BASEL II normative and the Size of Banks

The mentioned regulations will be adapted to the norms of BASEL II in order to
be applied in Argentina as of 2010. Without considering the large benefits that would
contribute these norms as far as transparency and financial stability, that in indeed will
be significant, we could also expect certain repercussions with respect to the banking
costs analyzed, as following mentioned.
Among other modifications to the risk measurement systems, the new regulation
put greater emphasis on internal risks management of the bank denominated
`operational risk', that is to say, when the new norm being applied the organizations
must include the risks derived from their operations to calculate its requirements of
capital, and not only the credit risks. In order to confront and to measure this operational
risks the banks will have to apply methods and techniques approved by the Central
Bank, which are fitted in three basic types defined by BASEL II: Basic Indicator
Approach, Standardized Approach, Advanced Measurement Approaches (AMA):

- The basic indicator is calculated with `fundamentals' of the company, like the
annual gross income of the last three years;

- The Standardized Approach divides the activities of the bank in eight lines of
businesses and its relative weight within the organization;

- The Advanced Measurement Approach is the most complex level and requires
the institutions to develop their own internal operational risk measurement
system, in agreement with some general criteria and norms supervised and
approved by the Central bank.

Another indication of BASEL II establishes that the structure or person
responsible of the operational risk will have to be independent of the department of
internal audit, reason why an increase in operative cost could be expected.
Although the new norms do not affect the capital requirements directly, it could
do it on an indirect way mainly to smaller financial organizations, since they modify the
calculation formula:

In first place, the consideration of the operational risk would add another
weighted factor of risk, which would negatively affect the qualification of the portfolio
of SMEs.

Secondly, the implementation of a structure to evaluate the operational risks
could increase as well the operative costs of the banks, reducing the possible economies
of scale in the information generation and increasing the information asymmetries.

According to some analysts (Perrotta, 2007) in the countries that have adopted
these norms, or those which have an advanced implementation, the minimum capital
requirements have increased between 5.5% and 8.9% in Europe and 4% to 13.5% in the
other countries. In general it is considered that the impact will be greater in less
developed financial systems even increasing the requirements until 50%. In the same
way, in the Argentinean case, the financial organizations less prepared to confront these
modifications are the regional banks, the smaller institutions and the branches of foreign
banks with few offices in the country.