range - of - practice papers. in addition, in some cases, industry - led solutions may be the best approach. to respond to the accelerating pace of financial innovation and globalisation we need flexible frameworks. both the core principles and basel ii are examples of global standards that were developed for local application. both initiatives are flexible and responsive to innovation. for example, basel ii provides a menu of options to suit institutions with a range of complexity. moreover, the more advanced approaches are based on the modelling approaches developed by advanced banks – allowing regulatory and banking models to develop together. over the past ten years, we have observed significant changes in international capital flows, greater reliance on market funding in many jurisdictions, and banks becoming more active buyers and sellers of complex financial instruments. in light of the central role that banks play in providing liquidity, i believe that liquidity risk management is an area where it would be appropriate for the committee to do some exploratory work. i believe there is much that can be gained from sharing information on supervisory approaches to assessing liquidity, and bank tools for managing liquidity, particularly during stress scenarios. in this and all cases, i expect that the committee ’ s response will be proportionate to the risks identified, and that the policy tools that the committee employs will be designed to achieve the maximum benefit for the least cost. i also expect the committee will consult widely in the process of developing its views on the issues and then deliberating on possible responses. proactive outreach this brings me to the fourth element of the committee ’ s strategy, which is to engage in proactive outreach. this encompasses outreach to non - committee countries, to the industry and to other sectors. the committee ’ s dialogue with non - committee member countries is an extremely important element of its strategy. this stems from the need to promote the development of sound supervisory practices in developing markets and to accommodate the growing importance and sophistication of non - committee member banks, supervisors and markets. in addition, it is critical that we address home - host coordination issues that arise with the growth of cross - border banking. these trends, and the resulting need for dialogue, are quite clear when we look at the growing and changing financial landscape and the increasing trend towards market liberalisation in the asian region. as an indication of the importance the committee places on its outreach strategy, at its october meeting in merida the committee agreed to the establishment of the international liaison group ( ilg ). this group

or guidance. third, as you know, the policy guidance developed and promoted by the basel committee is based on consensus rather than on formal international legal agreements. an important objective of the committee therefore is to promote credible, practical and flexible mechanisms to achieve effective policy implementation in a wide range of countries. the successful implementation of international policies requires processes and mechanisms that engage non - committee supervisors, other sectors and the industry throughout the lifecycle of any initiative. with those objectives in mind, i would now like to discuss how the committee ’ s strategy is working towards achieving those goals. iii. the committee ’ s strategy and work program the committee ’ s strategy has four interrelated and reinforcing elements. the first element of the strategy is to maintain a strong capital foundation. that strong foundation is enhanced by the basel ii framework, which many countries are now in the process of implementing. secondly, the committee reinforces the strong capital foundation by promoting other infrastructure needed for sound supervision. thirdly, the committee develops policy responses that are proportionate and flexible. fourthly, the committee is deepening and expanding its outreach to non - committee supervisors, to other sectors, and to the industry. strong capital foundation it should not come as a big surprise to you that implementation of the basel ii framework is one of the highest priorities on our current work program. integrating an effective approach to supervision, incentives for banks to improve their risk management and measurement, and risk - based capital requirements are fundamental objectives of basel ii. by definition, we don ’ t know where the next economic or financial shock will come from. our focus, therefore, is on the important role of capital as a key shock - absorber for individual banks, and for the banking system more generally, no matter what the next shock entails. the implementation of basel ii reflects the reality that simple risk measures, such as those embodied in basel i are, for the largest and most complex banking organisations, no longer very meaningful. a strong capital foundation requires a risk - sensitive capital framework that is flexible to adapt to innovation. moreover, it should promote improvements in bank risk management and supervisory practices, and enhance transparency and market discipline. the three pillars of basel ii have been developed with those goals in mind. i would also like to emphasise that the choices that individual countries make with respect to the timing of implementation of basel ii, and the menu of options available in basel ii, should consider the development of their banking and supervisory systems, and financial markets.