In time tighter credit conditions could mean weaker business investment, though so far forward indicators of investment intentions still point to fairly strong growth. And any marked increased in uncertainty about demand conditions could lead to investment plans being shelved. But it is still early days – too early to draw strong conclusions about the size of these effects. Even more uncertainty surrounds the possible impact of tighter credit conditions on household spending, which alone accounts for three fifths of total domestic demand. There is already some evidence that banks are tightening the price and non-price terms on which they lend, especially to borrowers with relatively poor credit histories. And quoted fixed rate mortgage rates have already risen relative to market expectations of Bank Rate – though since markets now expect Bank Rate to fall instead of rising, the pick up in actual mortgage rates remains quite small. Overall, households seem to be in a relatively strong position: debt has risen a lot relative to incomes, but so too have holdings of financial and real assets. Mortgage arrears and repossessions remain well below their peak levels in the early 1990s. But the share of income which needs to be devoted to interest rate payments was already set to rise sharply,  2  BIS Review 136/2007  largely as a result of rising debt levels. And there is a growing minority of households who are reporting difficulties with their debts.
Indeed, the accord could smooth the punishing volatility of capital flows in and out of emerging markets as banks and investors better understand lending risks by applying the new rules. “Good risk management should also support emerging markets,” he said. Caruana said he welcomed China's announcement in August that it would delay adoption of the new accord, introducing its own rules in the meantime as its capital-weak banks struggled to modernise and reform. “It was perfectly consistent with what we were saying...a right timing and a proper sequencing was important, not to rush,” he said. *  *  *  Caruana, man of simple taste, faces complex Basel II Bank of Spain Governor Jaime Caruana is a man of simple tastes. A recent visitor to the Bank of Spain commented on the elaborate chandeliers in a conference room, a mass of coloured glass grapes. “I love those chandeliers,” the visitor said. “Personally I find them rather excessive,” Caruana replied. For a fan of the simple, it's no small irony that Caruana is driving a highly complex rewrite of global bank safety rules as the head of the Basel Committee on Banking Supervision, in one of the most dramatic and controversial financial reforms ever. In his most difficult job to date, Caruana took control of the committee at a time of unprecedented criticism for New Basel Capital Accord or Basel II, designed to replace the 1988 accord that set out how banks allot cash to buffer against surprise risks.