Basel II heralds huge banking reforms (page 1 of 5)

Basel is a small, sleepy town in northwestern Switzerland, close to the borders of France and Germany. Basels pretty, medieval architecture and picture-postcard location on the banks of the Rhine make it a popular destination with European tourists.

But that aside, the town and its 160,000 inhabitants appear to have little to distinguish themselves on the world stage.But appearances can be deceiving. Behind Basels humble facade, a team of international bankers is planning a financial revolution that is reverberating around the world Ð including the Middle East.

Basel is home to the Bank for International Settlements (BIS), the elite financial club formed by the worlds central banks. And along the corridors of power at BIS headquarters in Centralbahnplatz, work is nearing completion on the Basel II banking accord.

Without a doubt, Basel II will impact Middle East banks, says Darren Stubing, chief banks analyst at ratings agency Capital Intelligence (CI) in Cyprus. It is a quantum leap in capital standards and will have a big effect on banks in the region going forward.

What is Basel II? Essentially, its the tough new rulebook for international banks. Jean-Claude Trichet, president of the European Central Bank and a driving force behind Basel II, says it will strengthen the stability of the financial system and . . . serve as a source for sustainable growth for the broader economy.

In practical terms, Basel II will impact Middle East banks in a host of ways. It will change how banks lend money - and which countries they lend money to. It will force banks to be more open and transparent about their balance sheets, and it will force them to manage their risks far better. In the process, it will force them to invest millions of dollars in new IT systems and consultancy fees to comply with the new regulations.

Timetables

Strictly speaking, Middle East banks will not have to comply with Basel II. Under the timetable for Basel II, only G-10 banks are expected to adopt Basel II by the end of 2006. (The G-10 is actually 11 countries: Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom and the United States.

Luxembourg also sits on the Basel Committee on Banking Supervision, which is drafting Basel II.) However, there is little doubt that scores of Arab banks will have to comply with Basel II well before the end of the decade. Initially, Basel II will only apply to G-10 countries, as was the case with the original 1988 Basel accord.

However, history shows that other international banking regulators (mainly central banks) soon adopted the 1988 Basel accord as best practice, and required their domestic banks to comply. Today, more than 100 countries require their banks to comply with Basel I, including many in the Middle East.

Most of these central banks have pledged to adopt Basel II at the earliest opportunity. Definitely we are going to get our banks to comply with Basel II, says Khalid Ateeq, executive director of banking supervision at the Bahrain Monetary Agency (BMA), the countrys central bank.

Maybe not by the beginning of 2007, but by mid-2008 or 2009. Bahrain is the regions banking hub, and the BMA is recognized as the regions strongest regulator, so it is no surprise that the BMA plans to be an early adopter of Basel II. But the BMA is far from a lone voice: all six GCC central banks are working together on Basel II implementation, while many other Middle East central banks are also understood to be keen to comply.