Reform of Basel II as a consequence of the economic and financial crisis

According to Stefan Walters (General Secretary, Basel Committee on Banking Supervision), rapid credit growth, insufficient liquidity reserves and high risks are among the weaknesses of the financial system, which the banking sector was confronted with during the economic crisis. These weaknesses subsequently resulted in massive problems in the entire financial market and associated with it in the real economy.

Based on these developments, it is the target of the reform programme of the Basel Committee to ensure the sustainable strengthening of the resilience of the banking sector, both over a short and long-term period. The Basel Committee will prepare a full package (Basel III) of global standards by the end of 2010. This concerns in particular adequate risk hedging, the creation of transparency and disclosure requirements for banks. In addition, banks are expected to increase their liquidity reserves to be in a better position to cushion new shocks in the short term. Appropriate analyses will be carried out at the same time to determine possible impact assessments. This reform process is supported by G20 and FSB.

Barbara Frohn (Basel II and Risk Management of the Santander Group) basically welcomed the reform plans of the Basel Committee and the revision of the Capital Requirements Directive.

She presented a possible solution approach based on the model of Spain as due to this approach the consequences of the crisis had been presented as appropriately weakened. The formation of suitable reserves should ensure that losses were considered earlier (expected loss) and risks reduced accordingly. The bank could draw on these reserves in downtimes. This would have a positive impact on the stability of the bank and improve transparency. There would be no plans to form a dual system between the International Financial Reporting Standards IFRS and Basel II. This would be a compromise approach.

She added that it would be important to support a dialogue on the reform process between the private and the public sector. Only then, it could be ensured that possible impacts would be sufficiently taken into account. Uniform framework conditions would guarantee the requirements for financial sector stability.

In his statement, Andreas Treichl (Chairman of Erste Bank) pointed out the necessity to review the role of supervisory bodies, whereby the stability of the banks would have to take priority. He warned that stricter capital requirements for banks could result in a credit crunch in Central and Eastern Europe. In particular, SMBs in eastern European states would be dependent on direct loans as hardly any of them had access to the capital market. Politicians would currently not be aware of the extent of the consequences these regulations for awarding loans might have. It would therefore be important to find support for SMBs within the banking system.

In his address, Adrian Blundell-Wignall (Deputy Director, OECD) explained among others the following difficulties with Basel II:  Basel II as “uniform rules” for all banks as global risk factor, portfolio stability, procyclicality and unclear/inconsistent definitions. In his opinion, it would be important that the banks would ensure sufficient capital buffer and liquidity in future.

Many open questions are still to be clarified

The competent rapporteur of the Committee on Economic and Monetary Affairs, MEP Othmar Karas of the European People's Party pointed out that the reform of Basel II would still contain many open questions. This would among others include the granting of loans to SMBs and a precise definition of capital (i.e. banks, which obtain capital from the capital market compared to retail banks). He also expressed the opinion that the exact impact on the real economy had not been sufficiently examined. The results of the impact study of the Basel Committee would therefore be very important (the main focus should be on SMBs). A balance between banking structure and economy within the EU would be very important. According to the current state of the draft, there would be no majority in Parliament for Basel III.

Frohn regarded it as absolutely necessary to have a global unified implementation plan for the new Basel Rules for all banks. Basel II had still not been implemented in the USA.

Results to be expected in the coming weeks