Hawke highlights "thorny issues" of Basel II

Although Hawke praised the role of New York’s Federal Reserve chairman William McDonough in steering the “fractious” committee in the right direction, he also noted it is important to simplify articulation of the basic rules. “Bankers, examiners, legislators and policy makers need to be able to comprehend the structure and content of the new Accord without having to plough through reams of mathematical minutiae,” said Hawke.

One of the most difficult issues facing the committee, Hawke said, is how to deal with operational risk. “A one-size-fits-all approach to operational risk - such as a formulaic capital charge based on some percentage of gross revenues or a percentage of the charge for credit risk - while simple to apply, would disadvantage the best-managed banks and provide undeserved advantage to the worst managed. Worst of all, it would provide no incentive to improve internal control systems,” added Hawke.

Instead he said he is more in favour of placing operational risk under the Pillar 2, supervisory review approach of the proposed Basel II capital Accord. This is unlikely to happen, however. As Hawke observed, there are many committee members who are cautious of adopting this plan, believing it could be used by national supervisors to provide competitive advantages to their banks. “Those holding this view find strong comfort in highly detailed descriptive views,” claimed Hawke.

Another area concerning the Comptroller is securitisation. “The volume of securitisation activity among US banks vastly exceeds that of all other G10 countries combined,” said Hawke. “While the popularity of securitisation is certainly spreading, we must resist the temptation to embrace new rules uncritically when their burden will fall most heavily on countries other than the US.”

Hawke also noted that only a maximum of eight US banks are likely to adopt the advanced internal ratings based credit risk approach, in which the most sophisticated banks develop their own models for calculating the credit risk capital charges under Basel II. Smaller community banks, meanwhile, will not be made to comply with Basel II.

As RiskNews reported yesterday, there is increasing speculation that Basel II will only come into effect in 2006, one year behind schedule.

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