jaime caruana : the basel ii initiative remarks by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the iif spring membership meeting, madrid, 31 march - 1 april 2005. * * * i would like to begin first by thanking for his kind introduction. it is an honour for me to participate once again in an event sponsored by the institute for international finance. it is doubly a pleasure for me to do so here in the city of madrid. although the title of this session is “ regulation and consolidation in the financial industry ”, i will not speak about consolidation in my intervention, because i believe that the role of the banking supervisor in such issues is minor compared to the role of the market. structural changes in the financial sector, such as consolidation, should, in my opinion, be market - driven phenomena that respond to market needs - such as economies of scale, it synergies, the benefits of diversification, gaining access to a larger client base, etc. this is particularly relevant in the eu context, where we are aiming for a truly single market. in this respect, i support all the steps the commission is taking to remove remaining internal barriers and restrictions in pursuit of this goal. the banking supervisor ’ s role in issues related to consolidation is tightly defined by both the letter and spirit of eu banking legislation. our task is confined to ensuring that structural changes do not undermine the soundness and “ supervisability ” of banking institutions, and that bank shareholders are suitable. so, with this in mind, let me turn to the main topic that i would like to discuss, which is the basel ii initiative. when the iif met in madrid last july, the basel committee had just released the text of the revised capital framework. the publication of basel ii marked a critical milestone in our efforts to improve the risk - sensitivity of bank capital requirements while providing incentives to strengthen the quality of risk management. i think that on this occasion the meeting of the iif has been preceded by another milestone in our work in relation to the new capital framework. a successful meeting of the basel committee concluded yesterday. among other things, we dealt with the double default and trading book issues, on the basis of the work undertaken in close collaboration with the international organization of securities commissions. i think this teamwork between iosco and bcbs can also be perceived as a landmark in the area of cooperation among supervisors. let me therefore start

##books for the qis 5 in july. this is in relation to the calibration. the second point i wanted to make is related to this but is of a more general nature. i agree that much is changing today in a short span of time. the wide range of standards that are evolving in parallel represents a drain on the limited resources that banks have to keep pace with these changes. in this respect, and especially in relation to our work on basel, i see some merit in concentrating, at least for a while, on completing our current regulatory work, and on ensuring the quality and consistency of its implementation. this will allow us all a period to digest the framework we have designed. let me conclude with a few words on the third topic : implementation of basel ii. i have just two remarks. on validation, we have recently published six principles that will guide our future work. we have also published a working paper entitled : “ studies on the validation of internal rating systems ” although validation is foremost the responsibility of banks, supervisors must have a thorough understanding of validation in order to ensure the overall integrity of banks ’ activities in this area. i think these principles set out clearly what supervisory expectations are, and should provide a useful guide to the industry. our work on validation will accelerate over the coming months, although our focus will be more on sharing and cataloguing information and approaches, and not on trying to develop a prescriptive method. close dialogue with the industry in our work will be of great importance. let me finish by saying that we, the supervisory community, continue to devote significant resources and efforts to improving the consistency of cross - border implementation. consequently, the excellent dialogue between supervisors, organisations such as the iif, and the industry more broadly, must continue in the coming months and years ahead. i welcome the discussions that we have been having, both inside and outside this conference, and look forward to hearing more of your thoughts and perspectives.