Kroszner lauds Basel II bank reforms

The recent market turbulence demonstrated the need for Basel II rules, says Fed’s Kroszner

NEW YORK – In a speech at Standard & Poor’s annual conference in New York, Randall Kroszner, governor of the Federal Reserve System, referred to the recent market volatility as justification for the swift implementation of Basel II capital requirement rules.

“Recent market events highlight why a robust and independent assessment of risk on the part of banks is so important,” said Kroszner. “The enhanced risk-sensitivity of the Basel II advanced approaches creates positive incentives for banks to lend to more credit-worthy counterparties and to lend against good collateral, by requiring banks to hold more capital against higher-risk exposures.”

Kroszner compared the adoption of Basel II rules to a marathon, although the passing of the final rules was just handing on the baton to another runner, and warned that banks needed to gear up preparation for Basel II. The largest US banks now have six months to complete and present their implementation plans to regulators, but he warned that both they and the regulators need to move on to implementation “carefully and with our eyes wide open” and that as banks move forward they should not lose sight of Pillar 2 and Pillar 3 requirements. Even though Kroszner stated that in order to foster international consistency and be less burdensome to banks if they adhered more closely to the international Basel II framework, he defended the decision to retain safeguards, including the leverage ratio to ensure capital levels remain strong.

The governor also reiterated the agencies’ plan to develop a standardised approach for non-core banks, which would be optional and the Basel I regime would be retained. Although he did not comment on the content of the approach, he expects the proposal to be presented to the Fed “within the next several months”, and that the Fed’s goal is “to have the standardised approach ready for implementation concurrently with the start of the first Basel II transition stage”.