CEBS defends Basel II as “a step forward”

CEBS chairman says full implementation of Basel II would have helped soften effects of the credit crisis

BRUSSELS-Daniele Nouy, chairman of the Committee of European Banking Supervisors (CEBS), has told the EU Parliament that the full implementation of Basel II would have cushioned the effects of the current credit crisis.

In a speech to the Economic and Monetary Committee of the European Parliament, Nouy said: “Most banks are still operating under Basel I, as 2007 is a transition year. Basel II is actually a step forward in covering off-balance-sheet exposures under regulatory capital requirements.” But Nouy points out that areas of Pillar III, including disclosure, the securitisation framework, the mapping of external ratings to risk weights and the incremental default risk charge, will need to be assessed more closely.

The CEBS chairman also commented on the organisation’s aim to gear up its work on liquidity risk, deeming supervisory practices “rather broad brush and obsolete” and not reflective of changes in market practices. He said supervisors would need to consider how much they should rely on banks’ internal models in light of recent events.

The CEBS has already started to review supervisory approaches to liquidity risk in response to a call from the European Commission for technical advice on the subject, the results of which have already been published. Nouy also confirmed that the CEBS was reviewing the existing large exposure regime, and would release its results for public consultation in early 2008.

Although the subprime fallout has not triggered a cross-border crisis, the CEBS points out that European regulators need to be prepared for such an event. It is co-operating with the Banking Supervision Committee of the European System of Central Banks to develop recommendations for co-operation between supervisors in a financial crisis.

Despite the emphasis on reviewing supervisory practices, Nouy called for regulators to be careful to strike a careful balance between regulatory overkill and complacency.