US regulatory bodies have released a new draft of Basel II softening the requirements for banks’ reserve capital. Analysts at InfoWatch believe US bankers are afraid of losing their leading position on the world’s financial markets and are trying to drag out the compliance process. If it continues, however, European banks may benefit from using the new system of risk management and the subsequent effect it will have on their image.
US financial regulators have proposed a modified version of the Basel II Accord for the nation’s banking system. The suggested changes would affect risk-based capital standards, and includes safeguards against a major drop in bank capital levels.
The regulatory agencies submitted the draft rules for a 120-day public comment period after they were approved by the Federal Deposit Insurance Corp. board. The transition period would not begin any sooner than January 2008, according to FDIC staff.
In early August a number of large US banks voiced their concerns over the implementation of Basel II, saying capital levels could fall sharply. A test run of the standards among 26 large US banks earlier this year resulted in an alarming drop in required risk-based capital, prompting criticism from regulators and Congress. The proposal by the bank regulators – including the FDIC, the Federal Reserve Board, the Office of the Comptroller of the Currency and the Office of Thrift Supervision – mandates that a 10% aggregate decline in risk-based capital among US banks implementing Basel II would trigger another review of the standards. An individual bank's risk-based capital would not be allowed to drop more than by 5% annually during the transition period, or 15% for the full three-year transition period.
The regulators' proposal differs from a draft released on March 30 in that it seeks comments on the option for banks to use a US version of the "standardized approach" to Basel II implementation rather than using the sophisticated formulas to gauge credit risks under Basel II. Implementation of the full Basel II formulas is likely to be limited to the largest banks that have assets of over $250 billion and are active in international markets. Smaller and mid-sized US banks will likely become subject to a modified version of current capital standards, to be known as Basel 1A. The regulators hope to propose rules for these standards sometime during the Basel II comment period.
“The US is drawing out Basel II implementation over worries about a loss of competitiveness for its banking sector on the world arena. This strategy can hardly be described as correct. First of all, universal compliance with the accord guarantees the stability of the international financial system. Secondly, authoritative studies by Ernst & Young and InfoWatch show that compliance with Basel II increases the competitiveness of a national banking sector as a whole, as well as that of individual banks,” says Denis Zenkin, marketing director at InfoWatch.
Source: Reuters
