Introduction of Basel II should not impact Gulf bank ratings, says S&P

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It will help regional banks improve their risk management systems and focus more on quantitative information and analysis, however many will be challenged to find reliable regional data on corporate defaults.

Emmanuel Volland, credit analyst at Standard & Poor's Ratings Services, said all GCC regulators have so far decided that banks must first implement the simplest approach to capital management under Basel II, the so-called 'standardized approach,' and some countries have already implemented this new regulation on minimum capital ratios. Kuwait was the first country in the world to introduce the Basel II regulation, as early as December 31, 2005, Mr Volland noted.

In the short to medium term, Standard & Poor's Ratings Services expects the most sophisticated Gulf banks to move to the 'Internal Ratings Based' approach. 'This would require deeper and more complex work, and banks will be challenged to find reliable regional data on Probability of Default and Loss Given Default,' Mr Volland said. 'Although Basel II is not expected to have a dramatic impact on GCC banks, it will help them to improve their risk management systems and focus more on quantitative information/analysis.'

Standard & Poor's Ratings Services plans to begin implementing its risk-adjusted capital framework (RACF) from the first quarter of 2008. In a new report titled 'Credit FAQ: Building Standard & Poor's Risk-Adjusted Capital Framework' Standard & Poor's Ratings Services answer questions raised in response to our request for comment published on November 8, 2006 ('Request For Comment: Risk-Based Framework For Assessing The Capital Adequacy Of Financial Institutions', updated January 12, 2007.)

Standard & Poor's welcomes the expected increase in transparency that will be driven by extensive Pillar 3 requirements under Basel II. This will allow us to develop a much more robust global risk-adjusted capital measure. In the more than 100 countries where Basel II will be implemented, Pillar 3 will be the starting point for our measure.

We believe adjustments can be made to make Basel II measures more comparable. We will take full advantage of the estimates and disclosures made for capital requirements under Basel II but will adjust these requirements to enhance comparability.

We will factor in our differences in opinion and will seek to provide a consistent and transparent quantification of Pillar 2 risk factors such as single-name concentration, industry and/or geographic concentration, asset class diversification, and interest rate risk in the banking book.

The new report addresses the following questions, among others:

-- Will the RACF only cover unexpected losses?

-- What is the time horizon for Standard & Poor's RACF?

-- What is the relation between the Basel II approach and Standard & Poor's RACF?

-- What is the geographical coverage of the RACF?

-- What will be the extent of public disclosure of Standard & Poor's RACF?

-- How will the RACF treat securitized assets?

-- How will Standard & Poor's RACF treat diversification?

-- What is Standard & Poor's global implementation schedule for the BCA, SCA, and ECA?