Confident regulators expect to issue upbeat Basel II statement next week

The Basel Committee on Banking Supervision is expected to give details of progress with the complex, risk-based Accord. The pact will determine how much capital major banks must set aside as a cushion against the risks of banking.

The statement, expected at the end of the Basel Committee’s quarterly meeting in Basel, Switzerland next week, will reflect the mood of greater confidence among regulators now the vexed question of the treatment of lending to smaller business was resolved by compromise last month.

The German government, which faces elections in September, this week dropped its objections to Basel II in the wake of the compromise. Germany had previously threatened to veto Basel II if it penalised lending to small and medium-sized companies, regarded as the engine of economic growth in the country.

Some critics described the compromise, which centres on allowing banks to reserve on average 10% less capital on loans to smaller businesses compared with loans to large companies, as a fudge that undermines the risk-based principles Basel II is supposed to be based upon.

But regulators said the compromise can be justified by empirical evidence of the lower volatility of small company failure compared with that for larger companies.

In March, the Basel Committee decided to delay Basel II’s implementation to late 2006 from 2005 because of mounting problems in developing it. The 2005 date was in itself a delay from an original intention to bring the Accord into force in early 2004.

Hong Kong Monetary Authority deputy chief executive David Carse has since said that at that stage the chances of Basel II going ahead were only 50-50.

The Basel regulators, who mainly comprise senior banking supervisors from the Group of 10 leading economies, rejected a proposal for a so-called 'Basel-lite' solution to their problems. Basel-lite would have been an accord based on what the regulators could agree on at their March meeting, leaving the disagreements to be sorted out later or never at all.

The Basel Committee never formally stated its decision to delay the accord. Instead it left it to national regulators to confirm if asked and to bankers to infer from oblique references in subsequent committee documents.

Next week the committee is expected to confirm it intends issuing QIS3, the key third quantitative impact survey that will seek information from banks on how they might be affected by the Accord, on October 1.

The same date should see the issue of a separate paper on progress with the treatment of the technically difficult area of asset securitisation.

The third Basel II consultative paper is expected to be issued for comment by the banking industry in May next year.

The Basel Committee expects to issue its final version of Basel II in late 2003, possibly in November.

That should leave three years for banks to ready themselves for the Accord’s implementation in late 2006, or in effect January 1, 2007.