Greenspan says Basel II will make US banks stronger
WASHINGTON, April 5 - Implementing the new Basel II global banking rules would make US banks stronger and safer, and were unlikely to harm their competitiveness, according to US Federal Reserve Board Chairman Alan Greenspan.
"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 the Reuters news agency yesterday.
"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."
Updated proposals for the US implementation of the Basel II accord, designed by the international banking regulators of the Basel Committee on Banking Supervision, are due by the middle of this year.
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 the Fed planned to release a study examining the potential impact of Basel II on residential mortgages in early April, and one on consumer credit cards by mid-year.
He 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.
Greenspan's response was to a written question he had received from Republican Senator Rick Santorum of Pennsylvania in connection with a Senate Banking Committee hearing in February.
In the US the complex, risk-based Basel II capital adequacy rules will apply only to the very largest of the nation's banks, estimated by analysts at around 20 or so. They will have to use only the most advanced Basel II methods for measuring their credit and operational risks. But these Basel II compliant banks will comprise the bulk of US banking assets when the rules come into effect on January 1, 2008.
The rest of the US banking system, comprising thousands of regional and smaller banks, will remain on the current, and much simpler, Basel I rules that date from 1988.
Last month Greenspan said US supervisors will propose this summer some options for simple revisions to the Basel I rules as they apply in the US where this would mitigate any unintended disadvantages created by Basel II for small and regional banks.
Smaller banks fear that the Basel II rules, which aim to get banks to align their capital more accurately to the risks they face, could result in the Basel II compliant banks enjoying relatively lower capital charges than Basel I banks.
Last week, Federal Reserve governor Susan Schmidt Bies said substantial work remains to be done before Basel II goes live.
Just over 100 countries have said they plan to apply the Basel II rules, either in accord with the Basel Committee's proposed schedule or later.
The Committee, which comprises senior banking supervisors from North America, Europe and Japan, suggests banks using the simpler and intermediate Basel II approaches to their risks adopt the rules from end-2006. Banks using advanced approaches should implement Basel II from end-2007.
Global Risk Regulator (info@globalriskregulator.com)
