12 May 2003

ESFRC statement on Basel II

In this statement, the European Shadow Financial Regulatory Committee (ESFRC) presents objections to the highly complex approach of the new Basel Capital Accord (Basel II). The Committee strongly objects to the treatment of operational risk, the politically influenced issues around lending to the small and medium sized enterprises, the insufficient consideration of the issue of pro-cyclicality, and the reduced emphasis on the third pillar, i.e. market discipline.

Comments on QIS 3:
The ESFRC believes that there will be a substantial overall reduction of the regulatory capital requirement. QIS3 implies that, most likely, the regulatory capital requirement on implementation will be substantially lower than the current projections. This significant reduction in the amount of capital held by banks in the EU and G10 and may have potentially adverse consequences for the stability of the banking system.

Recommendations:

At EU level, a Capital Adequacy Directive should be adopted that would make Basel II mandatory only for the large internationally active banks and investment firms. Smaller institutions should have the option of adopting either a simplified version of the “standardised approach”.

Distortions in the credit markets for SMEs should be remedied through fundamental reform accompanied by transitional measures and not by ad- hoc approaches favouring SMEs.

Implementation of Basel II may increase the pro-cyclical effects of capital requirements, because banks will have to increase their capital bases in recessions when borrowers appear more risky.

Full Statement

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