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Wednesday, October 17, 2018

Basel II – capital requirements for banks

During its 10 July 2002 meeting, members of the Basel Committee on Banking Supervision reached agreement on a number of important issues related to the New Basel Capital Accord that the Committee has been exploring since releasing its January 2001 consultative paper.

In its discussions, the Basel Committee has considered a range of issues related to both the standardised and internal ratings-based (IRB) approaches to credit risk. In this context, the Committee reaffirmed the importance of the revised standardised approach to be used by the majority of banks worldwide.
Although no conclusions have been drawn yet, it is expected that under the “standard method”, making use of external ratings, an additional much increased risk weighing factor will be introduced. An option is an “internal rating based” (IRB) approach, based on the borrower’s balance sheet and the overall ongoing operations; this can only be used if the bank satisfies certain operational and quantitative requirements.

Consideration is further being given to rules for Object Financing, usually involving a special purpose vehicle. Risk measuring would then seem purely IRB based and relate exclusively to the capacity to generate cash flow from the use of the subject single asset.

After the consultation procedures and publishing of the new Basel Capital Accord, the European Commission will no doubt follow the recommendations in a Directive.

Many ships are financed by a mortgage, but although this offers security to the bank, the ship or part value thereof is thus far not recognised as collateral under Basel Committee rules. The good news of the new rules for the shipping industry is probably that ships most likely will be recognised as collateral. On the other hand, the risk assessment and weighing factors approaches may prove an adverse development, subject to the financial and operational standing of the borrower of course.

(Sources: ECSA, Bank for International Settlements - BIS)

Link to latest Basel Committee press release at the BIS: Click here for more information

Contact: Jan Svenne, email: jan.svenne@intertanko.com,