Banking

Cheat Sheet: Basel II

Regulation, regulation, regulation...

Basel II? But I though there was only one season on Fawlty Towers?
If the only Basil you know owns a run-down hotel in Torquay and has a wife called Sybil, you're in for a surprise.

Basel II is an international business standard to ensure any large company that deals in money has enough cash at hand to cover all the risks it faces. It was created to make the financial world a little safer and more stable to deal in.

How will it do that?
The Financial Services Authority sums it up - "It will do so by seeking to ensure that the financial resources held by a firm are commensurate with the risks associated with the business profile and the control environment within the firm."

What that means in English is that the company should have enough money to cover credits, loans and still be able to function if everyone rushed in to collect their cash. The more companies can prove they are compliant, the easier it will be to do business. Essentially, Basel II tries to stop people trading with money they don't have.

Is that it?
Of course not - you don't get off that lightly. The more a company can show it is compliant, the more it can rate its own credit risk, for example. This may vary but it really comes down to assessing the trustworthiness of a company.

The more companies use "sophisticated" approaches (nifty IT systems that demonstrate due diligence and log all transactions and accounting procedures), the easier life will be for them.

Can I go home now?
Get back to your seat. Basel II also requires companies to publish details of their risks, capital and risk management practices. This is to improve transparency and international business disciplines.

What does this mean for IT?
Some consultants argue that Basel II means a complete overhaul of IT systems, and that could run into a lot of spending. Vendors are, of course, more than happy to step in and answer all prayers. Saying that - that overhaul can give companies the chance to genuinely improve their business practices and save money through better processes.

Others however say just a few nips and tucks of an IT system will do the job, improve processes and save money.

Oh - and all this needs to be done in time for next year (2007).

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Who created such a monster?
Basel II is the follow up to Basel I, which was also written by the 13 countries that make up the Basel Committee on Banking Supervision.

Basel II is also called "The New Accord" but the proper title is "The International Convergence of Capital Measurement and Capital Standards - A Revised Framework". Fun eh?

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