As debate over the Basel II Accord intensifies, banks and regulators are reaching a make-or-break point.
With China and India rejecting the introduction of the proposed Basel II capital adequacy reforms and recent reports from the Washington-based Institute of International Finance (IIF) and the British Bankers Association/London Investment Banking Association (BBA/LIBA) seriously criticising the proposals, what are the chances of implementation in 2007 as planned? The debate on the Accord is now intensifying as banks and regulators reach a make-or-break point.
For analysts, rejection of Basel II by China and India comes as no surprise. Like the smaller US banks that have also effectively rejected it, the cost/benefit advantages are simply not there: implementation requires significant costs with no apparent upside. But the core rationale of providing a better capital measurement to better reflect the underlying risk is unassailable and is a move in the right direction, especially considering the simplicity of Basel I. A new Accord is needed but getting the balance right between complexity and practical implementation is extremely vexing and the above reports are quietly scathing of the outcome so far.
Both are critical of the existing complexity and suggest refinements. BBA/LIBA proposes, for example, that “Basel I be retained as an option throughout the transitional period up until 2010”. There are also concerns that European countries will not be able to get Basel II done by 2007 because of legislative problems. The EC’s Capital Adequacy Directive (CAD3), meant to be built on Basel II, raises other difficulties.
The chances of finalising the new Accord this year as scheduled appear to be slipping, with further delays likely. Is Basel II in danger of being scrapped altogether? No, experts believe that too much effort has been expended and a viable version must eventually emerge. The fact that some countries will not be on board at the start may not be ideal but taking a piecemeal approach (as happened with Basel I) may be the most practical solution. For the developed world and the major players in the capital markets, a workable Basel II needs to be thrashed out – and soon. The time has come for the Basel Committee to take stock, absorb the recommendations and make the necessary compromises. The global financial sector needs clarity, not more delays.
