Banks advised to make Basel II views known in QIS 3

Banks would be wise to make their views on the complex Basel II bank capital accord known via the key QIS 3 survey due out on October 1, the UK’s chief financial regulator said today.

QIS 3 – the third Basel II quantitative impact study – will seek information on how the risk-based Basel II accord would affect banks when it is introduced in late 2006, noted Financial Services Authority (FSA) chairman Howard Davies. The FSA is the UK’s main financial market watchdog.

Davies said QIS 3 is not formally a consultative exercise, but it will allow banks to see an overview of the Basel II proposals for determining minimum protective capital requirements for major banks.

“You will then be able to reach a proper assessment of whether the [Basel] Committee has struck the right balance between risk sensitivity and complexity, both overall and in individual areas,” he told the annual supervision conference of the British Bankers’ Association (BBA), the body that represents both UK and foreign banks based in Britain.

Davies said QIS 3 is an important staging post, rather than a resting place, on the road to Basel II.

The Basel Committee on Banking Supervision, the architect of Basel II, approved the final details of QIS 3 last week.

Basel II will determine how much of their assets the large international banks of the world’s leading economies must set aside as a protective cushion to absorb unexpected losses from banking risks, including credit, market and operational risks. It will replace the current, and simpler, Basel I accord that dates from 1988 and which has been adopted in over 100 countries.

Meanwhile, BBA chairman George Mathewson, who is also chairman of the UK’s second biggest bank, told today’s conference that Basel II lacked flexibility.

“We don’t have a problem with regulators telling us that we should tie our shoelaces, but we don’t want them to tell us how to do it,” said Mathewson, who is chairman of the Royal Bank of Scotland.

“There is a danger that the rule-based procedure becomes a cosmetic shield for regulators,” he added.

Last week, Basel Committee chairman William McDonough said 265 banks from nearly 50 countries have agreed to take part in QIS 3. The Basel regulators want the banks to send in their responses by December 20.

On October 1, QIS 3 will give banks the risk-weight functions and formulas they will need to apply to the data they started collecting on receipt of draft spreadsheets in July.

The Basel Committee will also publish on October 1 an overview of progress with Basel II and a working paper on the thorny technical issue of the treatment of the risks to banks of asset securitisation.

The Committee plans to issue a third consultative paper on Basel II in May next year and a final version of the accord in late 2003.

David Keefe

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