Implementation of Basel II: Practical Considerations

July 2004

In June 2004, the Committee published the document "International Convergence of Capital Measurement and Capital Standards, a Revised Framework" (widely known as Basel II). While this revised Framework has been designed to provide options for banks and banking systems world-wide, the Committee acknowledges that moving towards its adoption in the near future may not be the first priority for all supervisors in all non-G10 countries in terms of what is needed to strengthen their supervision. Furthermore, the IMF and World Bank are of the view that future financial sector assessments will not be conducted on the basis of adoption of or compliance with the revised Framework if a country has not chosen to implement it. Rather, assessments will be based on the adequacy of the regulatory/supervisory standards adopted by the respective country and the country's performance relative to the chosen standards, consistent with the requirements of the Basel Committee's Core Principles for Effective Banking Supervision ("BCP, September 1997").

Basel II aims to build on a solid foundation of prudent capital regulation, supervision, and market discipline, and to enhance further risk management and financial stability. As such, the Committee encourages each national supervisor to consider carefully the benefits of the new Framework in the context of its own domestic banking system and in developing a timetable and approach to implementation. Given resource and other constraints, these plans may extend beyond the Committee's implementation dates. That said, supervisors should consider implementing key elements of the supervisory review and market discipline components of the new Framework even if the Basel II minimum capital requirements are not fully implemented by the implementation date. National supervisors should also ensure that banks that do not implement Basel II are subject to prudent capital regulation and sound accounting and provisioning policies.

Many national supervisors who are not represented in the Committee have already begun to evaluate the suitability of the new Framework for banks in their jurisdiction and plan for the transition to Basel II. In order to further this process, the Committee convened a Working Group largely comprised of members from non-G10 countries to assess the issues involved in implementing Basel II, to help them decide whether and when to implement Basel II, and to provide practical suggestions to supervisors for the transition to the new Framework. The Working Group undertook this work during the first half of 2003. A number of those suggestions are summarised in this discussion document. Although the document has been largely informed by the experiences of the particular members of the Working Group, the guidance is not focused on any country or particular type of banking system. Rather, the document offers suggestions that can be adapted for use in different jurisdictions; it may also serve as a basis for discussion between supervisors and the banking industry. The document is not intended to be an interpretation of Basel II rules.

The document is structured as follows. Section 1 sets out various policy considerations that can play a role in weighing the costs and benefits of Basel II implementation vis-à-vis other national priorities. Section 2 discusses the factors that could be considered in determining the application of Basel II, with regard to the particular options and the population of banks which would be subject to the new Framework. Sections 3, 4 and 5 discuss implementation of Pillars 1, 2 and 3 more specifically. Sections 6 and 7 address potential changes to the legal and regulatory framework and resource and training needs.