On the eve of a crucial meeting of the Basel Committee on Banking Supervision, "many open questions" still remain over a major package of reforms to the Basel II capital framework that must be agreed upon this week, a senior committee member has told Risk.
The committee's members, drawn from 43 organisations in 27 countries, will gather at the Bank for International Settlements in Basel today for their quarterly meeting, with the task of finalising an official communication currently known as Strengthening the resilience of the banking sector and believed to be roughly 70 pages in length.
The main pillars of the communication have been widely discussed in advance, and include the introduction of a leverage ratio, a counter-cyclical capital buffer, new liquidity ratios and new definitions of Tier I capital. But the committee still has a long way to go to reach consensus on some of the details.
"On the capital buffers, we haven't progressed much in the last two months and it's getting tough because we're getting closer to the consultation phase when the plans will have an impact on the market. On liquidity, we have progressed a lot and are getting closer to sending signals to the market - we just have some delicate issues to resolve, such as what qualifies as liquid assets," says the committee member.
Also on the agenda is a controversial proposal to increase the capital held against the credit risk of a bank by dramatically increasing the correlation assumption used in the internal ratings-based approach to 25% for banks. "This will mean more capital if your credit risk is with a bank rather than a corporate, so I'd like to discuss the impact of this measure on lending to banks," he says.
Proposed changes to the definitions of capital are also likely to be challenging - although the committee has already said that a greater proportion of a bank's Tier I capital should be common equity, it has still to agree on the exact proportion, and the type of common equity that would qualify.
Although there will be no formal vote on the reforms, committee members must reach consensus on the detail of the measures, and must also agree on the timing and format of the industry consultation and quantitative impact study that have been slated to begin early in 2010.
As they arrive in Basel over the next few hours, committee members can certainly be sure of a packed agenda - the meeting is scheduled to run only from Tuesday morning until lunchtime on Wednesday. By then, a working version of the landmark communication will need to have been signed off, although it may not be published until early next year, once all of the amendments have been incorporated.
This article first appeared on Risk.net