Still, we are working with the same timetable.” A storm of criticism from banks, academics and politicians in recent months has strengthened expectations that the final draft will not be completed until some time in early 2004, instead of end-2003 as planned. Critics blast the rules as fearsomely complex, too prescriptive and incurring costs far greater than the potential benefits. Some areas require more work, such as risks posed by highly diversified banks and on credit derivatives. Regulators were prepared to adapt the accord as they gained a better understanding of new risk modelling techniques, said Caruana. “Certainly there will be issues that will be important that we cannot manage now,” he said. “We have recognised that the Basel II process is an evolutionary approach.”  2  BIS Review 39/2003  The Basel II accord, so named because it will replace the 1988 Basel Accord, would update existing rules on how much capital large international banks must hold to remain sound and reflect changes in financial services over the last 15 years. Due for implementation in 2006, it would set standards for how bank capital is supervised and what type of financial disclosure institutions must make. Experts say that a delay in publishing the final draft of even several months could throw the target implementation date back by a full year if it means domestic rule-making and legislative deadlines in Europe cannot be met.
Caruana also sits on the Governing Council of the European Central Bank which sets euro zone interest rates. Less blue sky or rain? His top assistant Daniele Nouy, who is secretary general of the Basel Committee, was even more  BIS Review 39/2003  1  insistent, saying in the same interview that the new accord should help to smooth economic cycles. “I am personally absolutely convinced that it will be much less pro-cyclical than the old accord,” Nouy said. The new accord will require banks to make better decisions earlier about how much capital they need, thus reducing risk and economic volatility. “Right now we move from blue skies to full storm (in bank lending activities),” she said. “This could easily disappear. We will have much more light grey and dark grey. I know it is very hard to convince people in advance, but I have zero doubt on that.” As for the pressure the new accord will place on bank regulators, Caruana said he was impressed by how well prepared they are in general. Many bank analysts have said that relying on a patchwork of different national supervisory structures to implement the regulatory pillar will highlight weaknesses, for instance in emerging markets. “You would be very surprised. There is tremendous supervision there,” he said. Bank regulators have progressed immensely in the past five years in their sophistication in risk management assessment and are well equipped to implement the accord, he said.