Single-bank capital accord impossible for all banks, says Basel chief

Differences between banking systems make it impossible to conceive of a single-bank protective capital accord that would work for all banks in all countries, the world’s top international banking regulator said today.

“Rather, supervisors may need to consider different approaches,” said William McDonough, chairman of the Basel Committee on Banking Supervision, the architect of the planned Basel II capital accord aimed at making the world’s banking system safer.As a result, the Basel Committee, the body that effectively regulates international banking and mainly comprises senior supervisors from the Group of 10 (G-10) leading economies, is launching a joint initiative with supervisors from many other countries to develop practical guidance on the future regulation of smaller, non-complex banks, McDonough said. He was speaking at the International Conference of Banking Supervisors in Cape Town, South Africa. The conference, which is held every two years, brings together banking supervisors from around the world.

McDonough, who is also president of the New York Federal Reserve Bank, said Basel regulators want to give practical assistance to banking supervisors in developing regulatory regimes suitable for national circumstances and local banking systems.

But the purpose was not to develop one or even several specific “Basel-approved” approaches to regulation, he added.

The Basel Committee wants to introduce the Basel II accord for large, international banks from late 2006.

Basel II will determine how much of their assets major banks must set aside as a cushion of protective capital to absorb unexpected losses from banking risks, including credit, market and operational risk. The risk-sensitive accord encourages banks to measure the risks they face using internal computerised models and loss data. Banks using sophisticated risk management and measurement methods won’t be required to set aside as much protective capital as banks using cruder approaches.

Basel II will replace Basel I, the much simpler, one size-fits-all capital adequacy accord that dates from 1988 and which has been adopted in more than 100 countries.

McDonough noted that some countries have only recently adopted the 1988 accord and may still be working to ensure a basic level of capital adequacy.

He said that for some national supervisors, “retention of the current accord, supplemented by the second and third pillars, may be the best way forward”. Basel II has a three-pillar structure comprising capital charges under the first pillar, monitoring by supervisors under the second, and market discipline through greater disclosure of information under the third.

“Other countries may elect the [simpler] revised standardised approach of the new accord. Still others may seek a hybrid of these two possibilities,” McDonough said.

Attempts to force a uniform approach on non-complex domestic banks that typically do not compete across national borders “are unnecessary and possibly counter-productive,” he added.

“Instead, our energy would be better spent on sharing ideas and developing a common understanding of the challenges that supervisors face in dealing with non-complex domestic banking organisations.”

David Keefe

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