Congress’s insistence on more time not only threatens the June 2004 deadline but may lead to tandem versions of the accord appearing.

The battle between Europe and the US over the Basel II capital accord is coming to a head. After many previous delays, some degree of consensus was reached in Madrid last October and a long-awaited agreement on Basel II was expected to be reached by this June with implementation by the end of 2006. All seemed fine but then US politicians entered the picture.

While US regulators, including the Federal Reserve Board and the Office of the Comptroller of the Currency (OCC), had helped steer the US position on the Basel Accord over the previous five years, Michael Oxley, chairman of the US House of Representatives Committee on Financial Services was highly critical of their approach. In a letter last November, he complained that US regulators were moving too fast and making important public policy decisions outside of the political process.

Then in a speech in Berlin in December, John Hawke, Comptroller of the Currency – perhaps reflecting the political winds in Washington – noted: “I am concerned that the level of prescriptiveness reflected in the current version of Basel II does not mesh well with the traditional US approach to bank supervision and threatens to change it in a way that could be very unhealthy.”

Hawke not only criticised Basel II’s “mind-numbing complexity” but also stated that the OCC would insist on a fourth quantitative impact study (QIS4) in the US after the so-called final agreement on Basel has been reached in June. Given QIS4, he also doubted that Basel II could be implemented by end-2006.

In short, the US is following its own political agenda and timetable. Meanwhile, the European Commission announced on March 15 that it is committed to issuing a draft directive on the European version of Basel II this summer. Known as the capital directive CAD3, it will follow the issuing of the final text of the Basel II accord by the Basel Committee on Banking Supervision.

With US regulators and Congress insisting on more studies and negotiations, informed observers, such as Professor Harald Benink of Erasmus University, believe it is highly unlikely that the June deadline can be met. And the US’ unilateral approach may even lead to a European version of Basel II, with the US producing its own modified version at a later date. For now, the battle is far from over – and the concept of an improved bank capital regime and a level playing field is still far from implementation.

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