Substantial flaws remain in Basel II, says CSFB's Ervin

Wilson Ervin, head of the strategic risk management department at Credit Suisse First Boston, yesterday said that there are causes for concern in the Basel II proposals. "While there is much to admire in the new [Basel II] rules, there are also many elements that raise serious concern," said Ervin who spoke on behalf of trade group, the Financial Services Roundtable, at congressional hearings in Washington DC yesterday.

Ervin raised four “macro” criticisms of the proposed Basel II rules. First, he said the new rules were “too complex, too costly, and too inflexible to provide a robust, durable framework for bank supervision going forward”. He warned that a side-effect of the proposals could be the “effect of freezing the development of good risk management, and locking it into an ‘early 2000’s’ mindset”. The hearings were before the Subcommittee on Domestic and International Monetary Policy, Trade, and Technology of the Financial Services Committee, in the US House of Representatives. Second, Ervin said that the new Accord’s sensitivity to credit ratings will reduce liquidity in the markets during economic downturns — the so-called procyclical effect.

Third, Ervin sharply criticised the operational risk charge proposed by the revisions, calling it “a fundamentally flawed concept — it is built on sand, not a solid foundation — and could actually distract from good risk management.” Last, he criticised the increased disclosure that the new Accord proposals will require under Pillar III. He said these rules “are likely to add at least 20 pages of highly technical disclosure to bank annual reports, raising costs and providing little or no information of value to the reader”.

In raising the last point, Ervin noted that as a Swiss bank, CSFB will be regulated by Swiss authorities, as well as regulators in the UK and the US. He said, “This interlocking patchwork of regulation can pose significant challenges…we have been required to implement conflicting risk calculations by different regulators, making compliance a difficult ‘Catch-22’. He noted that co-ordination of regulators will be an issue of growing importance in the coming months.