The aftermath of Basel: a babel of responses as bankers have their say

It is now more than six months since more than 500 pages of documentation,laying out the new Basel Accord on capital levels for banks, were published. Much of the accord, which had a three-year gestation period, had already been well flagged.

However, the world's banks and regulators knew that the devil would be in the detail, and already some leading trade associations and some of the world's most influential bankers have been pressing for a delay in implementation of the rules.

Of particular concern among the banks is the costs of implementation for some of the smaller ones – these could prove to be extremely punitive. Also of concern is the fact that some institutions seem to have been inadvertently caught by the accord.

For instance, many European fund managers are irritated that they have been swept into the net when they claim that they are not subject to the same sort of risks as UK banks.

The European Asset Management Association (EAMA) has been one of the most vociferous critics of the accord, attacking what it believes could force fund managers to put aside more than $6 billion for no particular purpose.

EAMA was one of the strongest opponents to enforcement of the Basel Committee's consultative paper on regulatory capital requirements for asset management businesses. Donald Bryden, president of EAMA, points out, not unsurprisingly, that the European asset management industry is not the same as the European banking industry. He believes that high capital requirements on asset management companies will not act as a defence against systemic risk or give better levels of investor protection.

EAMA claims: "It is not at all clear to our members what is wrong with the current expenditure-based capital requirement. This regime has worked satisfactorily since its inception, affording adequate protection for investors without damaging the asset management industry." Some regulators have some sympathy with Mr Bryden's view.

However, one does not have to look into the not to distant past, to see one example where the strong capital base of a bank, in this case Deutsche Bank, was needed to bail out a fund management company, in this case Morgan Grenfell,where Peter Young, a fund manager, made what appeared to be millions of pounds of false investments.

Others to criticise the accord were a group of international bankers in Hong Kong holding a conference recently in Hong Kong. The Institute of International Finance (IIF) said it was concerned that some of the emerging market banks fell outside the accord's remit. This would have the effect of producing a two-tier banking system, giving those that did not have to meet the accord a significant advantage over competitors. The concerns were expressed at a meeting of the IIF's steering committee on regulatory capital, which presented its first detailed report on the Basle Committee's proposed new capital guidelines.

Jan Kalff, a former chairman of ABN Amro and one of the world's most respected bankers, said that, while supporting the broad direction and intent of Basel, the IIF was concerned whether regulators as well as the financial institutions themselves were ready to implement the complex and expensive guidelines. He expressed alarm over the fact that some commentators were estimating that it was going to cost as much to implement the accord as to prepare for Y2000.

Others also want more time to prepare as many of the US banks are already at commercial advantage to the some of their European counterparts. Regulators remain confident that the current timetable for finalising the rules by the end of the year for introduction in 2004 will be met, particularly as legislators in Europe are now on track to make the necessary changes. European banks had feared that the timetable would leave them at a disadvantage to US rivals able to move to the new regime before them. The banks' call for a pause for breath is understandable given that the treatment of a number of important areas has still to be hammered out.

Perhaps one of the most surprising things to come out of the Basel review is that investment banking comes out a less risky exercise than credit card lending. The outcome appears odd given some of the millions of pounds lost by clearing banks attempting to break into investment banking over the years. Barclays' disastrous foray in investment banking in the mid-1990s cost more than£800 million and is believed to have been instrumental in the departure of the chief executive. Other banks to lose money in investment banking include NatWest, and ING, the Dutch bank that bought Barings for £1 more than five years ago.

Basel also deems corporate lending to be less risky than retail lending. Again this seems a surprising consequence of the accord, as big increases in bad debts at corporates have been enough in the past to almost wipe out the capital reserves of even the most prudent of players.

The accord, however, does attribute a high level of risk to the business of lending to members of the public, either through credit cards or through mortgages. Analysts believe that ultimately this will act against the interests of the clearing banks such as Lloyds TSB and Barclays. Already Northern Rock,the UK's smallest mortgage bank, has scaled back its highly evolved securitisation operation, as it is as yet unsure how much capital it will have to carry to meet the requirements of the Basel Accord. Northern Rock is only a mortgage and savings institution, and therefore is highly susceptible to Basel's attitude to the risks of lending to the public.

However, a consensus has at least emerged on the broader impact of reforming rules first introduced 13 years ago. The rules will have a profound impact on the types of business that banks pursue, with a shift away from retail activities towards corporate and investment banking.

It will also have an impact on the pricing of banks' entire product ranges and raise their cost base because of the extra additional administrative load. For the first time, it will allow banks to use their own internal risk-management techniques to calculate the capital they require.

The Basel Committee is due to publish responses to a quantitative survey of the rules' impact next month, but it seems highly unlikely that there will be any particular change in the overall structure of the accord.

However, there is a possibility of a reprieve for the smaller banks which have more resource constraints. A desire to target banks with a larger impact on the global banking system could lead to smaller or retail-focused institutions facing a reduced burden of regulatory reporting.

There may also be some modification of the rating agencies' role in the Basle Accord. Moody's is one that has called on the Basel Committee to ensure the objectivity of credit ratings by setting out performance criteria for ratings used to determine the amount of capital financial institutions must hold.

Moody's said it had sent comments to the Basle Committee on Banking Supervision expressing its concern over "unintended consequences that may arise from the regulatory use of ratings" within the new rules. Moody's recommended that any regime set clear criteria for the recognition of qualified third-party providers of credit assessments. This would allow regulators, banks and investors to judge the appropriateness of the ratings.

Caroline Merrell is banking correspondent with The Timesin London.