Bank regulators to discuss how Basel II applies outside G-10

Banking supervisors from around the world are meeting next week in South Africa with a major item on their agenda regarding how and to what extent the complex Basel II bank accord could be implemented in countries outside the leading economies.

Some 300 senior banking supervisors are attending The International Conference of Banking Supervisors in Cape Town on September 18 and 19, regulators said.

They will discuss the risk-based Basel II accord that global banking regulators want to bring into force for large international banks in late 2006 with the aim of making the world’s banking systems safer. The accord will determine how much of their assets major banks must set aside as a cushion to absorb unexpected losses from banking business hazards such as credit, market and operational risks.

It will replace the current, and simpler, Basel I capital adequacy accord that dates from 1988 and which has been adopted in more than 100 countries.

The new accord encourages banks, under the watchful eyes of their supervisors, to use their own internal risk models to measure the risks they face and calculate how much protective capital they need. Banks using advanced techniques of risk measurement should face lower capital charges than banks using simpler approaches, in contrast to the current one-size-fits-all accord.

But the Basel Committee of Banking Supervisors, the body of senior banking regulators drawn from the Group of 10 leading economies that regulates international banking, designed the new accord to apply to banks of all sizes in all countries. The European Commission, for instance, wants to apply risk-based capital adequacy rules closely modelled on Basel II to all banks and investment firms in the 15-nation European Union.

The Basel Committee itself will meet in Cape Town on September 17, ahead of the banking supervisors’ conference, to give formal approval to the format of the key third Basel quantitative impact study, or QIS 3, that will go out to more than 300 banks in some 40 countries on October 1. QIS 3 will seek information on the impact of Basel II, and will give banks a fairly clear idea of the final shape of Basel II as envisaged by the Basel regulators.

The supervisors’ two-day conference is likely to discuss worries that the new accord’s risk-sensitive mode of operation could exaggerate economic cycles while putting smaller banks at a competitive disadvantage to larger banks able to afford the sophisticated risk measurement and management systems encouraged under Basel II.

Meanwhile, the risk management group (RMG) of the Basel Committee concluded a two-day meeting in Paris this week that put some uncontroversial finishing touches to the operational risk aspects of QIS 3. The RMG also continued work on the broader operational risk issues – such as the possible use of op risk insurance to reduce capital charges for banks using advanced approaches to measuring op risk – that will be discussed more fully in the third Basel II consultative paper, or CP 3, that is expected to be issued for banking industry comment in May next year.

Earlier this month the Basel Committee’s Capital Task Force, the committee’s most senior sub-grouping, agreed the last major outstanding Basel II issue – the technically thorny question of the treatment of the risks to banks of asset securitisation. The Basel Committee is expected to sign-off on the task force’s solution next week. The committee plans to issue a working paper on asset securitisation on October 1 along with QIS 3.

The Basel Committee expects to issue its final version of Basel II late next year, allowing some three years for banks and their supervisors in the leading economies to ready themselves for implementation of the accord in late 2006, or in effect January 1, 2007.

David Keefe

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