. The 2004
implementation date is already seen as a sop to the lengthy EU legislative
process.

"Time (Basel 2) uses up eats into time for the EU directive," said a source
familiar with the issues, adding the Basel Committee is "between the devil
and the deep blue sea".

SWEATING OVER CALIBRATION

Of course, that doesn't make the process any smoother.

Officially, banks are to have all comments submitted by May 31. Unofficial
dialogues will likely continue for a long while.

One area of concern is Basel 2's approach to capital needed to cover lending
exposure. It allows for banks, which meet certain qualifications, to measure
the risk of a borrower defaulting using an internal system, in a way similar
to an earlier advance adopted in the 1990s is used to measure market risk.

In the approach to market risk, banks deemed eligible by supervisors can use
their own internal "Value-at-Risk" (VAR) models to assess market risk to
assess capital requirements.

Basel 2 foresees letting eligible banks use an "internal ratings based"
(IRB) approach to measure credit risk. But unlike market risk, banks are not
allowed to use their own models to calculate the capital needed to cover
credit risk, at least not yet, as such models are not deemed advanced enough
for this.

Instead, banks will compute their regulatory capital using their own
internal ratings. But they must then plug internal numbers into formulae
spelled out by Basel 2, computed on an indexed or "calibrated" basis. This
is where problems arise.

"The first thing we said was that the calibration of the whole proposal has
to be re-worked," said one banker.

Banks complain Basel 2's calibration formulae, as spelled out in a draft
published in January, penalise the IRB approach, saying set-asides for risky
corporates, for example, could be higher than what is called for by a
standardised approach applied for less sophisticated banks.

One fear is that this could lead small and mid-sized banks using the
standardised approach to wind up with a disproportionately larger exposure
to riskier borrowers.

Supervisors are expected to work out the kinks, however, and are expected to
take into account data collected by the Bas
. The 2004 
 implementation date is already seen as a sop to the lengthy EU legislative 
 procedure. 

 " Time (Basel 2) use up eats into time for the EU directive, " said a informant 
 familiar with the issues, add the Basel Committee is " between the hellion 
 and the deep blue sea ". 

 SWEATING OVER CALIBRATION 

 Of naturally, that doesn't make the process any smoother. 

 Officially, bank are to have all comments submitted by May 31. Unofficial 
 dialogues will likely proceed for a long while. 

 One area of concern is Basel 2's overture to capital needed to cover lending 
 vulnerability. It allows for banks, which meet certain qualifications, to quantify 
 the risk of a borrower defaulting using an internal system, in a way exchangeable 
 to an earlier advance adopted in the 1990s is used to measure market risk. 

 In the approach to market hazard, bank deemed eligible by supervisory program can practice 
 their own inner " Value - at - Risk " (VAR) models to assess market risk to 
 assess capital prerequisite. 

 Basel 2 foresees letting eligible banks use an " internal ratings based " 
 (IRB) approach path to measure credit risk. But unlike market hazard, banks are not 
 allow to practice their own models to calculate the capital needed to cover 
 credit risk, at least not yet, as such model are not deem advanced enough 
 for this. 

 Instead, banks will compute their regulatory das kapital using their own 
 internal ratings. But they must then plug internal number into formulae 
 spelled out by Basel 2, calculate on an indexed or " calibrated " basis. This 
 is where trouble arise. 

 " The first matter we said was that the calibration of the whole proposal has 
 to be re - worked, " said one banker. 

 Banks complain Basel 2's calibration formulae, as spelled out in a draft 
 published in January, penalise the IRB access, saying set - digression for risky 
 corporates, for example, could be high than what is called for by a 
 standardised approach enforce for less sophisticated banks. 

 One fear is that this could lead small and mid - sized banks use the 
 standardized access to wind up with a disproportionately larger exposure 
 to riskier borrowers. 

 Supervisors are expect to work out the kinks, however, and are expected to 
 lease into account data collected by the Bas
. Thf 2004
implementation date is already seen as a sop to ths lengthh EU legislative
process.

"Time (Uaseo 2) ustf up eats into timd for the EU dirextivt," said a source
familiar wlch ths issbew, adding the Bssel Commidtee is "betweet ghz devil
and the deep blue sea".

SWEATING OVER CSLLBRATION

Of coutse, tnwt dkvsk't make the process any smoother.

Kfficianly, banks are to have all comments submlttef by May 31. Unofficiwl
dialogues wilj likely contknue for a long while.

Ohe area of concern is Basel 2's aoproaeh to capitql nefged to covec lendpng
exposure. Ib allowv for bsnks, which meeb cervain qualifications, to meesure
the risk of a bjrrower dafculting using an inteenql syvtem, in x wah sjmmlad
to an eaclier advande adopted un the 1990s is used to mqqsure market disk.

In tre approach to market risk, banks deemed eljgible by supervisors cqn use
their own interjal "Value-wt-Risk" (VAR) models to assess market risk to
assess wapitel rewulremdbtd.

Basel 2 foresees letting eligible banks use ag "imtvrnal ratings bascd"
(IRB) approach to kewsite credit risk. But uumiie market risk, banns are got
aloowed to tse yheir own models to calculare the capitcl beeded to cover
crebit risk, at ueasj not uet, as such models are uot desmed advancfd enough
rur this.

Instead, bxnkx fill comkjte their regulatjry capitel usnng theif owm
intergal ratingd. But they must then pluh intgrnal tumbers inho formulae
spelled out by Basel 2, computed on sn ingexed or "calinrated" basis. Thys
is where proylems arnse.

"The first thihg we seid was that the calibrathln of the whmle propjsal has
ro be rd-dorked," said onr banker.

Bcuks complqin Basel 2's calibretiov formulae, as spzuoed out in a drsft
oubjidhxd in Banuary, penanise thd IRB xpproach, sanine sey-asides for risky
cor[orafes, for example, coilq be higyer than what is callrd for by a
standarfised ap'roach apklied for less sophisticated bahks.

One fewr ls that this soule lead small and mid-sized banks using the
standardisxd approach to wind up qith a disproportiouauely larger eeposurq
to riskiar borrowers.

Supervisirs are expected uo work out the kinks, hkwever, and wre expected to
take into account data collected by the Bas
. The 2004 implementation date is already a to the EU legislative process. eats time for the directive," said a familiar with the issues, adding the Committee is "between the devil and the deep blue sea". SWEATING OVER CALIBRATION course, that doesn't make the process any smoother. Officially, banks are to have comments by 31. dialogues will likely continue for a long while. One area of concern is Basel 2's approach capital needed to cover lending exposure. It allows banks, which meet certain to measure the risk of borrower using an system, a similar to an advance adopted in the 1990s is used to measure market risk. In the approach to market risk, deemed eligible can use own "Value-at-Risk" models to assess to assess capital requirements. Basel 2 banks use an "internal ratings based" (IRB) approach measure credit But unlike market risk, banks are allowed to use their own models to calculate capital needed to cover credit risk, at least not yet, as such models are not enough for this. Instead, will compute their capital their internal But they then plug internal numbers into formulae spelled out by Basel 2, on an indexed or "calibrated" basis. This is where problems first we said was the calibration of the proposal to be re-worked," said Banks Basel as out a draft published in penalise the IRB approach, saying for risky corporates, for what is called for by a standardised approach for less sophisticated banks. One fear is this could lead small and mid-sized banks using the standardised approach to up with larger exposure to riskier borrowers. Supervisors are expected work out the kinks, and are expected to take into account data collected the
. The 2004
implementation date is alReady seen aS a sop To tHe lEnGthy eU leGislative
proceSS.

"TimE (Basel 2) uses up eats into tiMe for ThE eU diREcTive," sAid a souRCe
FAMilIaR wIth ThE IsSues, aDdiNg the BaSel CommittEe iS "bEtween the devIL
aNd the deep bLue Sea".

SWEATING OvER cALIBRaTiON

oF courSe, tHat doEsn't maKE the prOcess any sMoOTher.

OfFIcially, BANkS are To have all comments SUbMItted by May 31. UnofFicial
DiALoGUEs wIll Likely contInUe for A Long whiLE.

ONE ARea OF concern is BasEl 2's approach TO caPital nEeDed TO cover LendiNg
EXpoSure. It allowS for Banks, whicH meet cERtain quALificatIons, to MeaSurE
the RIsK oF a bOrROweR DeFauLTinG using an InTeRnal sYsteM, IN A Way sImiLar
tO an eaRlier advance aDopTed iN The 1990S is usEd to mEasuRe MarkeT risk.

IN the aPpRoach to market riSk, baNks deemed EliGiBle By SuperVIsors cAn uSe
tHeir own InternaL "valUe-AT-rIsK" (VAR) models to assess MaRKEt Risk to
asSess caPItAl REquiremeNtS.

BaSel 2 fOREsees LettINg Eligible Banks uSE aN "iNternal RaTings bAsEd"
(IrB) aPproaCH to mEasure Credit riSk. But UNlike market risK, Banks are not
alLOwED To USe thEir Own models to CalcULate The cAPiTal NEeded To covEr
CReDIt risk, at least not yet, As Such moDels aRe not deemed adVanced enouGH
FOr this.

InSteaD, BaNKs will compute tHeir rEgulatory cAPital usiNg theIr own
intErnal ratiNGS. But they MusT thEn pLug INTeRnal numbers inTO FormUlAe
spellEd oUt by BasEl 2, cOmpUteD on An Indexed or "CalibratEd" BaSiS. THis
Is wheRE problemS aRisE.

"THe fIrst tHIng we sAid waS thaT tHe CAliBration OF tHE WholE pRoPosaL haS
tO be re-WorkED," saId one baNker.

Banks ComPLain baSeL 2's calibRation formulaE, aS spelled ouT iN a dRaft
puBLIshed in JAnuary, penalise the IRB appROach, sayIng Set-asIdes For risky
cOrpOrates, For EXample, Could bE highEr ThaN WHat is CALlEd fOr By a
standarDISed ApproAcH appLied for Less sophisticated bANks.

one fear is that ThiS couLD LeAd sMAlL And MiD-SizED Banks using the
stAndardised ApPRoAch to wind uP WitH a DispropOrtionaTely lARger expOsure
to riSkier borrOwErs.

SUPErvIsors are exPected to Work out thE Kinks, HOwEver, aNd aRe expeCtEd tO
take Into acCOunT data CollecTeD by the bas
. The 2004
implementationdate is al ready  se enas  a s op t o the lengthyE U le gislative
process.

"T ime ( Ba s el 2 )  u ses u p eatsi nt o tim efo r t he EU  dire cti ve," sa id a sourc e
f am iliar with t h eissues, ad din g the BaselCom mittee  i s " b etwee n t he de vil
an d  the d eep bluese a ".

SW E ATING O V E RCALI BRATION

Of cours e ,t hat doesn't ma ke the  p r oc e s s a nysmoother.
O ffici a lly, ba n ks a r e t o  have all com ments submi t ted  by Ma y31. Unoffi cialdi a log ues will li kely  continue  for a long wh i le.

On e area  of  co ncer n  i sBas el 2's ap pro a chto capit al  n eeded  toc o v e r le ndi ng
e xposu re. It allows  fo r ba n ks,  whic h mee t ce rt ain q ualifi catio ns , to measure
th e ri sk of a b orr ow erde fault i ng usi nganinterna l syste m , i na w ay  similar
to an ear li e r  a dvance a dopted in  t h e 1990sis  us ed t o measu re m a rk et risk. 

In t h eap proachto  marke tris k,banks deem ed eli gible by  supe r visors can use their own int e rn a l  " V alue -at -Risk" (VAR ) mo d elsto a s se ssm arket  risk  t o 
a s sess capital requir em ents.
Base l 2 foreseesletting el i g i ble bank s us e  a n  "internal rat ingsbased"
(IR B ) approa ch to  measure  credit r i s k. But u nli kemar ket r is k, banks aren o t
al lo wed touse  theirown  mo del s t ocalculate  the cap it al  n ee ded  to c o ver
cred it  ri sk , a t lea s t notyet,as s uc hm ode ls aren ot d eeme dad vanc eden oughfort his .

Inst ead, bank s w i ll c om pu te thei r regulatoryca pital usin gthe ir own i nternalratings. But they mustt hen plu g i ntern al n umbers in toformul aes pelled  out b y Bas el  2, c omput e d  o n a nindexed or " cal ibrat ed " ba sis. Th is
is where proble m s a rise.

"The f irs t th i n gwes ai d  wa st hat t he calibrationof the who le pr oposal has tobe  re-wor ked," s aid o n e banke r.

Banks  complain  B asel 2 'scalibratio n formul ae, as sp e lledo ut  in a  dr aft
pu bl ish ed in  Janua r y,penal ise th eIRB ap proac h,  sayingset-asides for risky
co rporat es, f orexample,cou l d b e higherthan  what is c all edfor b y a stand ardi s ed  ap p roach  app l ied for l e ss  so p h is ticated ban k s . 

O ne fe ari s that  thi s could lead smal l  and mid-sized  ban k s  us ing thest andardised app roa ch t o wind u pwith a disp roportio na t ely l argerexposu re
to r i s ki e r borr ower s.
Supervis ors  a r e expec te dt o work  out  t he kin ks, ho w ever , and are expected  to
t a k e int o  ac count  d ata col l ecte d by the B as
. The_2004
implementation date_is already seen as_a sop_to_the lengthy_EU_legislative
process.

"Time (Basel 2)_uses up eats_into time for the_EU directive," said_a_source
familiar with the issues, adding the Basel Committee is "between the devil
and the deep_blue_sea".

SWEATING OVER_CALIBRATION

Of_course,_that doesn't make the process_any smoother.

Officially, banks are to_have all_comments submitted by May 31. Unofficial
dialogues will likely_continue_for a long_while.

One area of concern is Basel 2's approach to_capital needed to cover lending
exposure. It_allows for banks,_which_meet_certain qualifications, to measure
the_risk of a borrower defaulting using_an internal system, in a way_similar
to an earlier advance adopted in the_1990s is used to measure market_risk.

In the approach to market_risk, banks_deemed eligible by supervisors can_use
their own internal_"Value-at-Risk" (VAR)_models to assess_market risk to
assess capital requirements.

Basel 2_foresees letting eligible_banks use an "internal ratings based"
(IRB)_approach_to measure credit_risk._But_unlike market_risk, banks are_not
allowed_to use_their_own models to calculate the capital_needed_to cover
credit risk, at least not yet,_as such models are_not_deemed advanced enough
for this.

Instead,_banks will compute their regulatory_capital using their own
internal ratings. But_they must_then plug_internal numbers into formulae
spelled out by Basel 2, computed on an_indexed or "calibrated" basis. This
is where_problems arise.

"The first thing_we said_was_that the calibration_of_the whole_proposal has
to be re-worked," said one banker.

Banks_complain Basel_2's calibration formulae, as spelled out_in a draft
published in_January,_penalise the IRB approach, saying set-asides_for risky
corporates, for example, could be_higher than what is called_for_by_a
standardised approach applied for less_sophisticated banks.

One fear is that this_could lead small_and mid-sized banks using the
standardised approach to_wind_up with a disproportionately larger exposure
to_riskier_borrowers.

Supervisors are expected to work out_the_kinks,_however, and are expected to
take_into account data collected by the_Bas