Key Basel II package expected tomorrow

Regulators with the Basel Committee on Banking Supervision, the architect of Basel II and the body that effectively regulates international banking, expect to issue the documents early evening European time on October 1, regulatory sources said.

The committee will issue the third quantitative impact study on Basel II, QIS 3, to some 265 banks, large and small, in nearly 50 countries. The regulators will want replies in by December 20.

QIS 3 will be accompanied by a paper giving an overview of progress with the much-delayed and controversial capital adequacy accord that regulators claim will make the world’s banking system safer.

There will also be a paper giving the Basel regulators’ latest thoughts on the thorny technical issue of the treatment of the risks to banks of asset securitisation, where banks put loans into a pool and issue new securities against the pool. Asset securitisation is the last major issue outstanding with the accord, which regulators originally wanted to introduce in 2004 but that is now scheduled for late 2006.

Basel II intends to align bank protective capital more closely to the risks actually faced by banks.

The information accompanying QIS 3 will give banks a very clear idea of how the Basel regulators envisage the final accord. The survey will provide the risk-weight functions, formulas and so-called pillar 1 capital charges and rules that they can apply to the information they have collected for draft QIS 3 spreadsheets issued in July. Basel II has a three-pillar structure of capital charges under pillar 1, supervision by regulators under pillar 2 and the exercise of market discipline through greater disclosure under pillar 3.

As well as reviewing progress with the accord, the overview paper will try to provide answers to charges that Basel II is far too complex and that its risk-sensitive provisions could be “pro-cyclical”. By the latter charge, critics mean the accord could result in banks over-restricting their lending at the bottom of economic cycles and over-lending in boom times, thus reinforcing the extremes of the cycle.

The securitisation paper should provide new proposed risk-weightings for calculating capital charges against asset securitisations that are rated by the leading credit rating agencies. The paper will also provide a formula that regulators can use to calculate the capital charges for securitisation issues that aren’t normally rated by the agencies.

The responses and reactions to tomorrow’s Basel II package will be taken on board by the regulators as they prepare the third Basel II consultation paper that they hope to issue for industry comment in May next year.

The Basel supervisors expect to issue the final version of Basel II late next year, giving banks and their regulators some three years to ready themselves for implementation in late 2006.

The Basel II accord will replace the current, and much simpler, Basel 1 accord that dates from 1988, which has been adopted by over 100 countries.

David Keefe

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