my second broad topic, which is the lessons we have learned over the years as we have developed basel ii. i am not looking back simply for the sake of nostalgia. rather, in looking to the past, i would like to share some thoughts on how the things we have learned and reflected in the process of developing basel ii will help to make basel ii successful in the future, to stand the test of time and to have the impact that we intended. focus on risk management first, basel ii is fundamentally about establishing incentive - based approaches to risk and capital within the three - pillar framework. we should never lose sight of the fact that basel ii is built around both qualitative and quantitative risk management elements. why is this so important? as a bank supervisor and central banker, what most concerns me is financial stability. when i review the various reports on this subject that cross my desk, one thing they almost always have in common is an emphasis on the link between sound risk management and financial stability. it is my hope — indeed, it is my belief — that the incentives for risk management in basel ii will therefore promote greater financial stability in the future. improved and more formalised risk management, as fostered by basel ii, will bring more awareness of risks and better quantification of these risks. to the extent that risk assessment and control methods become more formalised and rigorous, this will lessen the likelihood of making bad decisions. it will also contribute to the prompt detection of errors and deviations from targets, allowing banks to implement corrective measures and develop buffers as appropriate at an early stage. banks should be encouraged to develop systems that allow managers to identify and understand the risks they are facing, consider the risks that may arise in the future, and respond promptly and actively to both. this will maximise the likelihood that they can continue to operate, even in the most difficult of conditions. continued outreach and dialogue a second lesson i have learned through the development of basel ii is that communication with interested parties is absolutely essential. one reason we were able to incorporate leading practices into basel ii is because of the open and transparent process by which the framework was developed. there has been a steady dialogue with the industry since the committee began discussing revisions to the capital accord back in 1999. many of the firms represented here today contributed extensive and valuable feedback to the committee on its proposals over the years. the committee has tried to explain to the industry as clearly as possible its objectives and methods during this process,

sitting on a lot of 4 / 5 bis central bankers'speeches excess liquidity. in terms of transmission, we also think up to now banks have benefited from a better macro picture, which means volumes are up even though margins are down. also, credit risk is down, so there ’ s been less provisioning, less concern about credit risk. that isn ’ t to say those forces will be forever, so we absolutely accept this is something we ’ ll look at all the time. it ’ s an ongoing question. i cannot think of a better question to end that interview on, and a better answer to give us a snapshot of what ’ s happening in europe. philip, thank you so much. 5 / 5 bis central bankers'speeches