of transparency. it is this latter aspect, relating to pillar iii, which is the least well - known, although it is that with the greatest potential in the medium term for disseminating best practices in risk management. of course, the completion of basel ii is only the beginning of the implementation process, and not just in credit institutions, but also in their supervisors. in this respect, i believe that our institutions and our supervisory model are in a magnificent position to lead the implementation process insofar as quality is concerned. and this process will yield better managed institutions and more effective supervision. these two key regulatory issues raise other points. first, the development of ias and basel ii make it necessary to strengthen international co - operation in supervision and regulation. the international expansion of spanish banking and its presence in a larger number of jurisdictions with differing features raise the need to establish closer bilateral relations with the authorities of other countries, so as better to comply with the respective responsibilities. in addition, the new european legislation on financial conglomerates also addresses in depth the need for greater co - operation. specifically, the eu has opted for a solution based on co - operation between supervisors as the most appropriate ( and essential ) approach. indeed, this is the prevailing course of action at present, routed through, for example, the ecb banking supervisory committee or the recently created committee of european banking supervisors, a “ level 3 committee ” set up in application of the lamfalussy approach to the banking sector. the functions of the committee of european banking supervisors include promoting convergence of the supervisory practices of the eu member states and increasing and improving co - operation between supervisors. growing supervisory co - operation will become unavoidable as further headway is made in the necessary process of integration of the single financial market. in this respect, we cannot ignore that the pace of integration is far from homogeneous. thus, the integration of the interbank market can be classed as full, particularly in the euro area, and very high in the wholesale, the securities issuance and the large company and bank financing markets. by contrast, the retail market remains markedly local in nature and it will only become integrated insofar as its cultural and idiosyncratic barriers are progressively lifted. the same is so of cross - border activity. mergers and acquisitions of credit institutions have raised to forty the number of institutions with operations in various eu countries. if profitability is adequate, this trend will foreseeably continue and european institutions will keep exploring

studies have identified those characteristics of sme lending that reduce the risk to banks and hence the need for additional capital. in that vein, i ’ d like to turn now to the rules that will apply to sme lending, which is my second topic. the treatment of smes under the new accord if you ’ ve followed our work over the years, you ’ ll know that our proposals have evolved considerably. for instance, after the committee published drafts of the rules in 1999 and 2001, we heard the message loud and clear from small business that the rules did not fully distinguish between exposures to very large corporations as opposed to smes. likewise, bankers themselves indicated that they typically view lending to large corporations and to smaller enterprises as very different businesses. we have investigated thoroughly the economics of sme lending. even though probabilities of default may be higher for individual smes, our research identified persuasive empirical evidence that most banks ’ holdings of loans to smes benefit from a greater degree of diversification than their holdings of loans to larger corporations do. diversification helps to reduce both a bank ’ s exposure to the credit risk posed by sme lending and the commensurate need for capital. moreover, we ’ ve taken a closer look at the precautions banks take when lending to smaller businesses, such as asking for guarantees or collateral. these measures help to lower further the potential losses a bank might incur in lending to a small business and can similarly reduce the need for capital. our findings motivated revisions to the proposals that will prevent an across - the - board increase in capital requirements for sme lending. what ’ s more, our “ quantitative impact studies ” have generated solid proof showing that, on average, many banks ’ requirements will actually decrease. three changes to the new accord are especially relevant. · first, in addition to an overall flattening of the risk - weight curve for corporate credits, we have reduced directly the capital charges for loans to smaller businesses. for example, banks on the irb approach will be permitted to adjust downward the capital requirements on exposures to small businesses with up to €50 million in annual sales. this adjustment will reduce the capital charges on a loan to an sme by as much as 20 % compared to the new requirements for larger companies and may in many cases be lower than the current requirements. · second, the new accord will recognise that some banks treat their smallest business credits as retail exposures. in these cases, banks group and