WASHINGTON - While lawmakers continued to pound regulators over their latest version of Basel II capital standards, the leaders of the Senate Banking Committee extended their criticism to bankers that have begun protesting the plan.
In a hearing on the issue Tuesday, the senators rejected arguments by four banking companies that the Basel II proposal would put them at a competitive disadvantage to foreign banks and U.S. investment banks.
Though U.S. banks hold more capital than foreign institutions already, "they are earning record profits and are doing much better than their competitors abroad," said Sen. Paul Sarbanes of Maryland, the lead Democrat on the panel. "I have yet to hear a single expert say banks are overcapitalized."
Citigroup Inc., Wachovia Corp., Washington Mutual Inc., and JPMorgan Chase & Co. sent Senate Banking leaders a six-page memo last week detailing their objections to the latest Basel II proposal, which was approved by regulators on Sept. 5 and is open for comment until Jan. 23.
Among other things, the bankers said that the U.S. version of the proposal would put artificial restrictions on how fast capital could fall and would leave the leverage ratio permanently intact.
But Senate Banking Chairman Richard Shelby turned the competitive-equity argument upside down, asking regulators if the less stringent European version could lead to a banking problem there that ultimately would damage banks here.
"Let's just switch the focus a moment and ask whether Basel II's capital requirements could hurt a foreign bank or firm, and the collapse of that firm would then have a ripple effect and ultimately hurt our banks in the reverse," Sen. Shelby said to nods from several regulators. "It's always possible, is it not?"
The Alabama Republican also challenged a Citigroup official to detail what bankers wanted to gain from the Basel II effort.
"Explain the types of benefits banks expected," Sen. Shelby asked Jim Garnett, the head of risk architecture for Citi. "How large must the capital reduction be for Basel II to be most effective?"
Mr. Garnett replied that the bankers sought global consistency in capital requirements and a better alignment of capital with risk.
Not every lawmaker was critical of the bankers' arguments.
Sens. Chuck Schumer, D-N.Y., and Tim Johnson, D-S.D., expressed support for giving banks the option of operating under a simpler standardized approach to risk-based capital requirements. The current Basel II proposal asks for comment on the issue but would require banks to adopt a more complex advanced approach.
Bankers have argued they should be allowed to use the standardized approach, which is an option for European banks.
Even Sen. Sarbanes raised concerns that the advanced approach may be too complex. A test last year of how capital requirements would be affected if Basel II were implemented showed steep drops at some institutions and significant increases at others.
"The advanced approach under Basel II may threaten the safety and soundness of the banking system," Sen. Sarbanes said.
Both he and Sen. Shelby remained highly critical of the banking regulators, arguing that the Basel II effort is still problematic after years of tinkering.
Sen. Shelby told reporters after the hearing that the proposal is "fundamentally flawed."
At the hearing, Federal Reserve Board Gov. Susan Bies repeated her staunch defense of the advanced approach and told lawmakers that many large European banks already have moved toward adopting the more complex approach. U.S. banks, however, argue that the advanced approach here is more onerous than the European one.
Federal Deposit Insurance Corp. Chairman Sheila Bair said she would support implementing the advanced approach "only if I can develop a comfort level that strong capital levels will be preserved."
Sen. Sarbanes also questioned the weight that regulators are giving to various assets. He noted that regulators defined certain concentrations of commercial real estate as risky in proposed guidance released this year. However, when researchers studied what would happen if Basel II were implemented, capital tied to commercial real estate dropped 30%, he said.
"How do you square that?" he asked regulators without getting a response.
