The Accord, which is compulsory and must be adopted worldwide, stipulates that banks must have new procedures for measuring and mitigating against credit and operational risk.
In general terms the Accord is based on three pillars:
- quantification of the risks arising from financial firms' trading and credit business;
- dialogue between regulators and firms on the risks run by firms and the level of capital needed to support them; and
- public disclosure by firms to enhance market discipline.
The implementation of the draft Capital Requirements Directive, which is linked to the Basel framework and has a 2007 deadline, will involve considerable work for those firms on which it impacts, requiring systems and risk management changes.
Accordingly the UK's financial regulator last week published a consultation paper, giving as much detail as possible on how the FSA is likely to approach the implementation, particularly in those areas where the UK has significant national discretions to exercise, and the industry seeks early signals on the FSA approach.
However, the timing of CRD implementation depends on the timing of the final agreement between the Council and the European Parliament on the text of the Directive.
In order to allow Member States the 18 months normally allocated for implementation and to ensure that the Directive comes into force alongside the new Basel Framework, the text needs to be agreed by June/July 2005. The Parliament is currently not expected to deliver its draft Opinion on the Draft Directive before April/May 2005.
In addition, a number of other aspects of the CRD remain subject to work being carried on jointly by the Basel Committee and the International Organisation of Securities Commissions (IOSCO), and on the progress of EU legislation.
"The introduction of the Capital Requirements Directive will mark a huge step forward in developing a modern capital framework that will improve the risk sensitivity of capital standards for firms across the EU," said Hector Sants, FSA Managing Director.
"Considerable uncertainties remain, however, not least in the timing of its introduction," he added.
The Consultation will remain open until 29th April 2005.
