Basel II Test Run Confirms Global Quest For Stable Capital Levels Achievable, S&P Report Says

Frankfurt - 28 September 2006

Basel II's dress rehearsal in the form of the fifth Quantitative Impact Study (QIS 5), its last and most comprehensive test run ahead of implementation, confirms that the quest by bank regulators for stable capital levels and improved risk-management practices is attainable, Standard & Poor's Ratings Services said in a report published today entitled "Basel II Dress Rehearsal Signals Global Quest For Stable Capital Levels Achievable".

"The overall decline in minimum capital requirements recorded in a very benign environment appears moderate indeed in our view," said Standard & Poor's credit analyst Harm Semder. "We expect that banks will manage their internal capital targets with a wider buffer above regulatory minima than under Basel I to cope in particular with volatility issues." This will be even more necessary in the years immediately after implementation, as QIS 5 findings have highlighted some remaining data consistency issues that have affected quantitative results at individual banks levels. This, combined with the significant impact of the various Basel II methodologies illustrated in the quantitative study, will make Basel II ratios very difficult to compare. The survey also confirms our view that Basel II will reinforce the trend toward global industry consolidation, and that the global shift in favor of retail lending will continue.

The QIS 5 survey served as a global litmus test for Basel II's potential minimum regulatory capital changes for credit and operational risk, set to come into effect in 2007. Survey outcomes have prompted regulators to confirm current scaling factor calibrations, allowing the Basel II framework to be maintained in its present form to avoid any further postponement to implementation. The results were deemed satisfactory enough by most G10 regulators for them to give the go-ahead to their own current national Basel II versions. Increasing uncertainties regarding the future implementation within the U.S., which will be delayed until at least 2009, could, however, hinder regulators' goal of creating a competitive global level playing field.

QIS 5 findings generally indicate that regulatory capital requirements will remain fairly stable for the global banking industry over the next few years. The survey recorded average single-digit minimum capital requirement declines for large diversified banks, which appear moderate in light of the ongoing very benign economic environment. Substantial capital relief for retail and small and midsize enterprise (SME) lending was balanced by an additional capital charge related to operational risk.

"That said, Standard & Poor's emphasizes that caution is warranted in QIS 5 interpretation," said Mr. Semder. Its wide data dispersions did not only reflect differences in risk profiles, but also an array of shortcomings due to remaining data inconsistencies, disparities and uncertainties in methodologies, and IT bottlenecks. Consequently, the impact of Basel II on capital at inception and thereafter may differ markedly from QIS 5 results, reflecting both potential changes in the economic cycle and ongoing refinements in methodologies. The extent of capital relief might be materially different.

In light of Basel II's complexity and of the significant impact of methodological choices on capital requirements, Standard & Poor's believes that extensive Pillar III disclosure is necessary for market constituents to analyze and compare a bank's capital adequacy. Indeed, we will continue to closely follow the Basel II process, and will leverage on increased disclosure to enhance our current capital and risk measures.

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