A long wait (nearly) over

So, it's finally here. Eight years on from first being mooted and six years since the seminal consultation paper that detailed the three pillar concept, Basel II is with us. After thousands of pages of consultation papers, countless redrafts and a handful of quantitative impact studies, the new regulatory capital framework came into force on January 1. Kind of.

Certainly, a number of banks will be going live with the standardised and foundation internal ratings-based (IRB) approaches from this month, while others will begin parallel runs of internal models, ready for implementation of the advanced IRB approach come January 1, 2008.

However, many European banks have decided to delay adopting the capital requirements directive - the European Union legislation that paves the way for the introduction of Basel II across its member states - until January 2008, while US regulators decided more than a year ago to delay implementation of the advanced approaches until 2009.

It's perhaps a sensible move. Despite the many redrafts and consultations, plenty of issues have either only been resolved relatively recently or still need fleshing out by regulators. In particular, risk managers point to the treatment of default risk in the trading book and the use of downturn loss-given default as potential problems, while the home/host issue - specifically, the use of national discretion by regulators - continues to be highlighted as a major concern. Some bankers say in hushed tones that it makes sense to allow the rules to bed down and for regulators to get used to co-operating before they begin reporting under the new framework.

In fact, a number of banks are having trouble meeting the implementation date of January 2008 for advanced IRB. As of mid-December, the UK Financial Services Authority (FSA) told Risk it had received only a handful of formal applications from banks to have their internal models validated (see page 74-77). While the regulator was expecting a flood of last-minute applications before the end of the year, it has publicly stated that banks submitting applications after the start of 2007 may not receive a decision in time for them to start their advanced approach from January 1, 2008.

The interesting thing is when you talk to risk managers about Basel II. While most still laud the concepts - to make regulatory capital more risk sensitive - many concede that the exercise hasn't been worth the time or money spent by banks. It was hoped Basel II would reward those institutions with sophisticated risk systems by enabling them to hold less risk capital. In reality, the quantitative impact studies suggest capital will remain more or less unchanged for many large banks. You have to suspect it might be a little harder winning support from banks for any future Basel III.

Nick Sawyer, Editor.

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