Agencies Seek Comment On Basel II
In their first official step towards U.S. implementation of the Basel II capital accord, the FDIC, Federal Reserve, OCC and OTS have jointly issued an Advance Notice of Proposed Rulemaking (ANPR) seeking industry comment. The document, which runs about 300 pages, presents an overview of the new accord and spells out the details of the proposed implementation in the U.S. International regulators began working four years ago to develop a more detailed and more risk sensitive capital adequacy framework.
U.S. regulators plan to require the advanced approach of Basel II-known as the Advanced Internal Ratings-Based approach or A-IRB-for the ten or so largest internationally active banks. These banks will use internal risk models to determine their regulatory capital requirements for loans and other assets. They will also be subject to a capital charge for operational risk. Other large institutions will be able to opt-in and calculate capital requirements under the A-IRB if they meet supervisory standards to do so. The banking agencies expect another ten or so large banks to opt-in. Banks not subject to Basel II will remain subject to the current Basel I capital rules.
Competitive Impact on Community Banks. The industry and regulators are concerned about a number of issues posed by Basel II. These include the impact on overall capital levels at large institutions, costs of adopting the new approach, the competitive impact that Basel II will have on smaller institutions that remain subject to Basel I, and a variety of other technical issues posed by the complex accord. For example, Basel II banks are expected to have lower capital charges for certain lines of business, including mortgages and retail credits to consumers or small businesses. Will this result in pricing advantages for Basel II banks? Competitive or market pressures to qualify for the new accord could also help drive industry consolidation.
Regulators hope industry comments will help illuminate the practical consequences of the Basel II capital regime, and position them to make necessary changes to the proposal at the international level.
Comptroller Jerry Hawke said the OCC will not begin implementing a final revision to the Basel capital rules until it has "fully considered all comments received and conducted whatever cost-benefit and impact analyses are required." If this process shows changes to the proposal are necessary, "we will not approve any revisions to our capital rules until appropriate changes are made," he promised.
FDIC chairman Don Powell also stressed the importance of the comment process, and signaled a degree of discomfort with the current proposal. "I hope that this comment period will result in a better understanding of the Agreement's impact on bank capital and on competition, and in exploration of alternatives to the current Basel II approach that would result in a better alignment of bank regulatory capital to risk."
The Federal Reserve has generally been viewed as most positive on the new accord. The greater risk sensitivity and transparency of the new accord "would contribute to a safer and sounder banking system here and abroad," Fed vice chairman Roger Ferguson said. But he also hopes industry comments will "help us think through the remaining issues and, possibly, simplify an admittedly complex framework."
Comments will be accepted for 90 days after publication in the Federal Register.
Congress Weighs In. Meanwhile, Congress weighed in on Basel II this week when a House Financial Services subcommittee approved a bill 42-0 that would create a federal committee responsible for developing uniform U.S. positions on issues before the Basel Committee on Banking Supervision. Congress is concerned about differing viewpoints of the agencies on the proposed Basel II capital rules.
The panel consists of the secretary of the Treasury, the Federal Reserve chairman, the comptroller of the currency, the FDIC chairman, and the OTS director. The bill also requires the new panel to submit a detailed report of its position and its findings regarding the impact of Basel proposals in the U.S. before taking a position on Basel issues. The Treasury's position would prevail if a consensus position cannot be reached. The agencies have said they already work well together and will not sign off on Basel II until they have reached a consensus. The agencies are concerned that the formalized mechanism created by the bill will impair their negotiating ability in Basel.
House Financial Services Committee chairman Mike Oxley (R-OH) noted that since Basel II could have a "dramatic impact" on U.S. institutions, Congress should play a role to ensure that "... any changes to the Basel Accord will have a positive effect on both competition and our economy." Subcommittee chairman Spencer Bachus (R-AL) said, "Proposed changes to the Basel Accord could raise costs and create competition disadvantages for many U.S. financial institutions. Congress must maintain its oversight responsibility on this important matter and ensure that a greater level of transparency is applied to the Basel negotiations."