UK expects EU countries to reopen Basel II arguments

The European Commission wants to apply risk-based capital adequacy rules closely modelled on those of the complex Basel II accord to all banks and investment firms in the EU, of which the UK is one of 15 member states.

The UK supports the carrying over of Basel II into draft EU laws and has encouraged the EU to adopt a straightforward transposition wherever possible, according to Clive Briault, director of prudential standards at the UK Financial Services Authority (FSA).

Briault’s remarks were delivered on his behalf by his deputy Ian Tower to the annual supervision conference in London of the British Bankers’ Association, the trade body representing both UK and foreign banks in Britain.

The FSA, the UK’s chief financial market watchdog, does not want to reopen Basel II discussions in the EU and hopes other countries do not either, Briault said. “Realistically, however, others will surely try, although one of our objectives will be to keep any differences between EU legislation and the Basel accord as small as possible,” he added.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that effectively regulates international banking, wants to introduce the accord by late 2006. The object is to make the world’s banking system safer by determining how much of their assets banks must set aside as a cushion of protective capital to absorb unexpected losses from the risks of banking.

The progress of Basel II was held up by wrangles over some of the accord’s provisions, in particular its treatment of the risks of lending to small and medium-sized firms, or SMEs. EU member-state Germany threatened to veto Basel II at one stage if it penalised lending to SMEs, regarded in Germany as a mainspring of economic growth. The German government dropped its objections in July after the Basel Committee agreed a compromise treatment of lending to SMEs.

Briault said the UK is a “serious signatory” to the Basel accord, and would have to think very carefully about whether to follow Basel II where it may prove tougher than EU requirements. “Moreover, we may choose in some areas to be super-equivalent to both the EU and Basel, where there is a material risk of the standards otherwise being too low to enable us to meet our statutory objectives, and where this is justified by a cost benefit analysis,” Briault said.

The European Commission intends issuing a paper on progress with its rules, known as the third capital adequacy directive, or Cad 3, about a month after October 1, the date when the Basel Committee will issue some key documents. The EU paper will include draft rules giving an idea of what an EU directive might look like if the Basel II proposals were finalised in their current form.

European bankers and regulators have in the past said they were worried the EU Cad 3 laws would lag behind the implementation of Basel II because of wrangling and procedural delays. The EU also has elections in 1994, which is also the year in which the union could expand to 25 nations. Both events could cause further delay to Cad 3, some bankers fear.

A major delay could put leading European banks at a competitive disadvantage to their North American and Japanese rivals who would be able to apply Basel II capital rules, these bankers argue.

David Keefe

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