The New Basel Capital Accord, which is compulsory and must be adopted worldwide, stipulates that banks must have new procedures for measuring and mitigating against credit and operational risk.
This places the onus on banks to rigorously assess both forms of risk and to build an action plan to reduce exposure to it. This needs to be done well in advance of the 2007 deadline to ensure banks are properly prepared.
In its formal consultation response of 1st August, the BBA and LIBA had many technical recommendations, but expressed particular concern as to the implications for cross-border groups - as discussions with various state regulators had shown differing approaches and interpretations of the Accord.
The BBA and LIBA therefore called for Basel II to be amended to ensure consistency of approach, and to make sure that institutions were not subject to more than one interpretation of the Accord in any one jurisdiction. The rules on national discretion should also be tightened to remove too many variations, said the response.
The Associations went on to call the proposed Accord unduly complex. They stated that it:
"will be difficult for our members to implement and for national regulators, even in the G10, to supervise. The cost of compliance, for firms and supervisors will be high, and we question whether sufficient resources will be available within the supervisory bodies to ensure consistent application, across and within jurisdictions."
The Associations urged the Basel Committee not to limit itself to one 'unique vision' of the Accord, remarking:
"Even at this late date, we would urge the Committee to consider an approach more based on principles and less on rules."
The BBA and LIBA recommended that the rollout provisions of the Accord be made more flexible too, proposing that the existing Accord – Basel I – be allowed to continue right up to 2010, so as make the transitional period smoother and cut the costs of compliance with the new Accord.
As it is, the implementation of Basel II is unlikely to be at all smooth. A survey of 55 UK banks conducted in April this year found that only 4% of those interviewed were ready to take the first step towards compliance.
With the need to have two years of Basel II-compliant historical risk data to work with by the 2007 deadline, banks may find themselves in compliance difficulties if the BBA and LIBA recommendations are not taken up.