Sunday, June 27, 2004

World's bankers set tough risk rules in Basel II

Following five years of debate in the banking industry, Central bank governors and regulatory heads from the U.S., Europe and Asia approved on the 26th of June 2004 a major rewrite of global bank safety rules. Amongst them U.S. Federal Reserve Chairman Alan Greenspan, European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Toshihiko Fukui. The Basel II Capital Accords govern how much cash banks must set aside as a buffer against risks. Regulators must still convince local politicians that the Basel II framework indeed will make the financial system more robust without causing too much trouble for the banking industry. Banks have complained loudly about the cost and complexity of the new system. Also certain banks, lending heavily to households, and financial services companies based on ultra low interest rates may be put in a difficult position should interest rates rise quickly. The rules begin taking effect at the end of 2006, for banks using the most basic formulas, or a year later for companies using the most complex approaches that take into account the internal credit ratings that lenders assign their customers. Application will probably vary by country. The EU is imposing the rules on all of its almost 8,000 banks, while the U.S. will require the guidelines only for big financial companies that compete abroad.