credit risk based more on the potential for loss. under the new standardized approach, for example, banks with smaller loan portfolios or less advanced risk management systems will be better able to incorporate a borrower ’ s creditworthiness into their capital management by relying on external assessments of credit quality. larger or more sophisticated institutions, in turn, will be able to rely increasingly on their own assessments under the internal ratings - based approach. similarly, now that the industry is developing a more refined sense of operational risk – the risk of losses caused by failures in processes – the new accord will " unbundle " this risk and allow banks to differentiate between, and manage separately, their exposures to credit, market, and operational risks. 3. encourage banks to improve their management of risk we ’ ve also attained the third goal : to go beyond a rules - based structure and instead encourage banks themselves to improve their abilities to identify, measure, and manage their risks appropriately. as you know, the most sophisticated approaches to credit or operational risk in the new accord will permit banks to rely increasingly on their internal assessments of risk when determining how much capital to hold. at the same time, the new accord will be flexible enough for banks to build their risk management functions on the best practices available in the industry, even as those practices evolve in the future. by promoting the improvement of the management of risk across the industry, i believe that we are laying a foundation for more stable markets. the milestones achieved square with banks ’ and supervisors ’ long - standing efforts all of us can take great pride in meeting the goals that the committee set out to embrace : the three pillars of capital adequacy, enhancing the risk - sensitivity of the capital framework, and creating incentives for banks to improve their management of risk. and we should recognize that these proposed revisions square well with the efforts that banks and supervisors themselves have undertaken, independent of the committee ’ s work. the banking industry has done much over the years to adopt a forward - looking approach to risk management – one that emphasizes flexibility in, and improvements to, the measurement and management of risk over time. for our part, supervisors have come to focus much less on point - in - time assessments of financial condition and much more on evaluating the quality of internal processes and control structures that protect against future losses. by embracing a philosophy of supervision that centers on evaluations of risk management capabilities, we gain deeper insight into banks ’ likely resilience during downturns, and

, it cannot be our job to prevent every bank failure, for some failures remove poorly managed banks from the market and encourage other banks to improve their management as well. motivating all banks to improve their management of risk, and thereby strengthen the stability of the banking system, is one of the principal objectives that the basel committee set out for itself in undertaking a major revision of the international standards for regulatory capital. the three years since have been a tremendous journey for all of us as we seek fundamental reform of the capital adequacy framework. meeting here in cape town, it seems fitting to portray our work to date as an unfinished journey. this historic port has traditionally served as a way station and respite for weary seafarers who had weathered many storms, but had not yet reached their destination. so today we ’ ll have a chance to rest near the cape of good hope, to reflect on how far we ’ ve come, and to chart the rest of our way to the successful implementation of the new accord. i ’ d like to share with you the latest news on where the new accord stands and offer some insight into what you can expect to see in the future. i ’ ll begin with my views on the milestones that we ’ ve achieved. then, i ’ d like to bring you up to date on how we are resolving outstanding issues. it ’ s wise to conclude any speech with thoughts about the future, so i ’ ll close with some remarks on what we ’ ll need to do to finish our journey – from the perspectives of the committee and of other supervisors, including of those who may have adopted the 1988 accord more recently. milestones achieved let me begin with the important milestones that we ’ ve achieved in this undertaking. as you know, we embarked on this voyage in the late 1990s because we realized that the original 1988 basel accord was becoming outdated. it was designed to be uncomplicated so that it could be applied to banks of various sizes and risk profiles in many markets and jurisdictions. its subsequent adoption by more than 100 countries represented an important first step in the development of an international standard. but it has since become clear that the 1988 accord has been overtaken by advances in the financial sector – and in the broader economy. new technology, the globalization of financial markets, and innovative financial products and services have changed the way that banks monitor and manage credit, market, and operational risks in a manner that the 1988 accord could not anticipate