US senator voices concerns over Basel II in senate committee hearing

Senator Tim Johnson (Democrat, South Dakota) slammed aspects of Basel II in a US Senate committee on banking, housing and urban affairs yesterday for its regulatory burden on banks and claimed that the revised accord would stymie US competitiveness.

“Basel II was intended to create a risk-based capital regime. However, because of what I presume are political compromises, the latest draft would impose a heavy regulatory burden on large banks, while ironically, reducing their competitiveness in the global marketplace… While safety and soundness of our insured depositories is, of course, paramount, the last thing we should be doing is making it harder for American banks to compete, both home and abroad,” he said.

Johnson also slated aspects of the notice of proposed rulemaking (NPR) on Basel II that he says contain loopholes to exempt industrial loan companies (ILCs). ILCs are financial institutions that may be owned by non-financial institutions, and have been a source of controversy in the US due to different and lower standards of regulation. The loophole was allowed to exist to assist very small companies, but has warranted further investigation as firms such as Wal-Mart have made moves to exploit its benefits.

“In my view, any insured depository institution which has a significant volume and value of transactions that could directly or indirectly affect the payments system, should be required to capitalise that risk. Operational risk is not a function of the nature of the parent company; it is a function of the scale and complexity of the activity taking place inside of the insured depository institutions,” said Johnson.

Johnson’s criticisms were expressed while the NPR for Basel II  is being reviewed by the Office of Management and Budget, and could still be changed prior to its publication in the Federal Register. The hearing preceded Sheila Bair’s nomination to become chairman of the Federal Deposit Insurance Corporation.

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