13 November 2003

Basel II: The Proposed U.S. Approach to Regulatory Capital

Remarks by Vice Chairman Roger W. Ferguson, Jr. of the U.S. Federal Reserve Board At the conference on The Changing Regulatory Capital Regime in Europe: A Challenging New Business Concept, Brussels

Excerpt

“In January, the Basel Committee will meet to address further analysis of outstanding issues and review the timetable for completing and implementing the committee's work on the accord. U.S. supervisors then plan to conduct another Quantitative Impact Study (QIS) to gauge more clearly the impact of the Basel proposals. The U.S. agencies will then conduct a full notice of proposed rulemaking once again to seek and then evaluate public comments before adopting a final rule.

“The U.S. banking agencies propose that only the most advanced approaches under Basel II be offered for banking organizations in the United States:

“Because of the heterogeneous nature of the U.S. banking system, some balance in the application of Basel II would be necessary. The U.S. agencies do not want to impose the higher costs of the advanced version of Basel II on institutions for which it is clearly not suited.

“The U.S. banking agencies have proposed that those banks that do not qualify as large and internationally active and for which the advanced approach of Basel II may not necessarily be appropriate would remain under the current U.S. regulatory capital rules.

“The U.S. agencies have increasingly focused on the potential competitive effects of Basel II on U.S. banks. If (…) empirical evidence indicates a high probability of general competitive imbalances, we will then review our options for addressing the problem.

“The accord revisions wisely contain a certain amount of flexibility to account for differences in the banking systems of member countries. These so-called national discretion elements mean that maintaining a level playing field across countries is a challenge.

“The Accord Implementation Group (AIG) issued a set of high-level principles for cross-border implementation of the accord. These principles clearly identify the need to respect both home and host country rules and regulations, the need for enhanced and pragmatic cooperation between both types of supervisors, and the desire for supervisors to minimize the burden on banking groups as much as possible. As a result, U.S. supervisors need to work very closely with supervisors from other member countries to assist banking organizations in meeting the various requirements.

“One of the most challenging home/host issues that has arisen of late is the allocation of operational risk capital within a consolidated banking organization. This issue goes right to the heart of home/host supervision. The conflict arises because host supervisors may require subsidiary banks at the local level to hold a certain amount of capital which, when aggregated across both geography and entity type, may be greater than what the consolidated organization deems necessary, because of diversification effects.

“It may well take some time for our efforts to converge to an acceptable solution in this matter, and that solution may not be completely satisfactory for all parties. Right now the AIG is working with the Committee's Risk Management Group (RMG) to develop a set of possible solutions to the problem. My expectation is that reaching a solution will require a slow and steady effort, but in the end, we will reach an acceptable compromise.

“Because member countries have different supervisory regimes, there is the possibility for Basel II rules to be applied in a variety of ways. While some variety in standards across countries may be unavoidable, we believe that maintaining as much consistency as possible is a worthwhile objective. It benefits no one if there is an appearance that countries vary considerably in their application of standards. The entire accord is undermined if a set of banks from one country appears to be subject to softer standards.

full speech

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