Basel II: March deadline impracticable    
Industry News

Posted online: Monday, August 14, 2006, Financial Express

Banks must have heaved a sigh of relief when the governor, Reserve Bank of India (RBI) announced on the sidelines of Asian Development Bank (ADB) Annual Conference 2006 that the implementation date is likely to be reviewed. Several banks’ CEOs have put on a bold front and made tall announcements that they are ready for implementing Basel II.

If they had come from the tech-savvy new generation private banks, it would be no surprise. But when it comes from the public sector banks, which occupy large space in Indian banking with their embracing technology just during the last three to four years, it is a cause for concern.

The mere absence of legacy issues should not embolden them to display such confidence. They may have said so mainly to please the regulator who is anxious to make the Indian banking an integral part of the global financial system.

The purpose of this article is to briefly look at the status of the developed, developing and emerging economies in terms of implementing Basel II.

While it is true that around the world, the pace of preparation for the new Basel risk based capital standard (Basel II) is picking up, there are several Indian Banks which cannot think of implementing Basel II; there are mid-size banks trying to shore up capital by tapping the capital market; there are large banks that are still in the process of building capacities and systems for implementing Basel II with effect from 31st March 2007; there are foreign banks which hesitate in US to implement Basel II but which claim to be more than ready to implement it from the regulator's deadline.

More than 100 countries have indicated that they intend to implement these rules eventually, although in many cases this remains an aspiration. So, Global Risk Regulator has put together all the available information on the implementation timetables of as many countries as possible. Implementation plans are still evolving in many cases, and timetables are subject to regular revision.

However, the table gives some information about the intentions of 52 countries – if the EU bloc is counted as 25. Outside Europe, the biggest regional block for which data exists is Asia-Pacific. Banks in China are still struggling to deal with huge non-performing loans, the supervisors there have decided only to implement some features of Pillar 2 and Pillar 3 of the new regulatory capital framework (Pillar 1 sets minimum capital levels, while Pillars 2 and 3 deal with supervisory review and market discipline respectively). Partial implementation is no implementation.

US Fed-Reserve supervisors have already delayed Basel II implementation by a year, and political opposition to the new standard is stronger than elsewhere. 'There remains a possibility that America may still not adopt the new Basel rules at all.' Various surveys in US suggest that over-regulation has become the number one concern in the financial services industry.

Announcing the establishment of the IIF Special Committee last September, Cees Maas, chief financial officer of the Dutch ING group, and the institute's vice chairman said: "new regulations and enforcement decisions have resulted in substantial shifts in the regulatory environment that have often been costly, cumbersome, difficult to implement, and therefore to comply with.

The Indian banking system is not mature for self-regulation going by the lack of seriousness in implementing corporate governance among even the well-run banks and the failure of banks in one category or the other.

The other area of concern is the integration of insurance and banking services from one single counter that would call for risk management of two streams of services, one of which, viz., Insurance is till in the evolution process. This is the opportune time for a serious engagement between the regulators and the banking and insurance community to evolve a more practical approach to implementing Basel II with a different time-table.

Yerram Raju is director, Indian Institute of Economics and former senior management executive of the SBI

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