Update on the New Basel Capital Accord

25 June 2001

25 June 2001

The Basel Committee on Banking Supervision has received more than 250 comments on its January 2001 proposals to revise fundamentally the 1988 Capital Accord, and intends to thoroughly review and consider all comments received. At this stage, the Committee wishes to highlight several important decisions that it has taken with respect to the proposals.

• First, consistent with the support that has been received on these points, the Committee remains strongly committed to the three pillars architecture of the new Accord and to the broad objective of improving the risk sensitivity of the minimum capital requirements.
• Second, the Committee reiterates its desire that the new proposals maintain an equivalent level of regulatory capital for the average bank under the revised standardised approach and that capital incentives between the standardised and IRB approaches should exist to encourage banks to adopt these more advanced approaches to credit risk. The evidence obtained by the Committee thus far, including an initial review of the comments, strongly suggests that the Committee's proposals need further adjustment to meet these objectives. In particular, the Committee anticipates the need for reductions in the basic calibration of the foundation IRB approach, both for corporate and for retail portfolios.
• Third, the Committee has concluded that the target proportion of regulatory capital related to operational risk (i.e. 20%) will be reduced in line with the view that this reflects too large an allocation of regulatory capital to this risk as the Committee has defined it. The Committee is considering numerous other comments and suggestions related to operational risk.
• Fourth, the Committee believes that further efforts are needed to ensure that the new proposals deliver an appropriate treatment of credit exposures related to small and medium sized enterprises (SMEs). This is likely to lead to lower capital for SME lending compared to the proposals in the January 2001 consultative paper.
• Finally, in light of the extremely high quality of the comments that have been received and in recognition of the Committee's desire to continue working cooperatively with the industry to achieve the best possible proposals, the Committee has determined to modify the timetable for completion and implementation of the new Accord. The Committee will release a complete and fully specified proposal for an additional round of consultation in early 2002 and will finalise the new Accord during 2002. Accordingly, the Basel Committee envisions an implementation date of 2005 for the new Accord.

The Committee greatly appreciates the substantial time and effort that many individuals and organisations have taken to develop detailed and constructive comments on its proposals. The Committee intends to continue promoting an open dialogue as its work continues and believes that such efforts will help to ensure that the new Accord meets its objectives.