The new Supervisor of Banks, Rony Hizkiyahu, on Tuesday, announced a plan for the Israeli banking sector to adapt and implement the Basel II capital accord by 2009, in an effort to improve risk management and capital adequacy in the financial system. "2009 has been set as the implementation date. From that year on, every banking corporation will implement all three pillars of Basel II," said Hizkiyahu. Basel II or the new Basel Capital Accord lays down guidelines for determining the minimum capital requirements for banks and tightens the link between credit risk and capital allocation. These guidelines, which are planned to be adopted by 49 countries, provide a system of models for weighting credit and operational risks run by banks in their loans to retail and corporate customers. Hizkiyahu said he will appoint a supreme steering committee on Basel II, which he will chair. The directives for implementation of Basel II will be published in two stages. First, at the end of the first quarter of 2007, Hizkiyahu will publish a so-called advanced notice of proposed rule-making including a preliminary draft directive for the implementation of Basel II. In the second stage, at the end of the third quarter of 2007, the Supervisor of Banks committed to publish a full draft of the directive. "The benefits of Basel II are, for example, better disclosure of risks and better risk-based pricing of loans but the main problem is the cost of implementation relative to the capital savings," said Barbara Ridpath, executive managing director rating services at the Standard & Poor's credit rating agency. "In particular in emerging market countries, capital requirements will remain very high where ratings are low and information is scarce." Dov Halperin, CEO of the Halperin Consulting Group, which assists banks and large corporations in Israel in implementing advanced information systems in the risk management market, estimated that implementing Basel II would cost an Israeli bank between $6 million and $10m. and would take two to three years. "The banks in Israel have already started to prepare for Basel II, but what is missing are the proper guidelines and directives from the Bank of Israel for adopting the capital accord in Israel," Halperin said. "My estimate is that we won't see implementation before January 2010." Bank Hapoalim in Switzerland is already operating according to the Basel II guidelines in Switzerland. "We are waiting for the central bank's guidelines for implementing Basel II in Israel and then we could be ready within two years," the lender said. In terms of the ability and cost factor to implement and operate the Basel II framework, Halperin emphasized that the small- and medium-sized banks would need to join together as they don't have enough statistical data to calculate Basel II models. "I don't see that the medium-sized banks will fall behind because of Basel II since already today they buy and operate similar software systems to the large banks," said Halperin. "Basel II will improve the efficiency of all banks whether small or large of giving credit as conditions are much stricter and as a result, it will force banks to use Basel II models to grant credit rather than based on the relationships they have with their customers." This, in turn, could mean that Basel II will disadvantage the economically marginalized by restricting their access to credit or by making it more expensive. "In the short-term, lending will become more expensive for those with low equity," said Ridpath.