The UK's Treasury yesterday launched a consultation on a draft
Capital Adequacy Directive – the law that will introduce an
international accord to overhaul the banking industry’s approach to
risk management.
The proposed Basel Accord, also known as Basel II, sets out
rules whereby banks must have new procedures for measuring and
mitigating against credit and operational risk.
The Accord is based upon a framework of three pillars: minimum
capital requirements, supervisory review, and market discipline.
These are intended to work together to allow a proper assessment of
the risks faced by banks.
While Basel II is not expected to be finalised until the middle
of next year, an implementation deadline of 31st December 2006
means that signatory countries, and banks, need to prepare for the
Accord now.
Banks are therefore assessing risk and building an action plan
to reduce exposure to it and Governments are preparing the
necessary legislation.
The Commission intends to implement the Accord through a new
Capital Adequacy Directive (CAD3), and the Government is now
consulting on the draft proposals.
CAD3 is expected to extend the scope of the new Basel regime to
all credit institutions and investment firms, while taking into
account issues specific to the EU.
CAD3 will also ensure that the new regime is legislatively
implemented throughout the EU, unlike Basel II, which is a
non-binding agreement that will only apply to the G-10 signatory
countries.
The consultation document lays out key questions and issues upon
which comments are invited. In particular, the Treasury is
interested to hear views on:
- the potential behavioural and wider economic effects of the
proposals;
- the effects of the proposals on borrowers and end users;
- the EU’s implementation of Basel II through CAD3; and
- the broader scope of CAD3 as compared to Basel II.
Announcing the consultation, Financial Secretary Ruth Kelly
said:
"A more modern and risk-sensitive approach
to setting prudential capital requirements should bring significant
benefits. However the proposals are complex and it is therefore
important that all interested parties engage in the consultation
process."
The closing date for responses to the consultation is 5th March
2004.
