Basel II: Preconditions, Options and Implementation Issues in non G10 Countries

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Basel II Preconditions, Options and
Implementation Issues in non G-10 Countries
Jonathan Fiechter, Deputy Director International
Monetary Fund 4th Annual Seminar on Policy
Challenges for the Financial Sector June 1-3,
2004, Washington D.C
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Preconditions for Basel II Implementation

• Basel II provides a framework to support large
  scale improvements in risk measurement and
  management practices.

• Implementation of Basel Core Principles is an
  essential precondition for successful adoption of
  Basel II.
• FSAPs have identified several priority areas for
  strengthening supervision

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Preconditions Basel II and BCP Assessments
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Preconditions Basel II and BCP Assessments

• Reasons for non-conformance with CP 6
• Lower assigned risk-weights
• Non-standard definitions of capital / components
• Required CAR lower than 8 of RWA
• No requirements for Market / Exchange Risk
• CAR assessed/ reported on non-consolidated basis
• No or only limited enforcement powers in event
  CAR falls below minimum

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Options

• Basel I capital rule could be the norm in many
  countries over the medium-term
• Significant benefits, nonetheless, from early
  application of supervisory review (pillar II) and
  increased disclosure (pillar III)
• Countries adopting Basel II could start with
  standardized approach

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Implementation Issues for Supervisors

• Benchmarking
• Finding/building required staff expertise (and
  keeping them)
• Developing implementation strategy
• Preparing implementation road map
• Identifying competitive implications of a
  go-slow approach
• Developing policy for home-host arrangements
• Facilitating development of common infrastructure

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Implementation Issues for Banks

• Preparing action plans for meeting minimum
  requirements for data and IT
• Finding/building necessary staff expertise and
  then keeping it
• Assessing effect on capital
• Anticipating shifts in industry practices and
  lending behavior
• Seeking shared solutions

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Implementation Issues

• 2007 target implementation date is meant for
  Basel Committee member supervisors and their
  banks
• Assumes several years of planning and a state of
  readiness
• Supervisors should be guided by status of their
  own systems and set timetables accordingly
  premature implementation will create problems,
  not solutions
• Avoid cherry-picking among options or
  inappropriate development of hybrid approaches.

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Basel II Implications for Fund Work

• Surveillance/FSAPs will not presume adoption of
  Basel II
• Intro of Basel II will make meaningful
  comparisons of the capital strength of banking
  systems (across countries and over time) more
  challenging
• Premature implementation of Basel II by any
  country is unsafe
• Fund ready, along with other providers, to
  provide TA to lay foundation for Basel II

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• Thank You