ii i would like to turn now to the third topic on my list. one trend in the market environment that we must track concerns the increasing harmonisation in accounting rules and practices internationally. the iif has quite correctly noted the need to align the supervisory framework more closely with the emerging framework for harmonised accounting guidelines. a greater “ meeting of the minds ” is warranted especially now that the new basel accord includes explicit disclosure requirements intended to promote greater insight into a bank ’ s risk profile. yet as the institute ’ s comment letter reminds us, there are also other areas of the new accord, such as its treatment of provisions and the valuation of financial instruments, where supervisors and accounting professionals should continue to work toward convergence. we think that in order to contribute to financial stability, accounting standards should be consistent with sound risk management and control practices in banks and should facilitate market discipline. the committee has, therefore, attached great importance to taking an active role in the international debates on accounting and to promoting the supervisory perspective on key accounting issues. the committee has consulted extensively with representatives of the accounting profession and this dialogue will continue. i should add that we are interested in pursuing new opportunities for discussion on issues of mutual concern with accounting - standard - setting bodies and private sector accounting professionals. in this respect, we very much welcome your initiative to enhance this important dialogue. recognition of diversification an area of change that capital rules must mirror is the constantly evolving state of the art in risk management. the 1988 accord became outdated to a large extent because it was a relatively simple and static document : its one - size - fits - all approach to capital regulation represented an important advance as a universally accepted standard, but it did not provide a means to recognise more advanced risk measurement techniques. it quickly fell behind as the pace of innovation in technology, financial products, and markets accelerated. in response, the committee designed the new accord to be a more flexible document and one that would be more welcoming of improvements in risk management techniques. its evolutionary approaches to credit risk and to operational risk, for example, give banks a range of options to choose from and create explicit incentives for banks to strive to adopt the most advanced approaches. the new accord still has its limits, however. members of the iif and others have cited as an example the failure to recognise use of full credit risk models, which would adjust a bank ’ s capital requirements in accordance with the benefits of diversification in its balance sheet. as you know, the committee evaluated proposals

greater potential for stronger non - inflationary economic growth. regarding risk sharing, it is interesting to note that in the us, according to a particularly interesting research, capital markets would smoothe out 39 % of the asymmetric shocks to gross state product ( the equivalent of our gdp ), the credit channel would smoothe out 23 % of such shocks and the federal government, through the fiscal channel, 13 %. 25 % of the shocks would not be smoothed out. 2 hence in the united states financial markets and financial institutions would contribute 62 % to the absorption of state idiosyncratic shocks. the effect is very substantially higher than the effect of the federal budget. we see from the us example that the financial channel can be much more important than the fiscal channel and that is a particularly important additional reason to speed up financial integration in europe. financial integration is also very important for stimulating economic growth in europe via its impact on the development of the european financial system. financial development refers to the process of financial innovation, and to the institutional and organisational improvements in a financial system that see the ecb ’ s website at http : / / www. ecb. int / pub / pdf / other / financialintegrationineurope200703en. pdf. see p. asdrubali ; b. sorensen ; o. yosha, “ channels of interstate risk sharing : united states 1963 - 1990 ”, the quarterly journal of economics, vol. 111, no. 4, november 1996, pp. 1081 - 1110. reduce asymmetric information, increase the completeness of markets, add possibilities for agents to engage in financial transaction through ( explicit or implicit ) contracts, reduce transaction costs and increase competition. progress in financial development can obviously also occur in perfectly integrated markets. therefore, by speeding up the reallocation of capital from declining to evolving and promising industries – the schumpeterian process of “ creative destruction ” – both processes of financial integration and financial development positively influence the efficiency of a financial system, ultimately leading to a higher potential for economic growth. for example, a research study by london economics estimates the benefits of the integration of european bonds and equity markets to be around 1 % of gdp growth over a ten - year period, or approximately €100 billion. 3 whereas an indicator for the degree of integration of a european financial market could build on the law of one price, a possible indicator for the degree of development of the financial system could be the