Jaime Caruana: What next for Basel? Remarks by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the Seventh Annual Supervision Conference of the British Bankers Association, London, 9 October 2003. *  *  *  Introduction  Mr. Mullen, distinguished guests, and members of the British Bankers Association, it is an honour for me to address you this morning as the new chairman of the Basel Committee on Banking Supervision. This conference, the seventh to date, encourages a healthy exchange of ideas between bankers and supervisors on ways to promote safety and soundness in the banking sector. Today’s agenda offers a timely focus on the development of regulatory policy on several levels – on a national level through the mission of the Financial Services Authority, on a European level through the directives of the European Union, and, of course, on a global level through the standards adopted by the Basel Committee. It seems appropriate to think about banking and supervision on national, regional and global levels. Enhancements in telecommunications, continued expansion in trading relationships, and the increasing interdependence of markets make it difficult to view banking on a purely local or even domestic level. Bankers are no strangers to the global economy, having underwritten letters of credit to exporters and merchants almost since the first trading vessels plied the rivers and seas. However, it seems fair to say that the pace of globalisation and innovation has accelerated dramatically in recent years.
For example we are not certain that any leading bank today consistently adjusts the value of all of its assets based on each asset’s contribution to diversification. Consequently, for the time being we have decided instead to establish standard estimates of diversification that banks would apply. I know that many members of the industry have accepted that choice as prudent for now, but you have also stressed the need to move forward with an approach that is more consistent with the existing treatment of market risk and the emerging practices in operational risk management. We are ready to start this work as soon as it is possible. Still, portfolio theory suggests that an obvious next step to further enhance the risk-sensitivity of the capital framework would be to incorporate calculations of diversification benefits into  BIS Review 42/2003  5  the framework. In the coming years, and we can start very soon, we look forward to working with banks, with banking associations such as the BBA, and with academics and researchers to find ways to move Basel in the direction of full credit risk models. Likewise, the Committee must continue to monitor developments in the industry to be prepared to harness other improvements in risk measurement and management practices. It is at once exciting and perhaps a bit daunting to think about the work ahead for all of us, whether on a national, regional, or global level.