Basel II system improvements still unclear, says UK regulator

The precise steps banks need to take to ensure their risk management systems are compliant with the proposed Basel II capital accord aimed at making the world’s banking system safer is unclear, a UK regulator said yesterday.

Regulators will need significant feedback from the banking industry to develop the final capital adequacy regimes that will apply, reasonably consistently, in all major countries, Kevin Ryan of the UK Financial Services Authority (FSA) said. Ryan is an associate in the prudential standards division of the FSA, the UK’s chief financial market watchdog.

But in general any measures by firms to improve risk measurement and management should be beneficial, as that is the point of the risk-sensitive Basel II accord, Ryan told a conference on Basel II organised in London by US business software firm SAS.

Banks that view Basel II as complementing their own efforts to improve their systems are likely to find qualification for the advanced approaches of the accord easier than banks who regard it as a regulatory compliance requirement, to be achieved with minimal cost and change.

Basel II is due for implementation in late 2006. It will determine how much of their assets the banks must set aside to protect themselves from unexpected losses from banking risks, including credit, market and operational risks.

Banks using advanced approaches to measuring their risks based on their internal models, systems and loss data will need less protective capital under Basel II than banks using cruder approaches.

The Basel Committee will issue a key survey next week, known as the third quantitative impact study, or QIS 3, seeking information from around 265 banks in nearly 50 countries on the effect that the Basel II rules would have on them.

David Keefe

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