The View from the Credit Markets

As the stock and bond markets become more confident in the risk management and capital allocation skills of banks that adopt the Basel II standards — and reward them with higher debt ratings — will smaller institutions be placed at a competitive disadvantage when it comes to attracting investor capital?

It may be too early to answer this question definitively, but two debt analysts say they don't expect Basel II to divide the banking world into haves and have-nots.

Kim Olson, a managing director at Fitch Ratings in New York, says banks will not have to be "Basel II compliant" — which would include the adoption of its operational risk provisions — to get a good credit rating. But she says that Fitch will want to understand how larger banks — including those that do not adopt Basel II — manage their operational risk exposures. "We want to know how the largest and most competitive institutions manage that risk," she says. "We definitely give credit for good risk measurement systems."

Olson also stresses that each bank's approach to operational risk management depends on its size and the complexity of its operations. "Yes, we will look at it, but the range of solutions an individual institution might adopt, and the weight we give to that, depends on their size and range of activities," she says.

Prodyot Samanta, Standard & Poor's director of enterprise risk management, sees Basel II's influence working its way down through the banking industry from larger to smaller institutions. "It's going to spill over to the smaller institutions," he says. "It's just good business sense.

"Whether you're a smaller institution or a larger one, it's important that you be able to allocate capital for economic purposes."

— Jack Milligan