and in turn firms and industry associations have shown a willingness to engage in a serious dialogue to find practical, prudent solutions. this has helped supervisors to better understand the state of industry practice. where we have found these practices to be reasonable and appropriate we have tried to incorporate them into the revised framework in a sound manner. looking ahead, one of the benefits of this transparent process is that it has set the tone for discussions between banks and supervisors as industry practices evolve going forward. we have also greatly benefited from the dialogue we have maintained with our supervisory colleagues outside of the basel committee. i believe that it is in many countries ’ best interest to adopt the new framework when they are ready, so it is critical that supervisors in these countries be part of the basel ii conversations. the basel committee has established several mechanisms for heightened dialogue with our fellow supervisors, and we are fully committed to further enhancing this dialogue. principles versus rules a third lesson i have learned is that it is important to strike the right balance between principles and rules. of course, we want to ensure that banks apply principles in the same manner and that supervisors interpret them in the same way even in different jurisdictions. but while the temptation is to do this through ever more detailed rules, i am reminded of the words of the famous surrealist painter salvador dali, who said : “ have no fear of perfection — you ’ ll never reach it. ” we have learned from the basel ii process that adding detail to the rules does not guarantee a level playing field or equal application. the marginal utility of adding detail falls rapidly as you move ahead in a process such as basel ii, so we need more than detail and prescriptiveness. we need a bottom - up, cooperative approach that maintains a focus on principles of effective risk measurement and management. as we have moved into implementation, the committee has placed greater emphasis on principlesbased guidance, for example through the use of so - called basel committee newsletters. we have found that these newsletters, which clarify supervisory expectations rather than establishing more rules and making the framework more complicated, have been well - received. examples include recent committee guidance on the use of vendor products in the irb framework and the treatment of expected losses in an operational risk ama. in my view, such an approach to communication with the industry allows for a range of sound practices and encourages further work by both banks and supervisors, but does not “ lower the bar ” in terms of supervisory expectations for risk management and capital ade

submitted in qis 5 was greatly improved over the data submitted in the previous qis exercises. this is certainly a positive development, and i hope banks continue to make strides in this area. what is important to keep in mind about qis 5 is that it represents a point - in - time view. we know that models and validations processes are still under development, just as banks are working to take into account the recent updates to the trading book regime and the guidance on incorporating economic downturn effects in lgd estimates. we cannot know the true impact of basel ii until it has actually been implemented, which is why we have built safeguards such as transitional floors into the framework. that is one reason the committee is placing so much importance on an effective basel ii implementation process, which brings me to my next point. implementation issues from the outset, one of the key objectives of both basel ii and, indeed, the current accord, has been to maintain a level playing field across jurisdictions. since experience has shown that this was difficult to achieve even under the fairly rigid basel i rules, the challenge will be even greater in the more flexible basel ii regime. one of the key lessons we have learned in this whole process is that having similar national rules, which are based on common international agreements, does not of itself create a level playing field. what is essential is how the rules will be applied. the success of basel ii will depend to a large extent on our ability to achieve greater convergence in our supervisory practices in implementing these rules. this will require a much higher level of cooperation among supervisors than hitherto. home country and host country supervisors will need to work closely with each other and with banks to provide effective supervision while minimising burden and duplication of effort. although changes in financial markets mean that these efforts would in any case be necessary, basel ii has raised the stakes. to promote convergence, the committee has established an accord implementation group, or aig, which is chaired by nick le pan, superintendent of financial institutions in canada and vicechairman of the basel committee. when the aig began its work, it quickly became clear that there was no “ one - size - fits - all ” approach to implementing basel ii. rather, implementation should be tailored to the specific circumstances of a bank and the jurisdictions it operates in. in this regard, one of the primary methods the aig uses to promote convergence is to encourage home supervisors of the 50 or 60 largest internationally active banks in