US anti-competitive Basel II concerns persist

The debate over the introduction of Basel II in the US continues to rumble on following the September release of two US inter-agency notices of proposed rulemaking (NPR). The latest releases call for public comment on the implementation of the new capital adequacy framework, and broader revisions to market risk capital requirements.

Ben Bernanke, chairman of the Federal Reserve Board, said that, based on some initial comments on the NPR, significant differences continue to exist over implementation of the Accord. In particular, the responses raise concerns about the level of capital floors that will be imposed when Basel II is phased in across the US from 2008, the cost of implementation and the home-host issue, which creates the potential for individual regulators to impose different requirements in each jurisdiction.

"Before we issue a final rule, we intend to review all international differences to assess whether the benefits of rules specific to the US outweigh the costs," said Bernanke during an address to a banking conference on October 16 in Arizona, given via satellite video link. "In particular, we will look carefully at differences in the implementation of Basel II that may adversely affect the international competitiveness of US banks."

Bernanke's comments follow a damning critique of the NPR by New York-based Jim Garnett, head of risk architecture at Citigroup, during a hearing held by the Senate Committee on Banking, Housing and Urban Affairs following the inter-agency release. Garnett, who was testifying on behalf on the American Bankers' Association (ABA), said the Washington, DC-based industry body has long supported a comprehensive approach to the regulation of risk-based capital, but argued that changes need to be made to the US regulators' proposed implementation.

"The stated goal of the Basel II Accord is to arrive at capital requirements that better reflect risk in a bank. However, the Basel II capital requirements, as embodied in the banking agencies' recently promulgated NPR, fall short of that mark," Garnett said. He went on to criticise the requirement that large and complex US banks will be compelled to adopt advanced approaches to credit and operational risk, rather than elect to use one of the less sophisticated approaches. He also criticised what he termed the "arbitrariness" of the aggregate capital floors.

The Fed, together with the Office of the Comptroller of Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision, issued the two NPRs on September 25. The agencies are taking the concerns of the ABA and others regarding mandatory use of the advanced approach seriously, and are soliciting comment on whether the larger, internationally active US banks should have the freedom to choose their approach, as is the case in many other jurisdictions.

The Basel II NPR details a new risk-based capital adequacy framework based on an internal ratings-based approach for calculating regulatory credit risk capital for wholesale, retail, equity and securitisation portfolios, and advanced measurement approaches for determining operational risk capital. The comment period ends on January 23, 2007.

The market risk NPR, meanwhile, proposes significant changes to the current market risk rule. The proposal includes possible changes to specific risk charges, criteria for delineating between the trading and banking books, and a new capital charge for default risk.

A frequent critic of Basel II, John Dugan, the Comptroller of the Currency, told the post-NPR Senate hearing that despite his previous scepticism over some aspects of the Basel II rule, he wanted the proposals to be successful in strengthening the safety and soundness of the banking system. "While we may not have all the details of the proposals yet, and we will surely make changes as a result of the public comment process, I fully support the objectives of the Basel II NPR," he said.

- Navroz Patel.