of business - very much like the principles - based policy approach. the benefits of such an approach are flexibility and adaptability to specific needs, both now and over time as situations and responses change. but this approach alone would also have its shortcomings. market participants could find it difficult to compare banks. the lack of a common standard across institutions might actually reduce transparency, since markets might not know or understand why supervisors established particular requirements for certain banks but not for others. this approach alone could also raise competitive equality problems, making it more difficult to ensure a level playing field, one of the key objectives of the basel accord. the third option would be a market - driven solution. as i have already said, the committee has recognised the importance of market discipline in the third pillar of the new accord. it draws on the power of markets to create strong incentives for banks, incentives to help ensure that banks manage their risks properly and do not hold unrealistically low amounts of capital for their risk. there is a lot of merit in this approach, yet all of us know that markets sometimes behave inefficiently. they can overreact to certain minor events yet still overlook significant indicators of risk in the short run. likewise, markets are not always able to capture some externalities on their own, such as the interests of the broader public. they sometimes focus on the immediate needs of direct participants rather than those of depositors or customers or they can be too short - sighted in their time horizon. i think the thoughtful comments made by malcolm d. knight yesterday about gaps and limitations of market discipline clarify these kinds of issues most constructively. so it is clear that no single one of these three options provides all of the benefits that supervisors seek. we want rules to provide clarity and strong incentives. we want the ability to use discretion to manage diversity, to tailor requirements to the specific businesses of each bank. finally, we want markets to provide economic incentives for institutions to improve bank management and disclose information that is relevant to end - users ’ needs. what i am saying is that the “ efficient frontier ” can best be achieved through a combination of the three pillars, given the reinforcing / diversification effects of each. each pillar provides something that the other cannot and is essential to achieving our overall objective of financial stability. i realise that this presentation of the three pillars as items of a portfolio of policy options is an oversimplification, but i think it helps us visualise why we

objective. in fact, the committee views pillar 3 as a further refinement of the accounting standards requirements as they should apply to banks in the light of the specific risks that they face. the committee is convinced that such specificity is both appropriate and necessary for prudential reasons. market discipline, and hence financial stability, is strengthened when accounting and disclosure requirements reflect sound risk management principles and represent the control practices that banks adopt. consequently, we recognise our responsibility to participate actively in the development of national and international accounting standards. when designing standards for the disclosure of components of capital, for loan reporting, and for other topics of mutual concern, we have sought out the views of accounting standards - setting bodies. this dialogue will continue. where regulatory and accounting principles may not yet be fully consistent, we have sought to align our requirements as best as possible with international accounting standards and to resolve other matters reasonably and based on our understanding of the potential direction that accounting standards might take in the future. because we recognise that there is still much to be done in this area we will continue to monitor pillar 3 in the light of accounting and market developments. i should add that we are seeking new opportunities for discussion with accounting standards - setting bodies and private sector accounting professionals. the status of the new accord the committee is currently reviewing carefully these responses and other issues that the industry raised. in relation to pillar 3, we are evaluating closely what should be reported publicly, versus what can remain confidential. we are refining the rules so that they will help secure a more level playing field without being overly burdensome. we are aligning our reporting requirements with those emerging from accounting standards. in terms of the way forward, as you may know, in mid - october the committee reached an important agreement on a work plan for taking these and other issues into account, and significant progress was made on major issues. what is most important to the committee is the quality and consistency of the new accord. at the same time, we recognised the need to provide banks with as much certainty as possible while they plan and prepare for the adoption of the new rules. in our last meeting in madrid, the members of the committee agreed on the importance of finalising the new accord expeditiously and in a manner that is technically and prudentially sound. we noted in a statement to the press that we expect to address the remaining issues and complete the text of the new accord in the coming months and no later than mid - year 2004. this