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Tuesday, 16th April 2024
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Basel Capital Accord proposals to impact Irish banks Back  
Large amounts of capital could be freed up within the EU banking system if Basel Accord proposals for a three tiered regulatory system are adopted in 2004.
Irish banks will be impacted by the Basel Committee on Banking Supervision’s recommendation that the industry be allowed greater freedom in allocating the amount of capital they hold to cover risks. Proposals to change the Basel Capital Accord, in place since 1988, were released on 15 January 2001 and if adopted will abolish the standardised percentage of capital needed to cover risks.

Under the proposals banks will qualify for one of three levels of supervision - each with increasing independence to set their own ‘capital to risk’ ratios based on their in-house calculations.

Since 1988 a minimum 8 per cent ratio of regulatory capital to assets weighted has been required. In June 1998 the Basel Committee made initial proposals to change this but stopped short of recommending that banks be able to use their own measures of credit risk to calculate risk provisions.

The Irish Bankers Federation have guardedly welcomed the proposals. Enda Twomey of the IBF said ‘There are many positive developments in these proposals which go some way to achieving the goal of aligning economic capital allocation with regulatory capital requirements.’

The three levels of supervision are: standardised; foundation and advanced. The level of supervision would be allocated by the national regulatory authority.

If the proposals are endorsed and brought in the move could free up huge amounts of capital within the banking system, as some banks’ capital allocation drops. The Basel Committee expects the aggregate amount of capital within the banking system to remain the same - but with sophisticated players likely to be able to reduce their capital coverage, smaller more regional players are likely to foot the bill.

The standardised level of supervision will use credit ratings from agencies such as Moody’s and Standard & Poors as the basis for calculating credit weightings. At the foundation level, banks will be able to use their own assessments of risk along certain parameters while the advanced system will grant banks more leeway on which parameters to use.

Large internationally active banks are likely to qualify for the advanced method while the danger is that smaller regional players may have to settle for the standardised approach. Many Irish banks could be given a standardised rating.

According to PricewaterhouseCoopers in Dublin, the non-compulsory nature of the proposals could lead to discrimination. ‘While the proposals represent a major advance they will give scope for significant national discretion, with the risk that regulators will introduce or reinforce competitive inequalities as a result of differences in implementation and supervision. Banks could face real challenges in having their internal credit ratings systems ready in time and operational risk capital charges will hit some institutions very hard.
Under the new proposals, less well-rated institutions could find themselves effectively priced out of some markets in which they are currently active as the capital requirements will be higher for the less sophisticated banks. Signatories will have to apply these rules to internationally active banks, but it is highly likely that EU countries will apply them to all banks. The EU will probably also apply them to investment firms.

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