an important element of basel ii. full implementation of pillar 2, would impose a significant enhancement in basel core principle compliance. under pillar 2, a bank would be required to maintain a capital cushion above the regulatory minimums to capture the full set of risks to which the bank is exposed. these include liquidity risk, interest rate risk, and concentration risk. the third pillar of basel ii is market discipline. the idea is that market forces ought to supplement supervisors ’ oversight of financial institutions. in this way, banks learn from investors how their risks are perceived, and supervisors learn from the market as well. the keys to market discipline are informational transparency and well - functioning financial markets. sound accounting systems are necessary for informational transparency. these issues are important and can make a difference to how investors evaluate firms ’ capital positions. under pillar 3, banks will be required to disclose to the public the new risk - based capital ratios and more - extensive information about the credit quality of their portfolios and their practices in measuring and managing risk. such disclosures should increase transparency and improve market discipline. there are several approaches to measuring credit risk. the standardized approach and the internal ratings based approach, either foundation or advanced. the standardized model of basel ii relies on impartial actors to assist in the calculation of regulatory capital. here, i make reference to the external credit assessment institutions. the higher the penetration of rating agencies and the more confidence there is in the workings of the rating market then the more attractive the approaches become relative to the new accord. the internal ratings based approached relies on the banks ’ skills and the banks ’ judgments but requires more input from the organization. basel ii also sets standards for risk measurement and management and for related disclosures that will give banks ongoing incentives to improve their practices. the proposal appears to be complex but this is mainly a question of familiarity. it would not have been appropriate to continue to assess complex matters with simple approaches which do not grapple with all the issues. commercial banks will desire to avoid unnecessary regulatory costs. we will be discussing with banks over the next several weeks which methodology they will be using. while we would wish banks to exercise preference, this may not always be possible in the light of the cost of overseeing too many systems at the same time. it may therefore be necessary to fine - tune our approach further to economize on resources. there were a number of areas of basel i which we needed to make sure were in place before moving on to basel ii

. given our resources and the structure of our economy, we are doing at least as well as could be expected, perhaps a little better ; and we have encouraging prospects, including in areas where we are just getting up to speed, such as alternative energy. this is not to make light of the formidable challenges we face. in the tourism sector, financing is needed for the refurbishment and upgrade of properties which cannot qualify for the borrowing they need for this work, because of the prolonged recession. in the international business and financial sector there remains a serious data and information deficit. we are making efforts to address this, with the help of funding from the european union, and the central bank has enquired about the possibility of collaboration in a joint initiative of the financial stability board and the imf on improving data flows in the international financial sector. barbados ’ well regarded systems of supervision of international banks are constantly being upgraded, and government is proceeding with legislation and implementation of equally strong supervisory arrangements for the rest of the sector. although barbados remains untainted by international financial malfeasance, this is another area where upgrading is an ongoing exercise. in addition, there are new initiatives afoot. in tourism, the renewed foray into the brazilian market seems to make sense, in view of the market potential just of one or two urban centres of that vast nation, and of brazil ’ s growing interest in the caribbean, most obviously in the case of guyana. encouragingly, it appears that the promoters have a multi - year perspective, perhaps as a result of their reflection on the previous abortive exploration of this market. new initiatives are also appearing in the area of alternative energy systems. government has just concluded a loan agreement with the interamerican development bank for support of these activities, and central bank will soon announce the formation of an alternative energy network based on a new website, www. aen. bb, to facilitate collaboration and an exchange of ideas towards the implementation of alternative energy systems. in sum, the world economic storm has not yet abated, and the good ship barbados has taken on water, but we are in no danger of sinking, and in much better shape than countries much larger, better endowed and richer than ourselves. we know from our past experience that we are a resilient, inventive people, and we have strong institutions of governance and collaboration between government and people, to inform decision making by government, by businesses and by individual households. there are formidable challenges ahead