UK questions feasibility of Europe's Basel II start-date
LONDON, March 11 - UK regulators, who favour a single `big-bang' 2008 start-date, are questioning the practicality of the planned January 1, 2007 date for bringing the Basel II bank safety rules into effect in Europe, given possible delays in the law-making process.
"Latest indications from Brussels suggest that delays in the European Parliament's consideration of the draft directive may mean that the Council (of national European Union ministers) may not be in a position to agree the final text before November," UK Financial Services Authority (FSA) managing director Hector Sants told an FSA-organised conference yesterday.
Sants said if so, the FSA's second consultation paper on implementing Basel II in the UK would be not be issued until the first quarter of 2006, which would be some months later than previously hoped. The second paper will contain the entire draft FSA handbook text for implementing the Capital Requirements Directive (CRD), the law that will apply the complex, risk-focused Basel II capital adequacy rules to all banks and investment firms in the EU's 25 member states.
In January, when issuing its first Basel II implementation consultation paper, the FSA, Britain's principal financial sector watchdog, said it planned to publish the second paper as soon as possible after an expected end-of-summer approval by both the Parliament and the Council. This first paper, which is open for comment until April 29, concentrates on areas where the UK is expected to have discretion in deciding how the rules shall apply.
Sants said the prospect of a delay in approving the CRD text raises the question of whether the start date of January 1, 2007 proposed by the European Commission for the simpler approaches to credit and operational risk "would still be feasible".
He said the UK still favours a single start-date of 2008 for all the Basel II/CRD approaches whereas the Commission, which as the EU's executive arm is responsible for initiating financial regulation in the bloc, proposes a two-stage introduction of the rules, starting on January 1, 2007. This is broadly in line with the timetable suggested by the Basel Committee on Banking Supervision, the body of senior banking supervisors from North America, Europe and Japan that devised Basel II. The Basel Committee recommends end-2006 as the start time for banks using the simpler and intermediate approaches, and end-2007 for banks using the advanced approaches. The UK, as a Basel Committee member, approved the staggered start dates when agreeing last year to the Basel II framework text.
However, Sants said that even if the final CRD text isn't available until late 2005, "we feel it is better to press on with our review of applications so that firms can be in business from January 1, 2007, if that is their wish".
Patrick Pearson, head of the Brussels-based Commission's banking and financial conglomerates unit, said September would be a key month in the EU lawmaking process.
Pearson said ministers and parliamentarians would be looking at some key issues with the CRD, including the level of its application in terms of, for instance, home-host regulator responsibilities. Another important issue is intra-group exposures, which for many EU countries is likely to be a political debate about industry consolidation masquerading as an argument about prudential approaches.
A key issue for big banks and investment banks is the need to incorporate into the CRD the separate decisions, which are still awaited, on the treatment of bank trading books under the Basel II rules, Pearson noted.
The Basel Committee and the International Organization of Securities Commissions, the Madrid-based grouping of the world's stock market regulators, are currently reviewing trading book issues. They expect to issue a paper, with a comparatively short consultation period, in April.
Pearson praised the FSA as the spearhead of European implementation work. "There is no other jurisdiction in Europe that's as transparent on Basel II/CRD as the FSA," he said.
Andrea Enria, London-based secretary general of the Committee of European Banking Supervisors (CEBS), said CEBS's own implementation guidelines should provide by the end of 2005 a comprehensive framework for the CRD's consistent implementation and for convergence in supervisory practice.
The main and crucial task of CEBS, which comprises senior banking supervisors from all EU countries, is to oversee the implementation of the CRD throughout the EU. The Committee plans to issue a number of consultation documents this year covering issues related to the convergence of supervisory practices and cooperation and information exchange.
Enria said priorities will be identified in line with what CEBS perceives to be the major issues for cross-border business in the EU. The consultations should enable the Committee to focus its work and adjust its aims over time, he added.
(Sants' speech: www.fsa.gov.uk)
David Keefe (dkeefe@globalriskregulator.com)
