Much US work to be done on capital rules
WASHINGTON - US federal banking regulators warned of much work to be done as they worked towards the mid-year target for releasing US proposals for the implementation of the Basel II global capital rules.
The head of the Federal Deposit Insurance Corporation (FDIC) reiterated the agency's view that any risk-based capital framework like Basel II must include a "straightforward capital floor".
And the Federal Reserve released a study in early April that concluded US mortgage rates are likely to be largely unaffected by the co-called bifurcated US policy on adopting the risk-focused Basel II rules.
In fact, the most significant competitive impact of Basel II in the mortgage market might be to put pressure on government-sponsored housing enterprises, such as Fannie Mae and Freddie Mac, to lower their guarantee fee to Basel-II compliant banks for prime mortgages.
The US plans to apply the complex Basel II rules only to a core group of around eight large international banks with another dozen or so big banks opting to operate under the regime. These banks represent the bulk of US banking assets. They will only be allowed to use the most advanced approaches to measuring their credit and operational risks when the rules take effect on January 1, 2008.
The rest of the US banking system, comprising thousands of smaller banks, will remain on the current, and simpler, Basel I capital adequacy rules that date from 1988. Some smaller banks fear they will be put at a competitive disadvantage to the Basel-II compliant banks, which could enjoy lower capital charges under the new regime.
As a result, US regulators have said they will propose this summer some options for simple revisions of the current capital rules where this would mitigate any unintended disadvantages for smaller banks arising from Basel II.
But US Federal Reserve Board chairman Alan Greenspan said in early April that implementing Basel II would make US banks stronger and safer, and were unlikely to harm their competitiveness.
"US banks would be stronger, safer, and less vulnerable to shock - and thus the preferred entities for global counterparties - because of having the strong risk measurement and management systems that Basel II requires," Greenspan said in a written response to a lawmaker's question, which was obtained by Reuters news agency.
"A bank is not competitively disadvantaged if it has strong risk and capital management systems vis-a-vis rivals here and abroad," Greenspan added.
"In any event, foreign rivals will be subject to the Basel II rules, and securities firms in this country will be subject to similar rules."
Speaking ahead of the publication of the Fed's mortgage rate study, the latest in a series of Basel II reports, Greenspan said Fed studies had suggested US implementation "would have at most modest competitive impacts, although the studies do indicate that there may be some potential effects on regional banks in the market for loans to small and medium-sized firms."
He said a study examining the potential impact of Basel II on consumer credit cards was expected by mid-year.
Greenspan also said markets were effectively forcing banks to adopt risk-management approaches similar to what
Basel II would require.
"We do not expect that Basel II will impede banks' efforts to mitigate their operational risk; in fact, Basel II allows banks to reduce substantially their
capital requirements for operational risk to the extent the bank has taken action to control or hedge its operational risk," he said.
Meanwhile, US Federal Reserve Board governor Susan Schmidt Bies said substantial work remains to be done before Basel II can go live.
Several areas in particular will require special efforts, she said in late March. Data collection and validation are examples, she added.
Supervisors are working diligently to provide guidance on what is expected for data warehouses and validation, but banks are responsible for collecting the data they will need for the advanced approaches, Bies said. Similarly validation starts with the institutions' own independent checks on the adequacy of risk management and internal control processes.
FDIC said some observers are suggesting that Basel II will make obsolete current requirements for FDIC-insured banks to meet certain leverage requirements.
"The leverage ratio is a simple, clear-cut minimum amount of capital banks need to hold as a percentage their assets," he told a derivatives conference in April.
"In our view, phasing out the leverage ratio suggests we are willing to contemplate a significant expansion of the federal safety net," Powell said.
But he said the FDIC, which insures deposits at nearly 9,000 US banks and savings associations, continues to support the view that there should be limits on regulators' discretion about the level of capital at which banks are permitted to operate.
Four federal banking supervisors are charged with implementing Basel II in the US. As well as the Fed and the FDIC, there is the Office of the Comptroller of Currency, which regulates some 2,000 national, or non-state charted, banks and the Office of Thrift Supervision.
*An Analysis of the Potential Competitive Impacts of Basel II Capital Standards on US Mortgage Rates and Mortgage Securitization is available on the Fed's website: www.federalreserve.gov.
