Basel II should be adjusted, not called into question

15 July 2009 - “The Association of German Banks is fully committed to Basel II, even if a few points need to be adjusted. There is no alternative to a risk-sensitive capital adequacy framework. We therefore firmly reject calling into question or suspending Basel II,” Hans-Joachim Massenberg, Deputy General Manager of the Association of German Banks, told journalists in Frankfurt.

It is inevitable, however, that a risk-sensitive capital regime will have certain procyclical effects. “In light of the lessons learned from the financial crisis, short and medium-term adjustments should be made to regulatory capital requirements in order to reduce the procyclical effects,” continued Massenberg. Amendments, especially if they lead to an increase in the level of capital requirements in the banking system, should nevertheless only be made once the crisis has been overcome “because they would otherwise merely exacerbate the current situation”.

Basel II was developed and introduced on the basis of normal economic cycles. But the scale of the current economic crisis far exceeded that of previous recessions, said Massenberg. Only in such an exceptional situation was it necessary also to consider temporary, short-term adjustments to Basel II. In particular, there should be a limit on the sharp rise
in capital requirements resulting from downgrades of the banks’ assets so as to maintain the availability of resources for further lending.

Short-term adjustments to the capital framework should ensure that downgrades and write-downs of assets do not put undue strain on the banks’ regulatory capital during the financial crisis. The Association of German Banks supports efforts by German Finance Minister Peer Steinbrück to obtain a short-term easing of requirements at European level. Similar measures must also be taken by the credit rating agencies, however. The German private banks also support revising the treatment of revaluation reserves since this has the potential to effectively strengthen the banks’ regulatory capital.

In the medium term, that is to say after the end of the crisis, it would be important to focus above all on better capital adequacy at the banks, at least where this was necessary from a risk angle, stressed Massenberg. The Association of German Banks rejects the introduction, alongside Basel II’s risk-based rules, of non-risk-sensitive requirements such as the leverage ratio. Measures to mitigate the procyclical effects of Basel II should also be taken. The Association of German Banks especially supports dynamic provisioning or buffering, as well as countercyclical adjustments to risk-weighted assets. Adjustments to accounting rules should make it easier to use alternative methods of valuing illiquid assets instead of using only market prices.

» Discussion Paper - Appropriate Capital Rules
» Position Paper - Appropriate Capital Rules

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