US regulators split over the future of Basel II

Washington, DC -- US regulators continued to air their differences of opinion on the future of the Basel II document within that country in competing speeches and statements during December 2003. By and large, the Federal Reserve remained the most supportive of Basel II within the US, while the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) both expressed doubts about certain aspects of the international agreement.

Federal Reserve vice-chairman Roger Ferguson opened the month with a speech at a risk management conference in which he indicated that the number of mandatory banks adopting Basel II in the US could grow before the US rulemaking process is finished, and that foreign banks that meet the US’s criteria for Basel II adoption could be placed in the mandatory category. Mandatory banks in the US will be forced to implement the advanced approaches of both credit and operational risk. Ferguson also noted that the US would be doing its own quantitative impact study, and that various regul- atory task forces were in the process of analysing existing data to help determine the impact of Basel II on banks. But the speech was largely supportive of the Basel II process, and indicated faith in the work of the Accord Implementation Group.

On the other hand, Comptroller of the Currency John Hawke, of the OCC in Washington DC, gave a speech in mid-December before the American Academy in Berlin that was more critical. "The monumental prescriptiveness of Basel II seems at times to be motivated by a conviction that if only the rules can be made sufficiently detailed and escape-proof, the Holy Grail of competitive equality can be discovered," says Hawke. "While I have enormous regard for my colleagues on the Committee, I must confess that I am very concerned about this approach." Hawke describes the complexity of the Basel Committee on Banking Supervis-ion’s third consultative paper as "mind- numbing." And perhaps most worryingly for Basel officials, he indicated that it was more important to get the wording of the document "right" than to hit the mid-2004 deadline that other nations are working towards.

Adding fuel to the fire, the FDIC published a paper in early December that says risk-based capital calculations based on the current Basel II framework show that capital levels would fall considerably below the levels the US requires, even with an op risk capital charge included. The paper voiced concerns about such a dramatic reduction in capital in the country’s banking system.

The FDIC paper is available at: http://www.fdic.gov/bank/analytical/fyi/2003/120803fyi.pdf