FDIC Study Heightens Concern About Basel II Capital Accord

DECEMBER 12, 2003


FDIC Study Heightens Concern About Basel II Capital Accord

A study released this week by the FDIC quantifying the impact of Basel II in the United States shows that risk-based capital requirements for Basel II banks would be significantly reduced-in some cases below the minimum 4% leverage ratio required to be "adequately capitalized" under Prompt Corrective Action.

Using 19 years of bank call reports and assuming a charge for operational risk, the FDIC calculated that average risk-based capital requirements for Basel II banks would likely be less than 4% during strong economic times. Regulatory capital reductions for 1-4 family mortgages would be particularly significant, dropping an average of 56%.

Unless Basel II requirements are changed, the FDIC observed, U.S. banks must either refrain from taking advantage of the capital revisions of Basel II or regulators will have to adjust Prompt Corrective Action standards. The FDIC suggested that a minimum capital floor be adopted for the new accord, but European regulators have firmly opposed that approach.

"This study heightens ICBA's concern that community banks could be at a competitive disadvantage if Basel II is implemented," said ICBA president and CEO Ken Guenther. "Large Basel II banks will have lower capital charges for residential mortgages, retail and small business loans, which are the bread and butter credits of community banks. The pricing advantages and excess capital at large institutions could lead to accelerated consolidation in the industry to the detriment of consumers, small business and local communities."

The study sparked comment from the Federal Reserve and the OCC. A Fed spokesman questioned the study's methodology, while the OCC said that a new round of data analysis is still ahead that may provide a better set of numbers to assess the Basel II's effect. ICBA supports the further delay of Basel II until more data is collected and analyzed and the issues raised by the FDIC study are addressed.

The Basel Committee hopes to issue a final rule in mid-2004, with implementation slated for early 2007.

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