to correct this. under the internal ratings based ( irb ) approach, banks will be required to use internal ratings as a factor in the pricing of credit risk. progress on the new accord as part of the process of creating incentives for better risk management, the basel committee is now engaged in a more general effort to recalibrate the new accord to adjust the amount of capital charge under each of the main approaches. the aim of the revised set of proposals is that, on average, the total amount of capital required under the standardised approach to cover both credit and operational risk should be the same as that required under the current accord to cover credit risk only. modest capital relief would be available to those banks that move to the foundation irb approach, with still more relief for those which opt for the advanced irb approach. these, and other revised proposals of the basel committee, seem to have got the new accord back on track. as you know, the project has suffered significant delays, and only a few months ago the chances of it going ahead seemed to be only 50 - 50. however, a number of the logjams have now been cleared and a revised timetable has been announced. the intention is now to release a revised set of consultation papers in may of next year. this would take account of a further quantitative impact study which will be held later this year to test the calibration of the revised proposals. if all goes well, the final accord would be released before the end of 2003 with implementation targeted for 2006. i know that there have been a number of false alarms on the new accord, and that some of the banks here today may be inclined to take a wait - and - see attitude. to such banks, i would say that the pendulum has swung in favour of implementation. it would therefore be sensible to plan on the basis that the new accord will now go ahead on the revised schedule, and that it will include an explicit capital charge for operational risk. this does not leave all that much time for those banks which might want to use the advanced approaches in the new accord to measure credit or operational risk to get themselves ready. i would advise such banks to start their preparations now if they have not already done so. i would particularly recommend that banks begin to collect default data for credit risk and loss data for operational risk. a framework for doing the latter is set out in the basel committee ’ s sound

focuses on the causes of operational risk - internal processes, people, systems or external events. operational risk losses can be further classified into various “ event types ” and assigned to each of a bank ’ s major business lines. by classifying losses in this way, banks are better placed to identify appropriate risk controls and to assess the impact of these. in its draft paper on sound practices for the management and supervision of operational risk, the basel committee has identified seven main loss event types for operational risk. these include losses related to “ execution, delivery and process management ” within which resides documentation risk. why has the basel committee decided to focus on operational risk? the answer lies in the growing diversity and complexity of banking operations arising from well - known phenomena such as globalisation, the growing sophistication of financial technology and outsourcing. this has shown up in concrete form in the severe operational losses suffered by a number of international institutions. the committee has therefore decided to take the lead in promoting greater understanding of operational risk and more consistency in the way in which it is measured, managed and controlled. this would by itself be relatively unobjectionable. however, the committee has decided to put some teeth into its recommendations by proposing an explicit capital charge for operational risk in the new capital accord. this is controversial for two reasons. first, there is no firm consensus on how to measure the capital required to support operational risk - the committee is currently proposing three approaches to this, which range from the very basic to the quite sophisticated. second, the amount of capital charge that the committee originally had in mind was considered to be much too high. in response to this, the committee is proposing a reduction in the proposed target of operational risk capital from 20 % to 12 % of minimum capital. a further reduction would potentially be available to those banks which use the more advanced measurement approaches. this is an example of how capital requirements can be used as an incentive to banks to improve their risk management practices. this, in our view, is where the real value of the new accord lies. among other things, the increased focus in the new accord on internal ratings and risk - adjusted pricing might encourage a more sensible approach to the setting of margins on syndicated loans. i know that many banks in hong kong think that margins are now too low to fully compensate for expected loss, the cost of capital and operational costs. however, more rational pricing policies are currently hindered by the lack of consistency among banks on how they price