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Latest Test Run of Basel II Raises Troubling Issues for Regulators (July 6, 2005)

Location: New York
Author: Scott Bugie
Date: Wednesday, July 6, 2005

Standard & Poor's Ratings Services said in a report that the latest test runs of Basel II may raise troubling issues for regulators, but do not alter Standard & Poor's fundamentally positive view of the new international capital adequacy framework.

The fourth in a series of quantitative impact studies (QIS 4) of Basel II was conducted in the U.S. and Germany to enable regulators fine-tune the complex rules of the accord. The early results of QIS 4, which indicate that the new framework would show an unintended decline in regulatory capital for the great majority of banks, may instead incite them to reconsider much of the framework.

"Even in light of the results, we hold firm in our view that banks will not precipitously increase capital leverage in anticipation of lower requirements under Basel II rules," said Standard & Poor's credit analyst Scott Bugie, author of the report, "Latest Test Run Of Basel II Raises Troubling Issues For Regulators."

The early results for QIS 4 in the U.S. and Germany , where they were just released by regulators, show a wide range in outcomes between the two country's large banks reporting under the advanced internal ratings-based approach (AIRB). These differences seem to be due to differences in current bank regulation and in the operating environment in the two countries, the report explains.

"We still believe that Basel II will improve risk management in the global financial services industry and reinforce already well-established trends," Mr. Bugie said.

The article includes tables showing the change in total minimum regulatory capital requirements (MRCR) and in MRCR by asset class under Basel II from under Basel I for U.S. and German banks participating in QIS 4.

The report is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit research and analysis system, at

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