US Regulators Propose Simplified Version of Basel II

Source Article: Regulators propose simplified Basel II - FT.com

Following concerns from large US financial institutions, the four US banking regulators (the Federal Reserve, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision) came to an agreement on Tuesday to allow large US banks to adopt the simpler capital requirements calculation under the new capital regulations, known as Basel II.

Basel II was created by the Bank for International Settlements. Its main goal is to further strengthen the international banking system while ensuring that capital adequacy regulation is not a source of competition between internationally active banks. (See: Basel Committee on Banking Supervision.) To further this goal, Basel II allows banks to choose between two methods of calculating their capital requirements: (1) the "standardized" approach of weighing the riskiness of loans to determine needed capital; or (2) a more complicated and costly method based on advanced risk management techniques.

Prior to the agreement on Tuesday, US regulators decided that the largest US banks should adopt the more advanced approach to allow them to reduce their regulatory capital. However, many believed that the money spent to implement the more complicated method would more than offset the money saved by reducing capital. Last month, representatives from Citigroup, JPMorgan Chase, Wachovia and Washington Mutual met with the Fed to ask they be allowed to adopt the simpler approach.

Now that the larger banks are looking to implement the simpler method, it will be interesting to see if they will be on a more level playing ground with the smaller banks, which were originally thought to be disadvantaged by not being able to afford to implement the complicated method that would further reduce capital requirements. (See Basel II Best for Biggest in Banks' View).