Cranking up for Basel II

The Basel Committee on Banking Supervision has at last resolved the outstanding technical issues that have delayed the finalisation of Basel II, and the definitive document is set for release at the end of the month.

It means that, finally, domestic regulators can get to work developing national guidelines and decide how to deal with the numerous items of national discretion. Most importantly, it will mean that more of the region’s banks will crank up their Basel II projects. While some financial institutions – particularly those in Hong Kong, Singapore and Japan – have made good progress towards Basel II, led by the pro-active efforts of their respective regulators, many banks elsewhere in the region have sat on the sidelines, waiting for the Accord to be finalised and for firmer direction from local supervisors. A recent survey from consultants KPMG shows that 16% of Asian institutions have not yet started Basel II preparations, double that of the worldwide average.

In it’s latest ruminations, the Basel Committee has decided that those institutions implementing the most advanced approaches to credit risk and operational risk have an extra year to get systems in place, with the start date now scheduled for end-2007. However, the start date for the standardised and foundation internal ratings-based approach remains unchanged at the end of 2006. For those institutions in Asia that haven’t started work on Basel II, it means there’s a lot to be done in a short space of time.

Nonetheless, there’s going to be some countries in Asia that just aren’t suited for the new Accord. Where the vast majority of a country’s corporates are unrated, for example, banks will find it difficult to implement even the simplest of the Basel II approaches. There’s no doubt that the new Basel Accord is more sensitive to measuring risk. But perhaps the most sensible approach for developing nations is to remain on the 1988 Accord for a few more years and to just introduce certain aspects from Basel II – better disclosure, a wider scale of ratings for credit scoring, improved supervisory review and so on. That’s what China has decided to do.

Arguably one of the worst things that could happen is for developing countries to feel pressured to implement the entire Basel II framework by 2006/2007, just because they feel foreign investors will see Basel II compliance as a benchmark requirement for future investment. An even worse outcome would be if domestic regulators apply Basel II in name only, yet make huge allowances for their banks so they remain competitive. Hopefully, that won’t happen. And hopefully, the implementation of the Basel Accord in the region will bring far more benefits than it does disadvantages.

In our Basel II articles this month, Asia Risk talks to Singapore’s regulator, the Monetary Authority of Singapore, over how it intends to implement the new Accord in the Lion City (see pages 36–37). Then, on pages 38–39, we look at how some banks in the region are preparing for Basel II.

Elsewhere, in this issue of Asia Risk, we publish our annual end-user survey, a chance for corporate treasurers, risk managers, chief financial officers and asset managers to give their views on which are the top derivatives houses in Asia. This year, HSBC climbs to first place after three years of dominance by Citigroup. You can read the full results of the survey on pages 10–19.