their risks, the more comfortable supervisors and the market will become with respect to their pillar 1 processes, as well as the amount of overall capital that pillar 2 indicates is appropriate. this is not a compliance exercise! senior management and boards of directors need to lead the process and ensure that their institutions establish robust internal systems that capture all material risks for their institution in a rigorous manner. management should make certain that the economic substance of risk exposures is fully recognised and incorporated into the bank ’ s systems. this is extremely important, particularly in the instance of securitisation and other complex risk transfer arrangements where the risks retained by the firm are more difficult to measure. these estimates of risk must translate into robust capital assessments that can be validated by banks and supervisors. when supervisors assess economic capital, they should leverage off of banks ’ systems. supervisors need to understand the global perspective within which banks operate. local approaches may be warranted, but we need to ensure that local deviations are proportionate and that the costs do not outweigh the prudential benefits. to achieve the full benefits of pillar 2, supervisors need to avoid falling into the trap of establishing a check - list approach to supervision. it is not in anyone ’ s interest to engage in a tick - the - box compliance exercise. let me stress this - basel ii goes beyond merely just meeting the letter of the rules. the framework is more about a risk - focused approach to capital and risk management. i understand that for banks and supervisors to realise the full potential of basel ii, more work must be done on home - host issues. with respect to pillar 1, we have resolved a number of concerns and have come quite a long way. the same vigour and energy needs to be applied to the home - host issues related to pillar 2. i am confident that with the development of the home - host principles, increased use of the supervisory colleges and further dialogue with the industry we will make progress on the outstanding issues. many of these pillar 2 issues, such as diversification, are particularly challenging and supervisors need to work with the industry to resolve them. i expect that over time bankers and supervisors will engage in a dialogue around pillar 2 that ultimately will turn out to be one of the most important benefits coming out of the implementation of basel ii. for instance, i have already heard from a number of banks about the fruitful discussions of how credit risk mitigation is reflected in their risk models and about the robustness of

, customers of financial institutions will experience less hassle when, let's say, opening a bank account. our supportive stance does come with a concern, though. a concern that can be brought back to the difference between support and guidance. between :'i encourage you to go and experiment with ai ', and'look, here's the technology you should use and a manual on how you should use it.'but sometimes, that's precisely what financial institutions seem to expect from us. alas, however supportive we may be, as supervisors we are not guiding the way when it comes to ai innovation. what's more, it is inevitable that we are running behind in our knowledge and understanding of ai. if a financial institution wishes to use ai, our primary task is to evaluate whether it does so with due observance of existing rules, regulations and fundamental rights. any real innovation must happen within and between financial institutions, and together with ai experts. ai supervision only provides boundaries to the responsible deployment of ai models. and we believe there is sufficient room within these legal boundaries to experiment and innovate with ai. 2 / 4 bis - central bankers'speeches now, even with many data science phds working at financial institutions, it is not a given that their knowledge will translate into cutting - edge models. so, this is when i look at you. at impact centres like this one : ai4 fintech. at centres that combine advanced research with a focus on actual industry impact. at making sure that research contributes to resolving challenges. at the bright academic minds who will do the hard work – and devote a few years of their lives to a phd. as i said, dnb is not leading the way in ai innovation. this does not mean, however, that we are not on an odyssey of our own. as supervisors, we are on a journey to adapt our supervisory role to this next era of ai. for our supervision to benefit society as a whole alongside financial institutions, our supervisors must be able to have in - depth conversations about responsible ai. as such, we want our people to be as up - to - date as possible with all innovations in this area – to have a deep understanding of ai in the financial sector. this will allow them to set this against the existing regulatory framework and to address fundamental rights issues, like algorithmic fairness, transparency and explainability, and privacy considerations. dnb is working hard on this. we are currently in