WASHINGTON -- It was in October, in Jaime Caruana's home city of Madrid, that the top banking regulators from around the world finally decided to see this thing through.
Members of the Basel Committee on Banking Supervision sat at a table in the Spanish capital and agreed -- some grudgingly -- to revisit one of the most contentious issues in the international capital accord known as Basel II.
The negotiations had already consumed five years, tons of money, and even more patience when these representatives of 13 countries reversed course and agreed that capital levels should cover unexpected losses only and exclude expected losses.
The man at the head of the table that day, Mr. Caruana, governor of the Bank of Spain, knew that was the pivotal moment.
"I think that at the meeting of October, everyone had a sense that we had to move forward," he recalled in an interview last week here. "That was extremely important."
Mr. Caruana would not reveal any details of the debate but said each member conveyed a commitment to finish the rule over those two days of meetings.
"We had gone a long way. We had resolved a tremendous amount of issues. We had gone through thousands of pages of work," he said. "Everybody thought that what we had was very good. It was inconceivable to think of turning back."
And they haven't.
The Basel Committee has two more meetings, in May and June, and then will release its final framework for Basel II. Then each of the 13 countries will set about implementing it.
Sitting in a hotel lobby on the eve of meetings at the International Monetary Fund last week, Mr. Caruana retraced the committee's progress over the past six years. He also looked ahead, and said the next iteration of Basel capital standards will not take years to accomplish.
"Everybody realizes that the industry and the standards for the industry are moving, and they would like to know whether we are going to move or not," he said. "And we have already very clearly stated that this Basel II is not like Basel I. Basel II is an evolutionary approach. We understand that when the industry moves, we will have to move."
Mr. Caruana inherited what some consider the biggest change in international banking in almost 20 years last May, after the surprise departure of Federal Reserve Bank of New York President William J. McDonough.
Since 1998 the Basel Committee regulators have been meeting to refine the capital rule they created in 1988. Their ultimate goal, Mr. Caruana said, is to move regulatory capital closer to the economic capital that the largest banks feel they need to guard against credit risk and other types of risk.
Though these internal capital levels are generally lower than regulatory requirements, Mr. Caruana echoed his U.S. counterparts when he said the overall amount of capital is not expected to fall as a result of Basel II.
"The level of capital will basically remain the same," he said. "What is new is that we are setting incentives for good risk management."
Mr. Caruana, 52, is the Alan Greenspan of Spain. Unlike the Federal Reserve Board, the Bank of Spain has just one governor at its helm.
Mr. Caruana, who became governor in July 2000 after a year as director of supervision, heads an agency with 2,600 employees. Before joining the central bank he was general director of the Treasury and financial policy.
From 1991 to 1996 he was the chairman of a fund management company, and from 1987 to 1991 he was a managing director at an independent investment services company.
He had big shoes to fill as chairman of the Basel Committee. Mr. McDonough had personally driven the Basel II project, and many wondered if the complex task would crumble when he retired.
Mr. Caruana declined to compare their leadership styles. All he would say is, "Sometimes projects have different phases, and I think sometimes it helps that the chairman is different."
His manner during the interview suggested an easy confidence. He engaged questions about the intricacies of the accord conversationally, not confrontationally. Asked which of the four American regulators who attend the Basel Committee meetings is the most persuasive, Mr. Caruana flashed his frequent smile and said, "They all are persuasive."
He respects the Basel Committee's members, who are all leading regulators in their own countries, and takes a no-nonsense approach.
"This is a very senior group of people," he said of the committee. "You just have to discuss things openly with them. … We have no time to waste."
One member, Comptroller of the Currency John D. Hawke Jr., has repeatedly questioned the Basel Committee's goal of implementation by early 2007. But Mr. Caruana is not ready to let that deadline slip.
"We have been working for a long time, and many banks have already invested a lot of money and a lot of resources in this process," he said. "So we have to deliver it as soon as possible in my view.
"Most of the issues have been narrowed down and are almost closed."
