Delay to QIS3 survey delays Basel II to 2006

Regulator determination to get a key survey of banks right was a major factor in the decision to postpone again the coming into effect of the complex Basel II banking Accord until late 2006, from an undetermined date in 2005, banking regulators said.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that in effect regulates international banking, hopes to issue its third Basel II quantitative impact study – or QIS3 – on October 1, some five months later than originally planned.

QIS3 is intended to help assess the impact of the risk-based Basel II capital adequacy Accord on banks.

Regulators said they wanted to ensure that QIS3, along with the notes and guidance that will accompany it, would give banks an accurate and detailed picture of the final shape of the Basel II proposals.

Basel II will determine how much of their assets large international banks will have to set aside to guard against banking risks, including market and credit risks as well as, for the first time, operational risk.

Banking industry analysts said the Basel Committee appeared to be bowing to the inevitable in again postponing the Accord. The Committee decided in mid-2001 that its first target date – January 1, 2004 – was too ambitious, and postponed the date to 2005.

In December the Committee decided to issue QIS3 in order to ensure the Basel II Accord would attain its two main objectives. The first objective is that on average the total amount of protective capital in the world’s banking system should not be less under the new Accord than it is under Basel I, the current and simpler Accord that dates from 1988.

The regulators’ second objective is that there will be an incentive in Basel II for banks to adopt advanced approaches to measuring the risks they face based on their own internal models and data. Banks using advanced approaches should enjoy lower capital charges.

Problems have emerged in developing QIS3, mainly centring on the treatment in the credit risk proposals of asset securitisation – bonds or notes that are backed, for instance, by accounts receivable from credit cards – and long-term loans to small to medium-sized enterprises (SMEs).

The German government has threatened to veto Basel II if its risk-related provisions penalise bank lending to the politically sensitive SME sector, which the government regards as key to the health of the German economy.

Regulators said the Basel Committee now hopes to issue its third consultative paper on Basel II in the middle of next year for industry comment. The Committee’s final version of Basel II should then be out by the fourth quarter of next year.

That will allow time for the passage of any necessary national legislation to bring Basel II into effect, as well as give time for banks to upgrade their systems, regulators said.

Basel II is intended in the first instance to apply to large international banks of the Group of 10 leading economies, from which the Basel supervisors are mainly drawn. But it is also designed for banks of all sizes and all nationalities, and could ultimately affect up to 30,000 banks around the world, banking industry analysts said. The European Union intends applying a capital adequacy accord closely modelled on Basel II to all banks and investment firms in the 15-nation EU.

Over 100 countries have adopted the simpler provisions of the Basel I Accord.