Basel II Agreement Reached, Basel IA Dropped

By Nancy Feig

The federal banking regulators on July 20 finally reached an agreement regarding the implementation of Basel II in the United States. The agreement will lead to the finalization of a rule implementing the advanced approaches for computing large, international banks' risk-based capital requirements.According to a joint release from the agencies, including the Federal Reserve, FDIC, OTS and OTC, the agreement retains the transitional floor periods of the most recent notice for proposed rulemaking and is fairly consistent with most already-in-place international approaches. After a parallel run in 2008, the transition floors provide for maximum cumulative reduction of 5 percent in the first year, 10 percent in the second year, and 15 percent in the third year.

While the final rule will only directly apply to the largest 11 U.S. banks, the rule's reverberations will be felt throughout the banking industry.

The regulators dropped Basel IA, which many non-core banks clung to as a potential life raft to stay competitively afloat. But the regulators quickly ensured the nation's smaller banks that a standardized approach for all non-core banks would be made available before the first transition period begins for the core banks on before the first transitional period in 2009.

This again brings up the argument that smaller banks would be left at a competitive disadvantage to the larger banks that will now be allowed to hold much less capital in their reserves and be able to free up that money for other purposes. Community bankers seem hesitant to acknowledge that dropping Basel IA is a good move. In a statement, ICBA said, "ICBA has expressed its concern about the impact of Basel II on the domestic competitive landscape, and we look forward to reviewing the proposed rule regarding a standardized option for non-core banks under Basel II to replace the earlier Basel IA option."

It seems as if they are expecting another battle ahead.

And according to a July 23 article in American Banker, John Reich, director of the Office of Thrift Supervision, is anticipating some backlash. He attempted tried to preempt any opposition by promising that all banks will be on a level playing field. According to the paper, Reich vowed to "make certain that nothing we have agreed to here today results in any competitive disadvantages."

From what I'm reading, it appears that the specifics of Basel IA were too complicated and that a standardized approach, like the ones available in other countries, may be the best way to keep non-core banks on a level playing field with the largest U.S. banks and large, international banks based outside of the U.S.

I do know that Basel IA was something in which many small banks had a vested interest. While the regulators and the lobbyists have had their say about last week's news, I would be interested in hearing some reaction from the non-core banks about the death of Basel IA and how they are preparing their institutions for the standardized rule that is yet to come.

It took eight years for the agencies to finally agree on a Basel II rule, I find it difficult to believe they will agree on a standardized approach by sometime next year.