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InterviewsDecember 2 2003

An aficionado for the fine print

Jaime Caruana, governor of the Bank of Spain, demonstrates his mastery of the detail of Basel II and the Stability Pact to Karina Robinson.
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I have been in this business too long. Two hours flew by as I questioned Jaime Caruana, governor of the Bank of Spain and chairman of the Basel Committee on Banking Supervision, on the intricacies of the
new capital accord, the detail of Spain’s economic miracle and the level of the euro.

If he is boring, so, sadly, am I. “It seems that since I became a central bank governor we have to be more boring and more tedious and give speeches that are more leaden,’’ he admits, when questioned about the lack of visual aids in a speech given to the British Bankers’ Association in London.

With his sparse frame, a five o’clock shadow at lunchtime and intense black eyes and black hair, comments from a peer in the commercial banking sector rang true: “He is very serious, very little given to the star system. He may come from private industry but he is very Bank of Spain. He was great [in his days] at Treasury.’’

It is true that 51-year old Mr Caruana spent nine years at Renta 4, a brokerage firm, but that appears as an aberration in a career dominated by public service. From commercial attaché in New York to director general of the Treasury to member for Spain at the Monetary Committee of the European Union, the steady progression of the Valencia native’s career is evidence of his ability.

Low profile

Unlike other Spanish central bank governors he has avoided the press. “He has no public profile in Spain, even though he has done a great job. He just gets on with the job,’’ says the head of one of Spain’s largest banks.

Mr Caruana admits he is not happy to appear in the press, insisting that the official bulletin of the Bank of Spain gives enough detail on economic issues and that headlines can never show the intricacies of arguments. This is a man who, arguably, has risen to international prominence (along with Spain, see page 18), on the back of his love of minutiae.

In mid-October the Basel Committee announced a ground-breaking agreement on the treatment of expected credit losses which was brokered by Mr Caruana after only five months in the job. “He does not need to be briefed. He has excellent comprehension of even the detail of the issues,’’ says Daniele Nouy, former-secretary general of the Basel Committee at the Bank for International Settlements. “As you know, the devil is in the detail.’’

Defending Basel II

Basel II, a new regime for bank capital that is meant to supersede the out-dated and excessively simple Basel I, is proving an immensely complicated process.

Mr Caruana asks, perhaps naively, why there is so much negativity about it. He is utterly convinced of its merits, not least because of the intense consultation carried out with bankers, academics and regulators. Over hake with garlic shrimp in the mahogany library of the Marquis of Salamanca at the Bank of Spain’s grandiose building, he responds robustly to every criticism, albeit with a willingness to listen and a lack of dogma.

Basel II is too complicated? “We are all agreed that we would like a simplified accord but Basel I was a long time ago in 1988. To manage diversity you need a wide accord with options. Nobody needs to eat all the menu, you can pick and choose. You also need comparability of different banks for a level playing field.’’

Is Basel II a lost cause and Basel III around the corner? “Basel II must be seen as evolutionary. We took a transcendental step. Basel I was static. Now, we are saying we want to be next to banking practices so that as they move, the agreement moves. Not necessarily Basel III, but we could have modifications of Basel II. We have used phrases like ‘not set in stone’.’’

Will the agreement exacerbate the economic cycle? “A very interesting point. Slightly true in simplistic terms. But in reality Basel is about better managing risk so it compensates. In terms of cyclicality, it is the badly capitalised bank that does it [exacerbates the cycle], or the bank that realises its risks aren’t good too late. But Basel II asks for capital and stress tests so banks will be aware of bad times and there will be incentives to analyse risk properly.’’

Will emerging market banks be forced to adopt this agreement that may be too expensive and too sophisticated for them, even though the Committee argues this is not the case? “Each country has to decide its timing and sequencing. [Emerging market banks] should head towards it but act on the fundamentals of their markets, working on the three pillars of the accord – capitalisation, improving regulation and improving transparency. That is the emphasis. Basel II can be applied only when the fundamentals [of those markets] are improved.’’

The accord is so expensive to implement – will it put small banks out of business? “There is a range of possibilities for banks. They can stay with the less sophisticated bits. It should be seen as an investment in risk so they can better manage capital and make returns.’’

Doesn’t Basel II represent yet another layer of regulation for banks that are already bowing under the burden of local, national and international legislation? “We have to analyse it carefully. The Basel Committee is aware that we don’t want to introduce unnecessary burdens. The Accord Implementation Group is trying to ensure more consistency and more convergence so banks which have to operate in many jurisdictions will have less work in meeting very different requirements.”

Strengthening euro

As for the rising euro, Mr Caruana, who is a member of the governing council of the European Central Bank, appears unworried and notes the euro is at about the levels it started off at. He sounds very central bankerish as he defends the Stability Pact, whose rules are being broken by Germany and France.

“Medium to long term, everything can be changed. The Stability Pact is very necessary in Europe because it is good for each country and for a monetary union. What has failed in the Stability Pact? It failed in the good times. The failure is not now. It failed when [in the good times] the margin of manoeuvre was larger,’’ he says.

Stability Pact

He even defends the fines which can be imposed on countries that break the rules: “I think in the end if there is non-fulfilment, there should be fines. Maybe it is too early to talk of fines. The rules of the game can be changed but not in the middle of the game.’’ His suit flapping around him, Mr Caruana acts as a tour guide to the Bank of Spain building, begun in 1891 and still unfinished. Minions open and close doors around us. As we walk through high-ceilinged corridors, he shows me the eight paintings by old Master Francisco de Goya in one room, as well as his office. Rather than working in the room traditionally occupied by the governor, the father of three girls – “You are only God [in their eyes] for a certain time’’ – has taken over a cubbyhole next door where the secretary sat.

There is a touch of Felipe II to the work-obsessed Mr Caruana. Like one of Spain’s greatest kings, there is an ascetic side to him. When in the 16th century Spain was the most powerful nation on earth with a large empire, the King insisted on living in a small room in the austere palace-cum-monastery of El Escorial, near Madrid. His workaholic ways were considered exceptional at a time when royalty was more into pomp and dissoluteness.

It is, surely, no coincidence that the governor holidays in the El Escorial area.

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