’ s overall financial performance. this would allow for more - informed decision - making, thus contributing towards greater competitive advantage. moving forward, there will be increased expectation for more efficient use of internal resources. a more enhanced and integrated risk management framework, and the adoption of a risk adjusted performance management model would serve to further facilitate shareholders ’ activism and drive greater efficiency among banks. risk management however does not operate in a vacuum or in isolation and it should not be viewed merely for the purpose of regulatory compliance. priority should be given to ensure that the risk management framework is well - aligned and well - integrated with the strategic business directions of the banking institution. the benefits of refined risk quantification and more robust risk management should be translated into improvements in business operations and more effective functioning of the institutions. this will in turn ultimately bring benefits to the consumers and the economy at large. implementation challenges and considerations ladies and gentlemen, given the complexity of basel ii, the ability to comply appears to be the main concern within the banking community. this is truly a major undertaking with respect to the irb approaches or the internal rating based systems. the resources involved and data constraints are often cited as the two main challenges in implementing the irb approach, particularly for banks in the emerging markets. at this stage, data on default and credit migration for certain market segments is too limited to facilitate any meaningful analysis. it is therefore recognized that some lead time would be needed for banking institutions to produce a robust and meaningful validation of internal estimates of probabilities of default and loss given default. however, this does not mean that banks should wait until all the requisite data is in place. banks can initiate work to establish the framework for analytical functions. while the industry survey conducted by bank negara malaysia revealed a strong preference among malaysian banking institutions to adopt the irb approach, many had indicated the need to further strengthen their business case and undertake more comprehensive gap and impact analysis. this is indeed a critical process. of importance is to be able to extract the benefits out of the new accord. this would however, take time even for large and internationally active banking institutions that have made substantial enhancements over the years. standardised approach offers benefits with much less complexity while capital savings from the adoption of the standardized approach may be relatively lower than the irb approach, the benefits to be gained under the standardized approach are still considerable compared to the current accord. it includes the lower risk weights to be assigned to the mortgage portfolio, which would be reduced

lending such as that characterized by a high degree of portfolio diversification, could justify lower capital requirements. the third pillar specifies minimum disclosure requirements on capital adequacy to enhance market discipline. despite its relatively more complex architecture, the implementation of the new framework provides a number of options and flexibility to banking institutions. this is to ensure that the approach adopted reflects and is commensurate with the nature of risk - taking activities and the level of sophistication of individual institutions. in adopting the standardized approach for credit risks, the credit exposures are weighted based on recognized external credit ratings. however, for large banking institutions with businesses which are highly complex, the more advanced approaches, that is, the foundation or advanced internal rating based ( irb ) approach may be more appropriate to reflect their actual risk profile. similarly, there are three alternative approaches that may be adopted in allocating capital for operational risks, that is the basic indicator approach, the standardised approach and the advanced measurement approach. the objective of the new framework is to emphasise on the need for refined measurement of risks, more efficient capital management and the adoption of sound risk management practices that will ultimately contribute to greater financial stability. this will be complemented with efforts to enhance the corporate governance framework, the robustness of the internal control systems, and to introduce greater transparency and market discipline. within the context of these developments is the importance of the ability of the board members and top management of banking institutions to assess risk from a broader perspective and its strategic impact on the institution. in view of the significant implications of this new capital framework, bank negara malaysia has been directly involved in the consultative process through regional forums to ensure that issues and concerns of the emerging markets are considered by the bis in designing the new accord. we are pleased to note that many of these issues have been taken into consideration. motivation for migration to the new accord the adoption of the new accord is consistent with building strong risk management capability. the enhanced risk management practices required by the new accord not only can result in greater capital savings but becomes vital as the domestic banking system becomes increasingly competitive and integrated with the global marketplace. effective and efficient decision making is enhanced with relevant and timely information supported by more quantitative analysis. this can be achieved through having a more robust data architecture and information system, integrated processes and enhanced information flow and reporting. having a robust risk management framework would also allow banking institutions to better assess the marginal contribution of existing as well as new business lines to the institution