HighBeam Research: EU/US : APPLICATION OF BASEL II BANKING RULES TRIGGERS TENSIONS.(Basel Committee on Banking Supervision (BCBS))
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| Your friend Gerald Deutsch has sent you this document from HighBeam™ Research: Try HighBeam for yourself! Enter a research term in the search box below to view results from HighBeam's extensive library of articles from trusted business, trade, consumer & reference publications. To Sign up for a Free Trial of HighBeam Research, click Here. EU/US : APPLICATION OF BASEL II BANKING RULES TRIGGERS TENSIONS.(Basel Committee on Banking Supervision (BCBS)) Source: European Report Date: 11/16/2006 European banks would have a competitive advantage over their US counterparts under newly-proposed US rules on capital requirements, voices in the US banking sector are warning. A debate is raging in the US over how to implement the Basel II international agreement on capital adequacy, with the banking industry accusing regulators of being unnecessarily strict. Meanwhile, implementation of Basel II in the EU is proceeding much more smoothly. The tardiness of US implementation has not gone unnoticed by the European Commission, nor has the prospect of divergent interpretations of an agreement that was supposed to unify global capital rules. Basel II, the successor to a 1988 agreement, aims to ensure that banks have enough capital to cover the financial risks they take when they make investments. This should reduce the chances of them going bankrupt and defaulting on payments, which in turn should protect savers and investors and encourage overall economic stability. On the EU side, Basel II was converted into the Capital Requirements Directive, which the EU Council of Ministers and European Parliament adopted in June 2006. The adoption process was fairly quick and painless, with debate focussing less on the substance of Basel II and more on MEPs' right to review implementing regulations adopted under the comitology' procedure. Internal Market Commissioner Charlie McCreevy recently announced that nearly all EU member states were on track to implement the directive by the end of 2006 as required. DIVERGENT INTERPRETATIONS By contrast, the US regulators are still in the drafting phase, having published this September an updated notice of proposed rulemaking'. In a speech given on 8 November, Commissioner McCreevy said "we are continuing our talks with the US regulators and with the industry on how to deal harmoniously with differences in timing and other practicalities surrounding the implementation of Basel II." He has warned that the discrepancy "raises issues for EU banks with operations in the US and for US banks with operations in the EU." The commissioner wants to ensure that European re-insurers are not forced to post high-level collateral for their US business. The split between US banking regulators and the banks was highly evident at a conference on Basel II organised by the American Enterprise Institute (AEI) in Washington DC on 14 November. George E. French, Policy Director for one of the regulatory agencies, the Federal Deposit Insurance Corporation, said "there are problems with Basel II which need to be addressed". He felt Basel II could lead to a dangerous lowering of capital requirements and likened the formula used in Basel II to "waiving a magic wand". Asked about the danger of a stricter US regulation losing American banks business, he responded "we would rather not have capital regulation become a tool of international competition". French is responsible for developing policies that promote banking safety and soundness. US BANKS UNHAPPY On the other side of the argument, Mark Tenhundfeld from the American Bankers Association said the proposed US rule "ties one of our hands behind our backs" by requiring banks to hold more capital than justified. He also noted that the proposed three-year phase-in period was out of sync with the two-year period adopted elsewhere. If enacted, "corporations may take their business elsewhere and seek funding outside the US," he warned. He wanted the US to adopt similar rules to those adopted in other countries. Tenhundfeld also voiced these concerns in hearings on Basel II in the US House of Representatives and Senate, which took place in September. Gary Wilhite from Wachovia Bank told the AEI conference he was "very worried" about the proposed US rules as they would be "very expensive to comply with". In particular, he felt the formula for calculating minimum capital requirements did not factor in periods of economic downturn, when it is much harder for banks to raise capital. LAWMAKERS DIVIDED Congress seems divided on how to proceed. For example, during September's hearings Republican Senator Elizabeth Dole (North Carolina) was "somewhat troubled" that the draft US rule differed "so significantly" from Basel II. "We bear special responsibility to US banks to justify deviation from the international accord," Dole said. However, Democrat Congresswoman Maxine Walters (California) insisted "we must ensure the safety and soundness of our banking system". Though the Congress cannot veto the new rules, the regulators are supposed to take their views into consideration. Since the traumatic collapse of US energy giant Enron, US legislators have zealously tightened up regulations in the financial sector in a bid to prevent a similar crisis occurring again. The Basel II framework itself came under fire from AEI Resident Fellow Peter Wallison. He argued it was based on the flawed premise that banks have in place a very sophisticated system for calculating the financial risks that arise from their investments. He criticised banks for seeking to lower capital requirements, saying this was not in their interest ultimately because under US law, if a bank goes bankrupt it is up to the other banks and not the taxpayer to foot the bill. The definitive US regulation on Basel II is expected to be published by the regulators in the coming months. Origins Basel II is the end-product of a round of deliberations by central bankers from around the globe, under the auspices of the Basel Committee on Banking Supervision (BCBS). Basel II has three pillars. Under Pillar I, credit institutions can choose from three different levels: standard, foundation and advanced. Under Pillar II, they must do internal assessments that are then checked by supervisors and the minimum required amount of capital is set. Under Pillar III, they must make certain information, including their capital charge, public to allow the market to judge their risk worthiness and react accordingly. The Basel II deliberations began in January 2001, with a final version issued in June 2004. COPYRIGHT 2006 Europe Information Service This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. Click here to see more articles on this topic. Try your research topic on HighBeam Research now (great for any business, educational or personal research need). |
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