Sam Zavatti, global head of financial institutions at ABN AMRO, says the bank’s breadth of operations and product offerings make it well-placed to offer advice on adapting to Basel II requirements.

The genesis of this sponsored special supplement comes from the increasingly complex conversations that ABN AMRO has been having with its banking clients and with the regulatory and supervisory agencies around the world. Key themes are the challenges presented by implementation of the new Basel Capital Accord and, in the near-term, next year’s adoption of International Accounting Standard 39.

It is perhaps a truism to say that regulators enjoy certainty and bankers enjoy a degree of uncertainty. However, the discussions, intimations and conjectures surrounding the Basel II Accord have weighed in favour of uncertainty. As we approach Basel II implementation in 2007, the broad framework is clear and banks, particularly those in western Europe, are close to finalising how they will adapt to the new requirements for the industry.

Variable implications

The implications will vary from bank to bank and from country to country. For a bank of ABN AMRO’s complexity, the implications are profound, as highlighted in the interview with our chief financial officer Tom de Swaan. As we operate in 65 countries, with a product spectrum spanning the universe of consumer and wholesale requirements, we are required to measure a range of risks associated with the vagaries of local market conditions as well as the local interpretation of our risk profile. Given the need to meet these sometimes competing and complex global requirements, we are well placed to offer advice to other banks and regulators on the approach to adapting to these changes.

It is worth remembering that the new proposals for capital regulation have been discussed for eight years. Originally, the plan was to introduce the accord by the end of 2004. However, by 2001 the implementation date had been pushed back to 2005 based on the first round of industry and regulatory consultation. Again in 2002, the date was deferred and 2006 was chosen as the most appropriate date. We now assume that implementation will be in 2007 and that any further attempt to delay will be strongly resisted. Although national regulators will have discretion in managing the implementation, it seems clear to us that in a little less than three years the international banking industry will be changed forever.

In step with global banking

There is a clear determination on the part of the Basel Committee and many of the leading national banking regulators to amend and upgrade the original 1988 banking accord substantially. Given the wholesale changes that have occurred in global banking in the past 15 years, it is perfectly reasonable to expect that the regulatory environment has to change with the market and place new demands on market and supervisory participants.

As the various external and in-house contributors to this supplement have shown, there will be change arising from Basel II but perhaps not to the extent that some doom mongers had forecast. The need for a substantial infusion of new capital into the industry is not a threat to either shareholders or bondholders. Instead banks will, as they have been doing for the past five years or so, use capital in a smarter and more efficient manner and will continue to push the ‘regulatory envelope’ in terms of developing new structural alternatives for Tier One capital instruments.

Securitisation will not be consigned to oblivion as a result of the accord; instead it will evolve. Simple and capital-efficient assets are more likely to be financed on balance sheet while more complex and esoteric assets will be securitised. As we show in this supplement, the explosive growth in the covered bond market has provided an efficient and liquid alternative to finance vanilla assets in Europe.

Risk to developing markets

The one reservation we have is that the new risk-based approaches may potentially threaten the developing markets, particularly where banking systems have yet to move to a full acceptance of Basel I. It is not in any of our interests to see these markets marginalised because the indigenous banks are no longer viewed as acceptable counterparts for the international banking industry.

To be a success, the Basel Committee needs to look beyond the developed world boundaries and work to establish a framework that also meets the needs of the developing world. It should be mindful of creating a two-tier banking system, which may impede growth and development in many emerging markets. This is hardly the epithet by which any of us wish to remember Basel II.

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