Jaime Caruana: Basel II - a review of ongoing work Keynote address by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the 20th Annual General Meeting of the ISDA (International Swaps and Derivatives Association), Barcelona, 16 March 2005. *  *  *  Mr Moulds, Mr Pickel, Ms. Sebton, distinguished guests, It is an honour for me to be invited to join your meetings today and it is furthermore my pleasure to welcome you and the International Swaps and Derivatives Association to Spain. It appears to me that you have all of the ingredients for a stimulating and memorable conference. The agenda is ambitious and addresses the latest topics in the ever-evolving derivatives markets. The speakers are distinguished, deeply experienced, and represent a wide range of perspectives and institutions at the forefront of financial services. And, of course, I must commend you on your selection of a marvellous location for your annual meeting. Barcelona has undergone a fantastic transformation, is a gateway for the world and a city that celebrates the ancient and the innovative. I hope that you take some time outside of your sessions to explore its blending of the old and the new. A walk through the “Gothic” quarter serves as a window into our past. A visit to any of the creations of Antoni Gaudì – after whom this conference hall was named – offers a vision of Catalan modernism through architecture.
We also published a working paper called: “Studies on the Validation of Internal Rating Systems” Let me mention these principles briefly. Firstly, we set out our understanding that validation is fundamentally about assessing the predictive ability of risk estimates and the use of ratings in credit processes. Secondly, we stress that the primary responsibility for validation lies with the bank itself, while the supervisor’s responsibility is to review the bank’s processes and outcomes – a point which I think we all agree is very important. 4  BIS Review 17/2005  The remaining principles relate more to the process itself. We note that validation is a likely to be an ongoing, iterative process which will require an ongoing, iterative dialogue between banks and supervisors. Then our fourth principle reflects that there is no single validation method, or universal tool for validation, even though techniques may converge over time. We also highlight, in our fifth principle, that validation should encompass both quantitative and qualitative elements – validation is not a purely technical or mathematical exercise, but should also include an assessment of controls and other qualitative factors. Finally, we stress our view that validation processes and outcomes should be subject to review within the bank, by parties which are independent of those who are responsible for the design and implementation of the processes. I think these principles set out clearly what supervisory expectations are, and should provide a useful steer to the industry.