‘Restructuring’ partly dumped as Basel shifts stance on risk mitigation

The Basel Committee on Banking Supervision, the architect of new banking regulation, Basel II, which is due for implementation by the end of 2006, has made a number of concessions in its proposed treatment of risk mitigation techniques in the release of its third consultative paper, CP3, today.

The Committee has partially dumped its requirements for the inclusion of ‘restructuring’ as a credit reference event when recognising credit derivatives for risk lay-off related to a bank’s lending book. But under these circumstances, the bank must have complete control over the decision of whether or not there will be a restructuring of the underlying obligations.

“During the CP3 consultative period, the Committee also intends to explore alternative regulatory capital treatments for credit derivatives that do not include restructuring as a credit event trigger,” the Committee said in a statement.

The Committee added that it would allow banks using the advanced measurement approaches to operational risk to use insurance as an operational risk mitigant when calculating regulatory capital. But this must not exceed 20% of a bank’s total operational risk capital requirement, the Committee said.

But there was less progress in the area of securitisation following industry objections to the Basel Committee’s second working paper on securitisation issued in October last year. “The Committee reaffirms the need for banks to deduct from capital positions that are highly subordinated,” said the Committee. “The Committee views this requirement as necessary in order to create strong incentives for banks not to retain or to assume the risk associated with these positions that inherently contain the greatest risk.”

The earlier-than-expected release of CP3 – albeit already delayed from the Committee’s original timetable – provides bankers with more time to review the 216- page revised Basel II Accord.

The banking industry will have three months to issue comments related to CP3, with all submissions to national supervisors, central banks or the Bank for International Settlements due no later than by July 31. The Committee will then review these comments and plans to issue the final Accord in the fourth-quarter of this year.