BASEL II

STATUS
On March 30, 2006, the Federal Reserve released draft rules to implement the Basel II capital accord in the United States. The Notice of Proposed Rule making is intended to give interested parties the opportunity to get a head start on reviewing the proposal. The formal rule making process will not start until the proposal in published in the Federal Register, which is not expected to occur for several weeks.

On May 9, the four US banking regulators announced that they would delay issuing proposed rules implementing the Basel II Capital Accord. The delay in rulemaking was, in part, because the most recent Qualitative Impact Study (QIS) showed that capital requirements might be reduced for the 20 large banks that would fall under Basel II. Despite the delay, rule makers still expect to have the new Basel II Accord in place by 2008. However, disagreement among U.S. banking regulators could further delay the implementation of the Basel II accord.

In the summer of 2004, the Basel Committee released the final version the new Basel II framework. To date, four Quantitative Impact Studies (QIS) have been completed with another expected in 2006.

House Financial Institutions Subcommittee Chairman Bachus (R-AL) has introduced legislation that would create a Financial Policy Committee. The Committee would coordinate the U.S. position on Basel II and analyze the impact of the accord on U.S. capital markets.

BACKGROUND – The Basel Accord is an international agreement governing the capital adequacy of banks operating internationally. In 1988, the Bank for International Settlements (BIS) first established these international capital adequacy standards, commonly referred to as “Basel I.” However, Basel I does not accurately reflect the diverse risks taken by banks. Thus, the BIS’s Basel Committee decided to undertake a comprehensive rewrite. The new accord (Basel II) uses three-pillar architecture to achieve this goal. It includes:

minimum regulatory capital requirements
enhanced supervisory review of an institution's capital adequacy and internal assessment process
market discipline through public disclosure of various financial and risk indicators

AFP ACTION – AFP had previously commented on the development of Basel II. Please visit AFP’s web site for copies of the 2001 and 2000 comment letters.