Academic voices dissatisfaction with Basel II

The Basel Committee on Banking Supervision still has a great deal of work to do before the Basel II capital accord can be successfully implemented at financial institutions, Jacques Pézier, director of the risk management group of the ISMA Centre at the University of Reading in the UK, told delegates at a conference on capital allocation held by the Risk Waters Group yesterday.

Basel II will determine from late 2006 how much of their assets major banks must set aside to absorb unexpected losses from banking risks, including credit, market and operational risks.

Pézier said the Basel II risk assessment methodologies for credit risk and operational risk were still “dubious”. For example, he questioned why the proposals as written required combining expected losses and unexpected losses, as well as linearity and additivity assumptions. He also said that treatment of profits in some cases was biased, and that the current proposals neglected business risk, reputational risks, and systemic risk. In March 2003, the final Basel II consultative paper is due to be released, including the results of the third Quantitative Impact Survey. Industry participants are hoping that some of these issues will be addressed in this newest release.

Pézier also said that the accords could cost financial institutions worldwide more than $23.6 billion to implement by 2006.

BaselAlert.com

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