Despite pronouncements of consensus, US regulators may yet reject Basel II causing the US to take unilateral action thereby creating problems for banks elsewhere.
Consensus has been achieved on Basel II, a deal has been done and the text of the new international capital adequacy framework will be published at the end of this month. So, are the seven years of delays and deliberations over Basel II finally over?
“Basel II introduces a far more comprehensive framework for regulatory capital and risk management than we have ever known,” said Jaime Caruana, chairman of the Basel Committee.
But is this really the final version? Some have serious doubts.
On May 11 the Basel Committee (which includes the US) confirmed that the standardised and foundation approaches will be implemented from year-end 2006 but it decided that one further year of impact analysis/parallel running would be needed for the most advanced approaches and thesetherefore would be implemented at year-end 2007.
The question is whether the decision to stagger the timetable represents a useful compromise, allowing US regulators in particular more time for studies, or is it a face-saving device to achieve a long-awaited deal now which still leaves the hard issues unresolved?
The critical issue seems to concern US attitudes and what US politicians may construe as giving competitive advantage to certain groups of banks.
Over the last year, US regulators have made it abundantly clear that Basel II would only apply to a select group of less than 20 banks using only the advanced internal ratings-based approach (IRB), while the remaining US banks would continue to useBasel I.
The US regulators have also insisted on more studies and a fourth quantitative impact study (QIS4) which will be based on the June text and will not be available until early 2005.
The problem is that if Basel II significantly reduces capital applied to certain areas, such as mortgages, this will give certain banks significant advantages and this is deemed unacceptable in the US.
New studies, such as QIS4, are not likely to change this core issue of a level playing field and this puts the US on a collision course with supporters of Basel II, in particular the European banks.
The May 11 statement allows for flexibility and “the need to further review the calibration of the new framework” but this merely fudges the core conflict.
Some believe that in the end US regulators will not be able to agree to Basel II and the US will take unilateral action and perhaps want changes to both Basel I and Basel II, causing problems for banks elsewhere. While the deal reached has achieved a lot, the saga of Basel II is far from over.
