notable exceptions, banks should find that their overall level of capital allocation remains broadly similar to that under the previous regime. The IRB approach, by being split into a foundation and advanced options,9enables a larger range of banks the option of adopting it, rather than just the larger ones that might be expected to have the requisite internal systems. The most contentious element of the proposals is the charge for oper- ational risk. The Accord allows three approaches for determining this charge. The first, the "basic indicator," uses a simple one-level indicator, while the second is a standardized approach that specifies different levels of charge for different business lines. The third option is an internal mea- surement mechanism that enables banks to use their own internal loss data to estimate the charge. The overwhelming market response to these proposals was that they resulted in too high a charge for an element of risk that is still vaguely defined. However the three different options will produce different results, and this flexibility was introduced in the second draft after the markets negative reaction to the blanket 20% operational risk charge stated in the first draft. For instance, a senior vice-president of a middle-tier investment bank has stated that using the third approach produces a capital charge that is $500 million lower than that produced by the flat 20% charge.10Therefore banks will probably wish to ensure that their internal systems and procedures are developed such that they can employ the internal method. Nevertheless, it remains to be seen if the proposals are adopted in their current form. Under the proposals, capital relief can be obtained by the use of col- lateral, bank guarantees, and credit derivatives. These proposals should result in a rise in the use of synthetic securitizations such as synthetic col- lateralized debt obligations transactions, to reduce capital exposure of bank balance sheets. The Accord stipulates a haircut (denoted by H in the draft) to be applied to collateral, in accordance with its credit quality, asaprotectionagainstmarketrisk.Thisis not controversial. Collateral,     9This was introduced at the time of the second draft proposals. 10RISK,February2001,p.27. BankRegulatoryCapital     non-bank and non-sovereign guarantees and credit derivatives also will be subject to a charge of 0.15 of the original charge on the exposure, known as w. This charge is designed to reflect risks associated with these instruments, such as legal and documentation risks. However the credit derivatives market has reacted negatively to this proposal, suggesting that w is not required and will have an impact on the liquidity of the default swap market. The w factor is expected to be modified or removed