Advanced IRB Basel II approach delayed

The Basel Committee on Banking Supervision said the implementation of the advanced internal ratings-based approach (IRB) for credit risk and the advanced measurement approach (AMA) for operational risk would be delayed until the end of 2007. This will provide additional time for supervisors and the industry to develop a consistent approach for implementation.

But the Committee confirmed that it will release the New Basel Accord, also known as Basel II, at the end of June 2004.

Implementation of the basic, standardised, alternative standardised and foundation approaches for credit and operational risk remain scheduled for the end of 2006.

The Committee felt that one further year of impact analysis/parallel running will be needed for the most advanced approaches.

The Committee said it had reached an agreement on outstanding technical issues, including treatment for revolving retail exposures and the measurements required for ‘loss-given default’ parameters for banks that adopt the IRB approach for credit risk.

The Committee also decided to leave the term 'significant subsidiary' undefined for home/host issue purposes, allowing the home and host supervisors to work together in determining which internationally active subsidiaries can reasonably be deemed to be significant and be allowed to use AMA on stand-alone basis.

The home supervisors have been given a leading role in approving and co-ordinating supervisory assessment of the AMA models. Supervisors should avoid performing redundant and unco-ordinated approval and validation work relative to Basel II to reduce the implementation burden on the banks and to conserve supervisory resources, according to the Committee.

As a practical application of this principle, the Committee expects the initial validation work for most advanced IRB approaches for larger corporate exposures will be led by the home country with appropriate input from the host country supervisor and material reliance by host countries on the work of the home regulator.

“As a general rule, where a banking organisation wishes (or is required) to adopt an AMA at both the group-wide and subsidiary levels, the Committee believes it would be beneficial for the supervisory assessment of the AMA models to be co-ordinated by the home supervisor,” the Committee said.

Some US operational and credit risk managers have welcomed the Basel Committee’s announcement. “We find the decision to give the home supervisors a lead role in approving and validating certain techniques of the advanced methods to be a positive step forward,” said Joe Sabatini, managing director for operational risk at JP Morgan Chase. “Although the ambiguity continues on the definition of the ‘significant’ subsidiary, we find the hybrid approach proposed by the Basel Committee to be a workable compromise.”

And a credit risk manager at an internationally active US bank said delaying the implementation of the more advanced methods was a reasonable and important signal to the banking and regulatory community; and a sensible thing to do in light of the complexity of the models used in the advanced approaches. “The foundation approach is something we never considered before, so we will need to think about how to address the issue of host regulators that will demand implementation of foundation approaches before the IRB is implemented,” the risk manager said.