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AmericasJanuary 5 2004

US legislators likely to delay Basel II signing

US concern over domestic banks looks set to put back the Capital Accord again, and may jeopardise hopes of a level playing field.
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After the October meeting of the Basel Committee in Madrid, Basel II looked as though it was back on track. The compromises with the US regulators in particular appeared to have been made and implementation was still on for the end of 2006 even though signing of the accord was put back to around June 2004. There were collective sighs of relief and Basel Committee chairman Jaime Caruana was judged a hero.

Congressional worries

The reaction of the US Congress, however, had not been fully considered. Unlike the US regulators, who were willing to seek compromises to achieve a global solution, the House committee on financial services, chaired by Ohio congressman Michael Oxley, is working largely to a domestic agenda. Reflecting congressional worries, the US Federal Reserve chairman Roger Ferguson acknowledged in a December speech the domestic concerns of banks not adopting Basel II on their competitive position in relation to residential mortgages, small business loans and credit cards: “In short, creating international competitive balance under Basel II carries the potential that domestic competitive balance will become distorted.”

The powerful Mr Oxley and other US lawmakers are worried by the possible adverse impact of Basel II on the 7000 or more smaller US banks that are likely to remain on Basel I. As a result, US regulators have been told to request another Quantitative Impact Study (QIS) early in 2004 and the US lawmakers are expected to scrutinise the results closely before giving their comments, changes and possible final approval.

The critical aspect of this US cautionary approach is timing. The US legislators are firmly fixated on their domestic agenda and they will definitely follow their own domestic timetable rather than adhere to what the Basel Committee may want.

Time is tight

Time is tight on both sides of the Atlantic. The European legislative timetable in mid-2004 is extremely crowded with EU accession in May and the complex Capital Adequacy Directive (CAD 3, linked to Basel II) likely to be a legislative nightmare. Therefore given the extended time US Congress is likely to take to clarify its position as well as difficulties in Europe the chances of Basel II being signed off by June this year now seem remote.

The Basel II process has suffered many delays and the US looks set to cause further delays, at least in the signing of the accord. US domestic political considerations could scupper the opportunity to provide a level playing field for banking organisations meeting in international competition. The US needs to consider the bigger picture.

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