FSA plans to maintain a level playing field under Pillar II

Rosemary Hilary, head of the risk review department at the Financial Services Authority (FSA) in the UK, outlined plans to maintain a level playing field under the principles-based approach to regulation of Basel II’s Pillar II.

Hilary acknowledged that regulators were between “a rock and a hard place” when trying to balance prescriptive rules and principles-based regulation. On one hand, Basel II’s requirements and complexity demand flexibility that can only realistically be achieved using a principles-based approach, she said. On the other, differences between the approaches of banks may give one bank an advantage, even though both may meet FSA guidelines.

Hilary reasserted that the FSA is avoiding prescriptive rules as much as possible, but is aware of the need to ensure a fair market. To this end, Hilary added that the FSA is looking to build a knowledge base to examine diversifications benefits, which needs to be both generated within the firm and consistent within the industry.

Over two years, the FSA will be building up a knowledge base to understand diversification benefits, which will in turn develop the FSA’s views on Pillar II policy.

On a positive note, Hilary stated that work on Pillar II is already paying off. “Firms have called us to say that because of their efforts to implement Pillar II, they have already seen benefits,” she told the Global Association of Risk Professionals’ annual Basel II forum.

BaselAlert.com