US banks biding time on Basel II, says Dugan

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WASHINGTON, DC – Not one US bank will begin to implement Basel II’s capital adequacy requirements by the earliest possible date of April 1, according to the US comptroller of the currency, John Dugan.

Tier I banks such as Citigroup will use their full 36-month window to begin Basel II implementation, said Dugan at an international banking conference on Monday.

“We haven't received any notifications, so I think it's safe to say no national bank will be starting on that earliest possible date. The next time an institution could begin that process is July 1, but we don't yet know if any institution will begin as of that date,” he said.

Concerns over the validity of Basel II’s capital requirement models have been exacerbated by the unforeseen turbulence in the US subprime mortgage market and its overspill into the global credit crunch.

Market illiquidity has also contributed to US banks’ reluctance to rush into the flexible but lower capital requirements offered by Basel II models.

Dugan emphasised the short-term stress for banks created by problems in the US mortgage market and the long-term nature of Basel II requirements, saying regulators “might need to consider taking steps – possibly including imposing higher minimum capital requirements”.

The Basel II implementation framework involves a one-year test period followed by three years for complete implementation. Banks are limited to a 5% capital reduction in their first year of implementation, 10% in the second and 15% in the third.

The US has only adopted Basel II’s rules for its largest and international ‘core banks’ – such as Citigroup, JP Morgan and Bank of America. The comptroller of the currency said a rule for smaller banks could be expected in the second quarter of 2008.