Basel II: Implementation in the Isle of Man

Overview of the Commission’s Approach

In recent years, there has been significant international effort to establish a new set of rules for calculating the level of capital that individual banks should hold. This has become known as “Basel II” and its aim is to develop a framework that will:

• Further strengthen the soundness and stability of the international banking system;
• Establish close alignment of regulatory capital requirements with economic capital needs; and
• Maintain sufficient consistency such that capital adequacy regulation would not be a significant cause of competitive inequality among internationally active banks.

The new framework is documented in a paper entitled “International Convergence of Capital Measurement and Capital Standards – A Revised Framework” which was last updated in November 2005 and was re-issued as a “comprehensive version” in June 2006. This framework is commonly referred to as “Basel II”.

The Commission formally commenced its plans for implementing Basel II in late 2005 when it held an exploratory meeting with the Guernsey Financial Services Commission (“GFSC”) and Jersey Financial Services Commission (“JFSC”) with a view to working together throughout the implementation. Following this the Commission issued a paper in February 2006 “Approach to Basel II Adoption” outlining its initial high level approach to implementation of Basel II. It subsequently became evident that the expected date for implementation across the industry would commence in 2008 rather in 2007. The Commission always maintained that it would adopt a flexible approach to the roll-out of Basel II in the Isle of Man, and issued an implementation update paper in September 2006 “Basel II – Implementation – Update” which explained in more detail the progress made and the work that was still required.

The Commission has been working with the GFSC and JFSC (collectively the “Tri-Party Group”) to, wherever possible, harmonise our approaches to implementing Basel II. A joint paper on “National Discretions for the Standardised Approaches to Credit and Operational Risk under the Basel II Capital Framework” was issued in August 2006 (amended in November 2006) to take into account representations made by a recognised ECAI (see below). This brought together work carried out by each island’s Basel II implementation teams and reflects the agreed positions of all three regulators following industry consultation. A further joint paper was published in October 2006 on the recognition of “External Credit Assessment Institutions (“ECAIs”) and the mapping of their risk ratings to risk weights”. As above, this was amended in November 2006 following representations made by a recognised ECAI which are explained in the joint paper “Unsolicited ratings from approved rating agencies”.

During 2007, the Tri-Party Group issued additional papers, detailing further cooperation during implementation of Basel II. This included a paper in June 2007 on “High level principles on Pillar 2 and revision of supervisory returns”. This paper focused on two general areas of implementation, Pillar 2 and Supervisory Returns. Further detail is contained within the “Prudential Reporting” and “Pillar 2” sections.

The Commission expected, and encouraged, a high proportion of deposit taking incorporated banks to be in a position to implement Basel II with effect from 1st January 2008, for reporting to the Commission for the quarter ended 31st March 2008. However, the Commission continues to adopt a flexible approach to implementation and will facilitate later adoption during 2008. Only under exceptional circumstances will the Commission accept a deposit taking bank to remain under Basel I in 2009.

Commission papers

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