provides an adequate buffer for unexpected losses. the internal rating based ( irb ) model approach under basel ii credit risk capital computation gave a fillip to the expected loss based provisioning and unexpected loss based capitalisation. in the immediate aftermath of the crisis, in april 2009, the g20 leaders called upon the accounting standard setters to work urgently with banking supervisors and regulators to improve standards on valuation and provisioning and achieve a single set of high quality global accounting standards. the basel committee on banking supervision ( bcbs ) took it forward by publishing a document in august 2009 titled guiding principles for replacement of ias 39 that was also sent to the international accounting standards board ( iasb ). these principles state that loan loss provisioning should be robust and based on sound methodologies that reflect expected credit losses in the banks ’ existing loan portfolio over the life of the portfolio. the accounting model for provisioning should allow early identification and recognition of losses by incorporating a broader range of available credit information than presently included in the incurred loss model. for the purpose of these principles, expected credit losses are estimated losses on a loan portfolio over the life of the loans and considering the loss experience over the complete economic cycle. post - crisis, there is convergence of views among the prudential regulators and accounting standard setters on the desirability of a forward looking expected loss approach to loan loss provisioning. in reality, financial results do objectively worsen in an economic downturn in a way similar to the rise in unemployment rates. therefore applying an impairment model based on expected losses is arguably a faithful representation of current conditions. the iasb, financial accounting standards board ( fasb ) as well as the bcbs are actively engaged in finding a solution to this complex problem. in this context, the expected loss based provisioning approach is a topic of significant interest for the global financial markets. even when banks and accountants were making incurred loss based provisioning for identified losses, called “ specific ” provisions, they also voluntarily did make some sort of “ general ” provisions or “ floating ” provisions. these “ general ” provisions are not based on any expected loss model, but as a prudent practice to strengthen the balance sheets. the basel committee also incentivises general provision up to 1. 25 % of credit risk weighted assets by counting towards tier 2 capital. bis central bankers ’ speeches concepts and principles dynamic provisioning is a technique that allows banks to build up loan loss provisions when their profits are growing to draw

never happens again. no doubt, the sweeping scope and complexity of these reforms has some thinking that the new regulatory architecture is excessively tight, at least at first glance. of course, optimizing the scope and intensity of regulation was never going to be easy. the new regulatory architecture is the outcome of a political process with many trade - offs and significant differences across financial systems. accordingly, the principles behind the reforms matter more than the rules themselves – principles, complemented by a high level of supervisory vigilance. fact is, the financial world is a dynamic place, where competition is inherent to it, regardless of market structure. principles - based financial regulation sets a high bar under which competitive forces can still foster financial innovation, innovation that is more likely to be socially improving than simply evasive. bis central bankers ’ speeches in canada, active and vigilant supervision goes hand in hand with this principles - based approach to regulation. to help monitor potential emerging risks, we have a comprehensive radar system that includes surveillance, guidance and enforcement. canadians have found that this complementary approach to regulation and supervision is conducive to responsible financial innovation. an important objective of these g - 20 financial reforms is consistent implementation across jurisdictions, but in a manner that avoids unduly impeding financial innovation. i see such innovation in financial intermediation as essential to fostering regulatory balance between maintaining financial stability on the one hand and facilitating competitive market forces on the other hand. as people in the financial industry create new ways to do business – some call this regulatory arbitrage, which of course sounds like a bad thing – their innovations help re - set this balance, prompting regulation to adapt to positive progress in financial intermediation. there is a natural incentive behind financial innovation, since there is a lot of money at stake for those who innovate successfully. there is a lot at stake for the macroeconomy, too, because a return to sustainable economic growth around the world will require continued financial innovation. regulation must allow these natural forces to manifest themselves, albeit in a safe way. where the creative forces might take us given this context, let ’ s speculate about the future of financial intermediation : how will the forces of competition manifest themselves in the years ahead? let ’ s start with banks. some may choose to shed business lines that have relatively low riskadjusted returns. in particular, capital market activities could shrink as the risk weights associated with them increase. this has already