Three cheers for Callum McCarthy

I have been rather critical of the UK Financial Services Authority’s approach to Basel II, and op risk specifically. But chairman Callum McCarthy’s daring speech in early December on the potential pitfalls of a home-host regulatory framework that placed too much emphasis on the ‘home’ portion of the equation warmed my heart.

The collapse of the Bank of Credit and Commerce International provided the impetus behind Basel II (Operational Risk October 2004, page 20). But, as McCarthy pointed out, an approach being considered for the EU’s internal home-host framework would lead to the creation of precisely the same circumstances that precipitated the collapse of BCCI. Although BCCI’s main operations were in London, its HQ was in Luxembourg, where the regulators seemingly turned a blind eye.

McCarthy also notes that host supervisors have important responsibilities to the citizens of their nation. And he dares to state the obvious -- not all regulators are equal. The powers entrusted to regulatory bodies vary by jurisdiction, as does the level of political will behind enforcement, and the competence of staff.

In one fell swoop, McCarthy has outlined the key op risks EU regulators face in implementing Basel II. I applaud him for his courageous practicality, for as most op risk managers know, frank discussion of potential pitfalls is often the most difficult thing to achieve.