LONDON: The influential Basel committee has unveiled the third draft of a new global accord for international banking, the biggest regulatory change to hit financial markets in decades.
The 216-page New Basel Capital Accord has been described as a watershed in banking regulation because it goes far beyond the rules-based approach of the 1988 accord and instead encourages banks to identify, measure and manage their own risks.
The latest draft by the Basel Committee on Banking Supervision, a group that in effect regulates international banking, largely mirrors the draft from 2001 but also reflects changes to lending to small businesses, operational risk charges and efforts to limit its impact on economic cycles.
The shortcomings of the original 1988 Basel Capital Accord were dramatically highlighted by the 1997/98 Asian financial crises and the collapse of British bank Barings in 1995, and six years ago supervisors began to revise the global rules.
During the 1990s, the rules of international finance changed dramatically as global banks were able to shift huge sums of money across borders almost instantaneously, threatening the stability of markets.
But instead of handcuffing banks and restricting markets, supervisors reacting to the growing riskiness of financial markets by encouraging banks to manage that risk – the main thrust of the new accord.
The new accord – dubbed Basel II because it replaces the 1988 accord – aims to maintain the same cushion of capital that the 30,000 banks worldwide set aside against unforeseen hazards. However, supervisors have also been quite clear that the new accord will penalise riskier banks with a higher capital charge while banks that show they can control their risks will be rewarded with a lower charge.
The committee, which comprises supervisors from major industrial countries, said in its statement on Tuesday that its “goal continues to be to finalise the new accord by the fourth quarter of this year.”
The revision has been dogged by delays and following release of the third draft, banks and regulators worldwide will have until July 31 to comment on the rules.
Then – if it successfully negotiates its way through the legal loopholes to become national law – banks should be putting it into practice by the end of 2006.
Unlike the original accord, based on a one-size-fits-all approach, the new accord comprises three pillars – minimum capital requirements, supervisory review and market discipline.
The first pillar retains much of the original accord's 8% risk-weighted capital charge, but also goes significantly beyond by allowing banks to gauge the riskiness of their lending and use this to calculate regulatory capital.
The second pillar sets standards for supervisory review with institutions having to prove the effectiveness of their risk management process. It allows supervisors to force banks to set aside more than the minimum capital where needed.
The third pillar calls for more disclosure by banks to allow their peers to evaluate risk in lending to them. Banks must also disclose how they evaluate their own capital adequacy. – Reuters