Academic journal article ABA Banking Journal

Waves of Consequence to Follow New Capital Accord

Academic journal article ABA Banking Journal

Waves of Consequence to Follow New Capital Accord

Article excerpt

Last month we ran the first part of a report prepared by Contributing Editor Ed Blount based on a breakfast meeting with Jaime Caruana, chairman of the Basel Committee on Banking Supervision, the morning after the new Basel Capital Accord was announced. This article concludes that report, touching on additional ramifications of the new accord.

Next month, a feature article will explore banker reactions to the new rules, which take effect formally at yearend 2006.

In the long run, the revised Capital Accord, known as Basel II, will significantly change the behavior of bankers. Affected banks will have so much to accomplish that, as their managers weigh risk tolerances, the accord may even generate its own feedback loop. This will be especially true for customers who have learned how their banks 'think' over many years of dealing with loan and calling officers.

The new capital rule-set is so specific that some customers (and their consultants) will be able to estimate how much regulatory capital will be required to support their service requirements. Some of those customers have already come to appreciate, in very specific ways, how changes in their loan terms or service contracts, such as an easing of their expectations for operational quality, can result in lower risks and lower capital requirements for banks--and how those accommodations can probably be negotiated into a better deal. After all, the bank can achieve the same results for a low-fee/low-commitment service, as for a service that is risk-adjusted down from the high end of the capital scale.

Waves of consequence have also been spreading through the vendor community of the banking world since June's announcement that the G-10 central bank governors had adopted the Basel Committee's proposal for a new accord. Information technology vendors realized immediately, after hearing Committee Chairman Jaime Caruana say, "We will work toward a full credit model in the future," that they would be faced with great challenges--and equally great opportunities.

Bankers will be committing a great deal of their computer systems to capture and organize the datasets needed for large-scale credit risk modeling. As banks move into the implementation stages of Basel II, their current IT platforms will be presented with a number of critical tests in supporting the new risk systems. For example, JPMorgan Chase has already been reported as planning to spend $100 million on upgraded, central risk systems during the next four-to-five years. …

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