More than a decade has passed since the Basel Committee on Banking Supervision (the Committee) introduced its 1988 Capital Accord (the Accord). The business of banking, risk-management practices, supervisory approaches, and financial markets each have undergone significant transformation since then. In June 1999 the Committee released a proposal to replace the 1988 Accord with a more risk-sensitive framework, on which more than 200 comments were received. Reflecting those comments and the results of ongoing dialogue with the industry and supervisors worldwide, the Committee is now presenting a more concrete proposal, seeking comments from interested parties by 31 May 2001. Comments received will be published on the BIS's website at the end of the comment period. The Committee expects the final version of the new Accord to be published around the end of 2001 and to be implemented in 2004.

Safety and soundness in today's dynamic and complex financial system can be attained only by the combination of effective bank-level management, market discipline, and supervision.

The 1988 Accord focussed on the total amount of bank capital, which is vital in reducing the risk of bank insolvency and the potential cost of a bank's failure for depositors.

Building on this, the new framework intends to improve safety and soundness in the financial system by placing more emphasis on banks' own internal control and management, the supervisory review process, and market discipline.

Although the new framework's focus is primarily on internationally active banks, its underlying principles are intended to be suitable for application to banks of varying levels of complexity and sophistication. The Committee has consulted with supervisors worldwide in developing the new framework and expects the New Accord to be adhered to by all significant banks within a certain period of time.

The 1988 Accord provided essentially only one option for measuring the appropriate capital of internationally active banks. The best way to measure, manage and mitigate risks, however, differs from bank to bank. An Amendment was introduced in 1996 which focussed on trading risks and allowed some banks for the first time to use their own systems to measure their market risks. The new framework provides a spectrum of approaches from simple to advanced methodologies for the measurement of both credit risk and operational risk in determining capital levels. It provides a flexible structure in which banks, subject to supervisory review, will adopt approaches which best fit their level of sophistication and their risk profile. The framework also deliberately builds in rewards for stronger and more accurate risk measurement.

The new framework intends to provide approaches which are both more comprehensive and more sensitive to risks than the 1988 Accord, while maintaining the overall level of regulatory capital. Capital requirements that are more in line with underlying risks will allow banks to manage their businesses more efficiently.

The new framework is less prescriptive than the original Accord. At its simplest, the framework is somewhat more complex than the old, but it offers a range of approaches for banks capable of using more risk-sensitive analytical methodologies. These inevitably require more detail in their application and hence a thicker rule book. The Committee believes the benefits of a regime in which capital is aligned more closely to risk significantly exceed the costs, with the result that the banking system should be safer, sounder, and more efficient.

• First pillar: minimum capital requirement

• Second pillar: supervisory review process

• Third pillar: market discipline

The new Accord consists of three mutually reinforcing pillars, which together should contribute to safety and soundness in the financial system. The Committee stresses the need for rigorous application of all three pillars and plans to work actively with fellow supervisors to achieve the effective implementation of all aspects of the Accord.

The first pillar sets out minimum capital requirements. The new Accord maintains both the current definition of capital and the minimum requirement of 8% of capital to risk-weighted assets. To ensure that risks within the entire banking group are considered, the revised Accord will be extended on a consolidated basis to holding companies of banking groups. The revision focuses on improvements in the measurement of risks, i.e., the calculation of the denominator of the capital ratio. The credit risk measurement methods are more elaborate than those in the current Accord. The new framework proposes for the first time a measure for operational risk, while the market risk measure remains unchanged.

For the measurement of credit risk, two principal options are being proposed. The first is the standardised approach, and the second the internal rating based (IRB) approach. There are two variants of the IRB approach, foundation and advanced. The use of the IRB approach will be subject to approval by the supervisor, based on the standards established by the Committee.

The supervisory review process requires supervisors to ensure that each bank has sound internal processes in place to assess the adequacy of its capital based on a thorough evaluation of its risks. The new framework stresses the importance of bank managementdeveloping an internal capital assessment process and setting targets for capital that are commensurate with the bank's particular risk profile and control environment. Supervisors would be responsible for evaluating how well banks are assessing their capital adequacyneeds relative to their risks. This internal process would then be subject to supervisory review and intervention, where appropriate.

The implementation of these proposals will in many cases require a much more detailed dialogue between supervisors and banks. This in turn has implications for the training and expertise of bank supervisors, an area in which the Committee and the BIS's Financial Stability Institute will be providing assistance.

The third pillar of the new framework aims to bolster market discipline through enhanced disclosure by banks. Effective disclosure is essential to ensure that market participants can better understand banks' risk profiles and the adequacy of their capital positions. The new framework sets out disclosure requirements and recommendations in several areas, including the way a bank calculates its capital adequacy and its risk assessment methods.

The core set of disclosure recommendations applies to all banks, with more detailed requirements for supervisory recognition of internal methodologies for credit risk, credit risk mitigation techniques and asset securitisation