^aGovernor Banco de España, C/Alcalá, 48, 28014 Madrid, Spain. E-mail: jclgovjl@bde.es

¹Chairman, Basel Committee on Banking Supervision

^*This article is based on Mr. Caruana's address to the 31st General Assembly of the Geneva Association on 27 May 2004 in Madrid. The opinions expressed are the author's own and do not necessarily reflect the views of the Bank of Spain or those of the Basel Committee on Banking Supervision or its member organisations.

Abstract

In this paper, the author argues that financial supervision is keeping up with the pace of innovation in the industry by virtue of what he calls a "virtuous circle": the supervisory framework is aligning itself more and more with the best risk management practices, while at the same time encouraging further advances in those practices. In the long run, financial stability would benefit businesses, consumers and financial institutions.