The new Basel II standards may make the comparison of lending risks harder, said rating agency Standard & Poor's (S&P) in a report released earlier this week. This is because the application of the permitted different approaches in Basel to calculating risk, plus the ability of national supervisors to have slightly differing interpretations, could result in differing amounts of capital being allocated to protect against the same amount of risk.
Whilst seeing Basel II as a positive development in driving massive investment in risk measurement and management systems across the globe, S&P said that they believed banks' capital ratios would have less comparability than was generally believed under the new Accord. S&P analyst Bernard de Longevialle said "In addition to multiple options for national discretion in applying the rules, the move to a regulatory system that allows several different approaches to measuring the same type of risk creates the potential for significant inconsistencies among banks' capital requirements, even within the same country."
The increased disclosure required by Basel II Pillar 3 would provide valuable information on banks' risk profiles and risk management systems but S&P still saw the need for in-depth analysis and that there was still the possibility that their view of the risk and the amount of capital needing to be allocated would differ from the regulators.
In a separate exercise, S&P surveyed 78 insurers and reinsurers across the USA and Europe to test the adequacy of their enterprise risk management (ERM) processes and found that they were by and large acceptable with only five being rated as weak. This is an important benchmark as, until the arrival of Solvency 2, there is no established regulatory or trade association criteria for ERM in this sector.
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