you all know, basle sets a minimum capital ratio of 8 percent of risk weighted assets. the 8 percent ratio is sometimes interpreted as a ‘ one - size - fitsall ’ standard. the bank, however, sets the trigger capital ratio for each authorised bank at, or above, the 8 percent floor and considers an adjustment to that trigger ratio whenever we see a substantial change in that bank ’ s risk profile. where does this all leave us in comparison with other regulators? i suggested earlier that our flexible, judgmental approach is somewhat distinctive. but we are no longer, if indeed we ever were, outliers on the supervisory spectrum. while the bank has decided to implement a more systematic approach to risk assessment, other supervisors - who traditionally operate a rule book - are ( in a fast moving marketplace characterised by rapid product innovation ) moving towards a regime that gives more scope for supervisory judgement. but the fact that regulators internationally are converging in their approach does not necessarily mean that they are right. they may all be converging on an inappropriate model. indeed some would argue that regulators do as much to create problems as to solve them : that regulators create perverse incentives - even as we speak bankers may be designing products whose whole rationale is to exploit anomalies in our rules. perhaps we would all be far better employed elsewhere, leaving the market to regulate itself. why should we not facilitate that process by concentrating on rules of disclosure, obliging banks to publish accurate information on their capital adequacy and risk profiles, and leaving the rest up to the market - perhaps with some safety net for small depositors and investors? as you know, the new zealanders have made an interesting move in this direction in the last couple of years. should we then get out of the business and leave it all to the markets? to answer that question, it may be helpful to go back to first principles. back in 1958, modigliani and miller demonstrated that in a frictionless world a firm ’ s capital structure cannot affect its value. in the real world, however, departures from the m & m assumptions - such as taxes, bankruptcy costs and agency costs - may influence the capital decision of any firm ; capital may after all be costly. but banks differ substantially from most other firms because their soundness and safety is crucial to maintaining systemic stability ; without capital requirements some will exploit this fact by taking large risks with little of their money, in the hope that the

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