The Basel II accord is an international agreement among bank supervisors to change the way capital requirements are developed and calculated for banks. Up to this point in time, all banks had the same rules, called Basel I. They were not very risk-sensitive, so that if the bank was lending to a corporation that was rather weak or a corporation that was really strong, the capital charge was the same for both. Under Basel II, a lot of work has gone into developing more risk-sensitive requirements. A lot of mathematics goes into this.
In addition, there were a lot of requirements that banks have a lot more data to look at the types of risk they take, and there were more requirements for boards of directors and managers to have more information about how the bank is performing when it makes loans.
In terms of OSFI's role, we had to create a number of new systems so that we could receive a lot more data from the institutions, and we could slice and dice it to look at what was really happening and to come to some understanding with the banks as to what each bank's capital level ought to be. It's fairly important, because going forward under this new regime, some banks may have to increase their capital and some banks might see a decrease in their capital. That's a fairly important thing.
All of our work now is designed to ensure that we understand each bank's system, how they're coming up with their numbers, so that we can make a final determination as to whether their capital levels at the end of the day are acceptable.
