Opening Remarks at the Seventh Hong Kong Monetary Authority Distinguished Lecture: "Basel II: Back to the Future"
Speeches
04 Feb 2005
Opening Remarks at the Seventh Hong Kong Monetary Authority Distinguished Lecture: "Basel II: Back to the Future"
Joseph Yam, Chief Executive, Hong Kong Monetary Authority
- Let me first extend a warm welcome to all of you to this
seventh HKMA Distinguished Lecture. It is a great pleasure for me
to introduce our speaker, Governor Jaime Caruana, and our
discussant, Mr David Eldon.
- Basel II, or the New Capital Accord, or whatever we might call
it, has been on the minds of bankers and regulators for around five
years now. This new framework of capital adequacy standards for
banks, issued by the Basel Committee on Banking Supervision, is an
important step forward in the field of regulation. By making
capital requirements more risk-sensitive, Basel II will bring
banking regulation more into line with the way that banks
themselves manage risk. It will also give banks the incentive to
improve their own risk management. Basel II will help make banks
stronger, and it will improve the safety, stability and efficiency
of financial systems.
- The title of Governor Caruana's lecture today, "Back to the
Future", might for a moment give the impression that Basel II is
the stuff of science fantasy. There is no doubt that it is a highly
complex matter, and that it has - literally - required the
recruitment of physicists and rocket scientists by the regulators
and banks tasked with its implementation. There were, I think,
times when the pessimists among us wondered whether there would be
the resources, and the will, for this initiative to get off the
ground. But, thanks to the enormous effort and co-operation among
those involved, implementation, over the course of the next few
years, appears now to be very much a certainty. Over the past few
months, regulators around the world, including those in this
region, have been setting out the approaches they intend to adopt
in implementing Basel II, and banks have been preparing themselves
energetically for implementation.
- Approaches vary from one jurisdiction to another: one of the
key features of Basel II is its flexibility. In Hong Kong, our aim
is to switch over to Basel II at the start of 2007, in line with
the approach being adopted in other major international financial
centres, and of the Basel Committee members themselves. We see
value in being among the first in adopting Basel II, not only
because of the intrinsic merits of the New Accord, but also because
this city has one of the highest concentrations of banking
institutions in the world, with a strong presence of international
banking groups.
- Many people all over the world have been involved in Basel II.
But there is no-one more qualified to speak on the subject than our
guest today. Governor Caruana is the current Chairman of the Basel
Committee on Banking Supervision. He is also Governor of the Banco
de Espana, and a Member of the Governing Council of the European
Central Bank. Governor Caruana has extensive experience in both the
private and public sector in Spain, and is the author of several
publications on the Spanish financial system. We are greatly
honoured that he has accepted our invitation to speak on Basel II
today.
- The Basel II project was already several years old when
Governor Caruana took over its leadership, as Chairman of the Basel
Committee, in May 2003. But he has put his own stamp on this
project, and has made three special personal contributions. First, he has brought
the formulation process to a successful conclusion with the
publication last June of the definitive document on the revised
framework. Producing this necessary road-map was no easy
achievement given the differing views that had to be taken into
account, and the considerable degree of scepticism in the industry.
Secondly, he has,
through persuasion and advocacy, managed to convert scepticism
towards Basel II into a positive and constructive attitude. He has
done this in particular by stressing that, when you look beneath
the surface, Basel II is not so much about how capital adequacy
ratios are calculated, as about how banks can improve their risk
management and, thereby, how the efficiency of the banking system
can be improved. He has also placed emphasis on the point that
Basel II applies not just to advanced banking systems but to
banking systems in all stages of development - an observation of
particular relevance to this region.
- Thirdly, and
of no less importance to us in Hong Kong, Governor Caruana has
personally supported greater involvement by non-G10 members in the
Basel II process. Within this region, central bankers have been
increasingly active in recent years in trying to ensure that our
voice is heard in the process of policy formulation and
standard-setting in Basel. Governor Caruana has on a number of
occasions spoken out on the need to ensure that our voices are
indeed heard, and that our views are actually taken into account.
And there are signs that this practice is turning into a tradition:
it has been extended to other areas, such as the review of the
Basel Committee Core Principles for Effective Supervision, in which
Hong Kong is heavily involved.
- Successful implementation of Basel II depends not just on the
standard-setters and the regulators, but also on the banks
themselves. The enthusiasm with which the Hong Kong banking
community has taken to Basel II has been impressive. As a senior
member of this community, our discussant today is particularly well
equipped to provide the perspective from the banks. We are
fortunate in having secured David Eldon's presence today. After
more than 40 years in banking, many of them in Hong Kong, he is
about to retire from the field. He is thus currently much in demand
among his many friends within the financial community, who wish to
fete him on his retirement. He is also receiving bookings in his
new, risk-taking career as popular singer and entertainer - a field
in which we wish him every success. I take this opportunity to pay
tribute to David for his outstanding contributions to Hong Kong
during difficult and challenging times, not just in the financial
sphere, but also in the many community and charitable activities in
which he is involved.
- Ladies and gentlemen, it is an honour to welcome Governor Jaime
Caruana as speaker, and Mr David Eldon as discussant. I now have
much pleasure in inviting Governor Caruana to deliver the seventh
HKMA Distinguished Lecture.
