jaime caruana : consequences of basel ii for smes address by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, to the european parliament workshop on the " consequences of basel ii for smes ", brussels, 10 july 2003. * * * introduction good afternoon. i would like to thank the european parliament for organising this important workshop on the new basel accord and its implications for small - and medium - sized enterprises in europe, and for inviting me to participate. i ’ m privileged to join you as the new chairman of the basel committee on banking supervision, and i welcome this opportunity to offer our views. as you know, the basel committee was founded almost thirty years ago to help promote safety and soundness in the banking sectors. we believe that, when banks are adequately capitalised and wellmanaged, they are better able to promote growth by providing credit to consumers and businesses alike. but more broadly, when banking systems worldwide are adequately capitalised and wellmanaged, the international financial system becomes more stable, better able to promote sustainable growth, and more resilient during periods of distress. of course, simply providing credit does not guarantee growth. indeed, how credit is applied matters greatly to the development of an economy. and in every economy, small businesses have long been the true engines of economic growth. small and medium - sized enterprises traditionally produce much, or even most, of the technological innovations in business and industry. they create new jobs at a faster pace than larger companies do. their significance can furthermore be measured in the sizeable contributions they make to nearly all countries ’ gross national products. your workshop today reminds us that, if we are to promote growth by strengthening the banking sector, the basel committee must act in a manner that benefits banks and their ultimate customers as well. we must recognise that fair and reasonable access to credit matters, not just because credit helps small businesses to grow, but more importantly because small businesses help the economy to grow. so we have taken seriously the need to ensure smes of continued favourable access to credit under the new basel accord. this afternoon i would like to share with you some of my and the committee ’ s views on why the new accord is necessary. i shall then illustrate how the proposals will bear positively on small business lending. i ’ ll conclude with an update on the status of our work, after which i look forward to a discussion on issues you may wish to raise. the goals

approach. the capital savings are even more dramatic for sme loans that qualify for retail treatment : participating banks from basel committee member countries reported that their capital requirements on sme exposures qualifying for retail treatment would decline by an average of 12 - 13 % under the standardised approach and up to 31 % under the irb approach. similar conclusions can be drawn for those european banks participating in this study. actually, eu banks in general reduce their capital charges for loans to smes compared to the current rules, and this decline is slightly stronger than the average of all banks providing data. i should note that qis 3 did not fully recognise the risk - mitigating effects of collateral and guarantees, so we expect that, in some cases, banks may experience even larger “ savings ” when the new accord comes into force. other studies concur. for example, researchers at my home institution, the bank of spain, combed through a database covering almost every loan made by a spanish bank to evaluate the potential effects of the new accord on sme lending. their findings, which, if you are interested, i can share in written form with you, agree that the new accord will not create tougher capital requirements for loans to spanish smes and may, indeed, reduce them. we are extremely pleased now to have tangible evidence that the new accord will not create burdens for banks that lend to smes. as the savings show, our new rules do an even better job of recognising the characteristics associated with lending to pools of smes compared to other forms of credit - giving. the status of the new accord let me conclude with a word on the status of our work. the committee has asked for final public comments on the “ third draft ” of the rules by july 31 of this year. we would certainly welcome comments on any aspect of the proposals related to sme lending and will give full consideration to whether any final changes may be necessary. the committee expects to approve and publish the final text of the new accord this year, and for the new rules to be implemented at the end of 2006, which gives bankers and supervisors three years to prepare. other countries are likely to seek to adopt the new accord in roughly the same timeframe, or perhaps thereafter, depending on national circumstances. while this will require substantial efforts from bankers and supervisors, we all acknowledge that better tools are needed for measuring the risks that banks face. likewise, we know that, for banking supervision to remain robust