Emily Vogl, Frank Vogl
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IIF Releases Report on Basel II Outstanding Issues
Leading global banks welcome progress, but stress challenges of staggered implementation and concerns on capital calculations
London, November 14, 2005 — The Institute of International Finance, the global association of financial institutions, today welcomed the progress made by the Basel Committee on Banking Supervision toward finalizing the new Basel Accord and it called on the Committee to resolve outstanding issues in order to lay the groundwork for effective implementation.
"The Basel Committee has continued to move forward to finalize the new Accord. We welcome this progress and the Institute and its members remain committed to the new approach embodied in Basel II. However, it is clear that important issues remain to be resolved and that securing coordinated implementation poses a growing challenge to us all" said Mr. Daniel Bouton, Chairman and Chief Executive Officer of SociÃ©tÃ© GÃ©nÃ©rale and Chairman of the Steering Committee on Regulatory Capital of the Institute of International Finance (IIF). The IIF, which has over 340 member institutions headquartered in more than 60 countries operating across the world, today released a report that it has sent to the Basel Committee.
Dr. Josef Ackermann, Chairman of the IIF's Board of Directors and Chairman of the Group Executive Committee of Deutsche Bank AG, said, "Basel II represents a major innovation in approaches to financial sector regulation that, when implemented to its full potential, will result in a stronger, more resilient global banking system. It is now important for the regulatory authorities to concentrate on a set of key outstanding issues that can foster pragmatic and efficient implemention."
Speaking via a video-link from Paris to a press conference here, Mr. Bouton emphasized the productive nature of the extensive discussions that the IIF has held with the Basel Committee and he stressed that, "The Basel Committee has accomplished a great deal and has set a high standard of openness and consultation in international regulation of financial services. It will be important that we sustain the strong dialogue with the Committee as we focus on a range of implementation concerns, most notably the next quantitative impact study; international implementation schedules; home-host cross-border issues; operational risk; trading book issues; as well as implementation of the Accord in emerging market banks."
International Implementation Schedules
Mr. Bouton stated that, "We attach utmost importance to a truly international framework, implemented consistently across jurisdictions. We believe that adoption of inconsistent versions of the Accord in different jurisdictions not only would generate additional costly efforts for banks, but also could ultimately disrupt the successful implementation of Basel II, undermine its basic fabric and create serious level playing field issues."
The Steering Committee noted in its report that a major concern relates to different starting dates for implementation of the advanced approaches with 2008 for the European Union and one year later for the United States. Mr. Bouton stated that, "Our members, many of whom operate in many countries, are concerned that different implementation schedules have been set for various jurisdictions. This is in our view regrettable. In addition to the increased risk that competitive inequities could develop, it would also generate costly inefficiencies in the implementation of the Accord."
In regard to the implementation schedule set by in the United States Mr. Bouton noted that, "As yet, there has not been clear guidance as to how the practical implications of staggered implementation will be addressed. It is important that international regulators coordinate their efforts in order to provide clarity in these areas swiftly."
Mr. Bouton added, "The complexities of implementation by different jurisdictions at different times are not just limited to this lack of parallelism between the EU and the US. This issue features in our general concerns about home-host issues: the more discrepancies there are between jurisdictions, the more critical supervisory cooperation and flexibility will be as international groups try to implement what was supposed to be a global Accord across borders."
The report noted that the Accord's success will depend on the right balance being found between home and host supervisors and that a great deal of work remains. Mr. Bouton said that, "While recognizing the validity of host-supervisor concerns regarding the local operations of foreign-headquartered banks, historical patterns of host-country regulation will need to be adapted to new global realities."
Mr. Charles Dallara, IIF Managing Director, noted that the IIF includes most of the largest banks headquartered in emerging market economies and that today's report emphasized that, "Regulators in these countries need to join together with other international regulators to advance a truly global accord that is consistently implemented. This is beginning to happen, but much more needs to be done. The Financial Stability Institute (FSI) of the BIS has played an important role in moving this process forward and the IIF remains ready to continue its cooperation with the FSI in this effort."
Mr. Bouton stressed that, "A key issue is how closely the levels of capital that banks are required to hold are determined by risk-based processes endorsed by the new Accord. Notwithstanding the serious reservations of the banking community, the Accord includes a scaling factor to adjust the results of risk-based capital calculations to the rough equivalent of current capital levels. The questions are now by how much, by what process, and for how long?"
The report of the Steering Committee underscored the need to take into account the effects of the economic cycle when making final calculations about capital levels. Mr. Bouton emphasized that, "It is also important to take account of the conservative assumptions already built into the Accord, and the possibility of additions to regulatory capital via Pillar 2. If this is done, then it will enhance the prospects of capital targets being set that are proportionate and reasonable."
Operational Risk & Trading Book Issues
The IIF report pointed out that the industry has been supportive of an operational risk approach based on banks' internal operational risk methodologies, but the cross-border application of the model that has been agreed upon is meeting serious obstacles. Several jurisdictions have not been willing to allow for capital allocation at the subsidiary level as called for in the model. Mr. Bouton said, "We recognize the complexity of this issue and that quantifying operational risk is a relatively new area in risk management. Nevertheless, it would be highly unfortunate if the advanced methodologies agreed by bankers and regulators would not be applied for subsidiaries in crucial jurisdictions. Banks have made considerable efforts to develop systems of operational risk measurement and to collect data on historical losses, and it would be regrettable if regulators in some jurisdictions do not allow banks to use these major advances in operational risk management. We strongly encourage the Basel Committee to work with national authorities to facilitate meaningful implementation that is consistent with the Accord."
With regard to trading book assets, Mr. Bouton noted that new guidelines were set forth in July by the Basel Committee. He said, "It will be crucial that the Basel Committee work with the banking industry to translate the principles-based approach into practical techniques for calculating a bank's trading book capital charge at a reasonable level."
Dr. Ackermann announced that Mr. Bouton will be stepping down from the chairmanship of the Steering Committee on Regulatory Capital on December 1, 2005 and that Mr. Stephen Green, Group Chief Executive, HSBC Holdings plc, has agreed to succeed him. In addition, Dr. Ackermann stated that Mr. Tom de Swaan, a member of the Managing Board and Chief Financial Officer of ABN Amro Bank N.V., will become Vice Chairman of the Committee.
Dr. Ackermann said, " We are highly indebted to Daniel Bouton for the outstanding leadership of the Steering Committee that he has provided over this crucial period in our dialogue with the Basel Committee. We look forward to Stephen Green and Tom de Swaan continuing this effort as we move into this next phase of cooperation with the Basel Committee."
Emily Vogl, Frank Vogl