Basel II – further proposed changes – but is there time?

1. Revisions to the Basel II market risk framework,
2. Guidelines for computing capital for incremental risk in the trading book, and
3. Proposed enhancements to the Basel II framework were released simultaneously.

Comments on the first two papers are due back on March 13th and on the supervision and disclosure proposals by April 17th.

The three documents are closely linked (some of the press statements look to have suffered from cut-and-paste reuse) and look closely at the use of value-at-risk (VaR). There are proposals for an incremental risk capital charge for unsecuritised credit products, a stressed additional VaR for major events to counter procyclical impacts, and to remove the preferential treatment for portfolios that are categorised as liquid and well-diversified. They also propose that the new charges will take migration risk into account as well as default risk.

Pillar 2 and 3 also get treatment with emphasis on concentrations, off-balance sheet exposures, securitisations and related reputation risks, and added disclosure requirements for securitisations and off-balance sheet vehicles.

The proposal is that the Pillar 2 enhancements take effect July 1st 2009, with most of the Pillar 1 and Pillar 3 enhancements become effective by end 2009. A date of "no later than end 2010" is proposed for the trading book proposals.

All these proposals will have the effect of increasing capital requirements, particularly in banks dealing in esoteric instruments, i.e. most of those currently in trouble. These proposals will therefore be looked at closely by governments and regulators working with the troubled banks, as reducing capital requirements is one of the possible solutions being proposed.

The Basel Committee has to continue on a business-as-usual basis - but, given the current revelations of further toxic assets and the resulting nose-dive of bank share prices across the globe, will there be a banking industry around as we know it for these detailed Basel II changes to regulate? Maybe something simpler and immediate is required – like the leverage ratio?