Accord sans frontières

Featured in "Operational Risk" - March 2004

Arguing the technicalities of Basel has been a long sideshow to the real issue - how it is going to be implemented. Or more specifically, how the Accord is going to be implemented consistently across national frontiers.

The issue dominated responses to CP3. ANZ Bank was concerned at the threatened loss of "competitive equity" if supervisors do not act consistently. Citigroup noted the danger of "unnecessary and duplicative incremental costs". JPMorgan Chase, with others, looked for a charge calibrated at the consolidated level, and hoped that home supervisors would be left "to bridge the gaps". It urged national supervisors urgently to explain the processes by which they will assess qualification for the AMA.

Put simply, home-host is the big issue. It's the one which affects banks of even modest size - if they happen to be European. It's the issue which can increase costs exponentially. And it's a major cost factor over which banks have little or no control. On this, more than any other, the industry is in the hands of the regulators.

At this late stage, though, with the clock ticking fast towards midnight - assuming we're still aiming for tonight and not some time tomorrow - the outcome remains as uncertain as ever. And I say that having read the four new Principles on AMA implementation, which came down from Mount Sinai in January.

In the face of the industry's chorus of concern, we have simply got confirmation that capital will have to be calculated at every tier within the banking group - and be approved by both home and host supervisors. And as a subtle riff on this, Principle 3 says that each subsidiary must be adequately capitalised. Principle1 also talks about "significant cross-border operations". Presumably significant to the host supervisor. So even minor subsidiaries could be caught in the web. It's all very depressing. At least Principle 4 asks supervisors to balance the principles with the aim of minimising the burden and cost. Amen to that.

Perhaps we expected too much. Perhaps we underestimated the demands of national sovereignty. Certainly, there is little to suggest that supervisors have found a formula which they can operate internationally. Anecdotal evidence suggests that few regulators have really engaged in meaningful dialogue with their industry to understand the peculiar issues surrounding operational risk. Which makes cross-border implementation even more frightening a thought. The more so when you consider the US opt-out, and the understandable one by major emerging economies such as China and India. Standard Chartered's Richard Meddings, in a recent interview with Asia Risk, pointed to the "differential stance taken across countries" and the complexity "in terms of different regulation and in terms of inaction."

It's not as if agreements on international standards have a good track record. From Kyoto to accounting, the roads are paved with good intentions. Take accounting. Everybody wants common standards - the EU, the SEC, the markets and, of course the IASB, which is writing them. But look at the current furore surrounding the accounting treatment of financial instruments. The SEC says that if IAS 39 is watered down, European companies with US share listings may have to produce accounts under US rules. On this side of the pond, Jean-Claude Trichet no less, with the support of the financial sector, urges the adoption of pan-European standards but opposes the proposed treatment, a stance in which he is supported unsurprisingly by President Chirac. An impasse, therefore, or perhaps a high rolling game of poker?

Monsieur le Président, of course, leads me neatly to politicians, who have decided to gate-crash the Basel party. An unholy alliance of the US House of Representatives and German socialist MEP Alexander Radwan have each expressed concern at the lack of involvement of democratically-elected bodies in the process of agreeing this and other international agreements. They point out that the Basel Committee, like the IASB, "has no democratic mandate".

Surely, after all the effort of the last many years, it's not going to come down to political horse-trading. There's been enough of that already. But it just may do, if regulators cannot come up soon with clearer ideas than they have to date on how they will implement the Accord. If not, the uncertainties will increase and the costs will continue to mount even more unreasonably than they have already. And to add to the confusion we may find a lot of the good work unpicked by vote-seeking politicians. The clock is ticking.

John Thirlwell, Executive Director, Operational Risk Research Forum.
The views expressed in this article are those of the author.


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