OCC’s Hawke Passes on Basel

The Basel II risk accord makes the U.S. tax code sound like a breezy summer novel, at least as described by John D. Hawke, Jr., Comptroller of the Currency.

Indeed, Hawke uses language befitting an aggrieved taxpayer in lambasting the "monumental prescriptiveness" of Basel II, an effort seemingly motivated by the quixotic hope of discovering the "Holy Grail of competitive equality."

Speaking at the American Academy in Berlin on December 15, 2003, Hawke refers to the Basel Committee's most recent consultative paper, CP-3, as "mind-numbing in its complexity," "complex far beyond reason," and having formulas "so complex that the mere visual depiction of them has been cause for ridicule."

Furthermore, Hawke characterized the effort to improve upon Basel I as having "absorbed an incalculable amount of time, energy and resources on the part of the Basel Committee, its member agencies and their staffs, and the banking industry worldwide."

And the effort isn't even over. "There is a staggering amount of work confronting both us and our banks before Basel II can be implemented," says Hawke, "and I am absolutely confident, based on past experience, that as we move into the implementation phase we will uncover a myriad of issues not previously thought of or addressed."

Accordingly, Hawke has expressed doubts about the industry's ability to implement the Basel II accord by 2006 as planned. "We have to exercise great caution that we do not, in the name of achieving international uniformity, needlessly disrupt settled banking practices and established, well-functioning markets," says Hawke.

Such a delay might be a welcome respite for U.S. institutions, such as those that specialize in credit cards and securitizations, which would be adversely affected by the proposed capital rules. On the other hand, Hawke's sentiments could chill the market for Basel II-related software providers, who indeed thrive on turning mind-numbing complexity into user-friendly solutions. For such technology firms, it may become a safer bet to promote adept management of operational risk as having benefits beyond just a haircut on capital reserve requirements.