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

c koep, m leibbrandt, h mcewan and i woolard, ‘ employment and inequality outcomes in south africa ’, southern africa labour and development research unit and school of economics : university of cape town, 2010. another part of the failing job creation machine is simply weaker real economic growth compared to the 2000s, when job creation was quite strong. this should not, however, lead us down the path of grasping at another seemingly ‘ easy ’ answer. higher inflation will not give us higher sustainable growth. instead, higher inflation undermines short - run growth by increasing interest rates on borrowing, affecting consumers ’ buying on credit and business owners who want to use credit to invest. higher interest costs reduce short - run cash flow, reducing all future consumption spending. while surprise inflation reduces the real value of the existing stock of debt owed, the trade - off is lower economic growth in subsequent years. the short - run benefit of a surprise lower interest rate is transformed by higher inflation into a long - run cost to growth. when inflation is higher than that of our trading partners, we suffer a continuous loss of competitiveness. high inflation overall also generally means higher inflation for poorer and less - skilled south africans than for the wealthy. this increases inequality further and worsens the already low standard of living for those households, making them costlier to employ. for a few years before the gfc in 2008, the relationship between growth and employment was better – if economic activity grew by 1 %, employment grew by around 0. 62 %. but since then, up to 2018, each percentage point improvement in growth only gives us 0. 37 % more jobs. our low employment problem overlaps entirely with our low growth problem. in this context, the best a central bank can do is stabilise unemployment at the rate consistent with price stability. if a central bank attempts to get unemployment below the nairu, the result will be larger quantities of inflation but only small and temporary quantities of jobs as the supply curve becomes more vertical. the same is true for economic growth. 11 assuming that most of our unemployment problem is structural, are we at least sure that the residual cyclical unemployment is being reduced by monetary policy? is a dual mandate better at addressing these cyclical drivers? at the sarb, we use an alternative measure of economic activity to the nairu for understanding where the economy is relative to its tipping point into more inflation or into deflation. this is the output gap, or the