Jaime Caruana: Basel II - a new approach to banking supervision Remarks of Mr Jaime Caruana, Governor of the Bank of Spain and Chairman of the Basel Committee on Banking Supervision, at the Fourth Annual International Seminar on Policy Challenges for the Financial Sector: “Basel II - the international banking system at the crossroads”, Washington DC, 1 June 2004. *  *  *  It is an honour to be invited to join you, the members of the global supervisory community, at this seminar on the future of banking supervision. I would like to thank our host, Chairman Greenspan, for his warm welcome into the hallowed halls of the Federal Reserve. Likewise, all of us express our gratitude to the World Bank, the International Monetary Fund, and the Federal Reserve for organising this seminar. To ensure rich, lively, and informed discussions, our sponsors have assembled an impressive array of speakers and participants, including senior supervisors, central bankers, and others from over 50 countries, an achievement that demonstrates, for the fourth time, excellence in international and inter-organisational cooperation. Overview of remarks The new capital adequacy framework, or “Basel II,” figures into virtually every discussion today on the outlook for international banking tomorrow. This seminar will tackle its policy implications. They include the new framework’s potential effects on risk management within an individual firm; on competition between firms; on the stability of the financial sector and the future of supervision; and, most broadly, on the long-term growth of the economy.
As I have mentioned before, the medium-term stabilisation of existing government debt levels at around 60% (with inflation at 2%) was consistent with running a headline deficit of around 3% of GDP (see left-hand side figure in slide 4). In the current context, however, the observed prevalence of negative r-g differentials (see the right-hand figure in slide 4) would be consistent with government debt levels stabilising at a higher percentage of output. Given this situation, it is legitimate to ask whether a government debt level above 60% is now the correct figure? The question is not easy to answer, and it will depend on national considerations (the economic fundamentals in the medium-term, the vulnerabilities and resilience of the economy) and, of course, the prevailing financial and monetary conditions. Moreover, the current high levels of government debt evidence the difficulties of transitioning to the medium-term debt anchors. At present, converging towards a debtto-GDP ratio of 60% would require a substantial fiscal effort over a prolonged time frame. Using the historical average values of real growth, inflation and interest rates, the euro area would need to maintain a fiscal surplus of 1.1% of GDP over 20 years in order to reduce the debt ratio to 60% (see left-hand side figure in slide 5). This is substantially higher than the average primary deficit of 0.4% of GDP observed since 1995. For this constant fiscal effort to be at more plausible values, the macroeconomic environment would need to be far more favourable than it has been in recent decades.