An interesting speech released yesterday from the Deputy Governor of the Central Bank of Sri Lanka on the way that Basel II is being implemented in Sri Lanka makes a few interesting points – and allows some commentary on events a long way away from Sri Lanka.

  1. The release of Basel II seems to be having its desired effect on both regulators and regulated around the world. The risk management practices of the banks and the regulators are improving and the tiered approach (allowing three routes to compliance) is actually prompting some true thinking on what needs to be done;
  2. Banks the world over are making the mistake, however, of allowing the regulators to dictate risk management practices. Basel II is a great improvement on Basel I, but it is not best practice. Each bank should work out for itself what suits them best, which should be better than the methods the regulator uses for strict Basel II compliance. For example, the use of the regulatory caps and floors on the factors should not be encouraged for internal capital allocation; and
  3. This speech reinforces my point below – the US approach of simply ignoring the existence of the simpler approaches is just plain ludicrous. If all of the banks in Sri Lanka can comply with Basel II (no insult intended to Sri Lanka, but the US banks can generally be considered to have better information on their risks) then why can’t the US?

Ranee Jayamaha can be commended for understanding the Accord – my guess would be that this has been assisted by the Financial Stability Institute – if so, well done on their part. It is a great pity the same cannot be said of the

US regulators.