US-UK regulators clash over Basel II implementation

Last week, senior executives from the US Federal Reserve and the UK Financial Services Authority clashed over the differing implementation plans for the Basel Accord revisions in a pair of speeches delivered to two financial industry trade organization meetings.

Roger Ferguson, vice chairman of the Fed, stressed the philosophical similarities between the US and European approaches to implementing the Basel accord revisions in a speech to the Risk Management Association on April 9. He defended the complexity of the Basel revisions, and stressed the advances in risk-oriented regulation that the new documents represented. The US has been criticized by European regulators for failing to implement the entire Basel II revisions—instead the US is implementing the advanced credit and operational risk approaches at only 10 “internationally active” banks. Other financial institutions will remain on Basel I.

Ferguson defended the 10-bank plan by saying that US banking regulation is effectively more advanced than that of other countries because of the “prompt corrective action” features such as the leverage ratio and the use of well-capitalized thresholds for both the risk-based and the leverage standards. “We are therefore confident that even for those banks not adopting the advanced approaches of Basel II, we will have a capital regime that achieves a standard of prudence as great as Basel II,” Ferguson said.

“I will not hide the fact that we propose to operate somewhat differently in Europe” from the US,” said Howard Davies, the head of the FSA in his speech to the Bond Market Association. “We believe that the standardized approach in Basel II is preferable to Basel I, even for simpler banks, in particular because of the greater risk sensitivity that it brings.”

Davies went on to remark on the general tension that exists between the US and Europe at the moment at may different political levels, and the knock-on effects that such tensions could have. Said Davies, “We are very aware of the problems that could be caused for our financial markets if there is a continued hiatus in top level political relationships, and if that tension were to be allowed to spill over into trade, economic, and regulatory issues. There are always a number of difficult problems around, which can become a source of tension if both sides want them to be. In these circumstances, it is more than ever important to maintain a strong dialogue between decision-makers on both continents, if only to ensure that new misunderstandings do not develop and fester.”BaselAlert.com