WASHINGTON When bank regulators set out to update the risk-based capital standard for international banks, the so-called Basel Accord was 10 years old and critics claimed it was hopelessly obsolete. But the job has proven so difficult that when the Basel Committee on Banking Supervision adopts the new rules, the standard will be nearly 20.
Burned by postponements in the past several years, the committee has grown wary of setting deadlines for producing a revision of the accord. But a source working with the committee said in an interview last week that a final consultative paper two earlier versions have been sent back for major changes will probably come out in the first half of 2003.
After a short comment period, the committee plans to finalize the new Basel Accord by yearend 2003. Banks will be expected to be prepared to apply the new standard by 2006, but international regulators will treat that year as a dry run; the current accord will determine banks compliance with regulatory capital minimums.
A second source close to the committee warned that, even if regulators manage to issue a final version of the proposal next year, there is one hurdle to implementation in the United States that many have not even begun to consider: Congress.
To date, lawmakers have not been closely involved in debates over the new capital rules. But if large U.S. banks are unhappy with the final result, they may loose their lobbyists on Capitol Hill to win changes in the way the accord is implemented by regulators here.
All parties agree that uniform implementation of the new standard is a stumbling block. In fact, the committee has a separate group of regulators already tackling that question.
But before anything can be implemented, it must be written, and the glacial pace of deliberations at the Basel Committee is a reflection of two things.
First, the proposal itself is extremely complex the most recent consultative paper, released in January 2001, ran to 500 pages and has been supplemented by numerous working papers since. Second, many of the worlds largest banks are eagerly awaiting the outcome and have met the committees proposals with comment letters as meticulous as the committees own offerings.
The task at hand is huge, and the committee is recognizing reality by taking a very measured approach, said Pam Martin, a spokeswoman for RMA, the Philadelphia-based risk management trade group. I think they are right not to rush ahead and put something out there that is just going to make everybody go nuts because it doesnt reflect industry practice.
Even though the next consultative paper isnt due out until 2003, bankers may get some indication of its impact from a comprehensive study the committee is planning. It is designed to outline many of the new rules that are expected to apply.
The quantitative impact survey is tentatively scheduled to begin in October and should take months to complete. Regulators said the results will be used to adjust the next consultative paper before it is released late next year. (This will be Basels third impact survey.)
The goal of the process is that the QIS in October will be based on a virtually complete rule, said Karen Shaw Petrou, managing director of Federal Financial Analytics in Washington. That rule will not be released to the industry but its shape will be clear to those institutions participating in the QIS process.
The findings may illuminate some issues that were not resolved in the committees last consultative paper, including the capital treatment of retail loan portfolios and loan securitizations and the application of a capital charge for operational risk.
For the worlds most sophisticated banks, the study may reveal technical changes to a method that would let institutions internal risk-rating systems play a major role in setting regulatory capital. The largest institutions have spent years fighting for this, and the committee members have hammered out the details with bankers hovering over shoulders, ready to consult and criticize.
But many observers note that, though big banks may benefit the most from the new accord, it will also affect many smaller ones. Most will be required to adopt a simpler capital standard that relies on outside ratings agencies and regulatory risk ratings.
There is a fiction here that this only applies to internationally active banks in the G-10 countries, said Mark Fogarty, a senior manager with KPMG Financial Services Practice. But the last accord was couched in the same language, and it has been applied in more than 100 countries and to banks of all sizes.
The big question in the United States, he said, is whether U.S. regulators will mandate full compliance with the accord for all banks or create a relaxed standard for community institutions. A number of regulators, including Federal Reserve Board Chairman Alan Greenspan, have suggested that such a bifurcated system will be necessary.
