Survey delay puts Basel II timetable under further strain

Delays in issuing a crucial survey could again imperil the timetable of the Basel II bank capital adequacy Accord and further endanger the European Commission’s schedule for risk-based bank regulation.

The survey – known as the Basel II third quantitative impact study or QIS3 – now seems unlikely to be ready until well into the European spring and might possibly not be sent out to major banks until mid-May. One of the main causes of the delay is the need for further work by global supervisors on how securitised assets – bonds or notes backed by accounts receivable on, for instance, credit cards – should be treated under Basel II.

The Basel Committee on Banking Supervision, the architect of the Basel II accord and the body that in effect regulates international banking, set no firm date for the issue of QIS3 when it said in December that a third survey was necessary to assess further the impact of Basel II on banks.

But officials hoped QIS3 would be with banks by the end of March, allowing the Basel Committee to issue its third consultative paper (CP3) on Basel II by mid-year, paving the way for the Basel Committee to issue its final version of the accord by the end of this year. A couple of years would then be needed for national rule-making and the adaptation of banks’ internal systems before Basel II came into force some time in 2005.

The decision to issue QIS3 meant a delay to the issue of CP3, which had earlier been scheduled for publication by the end of February.

The Basel regulators last year postponed the coming into effect of the controversial and complex Basel II accord by a year to early 2005 from 2004 because of banker concerns about various aspects of the pact, which will replace the current Basel I accord that dates from 1988. That “early 2005” has since become “some time in 2005”. The Basel regulators are still sticking with 2005, but some bankers think 2006 is a more realistic date.

Regulators said that QIS3 is 95% complete, but it’s the remaining 5% that’s causing the problem.

The Basel Committee’s high-level sub-grouping, the so-called Capital Task Force, is meeting in Basel next week to decide on the issue date for QIS3 and to try to resolve the securitisation issue, regulatory sources said.

But regulators hope to start “road-testing” the incomplete QIS3 with a few banks by the end of next week. The road-test will seek banker reaction to the survey’s format and framework.

The Basel II accord will determine how much of their assets major banks will have to set aside as protective capital to guard against the hazards of the banking, including credit and market risk as well as, for the first time, operational risk. Banks using sophisticated, but regulator-approved, models to measure their risks will enjoy lower capital charges than banks using simpler methods. This distinguishes Basel II from the 'one-size-fits-all' capital asset ratio regime of Basel I.

Basel II is intended to apply in the first instance to large, international banks of the Group of 10 leading economies from which the banking supervisors on the Basel Committee are largely drawn. But the accord is designed for banks of all sizes and Basel I was subsequently adopted in more than 100 countries.

The European Commission, the ruling body of the European Union, wants to apply capital adequacy rules closely modelled on Basel II to all banks and investment firms within the 15-nation EU.

The delays in finalising Basel II could cause problems for the Commission as the European parliamentary elections due in June 2004 loom into view. The necessary capital adequacy laws might not be in place by the time of the election and a subsequent parliament might take a different view of the proposals.

Bankers fear a prolonged delay between the coming into force of Basel II for non-EU banks and its effective implementation in the EU could leave major EU banks at a competitive disadvantage to the their North American, Swiss and Japanese rivals. This is because the non-EU banks would be able to benefit from lower capital charges.

But the European parliament voted this week in favour of the Lamfalussy programme for speeding financial reforms in the EU. This, say some bankers, could halve the time it takes for the EU to process financial legislation.