Jaime Caruana: Basel II - emerging market perspectives Keynote remarks by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, for a panel discussion on “Basel II - Emerging Market Perspectives”, Bankers’ Conference 2004, New Delhi, 11 November 2004. *  *  *  Thank you, for your kind introduction and opening thoughts on the significance of the new capital framework in emerging market countries. I would like to thank as well the Indian Bankers Association and our host institution, Punjab National Bank, for inviting me to take part in your conference. It is an honour to be asked to share some of my thoughts on Basel II and its implications for a country such as India. I must confess that it is a still greater privilege for me to hear your thoughts directly on this new standard and the role it may play in a large, rapidly growing dynamic economy. A discussion on India adds the perspective of a country whose banking sector has been undergoing an important period of transition. The scale of that transformation is evident in the global aspirations that Indian banking organisations are now pursuing, as the title of this conference suggests. I would like to continue our discussion of Basel II first by discussing briefly why the Committee felt that the international capital standard needed to be revised and how Basel II addresses the Committee’s goals for it.
Nonetheless, we have worked hard over the past years to clarify the rules, to simplify those thought to be the most complex, and to provide options for those wishing to use a simpler approach. In fact, as the Basel Committee demonstrated in an annex to the third consultative paper, supervisors can select  BIS Review 68/2004  3  options that would result in a very simple set of rules that can be specified in just 12 pages of text. That is approximately half the length of the original 1988 Accord. The “simplified standardised approach”, as we call it, is intended to be useful for those countries that do not wish to adopt all of the options available under the new framework. The trade-off, however, reflects the fact that the policy balance at stake is between simplicity and risk-sensitivity; if one chooses simpler rules, the cost is less sensitivity to risk and hence greater conservatism in capital requirements. Competition and consistency of application Another broad concern that the Committee has worked to address is Basel II’s impact on global competition. In particular, some have asked whether banks that choose Basel II’s advanced approaches will enjoy benefits over those that choose simpler approaches. Others have wondered whether banks that remain on the 1988 Accord for some time will be disadvantaged. To respond to these concerns, we should understand that adopting an advanced approach does not automatically reduce a bank’s capital requirements. Basel II is intended to align capital requirements more closely to risk.