Systemic risk: how to
deal with it?
Welcome to the March 2010 edition of the Basel ii
Compliance Professionals Association (BCPA)
newsletterDear
Members,Today we will discuss a very interesting paper
from the Bank of International Settlements: Systemic risk: how to
deal with it?Paper by Mr Jaime Caruana, General Manager of
the BIS, 12 February 2010.
The paper analyses
systemic risk and considers appropriate policies to
reduce it. It examines systemic
risk as a negative externality in
two dimensions: the cross-sectional and the time
dimension. The paper Discusses:Policies to reduce externalities in the
cross-sectional dimension seek to limit the damage
that can arise from interlinkages and common
exposures. Policies to address
procyclicality in the time dimension seek to build up
capital and liquidity margins of safety during the
upswing that can be drawn upon in the downturn.
The paper further argues that financial
regulatory policies are not enough to address systemic
risk. Other policies - especially monetary and fiscal
policy - also have a role to play. It also argues that
policy coordination is essential, nationally among
monetary, fiscal and macro- and microprudential
policies, as well as internationally. Already, the Basel
Committee on Banking Supervision, working with the
Financial Stability Board, has made great progress in
addressing the regulatory shortcomings highlighted by
the financial crisis.Systemic risk: how to
deal with it?Paper by Mr Jaime Caruana, General Manager of
the BIS, 12 February 2010. The international financial crisis has made us
all think much harder - not only about what systemic
risk means, but also about what it means for policy.
Systemic risk was underestimated
across the board before this crisis. We were faced with the unthinkable when a
number of very large institutions failed, despite
their previous reputation for balance sheet strength
and leadership in risk management. Coming to grips with systemic risk is vital
because the aggregate risk facing
the system is much higher than the simple sum of the
individual risks attending financial institutions,
products and markets. Following the work of the
IMF, FSB and BIS for the G20, systemic risk can
be defined as "a risk of disruption to financial
services that is caused by an impairment of all or
parts of the financial system and has the potential to
have serious negative consequences for the real
economy." If a bank loses money from a risky investment,
that is not systemic. But institutional failure,
market seizure, infrastructure breakdown or even a
sharp rise in the cost of financial services can have
serious adverse implications for many other market
participants. In these cases, there is a systemic dimension.
It is such negative externalities and the significant
spillovers to the real economy that are the essence of
systemic risk and which make a case for policy
intervention. Translating this general insight into
practical policies is of course very difficult.
What I would like to do is to
outline some of the thinking at the BIS and suggest
what this might mean for policy. First, from a
conceptual point of view, systemic risk has two
dimensions, ie a cross-sectional
dimension and a time dimension.In the cross-sectional dimension, the
structure of the financial system influences how it
responds to, and possibly amplifies, shocks. Such
spillover effects can arise, for instance, from
common exposures across
institutions or from network interconnections. The policy problem is how to address such
common exposures and interlinkages among financial
institutions. In the time dimension, the build-up of
risk over time interacts with the macroeconomic cycle;
the associated policy problem is how to address the
procyclicality of the financial system. Second, and from a
policy point of view, financial regulatory policies
are an essential part of the solution, but they alone
will not suffice to address systemic risk in all its
complexity. Other policies - especially monetary and
fiscal policy - also have a role to play. Third, policy
coordination is essential - not just nationally among
monetary policy, fiscal policy and macro- and
microprudential policies - but also internationally.
Finally, although this paper does not address
them, there is a fourth group
of very important measures bearing on market
discipline, transparency, governance, incentives,
market integrity, consumer protection, etc, that would
also be very relevant to supporting confidence,
fostering market and institutional resilience, and
curbing excesses in risk-taking. A key message is that a lot of progress has
already been achieved, but the reform agenda is still
large, and its implementation will speed up this year.
In the first section, the paper briefly discusses the
concept of systemic risk. The second section focuses
on the regulatory policies in the pipeline to address
that risk.The third and fourth sections deal with
monetary and fiscal policy approaches to the same
risk, while the fifth section outlines the role of
international coordination. The last section concludes
with a few final remarks. I. Concepts of systemic risk As already mentioned, systemic risk has two
dimensions, cross-sectional and time. Each has very
different policy implications. The first dimension of
systemic risk - the common exposures/interlinkages in
the cross section - relates to how a specific
shock to the financial system can propagate itself and
become systemic. The focus is on how risk is
distributed within the financial system at a given
point in time. A shock may take two main forms: The financial system is a network of
interconnected balance sheets. As a result, an
increasingly complex web of daily transactions means
that a shock hitting one institution can spread to the
other institutions that are connected to it and become
systemic. The Herstatt and
Continental Illinois crises both started with problems
in one specific financial institution.Because of settlement and interbank linkages,
the failure of each of these specific firms threatened
wider problems for connected institutions that were
otherwise sound. Alternatively, a shock
can have wide ramifications and become systemic
because of direct common exposures. By its nature, a nationwide downturn in
commercial real estate or housing markets tends to
have this character. As the recent crisis has shown,
such common exposure can
have a profound international sweep. A negative exogenous shock, or, metaphorically
speaking, a meteor strike or perfect storm, is indeed
how many practitioners viewed this crisis, at least
initially. The procyclicality dimension of systemic risk
relates to the progressive build-up of financial
fragility and how aggregate risk evolves over time.
Over the economic cycle, the
dynamics of the financial system and of the real
economy reinforce each other, increasing the amplitude
of booms and busts and undermining financial and
macroeconomic stability. Typically, booms are periods of financial
innovation. When things are going well, firms and
individuals feel (over)confident in experimenting with
and taking on risk. They create new, untested
instruments that are difficult to understand and
value. Credit grows rapidly, based on, and
contributing to, higher asset prices. In this way, the
common exposures/interlinkages dimension concerns the
various interconnections among the network of
financial institutions. By contrast, the
procyclicality dimension of systemic risk highlights
the underlying build-up over time of risks that are
hidden and underpriced. As strains develop, previously unseen risks
materialise, deepening the retrenchment that is
already under way. In this procyclicality dimension,
the financial sector endogenously generates systemic
risk and this risk can be highest precisely when it
looks lowest. It is precisely then that credit is
extended most freely and that low volatility
encourages the greatest leverage. Complacency
regarding risk itself turns into a source of risk.
Normal margins of safety, whether down
payments in real estate lending, haircuts in
securities financing or covenants in corporate loans,
are seen as unnecessary hindrances to profit. Policies to deal with systemic risk must
operate in both dimensions. II. Policies to deal with
system-wide interlinkages and with too-big-to-fail and
moral hazard issues Turning first to the cross-sectional dimension
of systemic risk, the policy task is to capture
system-wide risk and to adjust prudential tools based
on individual institutions' contribution to that risk
. It is a continuous approach, which does not require
one to draw up a list of systemic institutions.
Let me highlight six key
building blocks in setting policies to mitigate
this common exposures/interlinkages aspect of systemic
risk: 1. More and better capital/liquidity: Firms that contribute to systemic risk must
internalise the externalities that they create. Higher
prudential standards would be one way to do this.
Capital and liquidity buffers need to be
higher across the board. The Basel Committee's recent
reform package is aimed at improving the banking
sector's ability to absorb shocks arising from
financial and economic stress - whatever the source -
thus reducing the risk of spillover from the financial
sector into the real economy. The Committee's proposals include a series of
measures to raise the quality, consistency and
transparency of the regulatory capital base. In
particular, they aim to strengthen the component of
the Tier 1 capital base that is fully available to
absorb losses on a going concern basis. This will contribute to a reduction of
systemic risk from the banking sector. The Committee's proposals also seek to
strengthen the capital framework's risk coverage.
Failure to capture major on- and off-balance sheet
risks, as well as derivatives-related exposures, was a
key destabilising factor over the past two and a half
years. Therefore, in addition to the trading book and
securitisation reforms announced in July 2009, the
Committee is proposing to strengthen capital
requirements for counterparty credit risk exposures
arising from derivatives, repos and securities
financing activities. More importantly, the reforms also have the
necessary macroprudential focus, addressing both
system-wide risks and their procyclical amplification
over time. One way to get systemically important
institutions to internalise the risks that they pose
is to require them to hold more capital and more
liquidity than other firms. Such additional charges
should be calibrated to a given institution's
contribution to systemic risk on a continuous basis,
with a view to reducing its probability of default and
related knock-on effects. In addition, a
straightforward leverage ratio will serve as a
backstop to risk-weighted capital measures. 2. Resolution regime:The failure of a systemically important
institution should be managed in an orderly manner.
Adequate resolution regimes should be put in
place to hold down the system-wide loss that arises
when such an institution fails. One important aspect
is to ensure that the counterparties of an important
institution are not sheltered from loss in the event
of failure, so that market discipline is strengthened
ex ante. This can further help to limit the probability
of default. However, setting up adequate resolution
regimes is no easy matter. Progress has been limited, and work by the FSB
and the Basel Committee continues.One reason is that the
legal problems are complex, as the ongoing
Lehman Brothers liquidation reminds us. Another difficulty highlighted by the recent
crisis in Iceland relates
to the problem of cost-sharing across countries.
Nevertheless, new standards for cross-border
resolution frameworks have already been developed.
Concrete proposals to facilitate the orderly
resolution of a failing firm are actively being worked
on, and progress can be expected this year. 3. Structure of the
financial industry:The recent financial crisis was a sign of
market failures within the financial industry.
Measures must be adopted to avoid perverse
incentives that spur leverage and the pursuit of
short-term profit. Bank supervisors are working on proposals to
strengthen governance within firms and to encourage
sound compensation practices. In addition, a number of
countries are considering steps to limit the
size/structure of financial groups, or to place curbs
on some of their business activities. We have to accept that there will never be
total agreement across borders on what banks should
and should not be allowed to do. There have always
been differences in the business lines permitted to
banks in different countries and there probably always
will be. Hence, there can be a wide range of
approaches, depending on the particular circumstances.
But all measures should be consistent with
internationally agreed standards to ensure that the
playing field is level and that systemic risk is
reduced. 4. More robust market infrastructure: A key way to lessen the systemic risks created
by large, interconnected firms is to put in place more
resilient market structures. Trading of financial
derivatives on organised exchanges is one way.Another is to replace the web of bilateral
exposures with robust central
counterparties (CCPs). This can reduce the risk of common exposures
in several ways. A CCP is an entity that interposes
itself between the two sides of a transaction,
becoming the buyer to every seller and the seller to
every buyer; this contributes to greater liquidity in
the market and reduces contagion effects. A CCP also addresses default risk by requiring
each participant to hold a margin account in which the
balance is determined by the value of the
participant's outstanding contracts: the more volatile
the market, the larger the required margin balance and
the more expensive it becomes to hold large positions.
Furthermore, channelling transactions through a single
platform enhances the collection and dissemination of
information. This in turn allows market participants and
the authorities to monitor the concentration of
individual exposures and the linkages that they
create. 5. Taxation: Another building block added recently to the
debate is the idea of taxing bigness or
interconnectedness. While this deserves study as a classic means
of dealing with an externality, many questions arise.
Would the tax end up being paid by customers,
or even by shareholders if their control over
management is weak? Wouldn't higher capital and liquidity
requirements for systemic institutions, or prudential
incentives for simpler structures, be preferable?
6. Supervision: Finally, more proactive supervision of
systemic institutions is necessary to ensure that the
perimeter of financial regulation is wide enough for
supervisors to be able to see right through a
financial institution, no matter what the legal
configuration may be. An interesting question posed by the recent
crisis is why the same regulation produced different
results in different countries. Banking systems in
Australia and Canada, for instance, remained
relatively resilient during the recent crisis.
There were obviously many reasons for the
differences seen across various jurisdictions
including differences in the structure and the
business models of the financial system. Still,
another relevant factor was that regulation was not
implemented across countries with the same rigour.
So a key lesson is that good regulation will
not work without adequate supervision that looks
through both the business cycle and the structures of
financial institutions. But this is easier said than done.
The recent crisis has highlighted
the difficulties of setting a consistent perimeter of
regulation over time and across jurisdictions.
Moreover, the problem of the shadow banking system
remains a challenge. 8 Ongoing work to ensure greater
consistency across sectors and jurisdictions in the
key respects of capital, liquidity and resolution
regimes will be essential to address these issues.
III. Policies to deal
with procyclicality Let me now turn to
policies that deal with systemic risk in the time
dimension, the so-called procyclicality aspect. The first, and
obvious, lesson is that capital
and liquidity buffers need to be higher on
average over time, as was outlined in the previous
section. A second element
of the macroprudential response to procyclicality
consists in building up and
running down buffers over the cycle. The guiding policy principle must be to
build up safety margins of
capital in good times, when it is easier and cheaper
to do so. These can restrain risk-taking. In bad
times, the margins can be run down, allowing the
system to absorb emerging strains more easily and
dampening the feedback mechanisms. At the level of individual banks, the
maintenance of appropriate buffers can be achieved
through capital conservation measures when the buffers
are inadequately replenished, including actions to
limit excessive dividend payments, share buybacks and
compensation; these buffers can then be used when
periods of stress arise. At the macroprudential level, an operational
framework has to be set up that relies on adequate
indicators signalling the build-up of risks in the
financial system. A third element is
to encourage banks to use
forward-looking provisioning based on expected
losses instead of more backward-looking provisions
based on realised losses. This will promote early identification and
recognition of credit losses in a more robust manner.
It will better reflect the reality of the financial
performance and risk of financial institutions, by
incorporating a broader range of credit information,
both quantitative and qualitative. This should be done in a transparent way and
be subject to appropriate internal and external
validation by auditors. Finally, it should
be acknowledged that other macroprudential policy
tools can be used to limit or prevent the emergence of
macroeconomic and financial imbalances. Indeed, they have long been part of the
arsenal, particularly - but not only - in Asia. For
example, tighter provisioning norms against rapid
credit expansion have been used in China to counter
potential vulnerabilities from excessive credit growth
or asset price bubbles. Other prudential tools have been used as
automatic stabilisers, that is, to forestall the
emergence of such imbalances. In India, for instance, a
long-standing prudential requirement is that banks
must hold a relatively large part of their assets in
risk-free liquid securities. Several other
Asian economies place limits on credit exposures or
otherwise restrict concentration risks towards banks.
Korea, for instance, has
announced loan-to-deposit requirements that aim to
limit the exposure of its banks to wholesale funding
markets.Because it can be difficult to set general
rules that cut across all sectors, some countries have
also used sectoral policies to regulate credit terms,
as well as capital or provisioning requirements for
loans to specific borrowers or sectors. For instance, loan-to-value (LTV) ratios and
restrictions on mortgage lending have often been used
by Asian authorities to address concerns about real
estate bubbles. In India, the central bank has actively used
differential risk weighting in capital regulation and
countercyclical provisioning norms to slow the pace of
growth of bank credit to specific sectors. One must, however, recognise that some of
these measures can be intrusive and can have
unexpected distortive effects. In addition,
significant uncertainty remains about how and under
what circumstances these measures are likely to be
effective. While discretionary sector-based prudential
measures taken by Asian policymakers have proved quite
successful in containing financial system damage as
asset prices fall, generally they have been less
effective in preventing or constraining asset price
booms. It remains to be seen whether and how
rule-based measures might counter the effect of
distorted incentives and so prevent boom-bust cycles.
Effective rules need to take into account the
endogenous behaviour of financial institutions and
their impact on credit extension, as well as the
relationship between the financial and real sectors of
the economy. IV. Regulation is not enough: monetary policy
This brings me to my next point, that is:
better regulation is essential,
but even with the new macroprudential focus it may not
be enough to prevent the build-up of systemic risks.
Other policies, particularly monetary policy,
must play a supporting role. The question is not whether monetary policy
should target asset prices. It is rather what role
monetary policy should play in leaning against the
build-up of imbalances that contribute to systemic
risk which can derail the economy. It is tempting to make a neat Tinbergian
assignment in which we would assign a single policy
instrument to each policy objective. In such a world,
interest rate policy is assigned to stabilise prices,
while prudential policies, be they capital
requirements or credit restrictions, are assigned to
maintain financial stability.In reality, however,
prudential policies will not suffice to maintain
financial stability and should be supported by
monetary policy. A key element is that monetary policy should
take into account its effect on financial stability,
for instance on financial innovation and the quest for
yield. The current crisis has highlighted the hitherto
neglected channel of monetary transmission, the
"risk-taking" channel: the link between monetary
policy and the perception and pricing of risk by
economic agents. Such self-reinforcing dynamics were detected
empirically in Spain, where lower short-term interest
rates led Spanish banks to loosen their lending
standards and to grant riskier loans. This and other research at the ECB suggests
that this effect is related to the impact on the
banks' appetite for credit risk when interest rates
are low. As a result, the interest rate can affect the
supply of credit through the bank lending channel and
risk-taking through the search for yield, thereby
influencing the pace of financial innovation. Asset
price and credit cycles cannot be treated as exogenous
when they are, in fact, inherently influenced by the
monetary policy stance. A more symmetrical approach is
needed: monetary policy should not act only when the
bubble bursts, leading to a macroeconomic downturn; it
should also act pre-emptively to limit the preceding
phase of expansion. This suggests that the reaction function of
the monetary authorities should not be narrowly
understood as aiming at controlling inflation over the
short run. Rather, it must also take account of credit
growth and asset information with the goal of
promoting financial and macroeconomic stability over
the medium term. In some circumstances, central banks
may need to respond directly to this additional
information, even if inflation deviates from its
objective in the short run. This is because the trade-off between
financial stability and monetary stability may be more
apparent than real when the appropriate time horizon
is considered. In the long run, the two goals are indeed
likely to be complementary. For example, some
restraint on the build-up of financial imbalances
today may mitigate the severity of a subsequent
financial crisis, preventing a future economic
contraction and the undershooting of inflation
targets. Several recent experiences suggest that
central banks are becoming more alert to developments
in asset markets.
In 2003, for instance, the
Reserve
Bank of Australia's interest rate policy quite
appropriately erred on the side of tightness in the
face of strong credit growth and housing price
increases, even though consumer price inflation
remained muted. The RBA also made public statements
highlighting the risks in the rise in housing prices.
There is little doubt that this subsequently
contributed to the levelling-out of house prices. In
the euro area, the monetary pillar - that is, broad
money and credit growth - also helped the ECB to take
difficult interest rate decisions in 2004 and 2005.
V. Regulation is not enough: fiscal buffers
and tax policy Fiscal policy can also be called upon to
promote financial stability, not least because of the
sheer scale of the financial resources that the public
sector can call upon in times of stress. One obvious mechanism is to let fiscal
automatic stabilisers play their part in difficult
times, alleviating the impact of economic weakness on
business activity and employment. Moreover, government can play the role of a
kind of insurer by building fiscal room for manoeuvre
in good times. When bad times come, these "reserves"
can be used for financial stability purposes.
Governments have mobilised massive resources in the
financial rescue programmes set up in response to the
recent financial crisis. This implies that government debt should be
maintained at reasonably low levels in good times so
that additional debt can be taken on in times of
stress without unsettling financial market conditions.
As with monetary policy, it is also important
to take into account how fiscal policy affects
financial stability. In good times, procyclical
policies can serve to heighten complacency and
encourage the build-up of financial imbalances. This
is even more the case when rapid credit growth and
high asset prices flatter the fiscal accounts during
the upturn. All this implies that fiscal policy may
have to err more on the side of tightness, preparing
for the realisation that part of what appears to be
sustainable revenues may be subject to a payback. Of
course, this strongly reinforces the case for reducing
government debt in relation to GDP in good times. That
said, we should recognise the political economy
problem that Adam Smith highlighted in his treatment
of the public debt. Lastly, tax policy could be also used to
address sectoral developments with potential financial
stability implications. We have seen how
macroprudential tools can be used to limit excessive
credit growth in specific areas such as housing; tax
policy could also be of use here. A key way to ensure that the tax code worked
for rather than against financial stability would be
to reduce or to eliminate its bias towards debt and
against equity. The recent crisis has shown the unfortunate
results this bias can have on asset prices and
leverage, especially in housing markets. This is not
the place to explore in detail how the tax code might
be made more even-handed. Suffice it to say that
getting rid of the tax incentive to leverage could
make a handsome contribution to financial stability.
VI. The institutional framework of systemic
regulation To summarise, we need to ensure that
all public policies - especially
monetary, fiscal and macro- and microprudential
policies (complemented by adequate supervision) -
become part of a consistent macrofinancial stability
framework designed to pre-empt financial excesses and
serial boom and bust cycles. To make this framework effective, careful
thought must be given to the institutional setup and
to international coordination. It is crucial to align goals, know-how and
control over the various policy instruments, precisely
because the responsibilities for financial stability
are so widely distributed. The institutional setup
should therefore be based on clear mandates and
accountability. It will need to rely on close cooperation
between central banks and supervisory authorities,
both within and across borders. All that said, let me recognise that
some important questions remain
open. A first open question
pertains to the governance structure and flow
of information in systemic risk regulation. The crisis has shown that central banks play a
decisive role in systemic regulation. But it is not
entirely clear how central banks need to be equipped
to play this role. Especially where the central bank is not the
bank supervisor, it is important that the goal be well
defined, the instruments understood and the exchange
of information with other authorities appropriate -
including detailed supervisory information on
individual firms. Financial supervisors can also benefit from
information collected by central banks in the context
of their liquidity operations. A second open question
is how to balance rules and discretion.In principle, we should rely as far as
possible on rules and automatic stabilisers rather
than discretion. Rules can help avoid errors that can stem from
difficulties in identifying threats to financial
stability contemporaneously - dynamic provisioning is
a good example of a rule that can help in dealing with
procyclicality. In addition, clear rules can allow the
authorities to commit themselves ex ante to responses,
thereby facilitating international coordination and
enlisting the understanding, and even the
anticipation, of market participants.
For instance,
market participants, including rating agencies, may
not necessarily permit capital and liquidity that is
built up in good times to be used in bad times.
In this case, clear rules communicated by
supervisors will help drawdowns be accepted in the
marketplace. Lastly, and perhaps more importantly,
rules reduce the enormous political pressures on
policymakers to refrain from intervening against
booms. However, rules may not be enough: discretion
has a role to play as it can help tailor intervention
to varying, and often unpredictable, circumstances.
This is why we should accept that some degree of
discretion is inevitable. While these open questions have still to be
dealt with, I would like to emphasise that important
progress has been made in the international
coordination of systemic regulation. Indeed, we emerge from the global financial
crisis with a brand new structure. The crisis gave
further evidence that financial stability cannot be
assured by each neighbour keeping his own house in
order. This is necessary but not sufficient. Exposures
to a neighbour's losses can bring down one's own
house. The Financial Stability
Board has taken up a key role in coordinating
the work of national authorities and standard setters
to ensure international consistency. New mechanisms have been developed to support
the development of the IMF-FSB early warning
exercises, to increase cooperation across borders and
between supervisors, and to conduct peer review
exercises. Comprising both thematic and country by
country approaches, such exercises are a new
instrument that will strengthen adherence to
international standards. Key input into the coordinating work of the
Financial Stability Board comes from the
expanded
Basel Process, which internationally coordinates
standard-setting. Whatever the differences at the
national level regarding the scale and scope of
financial firms, international agreements on minimum
capital and liquidity are being refined. Peer review
exercises have been launched to ensure adherence to
these standards in each jurisdiction. New institutional arrangements are being
explored to enhance cooperation among supervisors both
at the national level and across borders. Let me just mention a few examples. In the case of the biggest firms
operating across borders,
colleges of supervisors are supplementing the Basel
Concordat that sets out the respective roles of home
and host supervisors. Another example, of a different
nature, is the proposed European Systemic Risk Board,
which will help to coordinate micro and macro
approaches and enhance international cooperation.
This body would take charge of macroprudential
supervision at the European level, issuing risk
warnings and making recommendations on policy
measures. Lastly,
the G20 is playing an increasing
role to enhance the necessary coordination of
macroeconomic policies and to ensure political support
for financial regulatory reform. The mutual assessment
process reinforces the commitment of national leaders
to joint and coordinated action. Just as financial
stability needs help from monetary and fiscal policy
at the national level, international financial
stability cannot be achieved in the face of
inconsistent policies at the global level. It is very
important that leaders remain engaged in and committed
to this effort. No
doubt this international structure will continue to
evolve. The challenge is to maintain the intimate
cooperation that has characterised the Basel Process
even as it widens the effort in terms of both
participants and issues. As it approaches the end of
its 80th year, the Bank for International Settlements
pledges to continue its support for this cooperative
project to tame systemic risk. VII. Final remarks The issue of systemic risk is probably
the
most important and most difficult that we confront.
Progress will require a combination of better
regulation, a more macro orientation of prudential
tools, better macroeconomic policies, enhanced
international coordination and greater market
discipline. A lot of work has been done and much
progress made. In some areas, such as capital and
liquidity, the convergence of minds has been already
substantial. In others, such as the handling of
systemically important institutions, work is well
under way. Many ideas and proposals are on the table, and
we need to make sure that this work does not lose
sight of the forest for the trees.The BIS will fully
support the Basel Committee and the Financial
Stability Board in their comprehensive assessment of
the impact of the various proposals to strengthen the
financial system before they are implemented. This assessment will clarify the new
regulatory framework and will ensure that the
transition to this new and more demanding framework is
achieved with minimal interference to the ongoing
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