jaime caruana : coordinating regulation and supervision of banks - basel ii and beyond remarks by mr jaime caruana, governor of the bank of spain and chairman of the basel committee on banking supervision, at the global operational risk forum of the risk management association, paris, 24 october 2003. * * * i would like to thank the organizers for inviting me to this forum on operational risk. as the new chairman of the basel committee on banking supervision, it is a pleasure for me to join you, the members of the risk management association, in a discussion about the latest trends in capital and risk management. overview many of you have travelled great distances to join us here. perhaps part of the attraction was the chance to enjoy the charms of autumn in paris. but the main reason is that you believe risk management matters. indeed, from their first meetings in philadelphia almost 90 years ago, the members of the risk management association have long helped to promote sound risk management, offering training, educational resources, and forums such as today ’ s event to financial professionals. moreover, for more than 80 years the rma has emphasised the analysis of quantitative data in helping to evaluate risk through its collection and annual publication of financial data and benchmarks. through your efforts, and the efforts of associations similar to the rma, you are helping to advance the state of the art in the management of credit, market, and operational risk and to encourage responsible banking practices. on this front, a risk manager and a bank supervisor share similar interests. a risk manager seeks the best risk measures and management techniques to protect a bank against losses, to hone its competitiveness, and to enhance its profitability and long - term growth. supervisors, for their part, advocate the use of sound risk management practices to ensure the adequate capitalisation and prudent management of all banks. this, in turn, strengthens the ability of financial sector to withstand periods of distress, to serve as an intermediary of credit through good times and bad, and to contribute to more sustainable growth in the economy. the basel committee ’ s landmark revision of the international bank capital standard represents one of the most important global efforts to encourage the responsible pursuit of risk and rewards and, hence, to promote greater financial stability. this represents the outgrowth of trends in many countries to build incentives into the regulatory framework that encourage banks to identify and understand the risks they face today, to consider what risks may arise tomorrow, and to respond actively and appropriately to both

that have taken place here. if you ’ ve been following our work since the first consultative paper was released in 1999, you know that the proposals have evolved and improved considerably thanks to the industry ’ s honest responses, candour, and letters such as those submitted by the rma. at the committee ’ s meeting, all members acknowledged our responsibility to consider carefully your concerns and those of the broader industry. at the same time, we recognised the need to resolve the open issues and release the new accord as soon as humanly possible so that banks can continue to prepare for the new rules. in a statement to the press after our meeting, the members of the committee noted that we expect to take account of the remaining issues and complete the text of the new accord in the coming months and not later than mid - year 2004. this period of time will also allow us to take better note of domestic consultations underway in some jurisdictions. the comment letters we received covered a wide range of issues. most of the comments focused on credit risk. while this is not a major focus of today ’ s conference, i would like to call your attention to the proposals that the committee has developed to revise the treatment of credit losses. as you know, cp3 calibrated regulatory capital on the basis of both unexpected and a portion of expected credit losses. this was intended as a practical compromise to account for differences in national accounting practices and supervisory authority regarding provisioning. based on views expressed by the rma and other respondents, and in light of our own continued research, the committee now intends to align regulatory capital more closely to economic capital by calibrating it on the basis of unexpected credit losses alone. a supplementary mechanism will help to encourage banks to provide sufficiently for expected credit losses. this proposal can be found on the website of the bank for international settlements, and the committee has invited public comment through the end of this year. motivation behind the committee ’ s proposals beyond the advanced methods proposed for the treatment of credit risk, the inclusion of a capital approach for operational risk represents one the new accord ’ s most notable innovations, to which i ’ ll now turn. in recent years, banks and supervisors have begun to recognise the need to evaluate and seek ways to reduce losses arising from failures in processes, systems, people, or external events. increasingly, supervisors, like many leading institutions, consider the management of operational risk to be a comprehensive practice comparable to that of credit or market risk. while operational risk is