In his first major interview since taking over the mammoth job of pushing through the "Basel II" bank capital accord, Mr Jaime Caruana said he doubted the complex risk-based capital requirements will worsen business cycles.

Instead, he said inserting more regulatory oversight into assessing how much capital a bank sets aside against possible loan losses, and increasing the amount of information banks must make public, should make banks much safer and better prepared for economic downturns.

"It is a completely new approach. In that sense it is a kind of revolution," said Mr Caruana, who is also governor of the Bank of Spain.

Some bankers and politicians have criticised the reforms, which aim to lessen the risk of banking crises and are scheduled to take effect at the end of 2006.

But Mr Caruana said that requiring banks to run their capital through a stress test to assess what impact worsening economic conditions will have on their loan portfolios, and requiring bank supervisors to evaluate those models independently, increases the safety of the bank.

"This is one of the measures that will help the banks to be less pro-cyclical because they will have taken into account the whole [business] cycle," he said.

The Basel Committee on Banking Supervision, which groups supervisors from major industrial economies, released the new rules earlier this year. The rules, dubbed Basel II because they replace a 1988 accord, were open for comment until July.

Critics have said the Basel II accord, by requiring banks to increase capital reserves as loans get riskier, will withdraw credit from the economy exactly when it is most needed, creating a credit crunch and making business downturns more severe.

While Mr Caruana said badly capitalised banks that have not assessed their risk properly certainly will face problems, he does not view it as endemic. Rather the banking system overall will be better capitalised so less vulnerable to shocks.

This in turn will reduce the need for central bankers to keep interest rates low for protracted time periods. - (Reuters)