In June 2004, a consensus was reached on Basel II, which requires banks to assess the ability of a borrower to perform despite adverse economic conditions. However, the complexity of the models has forced regulators to look again at the underlying data.
In December, the Basel Committee is understood to have quietly sought banks to participate in what amounts to the Fifth Quantitative Impact Study (QIS5) – more than two years after the launch of another comprehensive field test: the Third Quantitative Impact Study (QIS3).
The data from QIS3, which included studies on 350 banks in 43 countries, were the basis of the framework agreed in June 2004 but not all countries were satisfied. A number of countries were unhappy with the use of approximations on unavailable data, and the US and Germany decided to conduct national impact studies based directly on the June 2004 consensus (QIS4).
Concern over the various interpretations of the data, plus worries about the European approach to capital adequacy, new international accounting standards and the US Sarbanes-Oxley legislation, have complicated the Basel Committee’s strategy. And this has led – rather embarrassingly, experts say – to the call for yet another series of tests.
Whether QIS5 represents the last twist in the Basel II tale – due for implementation (depending on the various approaches) at either year-end 2006 or year-end 2007 – remains to be seen. The quality of the data supporting the models is the key underlying factor behind the new framework. If the models are not seen to be credible, then Basel II will be undermined.
