PARIS Oct. 21, 2004--The new and complex international capital-adequacy framework, known as Basel II, will help improve risk management in the global financial services sector, Standard & Poor's Ratings Services said in reports published today ("The Essentials of Basel II" and "Basel II: Evolution not Revolution for Banks").
"Basel II will reinforce certain major movements already well underway in the industry," said Standard & Poor's credit analyst Scott Bugie, author of the report, "notably the shift from corporate to retail lending, the growing proportion of trading in the business mix, the increasing tendency of banks to originate then sell loans, and the acquisition of smaller players by large, diversified financial conglomerates."
Mr. Bugie explained that if the Basel II framework were to be applied today, the risk-weighted assets and regulatory capital requirements of most banks would likely fall--in some cases substantially. Banks that specialize in mortgage lending and consumer finance appear set to receive the greatest proportional capital relief under Basel II. The national bank supervisors who will implement Basel II in three or four years, however, may find a way to maintain the current capital levels in the industry through the parts of the framework that are left to their discretion.
Standard & Poor's does not expect banks suddenly and materially to reduce capital, but rather that a gradual reassessment of the relationship between regulatory capital, loss reserves, economic capital, and risks will take place over the next several years. A potential medium- to long-term outcome of Basel II is that banks will maintain a wider margin over the minimum regulatory capital, in order to compensate for the potential volatility in risk-weighted assets (RWA), and in the regulatory capital ratio. Nonetheless, if a banking group were to reduce capital materially due to the anticipated change in the regulatory calculation of risk assets, without any change in the bank's current economic risk profile, it would be subject to a ratings review that could lead to a downgrade.