WASHINGTON - Four top U.S. banking companies are providing details publicly for the first time on how new proposed Basel II standards would put them at a competitive disadvantage against foreign competitors and U.S. investment banks.
Though the companies have raised objections privately to regulators during the past several months, Citigroup Inc., JPMorgan Chase & Co., Wachovia Corp., and Washington Mutual sent a joint six-page memo to Senate Banking Committee leaders specifying their complaints on the eve of a panel hearing on the subject scheduled for today.
The bankers objected to provisions in the proposal that would restrict how quickly capital can drop. They complained that keeping a leverage ratio permanently intact would make them vulnerable to foreign acquisition, and they raised concerns about some specific definitions.
"The changes - which would apply only to U.S. banks - reduce the risk-sensitivity of the accord and place U.S. banks at a competitive disadvantage compared to foreign banks and, currently, to U.S. investment banks," the companies wrote in the memo, which was sent late last week and obtained by American Banker. "They also significantly increase the cost of implementation."
The memo, which was requested by Senate Banking Committee members, appeared to be a response to Federal Reserve Board Gov. Susan Bies, who argued at a recent House subcommittee hearing that any competitive disadvantage for U.S. bankers would be temporary. Ms. Bies also told reporters after the hearing that regulators were unclear about the precise objections.
The companies have succeeded in slightly altering the Basel II proposal, which was approved by the regulators on Sept. 5 and is open for comment until January. The bankers demanded that regulators at least consider allowing them the option of using the standardized approach dictating risk-based capital requirements versus the more complex advanced approach favored by the Fed. The regulators sought comment for the issue in their latest version of the proposal.
The memo went beyond that issue. The bankers renewed objections to provisions that would keep the basic capital-to-assets leverage ratio in place even after Basel II went in effect. Such a system would contradict Basel II's goal, "because the leverage ratio will not change no matter how conservatively the bank operates."
"It would also make the U.S. banks a more attractive target for acquisition by foreign institutions that are not subject to an equivalent leverage requirement," the memo said.
European banks are currently not subject to a leverage ratio, but it is politically popular in the United States and adamantly supported by the regulators.
The memo also raised objections about how fast capital would be allowed to fall. Under the latest proposal, a bank's regulatory capital could fall 5% in the first year of implementation and 5% a year for the next two years. Under another safeguard, if the industry's aggregate regulatory capital fell more than 10%, regulators would reexamine the accord with an eye toward tightening it.
Banks in the European Union and countries following the international text are not subject to such restrictive caps, the memo said.
"A 10% limit is arbitrary and has no relationship to either U.S. or global economic conditions," the companies wrote.
The memo also targeted the largest U.S. investment banks, which are regulated by the Securities and Exchange Commission and may be allowed to comply with the international version of Basel II.
"Unless the SEC adopts the modifications in the … [notice of proposed rulemaking], U.S. commercial banks will be at a competitive disadvantage not only with respect to foreign competitors, but also against U.S. investment banks, since only U.S. commercial banks will fall under the increased regulatory burden and different rules of the U.S. NPR," the memo said.
Bear Stearns & Co., Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers, and Merrill Lynch & Co. are the only investment banks required to comply with Basel II. SEC officials have assured Congress that it plans to adopt most of the changes finalized by the banking regulators.
