The long-awaited implementation of the Basel II capital adequacy accord has been further threatened by US concerns over the results of the recently completed quantitative impact study (QIS4). The four US federal banking agencies (OCC, Federal Reserve, FDIC and OTS) have called for a delay in publishing an important notice of proposed rulemaking (NPR), from the summer to the autumn this year, to allow for further study.
Range of changes
And in submissions to Congress in mid-May, the agencies stated that QIS4 implied reductions in minimum regulatory capital far larger than expected from previous studies.
Changes in effective minimum required capital for individual banks ranged from a decrease of 47% to an increase of 50%. And no US bank would qualify under the advanced approaches to Basel II.
So what will the US moves mean for Basel II, which is due to start at the end of 2006 for banks using simpler approaches and the end of 2007 for those using advanced methods? While the US agencies testified that the original timetable was still possible, they also indicated that they wanted a better understanding of the QIS4 results on the 26 US banks involved: “Additional work is necessary to determine whether these results reflect differences in risk, reveal limitations of QIS4, identify variations in the stages of bank implementation efforts (particularly related to data availability), and/or suggest the need for adjustments to the Basel II framework.”
In short, the US is asking for more time and is concerned that the implied diversity and reductions in capital required under Basel II are too substantial a shift. If the US cannot get the Basel II models to provide more acceptable capital reductions, then the clear implication is that no US banks will be participating in Basel II as it stands today.
Without US, it’s not on
If the 20 US banks expected to participate in Basel II do not get approval, is the new capital framework doomed? The Europeans and others could carry on but without the support of the large US banks the concept of a global capital framework lacks credibility. Therefore the US’s NPR in the autumn becomes critical and the prospect of further start delays for Basel II increases.
If the US continues to find the results of the bank models unacceptable, as seems possible, then the Basel II framework may need to be radically changed, as has been suggested. The only certainty seems to be that whatever happens, the Basel II saga will continue to drag on even longer.
