Single-bank capital accord impossible for all banks, says Basel chief

McDonough, who is also president of the New York Federal Reserve Bank, said Basel regulators want to give practical assistance to banking supervisors in developing regulatory regimes suitable for national circumstances and local banking systems.

But the purpose was not to develop one or even several specific “Basel-approved” approaches to regulation, he added.

The Basel Committee wants to introduce the Basel II accord for large, international banks from late 2006.

Basel II will determine how much of their assets major banks must set aside as a cushion of protective capital to absorb unexpected losses from banking risks, including credit, market and operational risk. The risk-sensitive accord encourages banks to measure the risks they face using internal computerised models and loss data. Banks using sophisticated risk management and measurement methods won’t be required to set aside as much protective capital as banks using cruder approaches.

Basel II will replace Basel I, the much simpler, one size-fits-all capital adequacy accord that dates from 1988 and which has been adopted in more than 100 countries.

McDonough noted that some countries have only recently adopted the 1988 accord and may still be working to ensure a basic level of capital adequacy.

He said that for some national supervisors, “retention of the current accord, supplemented by the second and third pillars, may be the best way forward”. Basel II has a three-pillar structure comprising capital charges under the first pillar, monitoring by supervisors under the second, and market discipline through greater disclosure of information under the third.

“Other countries may elect the [simpler] revised standardised approach of the new accord. Still others may seek a hybrid of these two possibilities,” McDonough said.

Attempts to force a uniform approach on non-complex domestic banks that typically do not compete across national borders “are unnecessary and possibly counter-productive,” he added.

“Instead, our energy would be better spent on sharing ideas and developing a common understanding of the challenges that supervisors face in dealing with non-complex domestic banking organisations.”

David Keefe

For similar articles please visit www.BaselAlert.com - an indispensable source of news, comment and analysis on the development of the Basel II accord and banking supervision. The site contains a searchable archive of news, articles and technical papers, and a free monthly e-mail summary. Click here for a free trial.