First of all: an apology. There seems to be a lot of posts recently on the US implementation of Basel II (or Basel IA or Basel I). This is largely because in Australia we have a few things going well – the regulator is progressing well on implementation, the banks know what the rules are and either are very busy putting them in to practice or have done so and are now refining then and the market is well informed.
This is not the case in the US. Even the basic rules are not yet clear, as a speech by Ben Bernanke has made clear. The US has consistently proposed (to the combined, at best, polite comment and, at worst, outright derision of fellow regulators) that Basel II needed another layer of conservatism – a layer that is not risk sensitive.
Bernanke’s speech has now thrown that, as well as whether their “Basel IA” rules up in the air. Essentially, he is saying that the US regulators will now review whether those additional rules make sense (note to the Fed, they do not) and therefore whether they should drop them.
The so called “Basel IA” rules are also under re-consideration for at least the smallest banks. Apparently, they may be too complex for the very smallest to implement, so they should be allowed to remain under Basel I.
The “Basel IA” (I use inverted commas as they are a US formulation, not a Basel Committee formulation) are essentially dumbed-down Basel II standardised rules. In Australia, even the smallest ADI is using Basel II (the standardised approach). I cannot see why an Australian ADI can do it and a US one cannot.
Maybe we are getting some sense from the US regulators, at long last – but it comes too late and is going to introduce more uncertainty into the US implementation. The sooner they can get this sorted oout, the better. About 3 years ago would have been right.
[UPDATE]Looks like Sheila Bair at the FDIC is fighting back – at the
ABA convention in Phoenix yesterday she is reported to have said that
the leverage ratio “would ensure a minimum cushion of capital for
safety-and-soundness throughout the global banking system”.
Looks like we are in for a nice little stoush. Arguments in bank regulation – always good fun. Lets see who wins.[/UPDATE]
[UPDATE 2]Ben Bernanke fights back! This just gets better. On the linked speech, look at the 6th and 7th paragraph on the section on bank capital (the section is on page 2, with those paras on page 3). Bernanke’s focus is on what is “…likely to add to implementation costs and home-host issues…” rather than Bair’s emphasis on “…safety-and-soundness…”.
I would like to be a fly on the wall when they next meet.[/UPDATE2]