QIS3 survey delay puts back Basle II accord to 2006

This is likely to mean in practice that the accord would come into force at the start of the new financial year on January 1, 2007, some bankers said.

The Basle Committee on Banking Supervision, the architect of Basle II and the body that in effect regulates international banking, hopes to issue its third Basle II quantitative impact study - or QIS3 - on October 1 this year, some five months later than originally planned.

QIS3 is intended to help assess the impact of the risk-based Basle II capital adequacy accord on banks.

Regulators said they wanted to ensure that QIS3, along with the notes and guidance that will accompany it, would give banks an accurate and detailed picture of the final shape of the Basle II proposals.

The committee might issue earlier a separate survey - likely to be called the second tranche of QIS3 - covering the operational risk aspects of the accord.

The second tranche would be a data collection exercise rather than an impact study, as more information is needed to develop the advanced approaches to measuring op risk, regulators said.

Basle II will determine how much of their assets large international banks will have to set aside to guard against banking risks, including market and credit risks as well as, for the first time, operational risk.

Banking industry analysts said the Basle Committee appeared to be bowing to the inevitable in taking the decision to postpone the accord at its mid-March meeting in Basle.

The committee decided in mid-2001 that its first target date - January 1, 2004 - was too ambitious and postponed the date to 2005.

The committee had still made no official statement about the delay as Operational Risk went to press, which caused some bankers to criticise it for lacking the transparency that regulators were demanding of bankers under Basle II.

In December last year, the committee decided to issue QIS3 in order to ensure the Basle II accord would attain its two main objectives. The first is that on average the total amount of protective capital in the world’s banking system should not be less under the new accord than it is under the Basle I, the current, simpler accord that dates from 1988.

The regulators’ second objective is that there will be an incentive in Basle II for banks to adopt advanced approaches to measuring the risks they face based on their own internal models and data. Banks using advanced approaches should enjoy lower capital charges.

Problems have emerged in developing QIS3, mainly centring on the treatment in the credit risk proposals of asset securitisation -- bonds or notes that are backed, for instance, by accounts receivable from credit cards - and long-term loans to small to medium-sized enterprises (SMEs).

The German government has threatened to veto Basle II if the accord’s risk-related provisions penalise bank lending to the politically sensitive SME sector, which the government regards as key to the health of the German economy.

At its mid-March meeting, the committee decided against accepting the idea of a so-called ‘Basle-lite’ version of the accord, which would have been based on what regulators could agree on now, with outstanding issues to be settled in the future.

Instead, the committee voted to push ahead with the accord as originally proposed and agreed a further delay in the timetable in order to accomplish this, regulators said.

Bankers said Basle-lite would have meant either reducing the op risk capital charges proposed under Basle II or even dropping them altogether, in return for agreeing the credit risk proposals that have held up progress with the accord.

Final version
Regulators said the Basle Committee now hopes to issue its third consultative paper on Basle II in the middle of next year for industry comment. The committee’s final version of Basle II is likely then to be issued by the fourth quarter of next year.

This schedule will allow time for the passage of any necessary national legislation to bring Basle II into effect and will give time for banks to upgrade their systems, regulators said.

Basle II is intended in the first instance to apply to large international banks of the Group of 10 leading economies from which the Basle supervisors are mainly drawn. But it is also designed for banks of all sizes and all nationalities and could ultimately affect up to 30,000 banks around the world, banking industry analysts said.

The European Union intends applying a capital adequacy accord closely modelled on Basle II to all banks and investment firms in the 15-nation EU.

More than 100 countries have adopted the simpler provisions of the Basle I accord.Operational Risk