The implementation in the US just seems to get more confusing. Currently, the 20 or so banks that the Fed judge to be internationally active will have to apply the Basel II advanced methods. Everyone else will have to apply a modified version of the current, Basel I standards – this modification is termed Basel IA in the US. Clear enough – if not consistent with the rest of the planet.
A fair enough, too, in a way. The whole Basel framework is only meant to apply to internationally active banks. If a bank is not internationally active, then there is no need, within the accord, to apply Basel at all.
The odd thing in the US is that the banks are protesting the way Basel II is being implemented and, using the patchwork of regulators that apply in the US (the Federal Reserve, the OCC and the OTS in this case) the banks may actually be able to do it. What some of the 20 want to do is use the standardised approaches to Basel II compliance.
I am not sure why this approach attracts them. Good risk management practice these days, and certainly for big, sophisticated banks, is to calculate capital in much the way the accord mandates. The expense of doing this is high, but so are the benefits. In Australia, for example, it is the smaller institutions who cannot use the more advanced approaches (due to data shortages) that are protesting that the larger banks will be advantaged through capital relief.
My only thoughts here are that, given the higher exposure to sub-prime lending that many of the US banks have, the less sophisticated approaches actually reduce their capital requirements. This would be a problem if true – the the more sophisticated approaches show a high requirement for capital, should you really be moving to a lower one?
Given a January 2009 start date, though, and with the long lead times, they are going to have to be quick. A meeting to come to some sort of arrangement looks like it will be held early to mid September. Lets hope it get some way there. Meanwhile, we will be looking on with interest.
8 September, 2006 at 14:28
Basel II - US Implementation Update « Risk Management in Australia
[…] As I suspected may happen and discussed in an earlier post, the US regulators have bowed to pressure from the banks and are to investigate allowing the standardised approach to be used for Basel II compliance. […]