UK banks advised to delay Basel compliance

UK banks could make substantial savings by delaying full compliance with the Basel II Capital Accord until after it is implemented in 2007, according to new research.

Research conducted by Alistair Milne, senior finance lecturer at the Cass Business School, and Tim Giles of consultants Charles River Associates advises banks to adopt their own slower timetables towards compliance.

According to the research, compliance with the Accord by 2007 will lower regulatory capital requirements by one fifth, from 2.8% to 2.2% of total assets. However, Milne says this reduction does not constitute significant shareholder value and the saving is offset by short-term implementation costs, estimated at £200 million for medium-sized and larger UK banks. He estimates it would take 10 years for these savings to equal the cost of the initial investment.

Although the report concedes banks will eventually want to fully comply, Milne says: “It is more important to do it properly and our research has shown that there may be a significant cost saving by delaying until 2009 or 2010.”

The Financial Services Authority allows banks to choose whether they adopt basic or more advanced levels of compliance to pillar one of the Accord when it is implemented in 2007. This allows banks to allocate capital allowances based on internal ratings of risk.

The report advises banks to focus attention on pillars two and three of the accord, relating to ensuring robust systems of risk management and disclosure of risk exposure.