US Congressmen have questioned the effectiveness of Basel II risk modelling, and complained that it puts US banks at a disadvantage.At a Congressional hearing on the regulatory proposals for the Basel Accord held by the House Committee on Financial Services, representative Spencer Bachus voiced apprehension that: “The US interpretation of the Basel rule is less sensitive to risk than the international version of the Accord.”
Bachus added: “As I understand it, despite the US implementing Basel II differently to other countries, American banks will still have a higher capital requirement than their foreign competitors. If this is correct, surely this is a major competitive disadvantage.”
However, Sheila Bair, chairman of the Federal Deposit Insurance Corporation (FDIC), countered this assessment. “We may need to rethink whether allowing US banks to hold less capital in reserve is really an advantage over foreign competitors,” she said.
”It is the opinion of the FDIC that the use of leverage ratios is critically important to the US dual banking regime. I think the US should ask the Basel Committee to establish an international leverage ratio to increase liquidity,” she continued.
Although regulators and bankers called to give testimony were lukewarm, at best, in their support for Basel II in its current form, the strongest scrutiny came from members of the subcommittee. Representative Carolyn Maloney questioned whether Quantitative Impact Study 4 (QIS4) was an accurate measure of risk.
This led governor Susan Bies of the Federal Reserve to concede that: “QIS4 was too early and there was not enough data out to make accurate assumptions. The whole point of the exercise was to test where we were, but I think everyone would agree that it would not make a suitable framework.”
Maloney added: “I am concerned that our capital requirements are more onerous than those of foreign banks and that we’ll be competitively disadvantaged. Are you concerned?” Bies admitted: “We felt that we wanted something a little stronger.”
As the hearing closed, Maloney expressed dissatisfaction: “I think it is unfair that American banks will have to do more in terms of capital reserves than their foreign competitors. We should be fighting for a level playing field with international banks.”
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UK, 18th - 19th Mar 2014
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