used by them, iii ) the estimate of certain parameters such as loss given default ( lgd ), iv ) the operational integration of the approaches implemented in the daily management of risks and v ) the governance principles applicable to these approaches. until the end of 2007, the commission bancaire will monitor the implementation of the corrective measures requested of the institutions. following this process, the commission bancaire will take a formal decision as to whether or not to authorise the institutions in question to adopt the advanced approaches of basel ii on 1 january 2008. for institutions with foreign entities, this authorisation is granted, where appropriate, following an exchange of information with the host supervisors, i. e. where the institutions ’ subsidiaries are established. while many counties, such as france, have entered into the effective implementation phase of basel ii, the recent financial turmoil has once again drawn attention to this framework, leading some observers to call into question its overall rationale. this turmoil has new characteristics as it is a credit crisis in a market environment with particular implications concerning contagion channels. risk transfer operations, in particular securitisation, and the interaction between funding liquidity and market liquidity risks have played new or at any rate greater roles than before. i am nevertheless convinced that the reform of the capital adequacy ratio rightly remains a crucial element in the regulatory response to the problems facing us today. i would now like to explain why i am convinced of this. 2. the current financial turmoil confirms the need to concretely implement basel ii. this turmoil may very legitimately raise questions about several of the major provisions of basel ii, such as the use of rating agencies or the internal approaches developed by banks to assess credit risk. the risk associated with a regulatory capital ratio that is more sensitive to risk, and therefore potentially pro - cyclical, has also been advanced in some quarters. i shall, however, give five main reasons showing that these questions do not cast doubt on the benefits provided by the implementation of basel ii. firstly, unlike the present solvency ratio, the pillar 1 of basel ii stipulates down a specific calculation of regulatory capital to set against credit risk transfer transactions ( such as securitisations and credit derivatives ). this is essential in the framework of the “ originate and distribute ” model currently used by many financial institutions and that consists in transferring as quickly as possible the risks associated with the loans extended and not retaining them as in the past. the treatment

approaches, from standardised approaches to internal ratings - based approaches ( irb ), specifically developed by each credit institution. the approach must be chosen by each institution under the control of the supervisor, in relation to size and level of sophistication ; – the supervisory review process ( pillar ii ), which gives supervisors a key role in assessing the risk profile and the quality of risk management of each institution as well as the corresponding minimum regulatory capital ratios ; – market discipline ( pillar iii ), which enhances public disclosure requirements. these three pillars, whose technical aspects i shall not discuss today, constitute an ensemble aiming mainly to : i ) improve banks ’ risk management, ii ) align regulatory capital more closely with the actual risks incurred by banks, iii ) enhance the role of supervisors, as well as iv ) that of market discipline and therefore, ultimately, v ) strengthen financial stability. the implementation of such a framework, embracing a broad spectrum of possible approaches for banks and covering a large array of risks, is no simple matter and accounts for the current variety of national situations, including within the g10 : japan for example implemented basel ii in 2007, eu member states are set to do so in 2008 and the united states in 2009. the magnitude of this task is particularly vast since basel ii, in view of the very nature of its objectives that i have just recalled, will be applied in a very large number of countries. the latest study by the fsi on the application of basel ii, published in september 2006 and conducted among 115 countries, shows that 82 non - basel committee member countries intend to implement the new framework, in most cases as of 2008 or 2009, and in some cases at a later date. fully aware of the practical aspects of implementing a more modern, complete and risk - sensitive prudential framework, the basel committee published, in july 2004, i. e. directly in the wake of the new capital accord, a document entitled “ implementation of basel ii : practical considerations ”. recognising that the adoption and application of basel ii may not be a short - term priority for a certain number of supervisory authorities of non - g10 countries, the committee encouraged the latter to develop their own approaches and implementation timetables. given that the necessary legislative and regulatory changes and human resource requirements have to be identified, the application of basel ii will necessarily be a gradual process throughout the world. this is especially the case since technical decisions often have to be taken on the exact choice regarding