International bank regulators are conducting at least 17 case studies to prepare for the Basel II capital rules set to take effect in January 2008, according to Nicholas Le Pan, Canada’s top bank regulator.
More studies of bank operations in different countries are expected to begin in the next several months.
Mr. Le Pan, who heads the Basel Committee on Banking Supervision’s accord implementation group, said in an interview this month that regulators are carefully working through issues involving the sharing and validation of information banks must supply.
“Supervisory processes differ,” he said. “Attitudes towards how much capital banks should hold above the minimums differ across jurisdictions for legitimate reasons … But I think we can make a difference in the accord implementation group to promote consistency, reduce the number of kinks, [and] deal with kinks as they arise as well as we can. I think we are already making a difference.”
But some say the differences among regulators cannot be reconciled easily.
John D. Hawke Jr., whose term as the comptroller of the currency ended last week, said Thursday at an Institute of International Bankers luncheon that he is still skeptical that each country will apply the rules consistently.
“The Basel Committee’s accord implementation group, under the very able leadership of Nick Le Pan, will serve as an important mitigating influence but … cannot make up for deep structural differences in the nature and quality of supervision,” he said.
Mr. Hawke cited the detailed guidance letters U.S. regulators have given banks on corporate credit risk, operational risk, and retail credit risk. He said few other countries have even started drafting such guidance for banks.
After the Basel Committee completed the new capital rules in June, the implementation group was charged with ironing out unresolved issues. The new capital rules, which are much more complicated than the ones that regulators established in 1988, are meant to adjust capital requirements according to measurements of each bank’s credit, market, and operational risk. In the United States only the 20 largest banks are expected to comply.
But even after six years of negotiations, some major issues remain. Bankers continue to complain that different countries will inundate internationally active banks with requests for the same data and records. Mr. Le Pan said his group, made up of representatives from 13 countries, spends half its time working on the issue of cross-border implementation.
In a speech Oct. 4, Federal Reserve Board Governor Ben S. Bernanke gave an example of how the new case studies would work. He said regulators from 10 countries have met with Citigroup Inc. officials to talk about its risk management. The officials are expected to work through their concerns collectively, with the host country (the United States, in this case) taking the lead.
“Of course, the usefulness of each case study depends on how far along the subject bank is in its own Basel II implementation plan,” Mr. Bernanke said.
International bank regulators are finalizing the implementation plans for specific banks using lessons from their case studies and hope to apply them to multiple banks or situations, he said.
“The case studies are a transition between a theoretical discussion, which we had two years ago for home-host issues, and what actually has to be practical implementation plans,” Mr. Bernanke said.
Even though the Basel process appears to be gaining momentum, some observers say they still expect countries to question whether they are ceding control over banks within their borders.
Mr. Le Pan said the accord implementation group is working with dozens of countries, many of which were not directly involved in the original Basel II negotiations.
Pam Martin, the director of regulatory affairs at the Risk Management Association, said the implementation process “has the potential to become more political, because now it gets into a broader arena.”
The accord implementation group meets three times a year, but Mr. Le Pan said it would meet more frequently and hold phone conferences as the implementation date gets closer.
The group has also created several subgroups to work through specific issues. For example, one has already begun discussing how to validate models for credit risk management. Another, which was created in September, will focus on operational risk management — a criterion not in the 1988 rules. These subgroups are also expected to meet with bankers.
Kevin Bailey, a Basel II expert and the Office of the Comptroller of the Currency’s deputy comptroller for capital and regulatory policy, is in charge of the operational risk subgroup.
As the accord implementation group has gained steam, Mr. Le Pan said he has seen a shift in bankers’ attitudes. This month he flew to New York to meet with officials from the American Bankers Association and the Canadian Bankers Association, as well as with European bankers.
“A year ago the questions I got most were ‘Will the accord be done? When will it be done? Will it be done on time?’ Now a lot of attitudes … have shifted to ‘What does it take to have good implementation? What are some of the key success factors?’ ”
Mr. Le Pan acknowledged that regulators need to work together more to ease the burden for banks, but he also said banks could make this easier by involving foreign branches in their Basel planning and not leaving all of the expertise in their home countries.
“You can’t have every request go through the home regulator, because that’s not realistic,” he said. “Host jurisdictions have important roles in this, and if they can’t even get the most basic information from the local management, they have no other recourse but to start going to the head office.”
Still, Mr. Le Pan said, bankers have to accept that Basel II is going to be implemented differently in every country. Asked if his group’s goal was to create complete uniformity, he replied, “It’s not going to happen.”
