laurence meyer : the new basel capital proposal remarks by mr laurence h. meyer, member of the board of governors of the us federal reserve system, at the annual washington conference of the institute of international bankers, washington, d. c., 5 march 2001. * * * i am pleased to be here today to speak with you about the proposed new basel capital accord, which was issued for public comment on january 16th. developing and implementing a revised capital accord – and the associated other changes in supervisory practices – is a watershed in banking supervision. it will clearly affect banks'plans and practices in the years ahead – particularly the large, internationally active banks represented here. thus, it is important to both the bankers and the regulators that you carefully review and comment on this proposal. in my remarks today, i will raise some issues that i believe should particularly be called to your attention. i urge you to think carefully about them and let the regulators around the world know your views. more than a decade ago, the basel committee on banking supervision adopted the current accord for several reasons : ( 1 ) to make the capital requirements more sensitive to risk profiles among banks ; ( 2 ) to factor off - balance - sheet exposures into the assessment of capital adequacy ; ( 3 ) to minimize disincentives to holding liquid, low - risk assets ; and ( 4 ) to achieve greater consistency in supervisory assessments of bank capital adequacy throughout the world. these same objectives underlie the new proposal. let me be clear : the 1988 accord, the current rule, has served us well. at its inception, it was a significant step forward, reflecting the state of riskmanagement technology at the time ; it also clearly reflected compromises necessary for international agreement. but technology and business practice have moved on, and for the larger institutions this decade - old rule has developed critical shortcomings. risk - measurement practices have improved, and capital markets have become more tightly intertwined. assumptions and shortcuts taken in the current accord are far too crude, given practices today. to take one example, large, complex banking organizations now routinely structure their portfolios in ways that arbitrage around the current capital standard. these banks can often lower their capital requirements with little, if any, reduction in their actual risk - taking. as a result, reported capital ratios may – and too often do – overstate a bank's true financial strength. thus we need a capital framework that is more risk -

). conclusion independence in the conduct of monetary policy is at the core of advanced modern economies. and it can be too easily forgotten by those who have only known its benefits. if the federal reserve lost its independence, its hard - earned credibility would quickly dissipate. the costs to the economy would be incalculable : higher inflation, lower standards of living, and a currency that risks losing its reserve status. now more than ever, market participants are watching the relationship between central banks and their governments. they are keenly gauging whether changes in conditions, policies, or practices pierce the veil of central bank independence. central bankers the world over must demonstrate that we are worthy of this moment, and will be steadfast protectors of our institutions ’ credibility. that means respecting our important but circumscribed role in the conduct of policy, and performing our mission with competence and consistency.