The most glaring flaw, most bankers feel, was that all loan assets had the same risk weightage. In other words, a bank had to assign the same risk weightage to a loan to a blue chip firm, as one to a risky start-up venture. This was obviously absurd. The Basle Committee on Banking Supervision has now suggested a way out of that anomaly, by linking risk weightage to credit ratings.

For starters, they have proposed that banks will use external credit assessments, by rating agencies such as Moody's or Standard and Poor's, to determine the weighting of sovereign risks. But they have suggested that the approach be extended to the risk weighting of banks andcorporates too. Among other changes proposed are that banks be allowed to use their own internal risk monitoring mechanisms to assess the weighting of different assets, but only if the local supervisory bank agrees.

The new proposals have been framed against the backdrop of the Asian meltdown, the Barings collapse, and an explosion of derivatives. But enhanced capital adequacy norms, although welcome, will not be enough to prevent the panic seen in south-east Asia. Nor have the credit rating agencies acquitted themselves well in the crisis. There is no substitute for close supervision of the banking system, not merely in terms of capital adequacy but also in terms of quality of assets. And a global lender of last resort is also essential.