Chairman of the Fed says Basel II needs to go to the next stages of implementation

In his speech to the Federal Reserve Bank of Chicago’s annual conference on bank structure and competition, however, Bernanke spent most of his time assuaging various industry concerns.

Bernanke stressed no fewer than eight times in his speech that the revised Accord will only apply to the largest, most complex and most internationally active banks, but conceded that even these institutions are concerned that the cost of implementing Basel II will outweigh the benefits. Further, US banks have expressed displeasure over the complexity of the upcoming Proposed Notice of Rulemaking (NPR). Bernanke argued that modern risk management is itself complicated, and that sound risk management under the revised Accord will eventually pay for itself.

Other concerns that the industry has expressed include unfair advantages to banks implementing Basel II over those still operating under Basel I. Bernanke assured the audience that changes made to update Basel I will mitigate any such inequities, but he urged firms to submit specific advice if the provisions to Basel Ia are inadequate.

The chairman admitted that the Fed cannot say precisely how much Basel II, when fully implemented, will affect a bank’s risk capital requirements in comparison with Basel I. Referring to the flawed fourth quantitative impact study (QIS4), Bernanke stated that some of the studies have been conducted using banks that would generally not be implementing Basel II anyway, which in turn produced imperfect results. Bernanke stated that as the Basel II implementation process moved forward, the regulators will be able to provide more accurate information.

Bernanke warned that despite these concerns, the system needed to modernise. “Waiting for a crisis to force change would be foolish; by moving forward now, we have the luxury of being deliberate in the development and introduction of a system that produces benefits,” he said.

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