banks to issue specific kinds of uninsured debt. Holders of such subordi- nated debt are more concerned with the financial health of a bank because their investment is not guaranteed, and at the same time they are not interested in high-risk strategies because their return is the same every year regardless of the profit performance of the bank (i.e., the fixed cou- pon of their subordinated bond). Therefore the yield on this subordinated debt is in effect the markets assessment of the risk exposure of the bank. Charles Calomiris of Columbia University8has suggested that regulators should place a cap on this yield, which would force the bank to cap the level of its risk exposure, but this level would have been evaluated by the market, and not the regulatory authority. One improvement of Basel II over Basel I is that it acknowledges that "one size" does not fit all banks, and that greater flexibility is required in the capital allocation process. The IRB approach should result in a lower capital charge than the standardized approach, and as such should encourage the development of risk management systems in banks that are incentivized to adopt this approach. Depending on the nature of their activities, some banks will have higher risk profiles compared to others, and as such need more risk management than would be provided simply by a minimum capital level. This is the reasoning behind the three Pillar approach, and principally Pillar 2, which empowers supervisors to inter- vene if they feel steps taken by an individual bank are not adequate. This is meant to extend beyond a requirement to increase capital levels. Pillar 3 is also crucial to this overall process, as it is designed to ensure that there is adequate disclosure, not just of risk exposure but also of the pro- cedures used to calculate capital under the IRB approach.     7Many countries operate a deposit insurance scheme that guarantees the level of a private customers deposits in a bank should that bank fail. In the UK for example, the arrangement is that if a bank or building society is declared bankrupt, individuals are entitled to compensation of 90% of their savings with that institution, up to a maximum of £18,000 per individual. 8As described in "Better than Basle," The Economist, June 19, 1999. THEGLOBALMONEYMARKETS     REACTION AND CRITIQUE   The weight of market reaction and comment to the Basel proposals ini- tially led to a second draft of the proposals being introduced, in January 2000, following the first draft in June 1999. The consultative period was also extended by one year, so that final implementation of the Accord will not take place until 2005. The general market opinion has been that Basel II does at least attempt