Basel II Certification and Compliance in the European Union

In order to comply with Basel ii in the European Unionby the founding Treaties in the 1950s. It represents
(EU), it is important to understand the unusual way inthe member states, and its meetings are attended
which the European Union works.by one minister from each of the EU's national
Basel II is a best practice. It is an Accord, not an Act.governments.
A general framework that gives many levels ofWhich ministers attend which meeting depends on
freedom to national supervisors. The Baselwhat subjects are on the agenda. If, for example,
Committee does not possess any formalthe Council is to discuss environmental issues, the
supranational supervisory authority, and itsmeeting will be attended by the environment minister
conclusions do not have legal force.from each EU country and it will be known as the
Basel ii will be implemented in the European Union via'Environment Council'.
the Capital Requirements Directive (CRD), which isThe EU's relations with the rest of the world are
legally binding for every member state of the EU.dealt with by the 'General Affairs and External
This directive is making significant changes to twoRelations Council'. But this Council configuration also
existing directives that were implementing Basel I inhas wider responsibility for general policy issues, so its
EU: The Banking Consolidation Directive and themeetings are attended by whichever minister or
Capital Adequacy Directive. Financial institutions havestate secretary each government chooses.
to persuade their regulators that not only they haveThe Council has six key responsibilities:
allocated capital for their risks, but also they have1. To pass EU laws - jointly with the European
implemented best risk management and governanceParliament in many policy areas.
practices.2. To coordinate the broad economic and social
Managers and professional having to implement Baselpolicies of the member states.
ii in the European Union have to read and understand:3. To conclude international agreements between the
1. The Basel ii papers from the Bank of InternationalEU and other countries or international organisations.
Settlements. It is impossible to avoid these papers,4. To approve the EU's budget, jointly with the
because it will be impossible to understand theEuropean Parliament.
requirements that follow.5. To define and implement the EU's common foreign
2. The Capital Requirements Directive (in fact thereand security policy (CFSP) based on guidelines set by
are two directives: 2006/48/EC and 2006/49/EC).the European Council.
Basel ii is an idea, a best practice. These directives6. To coordinate cooperation between the national
describe what exactly we have to do in order tocourts and police forces in criminal matters.
implement Basel ii in the European Union.Most of these responsibilities relate to the
3. The guidelines from the Committee of EuropeanCommunity domain - i.e. areas of action where the
Banking Supervisors. An official interpretation of Baselmember states have decided to pool their
ii as seen using the lenses of the Capitalsovereignty and delegate decision-making powers to
Requirements Directive.the EU institutions. This domain is the 'first pillar' of
4. The choices of the national supervisors. Basel iithe European Union.
gives many levels of freedom to each country, andC. European Commission, which represents the
professionals have to learn the "national discretions"interests of the Union as a whole.
and options.The Commission is independent of national
5. Each bank's approaches, choices and options. Wegovernments. Its job is to represent and uphold the
have very different Basel ii implementations even ifinterests of the EU as a whole.
we compare banks in the same country using theIt drafts proposals for new European laws, which it
same approach.presents to the European Parliament (EP) and the
6. The Home/Host challenges for capital allocation andCouncil.
supervision on a consolidated basis.It is also the EU's executive arm - in other words, it
There are also a lot of challenges. In Sarbanes-Oxley,is responsible for implementing the decisions of
there are only two different implementations: OneParliament and the Council. That means managing the
for US domestic companies and one for foreign (noday-to-day business of the European Union:
US) companies. In Basel II, in 100 countries we haveimplementing its policies, running its programmes and
100 different implementations. Fortunately, we willspending its funds.
have fewer differences among the EU countriesLike the EP and the Council, the European
because of the Capital Requirements Directive, thisCommission was set up in the 1950s under the EU's
great opportunity for consistency and harmonization.founding Treaties.
But what is a European directive?THE CODECISION PROCEDURE
We will start from what is the European Union.Having been established by the Maastricht Treaty,
The countries that make up the EU (the memberand extended and adapted by the Treaty of
states) remain independent sovereign nations butAmsterdam to make it more effective, the
they pool their sovereignty in order to gain acodecision procedure now covers 43 areas under the
strength and world influence none of them couldfirst pillar (based on the Treaty establishing the
have on their own. Member states delegate some ofEuropean Community) following the entry into force
their decision-making powers to shared institutionsof the Treaty of Nice.
they have created, so that decisions on specific cAs defined in Article 251 of the EC Treaty, the
matters of joint interest can be made at Europeancodecision procedure is the legislative procedure
level.which is central to the Community's decision-making
It is not a federation like the United States, and it issystem. It is based on the principle of parity and
not an organisation for cooperation betweenmeans that neither institution (European Parliament or
governments, like the United Nations. The EU isCouncil) may adopt legislation without the other's
unique.assent.
The three main decision-making institutions are the:The 'institutional triangle' produces the policies and
A. European Parliament (EP), which represents thelaws that apply throughout the EU. In principle, it is
EU's citizens and is directly elected by them;the Commission that proposes new laws, but it is the
The Parliament has three main roles.Parliament and Council that adopts them. The
1. Passing European laws - jointly with the Council inCommission and the member states then implement
many policy areas. The fact that the EP is directlythem, and the Commission enforces them.
elected by the citizens of the EU helps guarantee theIf we want to add a fourth body, it should be the
democratic legitimacy of European law.Court of Justice of the European Communities (often
2. Parliament exercises democratic supervision overreferred to simply as 'the Court'). It is based in
the other EU institutions, and in particular theLuxembourg. Its job is to make sure that EU
Commission. It has the power to approve or rejectlegislation is interpreted and applied in the same way
the nomination of commissioners, and it has the rightin all EU countries, so that the law is equal for
to require the Commission as a whole to step down.everyone.
3. The power of the purse. Parliament shares withIt ensures, for example, that national courts do not
the Council authority over the EU budget and cangive different rulings on the same issue. The Court
therefore influence EU spending. It adopts or rejectsalso makes sure that EU member states and
the budget in its entirety.institutions do what the law requires. The Court has
B. Council of the European Union, which representsthe power to settle legal disputes between EU
the individual member states;member states, EU institutions, businesses and
The Council is the EU's main decision-making body.individuals.
Like the European Parliament, the Council was set up