It is my hope that in that book of the future, the Basel II framework would be portrayed as a revolution in our approach to financial regulation. It would represent the introduction of a new regulatory and  BIS Review 8/2005  1  supervisory paradigm, one premised on the need to begin to depart from blunt requirements and instead to develop rules that incorporate nuance, rules that align capital requirements more closely to the actual degree of economic risk a bank faces. Our author might write that Basel II represented an important step forward in continuing to replace static rules with rules that offer incentives for firms to improve constantly their internal governance and management of risk. And that it marked a milestone in the trend toward leveraging the power of the market place to exert discipline over firms’ decisions and strategies, such that other marketplace participants can better serve as effective allies of regulation and supervision to achieve financial stability. Yet I must confess that, with the evolution in practices and technology that can reasonably be expected by the year 2046, the Basel II capital framework released in June 2004 might well be judged to be excessively simple. Still, its greatest virtues might be considered its forward-looking nature and its flexibility, and its ability to adapt to new circumstances and to the emergence of better risk management practices.
Jaime Caruana: Basel II - back to the future Speech by Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the 7th HKMA Distinguished Lecture, “Basel II - Back to the Future”, Hong Kong, 4 February 2005. * 1. *  *  Introduction  Let me begin by expressing my gratitude for this invitation to participate in the “Hong Kong Monetary Authority Distinguished Lecture”. I am honoured to join the list of prestigious speakers who have discussed critical issues in economics and finance in this forum, issues made especially prominent by the important role that the Hong Kong Monetary Authority plays in promoting financial stability under the leadership of Joseph Yam. From my perspective as Chairman of the Basel Committee on Banking Supervision, I am indebted to Mr Yam for his support and initiative in contributing to the development, and now the implementation, of the new bank capital framework, or “Basel II”. “Nothing endures but change,” wrote the ancient Greek philosopher Heraclitus more than two thousand years ago. In a world where change is the only constant, success depends on the depth of our awareness of the risks and rewards on the horizon and on the quality of our preparations to respond to them appropriately. That is true not just in the banking industry, but certainly also in the formulation of public policies geared to promoting more sustainable economic growth through greater financial stability.