Monday, March 26, 2007

United States' Basel II Implementation Controversy


U.S. Banks Reiterate Basel II/IA Concerns as Deadline Nears

FDIC’s Bair Fears Basel II Impasse; Fed’s Bies Urges Forward Movement, Says Market Risk Timetable Could be Pushed Back

Today was the deadline for comments regarding two notices for proposed rulemaking (NPRs): one for U.S.’s version of Basel II and one for Basel IA. Basel II is the Bank for International Settlement’s (BIS) revised capital adequacy framework for internationally active banks. U.S. banks did not warmly welcome the more strict capital requirements of BIS’s proposed Basel II, so the U.S. regulators adjusted the framework into a more conservative version. Only the largest U.S. banks would adopt Basel II, which calls for more stringent capital adequacy guidelines and gives banks an option to measure their capital adequacy requirements using a much more complicated, and costly, formula.

In contrast, Basel IA is the United State’s answer for smaller banks, those that would not be able to afford to implement the more complicated capital adequacy formulas of Basel II. Using the more risk-sensitive goals of Basel II, Basel IA adjusts the original capital adequacy regulations (known as Basel I) into a small-bank friendly framework.

The U.S. federal banking supervisory agencies—the Federal Deposit Insurance Corporation (FDIC), the Federal Reserve Board of Governors (the Fed), the Office of the Comptroller of the Currency, and the Office of Thrift Supervision—issued the two NPRs over the past six months, but dissention, particularly over Basel II, in the industry is still prevalent as the commenting session has come to a close. On one side of the argument is the FDIC, which fears that the new framework will have adverse impacts on bank capital levels. FDIC Chairman Sheila C. Bair hopes that the comments on the NPR will be “some fresh thinking to bear on these issues, so we can ensure our decisions in this high-stakes process will be in the public interest.”

On the other side of the argument is the Fed, which is arguing to meet the current timetable (2009) of Basel II Implementation in the U.S. However, U.S. lawmakers concerned with the drop in the levels of capital in U.S. banks asked Federal Reserve Chairman Ben Bernanke to analyze whether the timetable is still feasible.

Question: The Government Accountability Office issued a report that raised transparency and ambiguity issues in the Basel II requirements. The supervisory agencies have vowed to address these and other concerns raised in the comments to both NPRs. How likely is it that the implementation timeline will remain intact if the agencies remain dedicated to address each issue?

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