UK expects EU countries to reopen Basel II arguments

LONDON – UK regulators expect that other European Union (EU) countries will try to reopen Basel II bank accord discussions within the EU framework, a senior UK supervisor said yesterday.

The European Commission wants to apply risked-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, Clive Briault, director of prudential standards at the UK Financial Services Authority (FSA), said.

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, doesn’t want to reopen Basel II discussions in the EU and hopes other countries don’t 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,” Briault said.

The Basel Committee on Banking Supervision, the architect of Basel II and the body that in effect regulates international banking, wants to bring the accord into effect for the large international banks of the leading economies by late 2006. The object is to make the world’s banking system safer by determining how much of their assets they 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 is 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.

The Basel Committee publications on October 1 will include the key third Basel II quantitative impact study, or QIS 3, which will seek information from banks in 50 countries on how Basel II might affect them.

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 2004, 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. Under Basel II, banks using advanced systems to measure and manage the risks they face won’t have to set aside as much protective capital as banks using cruder approaches, thus releasing more funds for use in their business.BaselAlert.com