Implementation of the new capital adequacy framework in non-Basel Committee member countries: Summary of responses to the 2006 follow-up Questionnaire on Basel II implementation

FSI Papers  | 
25 September 2006
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 |  55 pages

Executive summary

The new capital adequacy framework (Basel II) is a comprehensive framework for determining regulatory capital requirements and measuring risk. The process of implementing Basel II presents a variety of challenges for both supervisors and banks. For instance, some countries are developing or revising laws and regulations in order to implement the new framework. In addition, banks and supervisory organisations are in the process of acquiring additional human, financial and technical resources in order to implement Basel II effectively.

The Financial Stability Institute (FSI) decided to follow up on its 2004 Basel II implementation Questionnaire this year in order to see whether the plans reported in 2004 had changed significantly.1 The Questionnaire was sent to 115 jurisdictions in Africa, Asia2, the Caribbean, Latin America, the Middle East and non-BCBS Europe. BCBS member countries were not included in the Questionnaire. Responses were received from 98 jurisdictions, representing an overall response rate of 85%. The results from the Questionnaire indicate that 95 countries3 are currently planning to implement Basel II.4A number of other countries are still undecided as to whether or not they will implement the new capital adequacy framework.

Based on the 2006 Questionnaire responses, each of the three credit risk approaches under Basel II will be implemented by more countries than indicated by the 2004 Questionnaire results.5The standardised approach is expected to be the most widely used of the three credit risk methodologies for calculating capital requirements - 85% of respondents adopting Basel II plan to implement this approach. The foundation internal ratings-based (FIRB) approach ranks behind the standardised approach, at 67%, while 55% of respondents adopting Basel II intend to offer the advanced internal ratings-based (AIRB) approach. Some countries have decided to implement only the standardised approach for credit risk, while others will offer only one or both of the advanced approaches.

Similar trends are evident for the operational risk approaches. The number of jurisdictions intending to implement one or more of these approaches under Pillar 1 has increased significantly since 2004, with the basic indicator approach expected to be the most widely used of the three possible approaches.

A number of countries have decided to offer one but not both of the basic indicator or standardised approaches for operational risk. This partly explains why the number of jurisdictions adopting the basic indicator approach for operational risk is lower than the number of jurisdictions adopting the standardised approach for credit risk.

Relative to the 2004 Questionnaire results, more countries are now expecting to implement Pillars 2 and 3 before the end of 2015. Most intend to implement both at the same time; however, a few will implement Pillar 2 before Pillar 3.

Overall the results of the 2006 Questionnaire confirm that, since the previous Questionnaire was carried out, many supervisory agencies have firmed up their Basel II implementation plans. This is reflected in higher implementation rates for Pillar 2, Pillar 3 and the various Pillar 1 approaches, and in greater specificity about the timing of implementation.

This paper presents the responses to the Questionnaire from global and regional perspectives while observing the confidentiality commitment made in respect of individual countries' responses. The paper is organised as follows: Section 2 discusses the global results from the Questionnaire, while Sections 3-8 describe specific plans related to the implementation of each of the Basel II components in individual regions.

1 In recognition of the variety of implementation challenges confronting both supervisors and banks in the process of implementing Basel II, the FSI, in coordination with the Basel Committee on Banking Supervision (BCBS), conducted a questionnaire on Basel II implementation in 2004. The results of the Questionnaire were used to identify Basel II implementation plans and to determine corresponding capacity building needs in the non BCBS supervisory community.

2 Excluding Japan.

3 Comprising 82 non-BCBS jurisdictions plus 13 BCBS member countries.

4 Some countries which state that they are adopting Basel II do not yet have firm plans for implementing some aspects of the new framework.

5 Some countries which responded to the 2006 Questionnaire did not respond to the 2004 Questionnaire and vice versa.