Standard & Poor’s Ratings Services says that the implementation of the Basel II capital adequacy regime for global banks is a good thing, but it will make comparisons between banks trickier.

In a new report, Standard & Poor’s says that the forthcoming implementation of Basel II risk-sensitive regulatory capital measures planned for 2007-2009 is a positive development. The associated massive investments in risk measurement systems pave the way for enhanced risk management across global banking systems.

But as Basel II becomes a reality, S&P is having to explore ways to facilitate better international comparison of capital adequacy to maintain ratings comparability and consistency in methodology.

“Despite clear progress made toward achieving a more risk-sensitive measure, banks’ capital ratios under Basel II will have less comparability than generally believed,” said Standard & Poor’s credit analyst Bernard de Longevialle. “In addition to multiple options for national discretion in applying the rules, the move to a regulatory system that allows several different approaches to measuring the same type of risk creates the potential for significant inconsistencies among banks’ capital requirements, even within the same country.”

Increased disclosure required by Basel II Pillar 3 to promote market discipline should provide valuable information on banks’ risk profiles and risk management systems, it says. Explicit disclosure of the main components of ratio calculations will be necessary in order to identify areas of inconsistencies among banks. Nevertheless, this process will require time for market participants and the building of specific expertise.

Standard & Poor’s adds that its view regarding the relative risk associated with different asset classes and business lines, and the amount of capital that should be allocated to them, may differ from that of regulators. “We intend to use the expected improved information available to track inconsistencies and explore ways of adjusting Basel II ratios,” said de Longevialle. “In keeping with the goals of ratings comparability and consistency in methodology, our intention is also to refine our own measures that could be used to complement regulatory ratios and facilitate international comparisons,” he added.