Just a quick update on the happenings in the US on the Accord. I missed the update while on holiday (vacation for US readers). The NPRs (Notice of Proposed Rulemaking) were released on December 26 (was this straight after Christmas for a reason?) on the implementation / invention / re-implementation (respectively) of these sets of rules. At least the muddle seems to have stopped or at least been swept under the carpet. The deadline for comment on the Basel II NPR has been extended to March 26 to coincide with those for the Basel IA / I NPR.
The staggering thing, though, is the errors that are in the thought process behind the whole process the Basel IA / I NPR itself. Even on a chartiable view, the background statements justifying the differing rules in the US are somewhere on (if not over) the border between simply being wrong and outright lies.
The paragraph on the bottom of column 1 of the fourth page (numbered 77448) is the big one. The statements on the complexity of the Basel II Accord are simply wrong, as a cursory glance at the table of contents of the Accord will confirm.
The NPR document writes about the Accord as if it mandates the full Advanced criteria for all, ignoring the foundation and standardised approaches to credit risk, the standardised and basic indicator approaches to operational risk, the various market risk approaches and anything else that interferes with their interpretation of the Accord as being too difficult for the poor little banks. They even mention the existence of the simpler methods at the end of the previous page (see page 77447, col 3 last paragraph) and then proceed to behave as if they do not exist less than a column later.
They then use these outright lies faulty
interpretations to justify keeping Basel I for some and writing up some
concessional rules for others, dubbing these Basel IA to hide their
parentage as being in the halls of the US regulators and lobbyists.
This terminological inexactitude from the US regulators can easily be shown to be wrong. In Australia, every ADI (Authorised Deposit-taking Institution) must implement Basel II* in one of its forms. No options beyond those in the Accord. If an institution the size of Unicredit, with its five branches at the various universities in Perth, or any of the other building societies and credit unions in Australia can implement Basel II (with at least standardised credit risk and basic indicator operational risk) why on earth can’t a US bank?
The way to go is simple, but do not expect the US regulators to follow it. Only allow the full Basel II rules, with all the possible options and join the rest of the world. The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the various lobbying groups that are behind all this deserve to be strung up (metaphorically of course – otherwise that would be a breach of federal law) for this one.
If you wanted to implement a full free banking system that would be a truly brave position to take, but this regulatory muddle does nothing more than provide even more scope for regulatory arbitrage, distract from the core business of actually providing banking services and make the whole system that much more risk prone.
*Note – the linked letter talks about possible easier credit risk standards. APRA later decided that the Accord allows sufficient flexibility and actually moved to toughen these requirements up in some cases.
[UPDATE] BobsGuide has some information on the behind-the-scenes happenings. The big banks are complaining -can anyone be surprised? This is just silly. We can expect this to rumble on for some time.[/UPDATE]
[FURTHER UPDATE]See here for a differing interpretation[/FURTHER UPDATE}
4 comments
24 April, 2007 at 04:26
Shyamsundar Baliga
In summary, what is the state of Basel II implementation in various bigger economies, particularly USA, UK, China, Australia, and Japan. Specifically, for credit risk are they implementing standardised / FIRB/AIRB, and when ?
24 April, 2007 at 11:40
ozrisk
In summary:
The US is a mess. They have decided to implement advanced only and the regulators are arguing over it.
The UK is probably doing the best – the UK regulator (the FSA) is, despite some problems, competent and well regarded. They are allowing all options for credit risk.
China’s banking system is best described as government run. They made a show of implementing Basel I not long ago, but the ratios are, at best, questionable. They have announced they will be going Basel II, but I am not confident they have the skill base to implement it. People who know anything about banking are working for the banks – not the regulators.
Australia – doing reasonably well. The regulator (APRA) is only effectively allowing either standardised or advanced. They are also, with some real caveats, competent. All banks will be Basel II regulated from January 2008.
Japan – to be honest, not one I know much about. The (Japanese) FSA has allowed all options for credit risk and full implementation was scheduled from last month.
24 April, 2007 at 15:33
Shyamsundar Baliga
Indian regulator has recently come up with revised draft guidelines. Stdsd approach for Cr risk, BIA for OpR. Deadline March 31 2008 for internationally active banks and Mar 31 09 for other banks. The guidelines say banks may approach the regulators with a roadmap for implementation of advanced approaches. The general belief is that adv approaches may not be allowed until 2012 earliest. Bigger banks have started preparing in terms of addressing the basic requirements ie data and internal rating systems.
Others in asia-pac i think Malaysia and HK are close to implementation – all options allowed, 2008.
US had their own version “basel IA” — which i believe required adv app for bigger banks and basel-1 for smaller banks. Any logic there? Implications? Any update?
24 April, 2007 at 16:50
ozrisk
Thanks for the update on the other countries. Good to see the mess is (largely) isolated to the US.
India look like being an interesting case – and, hopefully, one for China to learn from. The process of decreasing State control while improving regulation should be the way that many of the developing banking markets go through – it might be good fodder for a few PhDs.
On the US, have a look at the category – US implementation. Basel IA is just a mis-mash of Basel I and Basel II standardised – with most of the downfalls of Basel I and few of the improvements of Basel II. Logic does not seem to be a strong point with it. Reasons – US politics. Implications – poor risk management at US banks, particularly in the smaller end. I hope no-one else is tempted down this path.