We hope that work will soon go on the end

The countdown is started. Major European banks have more than a year to prepare for prudential standards of "Basel 2". A sign that the calendar is accelerating, small and medium-sized banks will switch in fifteen days, on 1 January. In France, some 70 institutions of credit or financial institutions are concerned, who have chosen to adopt the "standard" method, the easiest to assess their credit risk. On their side, the larger institutions have until January 1, 2008 to develop more advanced method that most have chosen. The work internally fighting full. The Banking Commission began to intervene in the institutions for validation of internal rating models.

Interventions began a little over a year ago. BNP Paribas has opened the ball as early as November 2005, followed by Société Générale in June. Teams are also Caisses d'Epargne and Crédit Agricole. They should start their work to the Banques Populaires in the first days of January (see opposite). Human resources are enormous. In total, 180 responsible persons of the controls to the Banking Commission, 140 are mobilized 15 in each institution.

Even some members of the inspection of the Bank of France were called in reinforcements. It must be said that the time available. The Banking Commission hopes to complete its work of validation by late May 2007. Regulators of the European subsidiaries of big French banks must then have six months to provide their comments on the work that will have been carried out, at the consolidated level, by the French supervisor.

At this point, a third of the "blocks" of activities that the Banking Commission wants to sift through were examined, is 10 on 32. "As a first step, the Banking Commission has spent considerable time in the banks it was inspecting", said Sylvie Grillet-Brossier, Director of the Department risks and prudential for the French Banking Federation (FBF), which estimated that about half of the work has been done. "We hope that work will soon go on the end."

"The learning curve of the Banking Commission was paralleled to that of banks, note Jean-François Masson, Basel 2 Groupe Banque Populaire project responsible." The difficulty is the lack of statistical truth. Theoretically, each bank should have found an identical to given client default rates. But, in practice, ratings differ significantly from one institution to another. The history of the relationship is different, the products also. Each therefore has a very different perception of the risk.

The regulator has asked some already audited banks improve their copy. "When improvements are needed, they most often relate to the definition of default, the manner in which homogeneous risk classes are defined, or even estimate lgds", says one observer. "The Banking Commission may apply to some institutions to recalibrate their models to incorporate risk factors not taken into account, says Véronique McCarroll, at Mercer Oliver Wyman." There the risk is also the regulator recharacterize some internal models if the share of ratings of external agencies was considered too important.

Undeniable progress

Banks, indeed, are struggling to establish their own historical databases, "especially for the client repositories data or products", says Hugues Cremona, Director of the development of the firm BearingPoint. "What is complicated, do not risk modelling, which uses statistical methods in short enough classics, said Daniel Amadieu, Manager Basel 2 for Société Générale.". This is to ensure the quality of the data that feed.

It is true that the process of manufacture of the McDonough ratio is more complex than for the Cooke ratio: "part of the input is the management of the risks and ensure their consistency with the accounting data in the end," says Eliana Boudet, senior manager in the Ineum consulting firm. To avoid discrepancies, the collection of information should be comprehensive, accurate, relevant qualification of counterparties by major type of portfolio. "This part of the logic of a scoring, but it is much more than that, explains Sylvie Grillet-Brossier." The variety of risks and their sensitivity are much stronger.

Basel 2 is an undoubted progress for banks. "But this reform will make comparisons extremely difficult at least during the first years of application and some of the differences will be permanent," said Bernard de Longevialle, responsible of the banking sector in Standard & Poor's in Paris. The calculation of the new ratio is indeed a lot of place interpretations: "differences of method, estimation of probability of failure or likelihood of loss in case of default will be able to vary the needs of own funds of 1 to 4 for same individual exposure according to the banks", he said. This is why the rating agency Board on a supplementary template intended to restore a bit of comparability between the banks should apply on accounts at end of 2007.