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DIY capital: risk coverage Back  
The Basel Accord proposals announced this month are going to shake up the international banking system as never before - but as with every move forward there will be winners and losers in this game. There is a danger however that domestic Irish banks will be poorly placed to benefit from the advantages of being in the top tier or ‘superior’ level of supervision, where the freedom to allocate capital: risk ratios are more dependent on the internal bank’s credit management system than on external forces.

It is this superior level where all banks will want to be as the likelihood is that they will be able to substantially reduce the amount of capital they hold in reserve to cover their risks and re-divert this into new business areas or perhaps share buy-backs. But it is too early to estimate the amount of money that could be freed-up from this level of supervision. At the two lower levels of supervision there will be less chance to reduce the amount of capital held.

Many Irish banks will be unprepared for the changes afoot and will have to invest substantially, and quickly, in order to bring their CRM systems up to the international levels. The Basel Accord expects that the amount of money within the banking system will on aggregate stay the same, but with the smaller regional players having to invest heavily it is at the top end where huge amounts of capital could be freed-up. Could this be a case of the rich getting richer and the poor getting poorer?

Allocating the level of supervision has been left up to the national regulators - but how consistent or strict will each country’s regulator be? How will this be monitored? And are we at a disadvantage because there is still a decision to be made on who or what will be taking the financial regulation of Ireland forward into this millennium? We can only wait and see.

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