System improvements for Basel II still uncertain

LONDON -- There can be no certainty at present over precisely what 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 systems safer, a UK regulator said in late September.

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.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that in effect regulates international banking, wants to bring the accord into effect for the large international banks of the leading economies in late 2006. The accord will determine how much of their assets 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.

Ryan was speaking a few days before the Basel Committee issued its key third quantitative impact study, or QIS 3, seeking information from around 265 banks in nearly 50 countries on the effect the Basel II rules would have on them.