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Fed Issues Studies on Basel II

MARCH 5, 2004


Fed Issues Studies on Basel II

According to a study released by the Federal Reserve this week, those banks that will be subject to the new Basel II capital accord probably will have a competitive edge in the market for loans to small- and medium sized businesses.

The study supports the fears that the Basel II banks will have a competitive advantage over other banks because of their lower regulatory capital requirements. In the United States, only the ten or so largest banks will be required to adopt the new accord which is expected to be implemented on January 1, 2007. Other large banks may opt-in to the new accord if they meet certain regulatory requirements, while smaller banks will continue to operate under the Basel I accord adopted in 1988.

The study indicated that the institutions most impacted by the implementation of Basel II would be the regional and other large institutions that do not adopt Basel II, since they typically compete for the same kind of small and medium-size commercial customers as the banks that will be required to comply with Basel II. By contrast, community banks-those with assets of less than $1 billion-will not be significantly impacted because they lend to younger companies and tend to rely more on qualitative information from commercial loan applicants than larger banks. The study looked at the market for credit lines of $1 million or less to small and medium-size private companies.

The study concluded that it was doubtful that the Basel II banks would go after the community bank's commercial customers-even after a capital reduction-because those customers would be considered too risky and might require more capital.

Another Federal Reserve study concluded there was little basis for concern that adoption of Basel II by the large banks would result in significantly increased merger activity with smaller banks.