European Union Basel II/Cad 3 timetable remains tight

The European Commission’s plans to apply risk-based protective capital rules to banks in the European Union (EU) remain on a tight schedule following yesterday’s progress statement on the Basel II bank Accord by global banking regulators, a Commission spokesman said.

But the Commission welcomed the significant progress made with the Accord by the Basel Commission on Banking Supervision, the architect of Basel II and the body that effectively regulates international banking.

The Commission, which is the EU’s ruling body, wants to enforce capital adequacy rules closely modelled on the Basel II proposals on all banks and investment firms in the 15-nation EU from the time Basel II comes into force.

The Basel Commission confirmed today that it wants to introduce Basel II by the end of 2006.

But the Basel II capital Accord will not be finalised until the fourth quarter of next year. That means the EU will have about two years in which to get the EU version – known as the third capital adequacy directive, or Cad 3 – agreed by the European Council and individual member states. That’s tight, said the spokesman, and EU parliamentary elections scheduled for 2004 could further complicate matters.

Bankers fear that major European banks would be at a disadvantage to their North American and Asia-Pacific rivals if Cad 3 was not introduced at the same time as Basel II. EU banks will not be able to use Basel II – the advanced approaches of which could reduce their capital levels – until Cad 3 is given EU approval.

The Commission is calling on EU member states to ensure their banks reply in detail to the Basel II quantitative impact survey, or QIS 3, that the Basel Committee will send to banks on October 1. QIS 3 will seek information on how banks might be affected by Basel II.

The Commission said it was pleased with the compromise on the treatment of the risks of lending to small and medium-sized enterprises (SMEs). The compromise enabled EU member state Germany to lift its objections to Basel II last week. The German government had threatened to veto Basel II if it penalised lending to SMEs.

The SME agreement “should yield levels of capital that are prudent, sound and suitable to the situation of SMEs”, the spokesman said.