UK regulator disappointed at latest Basel II delay

Britain’s principal financial watchdog, the Financial Services Authority (FSA), was “a little disappointed” at the latest delays to the Basel II banking Accord, a senior FSA official said today.

But the FSA nevertheless remained “extremely committed” to the Basel capital adequacy Accord, said FSA managing director for regulatory processes, Carol Sergeant.

The latest delay to Basel II has sparked speculation among some banking industry analysts that national regulators such as the FSA might, in exasperation, move ahead independently with their own risk-based banking rules if the Basel Accord fails to get off the ground within a reasonable time.

The Basel Committee on Banking Supervision, the architect of the controversial Basel II Accord, last week again postponed the implementation of the Accord. Regulators now hope to have Basel II in operation by late 2006. The Accord was initially targeted for January 1, 2004.

The complex, risk-based Basel II Accord will determine how much of their assets banks must to set aside to protect themselves from losses.

Sergeant told Risk News that the latest delay was an irritation, but if it meant a better outcome by ensuring that Basel II met its objectives, it would be acceptable.

The delay was a logistical, rather than a technical, problem for the FSA in its task of achieving integrated risk-based regulation of all financial services sectors, she said.

The FSA will respond in the next few weeks to the views it received from the banking industry on the options available following the earlier delay in Basel II to 2005 from 2004.

Banking sources said the FSA seems likely to follow its preferred option of implementing as much as possible of the Basel II rules in its Integrated Prudential Sourcebook early in 2004, while deferring those parts that may have to be changed significantly as a result of discussions within the Basel Committee. The sourcebook will set out prudential requirements for all financial institutions and firms under the FSA’s jurisdiction.

The main issues holding up progress with Basel II are the treatment within the credit risk proposals of asset securitisation and of long-term loans to small- to medium-sized enterprises (SME). The German government has threatened to veto Basel II if the Accord penalises lending to SMEs.