Basel III: towards a safer financial system
Speech by Mr Jaime Caruana
General Manager of the Bank for International Settlements
at the 3rd Santander International Banking Conference
Madrid, 15 September 2010
Today I would like to review the agreement recently reached in Basel to strengthen financial
regulation. As you know, a long series of international meetings was just held at the BIS. On
12 September, the Group of Governors and Heads of Supervision, the Basel Committee’s
governing body, announced higher global minimum capital standards for commercial banks.
This followed the agreement reached in July regarding the overall design of the capital and
liquidity reform package. Together, these reforms are referred to as “Basel III”.
Basel III represents a fundamental strengthening – in some cases, a radical overhaul – of
global capital standards. Together with the introduction of global liquidity standards, the new
capital standards deliver on the core of the global financial reform agenda, and will be
presented to the Seoul G20 Leaders Summit in November.
As significant as this past weekend’s agreement was, it was neither the beginning nor the
culmination of the Basel Committee’s reform programme. Significant progress had already
been achieved since the start of the financial crisis in 2007, and there is still more work to do.
So Basel III is a key part, but not the only part, of the much wider agenda coordinated by the
Financial Stability Board to build a safer financial system and ensure its resilience to periods
I should caution, however, that better regulation is critical but not enough. It is just one piece
of the puzzle. The promotion of financial stability requires a broad policy framework, of which
prudential policy is only one element. The BIS has been a consistent and long-standing
advocate of the essential role played by macroeconomic policies, both monetary and fiscal,
as an important element in fostering financial stability. A third key ingredient is market
discipline: the crisis has reaffirmed the importance of effective bank supervision to ensure full
implementation of prudential policies, to avoid moral hazard posed by too-big-to-fail
institutions, and to promote strong risk management practices and appropriate disclosure.
And, of course, the financial industry – and here I am referring to banks, shareholders,
investors and other market participants – is an integral piece of the puzzle too. The crisis
revealed a number of shortcomings related to governance, risk management, due diligence,
etc that the private sector itself needs to address.
Needless to say, international cooperation is the foundation on which all of these elements
stand. Indeed, a key feature of the G20 process is the premium put on the universal
adherence to the goals of financial stability and sustainable economic growth. It is important
to note that the Basel III regulatory standards have been developed by the Basel