jaime caruana : the new basel capital accord : why we need it and where we're at remarks by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the fifth meeting of the asian program of the institute of international finance, beijing, 17 november 2003. * * * i ’ d like to thank the institute of international finance and the bank of china for hosting this discussion on the outlook for banking and finance in asia. for many reasons, it seems especially appropriate to discuss this topic here in beijing. the tremendous growth of china ’ s economy, its recent accession to the world trade organisation, and the wide scope of change that is occurring here has made china a reference for the world. i am very pleased to have this opportunity to discuss with you some of the efforts of the basel committee on banking supervision to promote financial systems better able to sustain growth and more resilient during periods of distress. it is an honour to address this forum, but i must confess that i have come to listen and to learn. the message i am consistently hearing is on the one hand one of strong support for the principles of the new capital accord and on the other a desire for the best standard for financial systems in each country. too many examples have illustrated the economic costs and social unrest that weakly capitalised and poorly managed banks can inflict on an economy. it seems to me that we all recognize the importance of a sound banking system to our economic well - being. in recent years, central bankers and supervisors around the world have been working hard on the new requirements for bank capital. i think you are familiar with the idea that, “ he who asks is a fool for five minutes, but he who does not ask remains a fool forever. ” for the last five years, we in the basel committee have asked for comments and ideas from the industry, from academia, and from the community of supervisors on how to improve the international capital standards. the wealth of ideas and views that so many shared with us has made the process longer than we expected, but the benefit of this open and honest dialogue is that we are better able to achieve a sound and balanced accord. i think that we are very close to meeting our objective. today i would like to emphasise, perhaps even over - emphasize, three words that have guided our work on the new accord, namely balance, consistency and cooperation. we seek a balanced approach so that the new capital guidelines

assets quality, legal lending limit, foreign borrowings, and asset securitization ; third, measures to improve consumer protection through certainty in the application of standard, secure, and transparent banking services. this objective will be achieved through the issuance of bank indonesia regulations relevant to consumer protection and transparency of banking products. fifth, bringing the national banking industry to international standard of capital adequacy according to basel ii principles. the adoption of basel ii will commence in 2008 by applying standardized models. by adopting this consolidation policy, we believe that the indonesian banking system will consist of banks with strong commitments and capacity to play an optimum role in the national development process. ladies and gentlemen, financial sector outlook in line with improving economic performance as well as a strong banking performance, bank loans are projected to expand about 20 % in 2005 ( or about rp106. 2 trillion ). based on our projection, banking sector will have adequate capacity to expand loans as targeted without impeding their capital adequacy and liquidity. with loan growth of 20 % - 23 % and deposit growth of 6 % - 7 % in the next three years, the cars of banks are projected to stay at 16 % and ldr will be approaching 100 %. in addition, higher international commodity prices ( especially primary non - oil / gas commodities ) resulting from rising demand in export markets would have a positive impact on the domestic business climate, which raise demand for loans. as i have mentioned earlier, we have so far achieved significant progress in putting in place the foundation for economic stability and financial system more in line with challenges in the years ahead. however we are also aware that in our path toward achieving the objective of a more satisfactory financial and banking sector requires time. we are entering a crucial period in the process of transition toward a better future of banking system. the process of consolidating the national banking industry is an objective that we cannot compromise if the stability and resilience that we desire for the banking system is to be achieved. we must all take note, first of all that the coming years will be no time for complacency. before us lies only one choice, to work hard to fulfill the commitments and sincere intentions to restructure whatever needs to be put right. we should no longer feel comfortable watching as the various problems unfold within our banking industry. in fact, we as the banking authority see that much remains for us to do to be able to meet this demand. the