Jaime Caruana: Contemporary issues in credit risk Keynote address by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, to the Credit Risk Summit USA 2003, sponsored by Risk Magazine, New York, 27 October 2003. *  *  *  Introduction I would like to thank Risk Magazine for inviting me to participate in this summit on contemporary issues in credit risk. Looking at the agenda, it is clear that, while credit may constitute the oldest risk in banking, it remains the most important and is still one where we have much to learn. There is a Latin proverb that says ‘Danger can never be overcome without taking risks’. As a supervisor, I would tend to rephrase that by saying that managing risks properly is the best way to overcome danger. I think this idea is at the core of any modern, innovative and dynamic economy. The next two days will no doubt offer a sense of the rich abundance of research under way to identify risks, to improve our measures for them, and to find better ways to address them. On this front, a risk manager and a bank supervisor share similar interests. A risk manager seeks the best risk measures and management techniques to protect a bank against losses, to hone its competitiveness, and to enhance its profitability and long-term growth. Supervisors advocate sound risk management practices to ensure the adequate capitalisation and prudent management of all banks.
Creditor safeguards and CCP resolution Intervention by a resolution authority, especially at a point where default management procedures have yet to be exhausted is action that cannot be taken lightly. Nor can the discretion of a resolution authority to deviate from the existing rules of the CCP be unbounded. Appropriate creditor safeguards are central to ensuring that an effective resolution regime does not unduly interfere with property rights or undermine its own value by introducing unnecessary uncertainty into a financial institution’s contractual relationships both in resolution and outside of it. Perhaps the most fundamental safeguard to creditors in resolution is that the actions of the resolution authority will not leave them worse off than if the authority had not intervened and the firm had instead entered a liquidation proceeding. For the purposes of determining this No Creditor Worse Off protection 6, bank resolution takes an insolvency counterfactual; recognition that a failing bank that meets the conditions for resolution would in most likelihood lose its licence at that point if not resolved, thereby tipping it into insolvency (whether cash-flow, balance-sheet or both) if it was not there already. That insolvency counterfactual requires an ex post assessment of the value of assets and liabilities of the firm. That is no easy task but one that can, and has been, credibly undertaken.