##uate. i think that under basel ii, in the context of a more efficient and sound financial system, fluctuations will occur around a superior trend. this superior trend represents a better relationship between the capacity of the economy to absorb risks and the ability of the banking system to provide credit. furthermore, one cause of pro - cyclical behaviour is low capitalisation and weak risk management. undercapitalised banks will tend to make abrupt decisions to cut lending when there is news of a downturn, and banks which have not assessed risks properly may likewise be forced to react abruptly. pillar 2 of basel ii requires banks to have a capital strategy that takes into consideration the fluctuations of capital through the cycle and to hold additional buffers of capital that will help to offset potential problems. basel ii ’ s more forward - looking approach to granting credit introduces “ risk awareness ” and “ early detection ” factors that will provide additional defence against credit disruptions and procyclicality. i also believe that when banks have the right incentives to manage their risks appropriately, to hold sufficient capital and to improve transparency, the banking system will become more resilient, more stable and better able to serve as a source for credit and growth nonetheless, the committee recognises that any risk - sensitive capital framework will cause the minimum capital requirement to fluctuate for the same exposure if a borrower ’ s creditworthiness strengthens or weakens. to mitigate excessively wide swings in capital requirements, the new framework incorporates a number of elements such as the requirement to use longer time horizons in the design of internal rating systems and in the average calculations of key variables, and also the need to carry out stress tests and conduct calculations in downturn conditions. all these elements will ensure that bank managers are conscious of how risk - drivers change through the cycle and in stress conditions, and that they incorporate these elements into their decision - taking processes and capital strategies. let me add a final comment to this important issue. it is clear to me that we could also do more, beyond the strict solvency standards, and study how other regulations, such as those related to provisioning, can contribute to reducing pro - cyclicality. 7. basel ii impact on global competition. another broad concern that the committee has worked to address is basel ii ’ s impact on global competition. in particular, some have asked whether banks that choose basel ii ’ s advanced approaches will enjoy benefits over those that choose simpler approaches or remain on the 1988 accord. basel ii

too are convergence, communication and confidence. communication is vital not only between supervisors or between supervisors and the industry but also, and very importantly at this stage, within banking groups so that all units are aware and understand the implementation plan. additional co - operation and communication among supervisors will enhance confidence, reliance and convergence of supervisory practices. and some reliance and convergence will be necessary if we want to avoid redundant work, inefficiencies in the use of supervisory resources and an excessive burden for the industry. we are placing great emphasis on all these issues in our “ accord implementation group ”, which is working together with many supervisors on what we call “ real ” case studies, and which is making good progress. 8. conclusion let me take a few moments to draw some conclusions. what i have tried to do today is to highlight the anticipatory and forward - looking elements of basel ii. but, as with many things, i think that the real value of basel ii will be best evaluated with the benefit of perspective. this brings me back to our author of 2046. it may be that basel ii does not cover all the areas and refinements that are necessary to complete the framework for financial stability. it may be that basel ii raises new issues and requires a lot of work to be implemented. however, it is my view that basel ii cannot be assessed in a static way. i believe that we will need some time to be able to fully judge the real benefits of basel ii. in my opinion, the main strengths of the framework do not come from its quantitative regulatory requirements, although these are certainly important. neither do i believe that the most fundamental aspect is when exactly the new framework will be implemented in different countries. this will just be a transitional issue. one of the essential strengths of the incentive - based approach of basel ii is the dynamic way in which it will contribute to financial stability by promoting risk sensitivity and strong risk management practices across banks, reinforcing market discipline and enhancing cooperation. these are key elements, because, in the end, no regulation in itself can prevent problems in badly - managed banks. and basel ii represents a tremendous opportunity for banks themselves. by stimulating them to upgrade and improve their systems, business models, capital strategies, risk management systems and disclosure standards, basel ii should improve their overall efficiency and ability to compete globally. it is my view that, if supervisors and banks in 2046 look back at the evolution of financial regulation over the years, they may