basel committee has and will be undertaking to produce a more robust supervisory and regulatory framework for the banking sector. such a framework needs to have four key components : 1. strong regulatory capital, 2. robust standards for bank liquidity, 3. enhanced risk management, governance and supervision, and 4. better transparency i would like to say a few words about each of these components. regulatory capital the basel committee, in a press release issued on march 12th following its recent quarterly meeting, underscored the importance of a strong capital base as a necessary condition for a strong banking sector. it stated that the level of capital in the banking system needs to be strengthened to raise its resilience to future episodes of economic and financial stress. the committee will do this through a combination of initiatives, which i will describe momentarily. our press release also noted that the committee will review the regulatory minimum level of capital, taking account of these initiatives. our objective will be to arrive at a total level and quality of capital that is higher than the current basel i and basel ii frameworks and appropriate to promote the stability of the banking sector over the long run. this effort will be phased in over a time frame that will not aggravate the current stress. building on the three pillars of the basel ii framework, we need to develop a more resilient capital framework that has multiple safeguards built into it. first, we need to improve risk coverage. one of the most procyclical dynamics has been the failure of risk management and capital frameworks to capture key exposures in advance of the crisis. for example, risks arising from securitisation activities – especially so - called resecuritisations – as well as certain trading book exposures were not sufficiently captured. i could also point to exposures to complex financial instruments that experienced severe declines in value because of impaired liquidity. the basel committee ’ s response therefore is to enhance the basel ii framework so that risks are more comprehensively and more accurately covered. second, there needs to be a solid capital base backing these risks. we will achieve this by strengthening the quality, consistency, and transparency of the highest forms of tier 1 capital. it must be based on a clear definition of capital that needs to be transparent and it must be global to ensure competitive equality. the basel committee already has a strong foundation for such a definition, namely common equity and reserves. we now need to deal with the many differences related to definitional issues, such as de

##ductions from capital and the treatment of prudential filters. third, we need to address procyclicality. procyclicality is a complex issue and it is the product of many factors. at the most basic level, it is the result of animal spirits, which produce exuberant behaviour in the upswing of the cycle, and fear during the downturn. we cannot change this behaviour, but we can seek to dampen the channels through which it manifests itself. these include accounting and capital frameworks, liquidity regimes, risk management and compensation, margining, basic infrastructure, transparency, and the way supervision is carried out. in the case of the regulatory capital regime, we need to address any excess cyclicality in minimum requirements over the credit cycle while maintaining appropriate risk coverage and sensitivity. the basel committee has put in place a process to systematically assess the quantitative impact of basel ii on the level and cyclicality of capital. we will take appropriate steps if the results of our capital monitoring suggest the capital framework is unduly procyclical. but even more importantly, we need to build countercyclical buffers into capital frameworks and provisioning practices. this will help ensure that reserves and capital are built up during periods of earnings growth, so that they can be drawn down during periods of stress. the committee is working to translate this important principle into a concrete proposal. the approach needs to have robust standards that can be applied at the global level and translated into national contexts. finally, the capital framework needs to be underpinned by a non - risk based supplementary measure. this is particularly important as the basel i - based floors are phased out. just like we expect banks to manage to a variety of measures when they assess risk ( such as net and gross exposures, var and stress tests ), we as supervisors also must not constrain ourselves by evaluating risk through the lens of a single, risk based measure. we need the risk based measure to interact with a simple metric that can act as a floor and help contain the build up of excessive leverage in the banking system, one of the key sources of the current crisis. the basel committee is working to develop by year end a specific proposal in this area. key principles guiding this work are that the measure must be simple and transparent, and it must address issues related to accounting differences and off - balance sheet exposures, among others. finally, it needs to interact with the risk based measure