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Basel II: Preconditions, Options and Implementation Issues in non G-10 Countries

Basel II: Preconditions, Options and Implementation Issues in non G-10 Countries. Jonathan Fiechter, Deputy Director International Monetary Fund 4 th Annual Seminar on Policy Challenges for the Financial Sector June 1-3, 2004, Washington D.C. Preconditions for Basel II Implementation.

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Basel II: Preconditions, Options and Implementation Issues in non G-10 Countries

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  1. Basel II: Preconditions, Options and Implementation Issues in non G-10 Countries Jonathan Fiechter, Deputy Director International Monetary Fund 4th Annual Seminar on Policy Challenges for the Financial Sector June 1-3, 2004, Washington D.C

  2. Preconditions for Basel II Implementation • Basel II provides a framework to support large scale improvements in risk measurement and management practices. • Implementation of Basel Core Principles is an essential precondition for successful adoption of Basel II. • FSAP’s have identified several priority areas for strengthening supervision

  3. Preconditions – Basel II and BCP Assessments

  4. Preconditions – Basel II and BCP Assessments Reasons for non-conformance with CP 6 • Lower assigned risk-weights • Non-standard definitions of capital / components • Required CAR lower than 8% of RWA • No requirements for Market / Exchange Risk • CAR assessed/ reported on non-consolidated basis • No or only limited enforcement powers in event CAR falls below minimum

  5. Options • Basel I capital rule could be the norm in many countries over the medium-term • Significant benefits, nonetheless, from early application of supervisory review (pillar II) and increased disclosure (pillar III) • Countries adopting Basel II could start with standardized approach

  6. Implementation Issues for Supervisors • Benchmarking • Finding/building required staff expertise (and keeping them) • Developing implementation strategy • Preparing implementation road map • Identifying competitive implications of a “go-slow” approach • Developing policy for home-host arrangements • Facilitating development of common infrastructure

  7. Implementation Issues for Banks • Preparing action plans for meeting minimum requirements for data and IT • Finding/building necessary staff expertise and then keeping it • Assessing effect on capital • Anticipating shifts in industry practices and lending behavior • Seeking shared solutions

  8. Implementation Issues • 2007 target implementation date is meant for Basel Committee member supervisors and their banks • Assumes several years of planning and a state of readiness • Supervisors should be guided by status of their own systems and set timetables accordingly – premature implementation will create problems, not solutions • Avoid cherry-picking among options or inappropriate development of hybrid approaches.

  9. Basel II Implications for Fund Work • Surveillance/FSAPs will not presume adoption of Basel II • Intro of Basel II will make meaningful comparisons of the capital strength of banking systems (across countries and over time) more challenging • Premature implementation of Basel II by any country is unsafe • Fund ready, along with other providers, to provide TA to lay foundation for Basel II

  10. Thank You

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