Comment by Rating and Investment Information Inc. on the Third Consultative paper (CP3) of New Basel

July 31, 2003 Rating and Investment Information Inc. 3-8-1 Nihonbashi-Ningyocho Tokyo 103-0013 (JAPAN) Comment on the Third Consultative Paper (CP3) of the New Basel Capital Accord (Basel 2) Rating and Investment Information, Inc. (R&I) appreciates the opportunity to make a comment on CP3 of Basel 2 issued by the Basel Committee on Banking Supervision (the Basel Committee) in April 2003. 1. Exemption from use of assessments by external credit assessment institutions (ECAIs) in determining the risk weights for corporate claims in the Standardized Approach (Para 42) (1) R&I supports the Basel Committee s principle of adopting the market best practices as a base for the regulatory capital adequacy framework and increasing the Basel 2’s risk sensitivity compared to the current Capital Accord in order to encourage ongoing improvements of the banks’ risk management capabilities. (2) However, Paragraph 42 permits banks to risk weight all corporate claims at 100% without regard to external ratings in the standardized approach, while the banks should obtain supervisory approval. R&I believes that this treatment is not consistent with the basic principle of CP3, "risk sensitive minimum capital requirements" and widens a gap with the Foundation Internal Ratings-Based (IRB) Approach. (3) While R&I believes that the provisions of this paragraph will not be applied to seek "cherry-picking" nor regulatory arbitrage, we recommend that the Basel Committee writes ...