less burdensome discussions of the risks that banks face and the responses they adopt. the committee recognises that national laws and regulations provide different avenues through which supervisors may conduct such reviews, and consequently pillar 2 affords each jurisdiction the flexibility to accommodate those differences. the topic of supervisory review must also be considered in the context of the level playing field, one of the themes i mentioned earlier that came out clearly in the comment letters. as the members of the bba and the london investment banking association expressed in their joint comment letter, for example, the way in which the new accord is applied and supervisory review is conducted across countries matters critically to the daily operations of internationally active banking organisations. your letter noted the importance of consistency in standards and consistency in the interpretation of the new framework, as well as the challenges that even limited areas of national discretion can create. these concerns go the very heart of the committee ’ s mission. some thirty years ago, the founders of the committee recognised the growing need for cooperation and consistency in the supervision of internationally active banks. as we prepare to adopt a new capital framework, we know that we supervisors will need to cooperate even more in the future to supervise an internationally active bank ’ s adoption of the more advanced approaches to credit or operational risk. the accord implementation group was created under the leadership of nick le pan, the canadian superintendent of financial institutions, precisely to share experiences and approaches to applying the new rules. by sharing information on practical matters, we expect that supervisors will apply the new accord more consistently at home, thereby promoting a more level playing field across countries as well. based on the aig ’ s work to date, the committee published a paper this past august on the “ high level principles for the cross - border implementation of the new accord. ” in this paper, we reiterate our view that the traditional allocation of responsibilities to home and host supervisors will continue. cooperation will be critical to the effective supervision of institutions under the new accord, especially considering the challenges an internationally active bank will face in receiving the initial approval to adopt, and then validate, advanced approaches to credit and operational risk at home and in host jurisdictions. similarly, supervisors will need to find practical ways to cooperate in the evaluations of capital adequacy under pillar 2 and ongoing reviews of compliance with the minimum operational requirements of the new accord. by promoting a more consistent approach to supervisory review, we intend to strengthen the quality of supervision across countries. we recognise as well the special function the

the escb will be willing to accept. this volatility will in turn depend on several factors : • the width of the corridor defined by the two standing facilities available to absorb or provide liquidity ( the deposit facility for the floor and the marginal lending facility for the ceiling ). under normal circumstances, the two facilities will bound the overnight interest rate. they will operate at the overnight maturity and will be accessible at the discretion of counterparties and for unlimited amounts, provided, in the case of the marginal lending facility, counterparties can supply adequate collateral. a very narrow corridor, allowing very little room for the functioning of the money market, would not be strictly in line with market principles. on the other hand, a very broad corridor would not help contain excessive market volatility. as a consequence, the width of the corridor is likely to be set pragmatically ( currently, it is around 2 % for most central banks that operate an interest rate corridor similar to the one planned for the escb ) ; • the frequency of fine tuning operations could be a more discriminating factor for interest rate volatility. very frequent intervention of the escb in the money market would not, in my view, be fully consistent with market principles. moreover, excessive intervention might complicate the extraction of information from movements in market interest rates, especially at the maturity at which the escb would intervene. intensive recourse to fine - tuning operations might also deprive regular refinancing operations and standing facilities of their signalling effect and be conducive to a centralisation of monetary policy operations ; • provided they are set at a sufficient level, and include an averaging provision, reserve requirements constitute an efficient buffer against liquidity shocks ; this would help stabilize short - term interest rates over the maintenance period. in turn, setting a fairly high level of minimum reserves might require remunerating them in order not to induce significant delocation or disintermediation ; 7 see the two emi reports “ the single monetary policy in stage three – specification of the operational framework ”, january 1997, and “ the single monetary policy in stage three – general documentation on escb monetary policy instruments and procedures ”, september 1997. • enhancing the signalling effect of the main refinancing operations should also contribute to lowering interest rate volatility. this may best be achieved through the normal conduct of fixed - rate tenders, which send clear signals to the market, rather than variable -