WASHINGTON - Federal regulators plan to offer a timetable next month that will make it clearer whether the Basel II process is picking up speed or grinding to a halt.
Two federal regulators previewed their positions Monday, in advance of the October status report, which is expected to tell when the next proposal will be released and new capital rules could take effect.
In his first major policy speech since taking office, Comptroller of the Currency John Dugan said regulators need a "clear plan" to address concerns about whether new Basel II capital standards will result in a major competitive imbalance between large and small banks.
The former banking lawyer warned that the process will "take time."
"We need to get this right - and that might well take more than one rulemaking," he said in the speech at the American Bankers Association's annual convention in Palm Desert, Calif.
At an Institute of International Bankers meeting in Washington, Federal Reserve Board Governor Susan S. Bies said October would be a "critical month."
"While I can't promise you that we will unanimously agree across the globe on something where - let's face it - in the U.S. we don't unanimously have a viewpoint yet, we clearly are trying to work together," Ms. Bies said.
The Basel II capital accord is supposed to go into effect in 2008, but disagreements among domestic regulators have led many observers to conclude that it cannot be completed in time.
U.S. and foreign bank regulators began changing the capital standards in 1998 to more closely align regulatory requirements with risk measurements that banks were using. In this country only the 20 largest, internationally active banks are expected to adopt the rules, because of the cost and complexity.
Some of these institutions hope the huge investment will reduce capital requirements. But many small and regional banks worry that this would let large banks lower fees on mortgages and other banking products.
To resolve this issue, U.S. regulators plan to revise capital standards for all other banks as well. An advance notice of proposed rule for these standards, known as Basel IA, should be released in several weeks for comment.
On Monday, Mr. Dugan called community bankers' concerns "perfectly appropriate" and said he wants to ensure that bankers get a chance to view the Basel IA and Basel II proposals side by side before they are finalized.
"That's why I think it is so important to have an overlapping comment period, so that we can take … [such concerns] into account when we promulgate the final rules," he said.
Observers have long speculated about what Mr. Dugan's position on Basel II would be. (He was spoken of as a potential nominee as early as last fall.) Though Fed officials have been aggressive in promoting the capital accord, officials of other bank regulatory agencies - including Don Powell, the chairman of the Federal Deposit Insurance Corp. - have publicly called for a delay.
On Monday, Mr. Dugan seemed to steer a middle course, urging caution but saying the process should move forward.
Though the Fed remains Basel II's biggest advocate among U.S. regulators, Ms. Bies struck an uncharacteristically cautious tone Monday, saying there were still major technical issues to resolve.
She said regulators were surprised at how inaccurately some banks had accounted for losses to be expected if borrowers default when the economy is under stress. QIS-4, an impact study released in April, showed that some bankers did not know how to account for such eventualities, Ms. Bies said. They simply reported the expected loss as "zero" - and that was "not acceptable," she said.
The impact study found that the drop in capital requirements would be uneven if Basel II were implemented today. Thirteen of the 26 banks would require at least 26% less capital, but the drop would be as much as 50% for some others - and still others would have to hold as much as 50% more than under current rules.'
Despite widespread concerns about the quality of data that banks used to measure the effect of Basel II, Ms. Bies said that there were no plans to conduct a fifth impact study before the Basel II proposal is issued.
Basel II is expected to garner more attention this week in Washington. The House Financial Services financial institutions subcommittee is holding a hearing on the issue, and several bankers are expected to testify.
European bankers seem on track to implement Basel II in 2008. At the conference Monday, domestic and international regulators avoided weighing on what would happen if progress remained uneven.
"I usually try to avoid questions of 'what if?' " said Jaime Caruana, the governor of the Bank of Spain and the chairman of the Basel Committee on Banking Supervision. "At the present moment, the schedule is the schedule, and we are trying to meet the schedule," he said. "I hope we will not be facing" a U.S. failure to meet the global deadlines.
In a brief interview after the meeting he said, "I think they are moving in the right direction."
Monday's meeting was a reminder that U.S. regulators, even after they settle matters among themselves, will have to agree with foreign regulators on jurisdiction and oversight of banks active internationally.
Sir Callum McCarthy, the chairman of the United Kingdom's Financial Services Authority, said it had already reached agreements with other regulators on how they would supervise more than 150 international banks. He said there were "a slew" agreements on other banks "in the pipeline."
But regulators understand that such agreements will be tested when Basel II is implemented, and that agencies must be willing to have "frank" discussions about jurisdictional issues, Sir Callum said. Regulators must be able to "pick the phone up … and have a grown-up conversation," he said.
One of his predecessors, Sir Howard Davies, who is now the director of the London School of Economics, said Sunday that the Basel II process has become too complex.
Negotiators tried to "resolve differences by addition," he said at the annual meeting of the Institute of International Finance. The accord is in danger of becoming a "Christmas tree" of conflicting or surplus ideas," he said.
"Maybe it's not too late to attempt a simplification exercise," Sir Howard said.
