base appears adequate to meet emerging challenges. from a regulatory capital perspective, the vast majority of all banks meet the definition for well capitalized. the original basel accord that was adopted in 1988 has served supervisors and the industry fairly well over the past decade as one of the primary tools for maintaining a sound banking system. more recently, the nature and complexity of risk undertaken by many larger organizations have made the blunt traditional measures of capital adequacy, whether equity - to - assets, leverage, or current risk - based capital ratios, less meaningful. in considering the likely continuation of innovations over the next decade, supervisors must develop ways to improve their tools while reinforcing incentives for sound risk management. the new basel risk - based proposal seeks to achieve the twin objectives of a more meaningful capital adequacy measure and promoting sound risk management practices. the proposal by the basel committee that was announced in january of this year calls for an international capital accord that is based on three pillars : a minimum capital requirement that is more sensitive to risk, a supervisory review process, and market discipline. it is important to note that the basel committee is in the process of reviewing the public's comments on the proposal and there are still a myriad of important issues and details to address and work out before it can be implemented. the proposal offers a menu of alternative frameworks for establishing minimum capital requirements so that institutions can be matched with the approach that fits their particular degree of sophistication, risk profile and risk management capabilities. on one end of the spectrum, the proposed advanced approach, designed for the most sophisticated and complex entities, relies on a bank's internal risk rating and loss estimates in the establishment of the minimum requirements for credit exposures. at the other end of the spectrum, the proposed standardized approach modifies the current framework to be somewhat more risk sensitive but retains many of the simple features of the current accord. the second pillar, the supervisory review process, requires supervisors to ensure that each bank has sound risk management processes in place. the emphasis in that review is both on the integrity of the process that produces the metrics used in calculating the supervisory minimum, as well as the adequacy of a bank's own analysis of its capital needs. the second pillar fits very well with the federal reserve's efforts in recent years to encourage larger, more complex banks to improve their internal risk rating systems while placing more emphasis on their own internal analysis of capital adequacy. the new accord

stanley fischer : past, present, and future challenges for the euro area speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the ecb forum on central banking conference “ inflation and unemployment in europe ”, sintra, portugal, 21 may 2015. * * * it is an honor and a pleasure to participate in the ecb forum on central banking, and i thank you, president draghi, and other members of the ecb board, for inviting me to take part. 1 although the topic of the conference is inflation and unemployment, i will take another perspective by discussing some of the past, present, and future challenges that have and may in future confront the ecb and the euro area. my theme is taken from jean monnet, who in 1976 wrote : “ europe will be forged in crises, and will be the sum of the solutions adopted for those crises. ” 2 this quote is discussed in the interesting recent paper by luigi guiso, paola sapienza, and luigi zingales, whose view of monnet ’ s contention can be deduced from the title of their paper : “ monnet ’ s error? ” 3 there are similar quotes from others, among them jacques chirac in 2003 and the former chief economist of the ecb, ottmar issing, in 2010. 4 i first heard a statement to this effect from jean - claude trichet at the 2011 jackson hole conference. 5 an extended 2015 version of the monnet contention would take the form : “ the first step on the road to european union was the creation of the coal and steel community in 1951. at the start, we did not have a road map, but we had the goal of ensuring that the countries of europe would never again go to war, and to that end, we had to build an institutional structure that would make another european war impossible. from time to time we encountered obstacles in that process. these obstacles often led to crises, but the crises were overcome, and from each crisis, the prospects for a united, prosperous, and peaceful europe emerged stronger. and that is what will happen this time too. ” i am grateful to brian doyle, jane haltmaier, stacey tevlin and paul wood of the federal reserve board for their assistance. the views expressed are my own and not necessarily those of others at the board, on the federal open market committee, or in the federal reserve system. see jean monnet (