fairly recent trend, but one that clearly stands out, is the rapid advances in credit risk measurement and credit risk management techniques, particularly in the united states and some other industrialized countries. credit scoring, for example, is becoming more common among banks. some of the largest and most sophisticated banks have developed credit risk models for internal or customer use. asset securitization, widespread already in us capital markets, is growing markedly elsewhere and the same is true for the credit derivative markets. 4. against this background, market participants claim that the basle accord is no longer up - to - date and needs to be modified. as a general response, let me point out that the basle accord is not a static framework, but is being developed and improved continuously. the best example is, of course, the amendment of january 1996 to introduce capital charges for market risk, including the recognition of proprietary in - house models upon the industry ’ s request. the basle committee neither ignores market participants ’ comments on the accord, nor denies that there may be potential for improvement. more specifically, the committee is aware that the current treatment of credit risk needs to be revisited so as to modify and improve the accord, where necessary, in order to maintain its effectiveness. the same may be true for other risks. but let me first go into credit risk. objectives 5. before going on our way, we should have a clear idea of what our destination is. one of the objectives for this undertaking is, at least for supervisors, that the capital standards should preferably be resilient to changing needs over time. that is, ideally, they should require less frequent interpretation and adjustments than is the case with the present rules. equally desirable is that capital standards should accurately reflect the ( credit ) risks they insure against, without incurring a regulatory burden that would ultimately be unproductive. substantial differences between the risks underlying the regulatory capital requirements and the actual credit risks would entail the wrong incentives. these would stimulate banks to take on riskier loans within a certain risk category in pursuit of a higher return on regulatory capital. in order to obtain a better insight into these issues, banks ’ methods to determine and measure credit risk and their internal capital allocation techniques should be investigated. in doing so, however, we should not lose sight of the functions of capital requirements [ as discussed in the preceding session ]. 6. capital requirements foster the safety and soundness of banks by limiting leverage and by providing a buffer

yesterday ]. its attractive features are that it incorporates a judgement on the effectiveness of a bank ’ s risk management, puts greater emphasis on the incentives for a bank to avoid losses exceeding the limit it has pre - determined and reduces the regulatory burden. in my opinion, however, under this approach, too, a bank ’ s choice of a capital commitment and the quality of its risk management system still need to be subject to supervisory review. and there are a number of other issues that are as yet unsolved, e. g. the comparability across firms as the choice of the pre - commitment is subjective, the role of public disclosure and the supervisory penalties, which are critical to the viability of the approach. for these reasons, international supervisors await with interest the results of the new york clearing house pilot study. other risks 14. now, let me turn to the other risks. if one leaves aside the recent amendment with respect to market risks, it is true to say that the capital accord only deals explicitly with credit risk. yet, the accord provides for a capital cushion for banks, which is meant to absorb more losses than just those due to credit risks. therefore, if the capital standards for credit risk were to be redefined, an issue that cannot be avoided is how to go about the other risks. interestingly, awareness of, for instance, operational, legal and reputational risks among banks seems to be increasing. some banks are already putting substantial efforts into data collection and quantification of these risks. not surprisingly then that the basle committee will also be considering the treatment of the risks that are at present implicitly covered by the accord, such as those just mentioned and possibly including interest rate risk. in this process, it will be important to distinguish between quantifiable and non - quantifiable risks and their respective supervisory treatment. more specifically, the committee will have to consider whether it should stick to a single all - encompassing capital standard embracing all risks, including market risks, or to a system of capital standards for particular risks, i. e. the quantifiable ones, in combination with a supervisory review of the remaining risk categories. from a theoretical point of view, one capital standard might be preferable, since risks are not additive. given the present state of knowledge, however, one all - encompassing standard for banking risks that takes account their interdependencies, still seems far away. as the trend thus far has been towards the