New banking rules hold no fears

The Bank for International Settlements is coordinating Basel II Keystone

Swiss banks and businesses have welcomed new international regulations that came into force on January 1 governing the way bankers measure and cover financial risks.

This content was published on January 5, 2007 - 18:01

Reports have made light of fears that the Basel II framework could unfairly disadvantage smaller banks and that small and medium-sized enterprises (SMEs) would find it harder to obtain credit.

The code replaces a 1988 agreement, known as Basel I, which had the same aim of determining how much reserve capital banks should set aside to lessen their exposure to bad debt or investments that go wrong.

Basel I was introduced in response to the global banking crisis which began in the 1980s and continued into the 1990s. Hundreds of banks went to the wall following a general economic slump that left the high-risk strategies of many exposed.

The more complex set of risk assessment procedures now introduced takes into account the size and business nature of different banks as opposed to the one-size-fits-all model of Basel I.

This "menu approach" offers banks the choice of implementing two versions of an expensive internal regulatory system or adopting the cheaper standard option that sets a crude minimum for reserves to be set aside.

Credit crunch

The Swiss Bankers Association says the changes are fair for every size of bank.

"We believe an adequate balance has been struck between ensuring the benefits of credible regulation on the one hand and minimising competitive disadvantages compared with other international financial centres on the other," spokesman James Nason told swissinfo.

Fears that Basel II could push up the cost of lending and make it harder for SMEs to obtain credit have been partially allayed by separate reports from Credit Suisse and the Swiss Federal Banking Commission that dismiss these scenarios.

Swiss banks have already refined their risk strategies following the real estate collapse and related credit crisis a decade ago.

Peter Neuhaus from the Swiss SME Association believes these changes should cancel any possible negative impact Basel II may have on credit supply.

"The problems that were around in the 1990s are now all solved," he told swissinfo. "There are certainly not going to be any credit restrictions and we do not see any problems in this area."

The Swiss Bankers Association expects business as usual under the new regulatory framework.

"We believe Basel II will not make such a big bang in Switzerland as it might perhaps make in some other countries," said Nason. "We do not expect it to cause a credit crunch or make loans much more expensive in Switzerland."

swissinfo, Matthew Allen

In brief

The first set of regulations concerning risk taking in the banking industry, Basel I, was adopted in 1988.

The regulations were introduced in response to the global banking crisis of the 1980s, which continued into the 1990s. Hundreds of banks went to the wall following a general economic slump that left the high-risk strategies of many exposed.

Members of the Basel Committee on Banking Supervision, considered the world's banking regulator, agreed the Basel II rules. The Basel-based Bank for International Settlements is coordinating the implementation.

The code has a three-pillared structure. The first sets minimum capital requirements for credit and market risks as well as operational risks not considered in Basel I. The second pillar builds in greater supervision and the third forces banks to reveal more information about risks.

The new code is a non-compulsory "gentleman's agreement" but any bank that declines to adopt the regime runs the serious risk of being cold-shouldered by the financial community and investors.

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