Recalibration of Basel II announced in final document

The document, which as been worked on intensively by the world's regulatory authorities for the best part of six years, will provide a new blueprint for financial services supervision. Although the document has no legal force—it is essentially a "gentleman's agreement" between governments—countries are already lining up the necessary regulatory text and resources to implement Basel II.

To download the final version of Basel II from the BIS website click here.

"As you know, Basel II has attracted much more attention, from more segments of society, than probably any other reform of bank supervision," said the head of the Basel Committee for Banking Supervision, Jaime Caruana, in a speech at the beginning of June. "Mainstream newspapers have reported extensively on it. Politicians of all views have addressed it. Even non-financial business owners have discussed it extensively."

Caruana adds that "Basel II is about much more than just setting quantitative minimum capital requirements. It is about establishing incentive-based approaches to risk and capital adequacy management, within a framework of three mutually-supporting pillars: minimum capital requirements, supervisory review and transparency."

However, the world's regulators have admitted that the capital charges for credit and operational risk's less advanced approaches could require some fine-tuning. "The committee indicates in the document that it intends to reconsider the calibration of the Basic indicator and the standardized approaches," said Roger Cole, associate director at the US Federal Reserve Board and chairman of the Risk Management Group at the Basel Committee, last week at a risk management conference held in Nice, France. "That will be especially of interest when more data becomes available through various quantitative processes" The recalibration will be taken from the parallel running period, during which firms will be running their Basel II capital calculations along side their current capital estimation processes.

The more advanced approaches for credit and op risk will also be examined in light of the parallel running exercises, as well as quantitative impact study results complied by individual countries. Several countries, including the US, are completing QIS4 studies over the next 12-18 months. Cole said the US expects to "collect better data than we got in QIS 3. We expect more complete and highly defined data." He added, "we want to get this as risk sensitive as possible based on the best possible data available at the time of implementation."

Substantial changes from CP3
It's been a long road to the final Basel Accord. Indeed, since the release of the third consultative paper in April 2003, substantial changes have taken place to the text, including the removal of expected loss from the credit calculation, the introduction of principles for home/host supervision, and a number of important "tweaks" to the operational risk charge. Users of can track these changes by clicking on the "BIS/International Regulation" subsection of the website's Archives area.

Yet much work remains. Already, changes to the trading book section are underway, with three working groups taking up a substantial number of important issues for resolution in the third quarter of this year. And other sections of Basel II are likely to be re-examined almost as soon as they are implemented — and the drafters of this document themselves acknowledge that it is a sort of "work in progress" rather than a final destination.

Nevertheless, Caruana says "I think that Basel II represents an unparalleled opportunity for banks to improve their business strategies and risk management systems."

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