Fed Governor Discusses Basel II Accords
In the year since the final Basel II international capital framework was agreed upon, much has been written about the implementation of the accords, which aim to reinforce the stability of the banking system. U.S. regulators plan to implement the accord’s safeguards by January 2008, but regardless of the schedule, at the heart of Basel II are sound risk-management precepts for a global banking environment.
|“New technologies and markets afford us exciting opportunities to meaningfully strengthen the risk-measurement and [risk]-management capabilities of our financial institutions.”
In a June speech to the Risk USA 2005 Congress in Boston, Federal Reserve Governor Susan Schmidt Bies expressed her hope that Basel II’s implementation will substantially improve institutions’ ability to measure and manage their risks.
Enhancing risk management
The major objectives of Basel II include creating a better link between minimum regulatory capital and risk, enhancing market discipline, supporting a level playing field in an increasingly integrated global financial system, and establishing and maintaining a minimum capital cushion sufficient to foster financial stability in periods of adversity and uncertainty. But the most critical objective, in her view, is grounding risk measurement and management in actual data and formal quantitative techniques, especially at large, complex organizations.
Because of Basel II’s complexity, U.S. regulators propose requiring only the largest, most sophisticated financial institutions to adopt it, and these institutions would have to implement only the accord’s advanced risk-management approaches, according to Bies. She said Basel II strengthens the link between regulatory and risk management, adding that the emphasis on improved data standards should be interpreted not solely as a regulatory capital requirement but rather as a foundation for risk-management practices that will enhance the value of the banking franchise.
New times demand new approaches
“These are challenging times both for banks and for bank supervisors,” Bies said. “New technologies and markets afford us exciting opportunities to meaningfully strengthen the risk-measurement and [risk]-management capabilities of our financial institutions. On the other hand, the risks of getting it wrong—of failing to keep banks’ risk-management practices up-to-date—can only grow as banking becomes ever more complex and sophisticated and as banking systems become more concentrated.”