Political Economy of the Basel II Process Tom de Swaan, CFO ABN AMRO Bank LSE Conference April 8, 2005

2 2 Subjects of today  Key principles for sound implementation of the framework  Specific concerns for international banks –Overview of the home/host debate –Role of the Accord Implementation Group  Future outlook of prudential supervision

3 3 Key principles for sound implementation of the framework

4 4 3 key principles  Quality of legislation is key –Rapid adoption not at the expense of quality of Directive  Convergence in implementation –Large number of national discretions result in uneven implementation –Superequivalent measures on top of standards set by Directive  Principles based approach –Basel II is not a compliance exercise –Avoid accumulation of conservative assumptions

5 5 Specific concerns for international banks

6 6 Background to the home/host debate  How to implement a world-wide Accord through local sovereigns?  Home/host issue relates to the tension between local responsibilities of host regulator and group-wide responsibilities of home regulator  Accord Implementation Group (AIG) promotes consistent implementation across jurisdictions although it has no formal mandate

7 7 Recommendations made to AIG by IIF task force on home host issues  Define clearer norms for expected communications between home and host supervisors and banks/colleges of supervisors  Set clear expectations for timings of approvals, validations and other implementation procedures  Involve banks in the process as much as possible

8 8 Current EU proposal for Capital Requirements Directive  Calculation of capital requirements takes place at the solo level which is to the disadvantage of cross-border banks  Consolidating supervisor is included in the draft directive but should also apply to Pillar II

9 9 Future outlook of prudential supervision

10 Looking ahead on the supervision model for Europe  Need for more efficient EU supervisory structures  Single EU supervisor?  Basel 3: market discipline leading, also for supervisors in supervisory review process

11 Conclusions  Basel II gives banks the opportunity to implement and benefit from enhanced risk management. Implementation of the framework is important to the banking industry  Regulators also need to embrace the core principles of the Basel II framework to ensure effectiveness  The implementation of the framework should be guided by the aforementioned principles  European supervisors are called upon to implement the framework consistently so as not to penalise the European Banking industry vis-à-vis competition