Bankers Maintain Criticisms of U.S. Version of Basel II

WASHINGTON - Federal banking regulators looking for solutions to the impasse over the Basel II capital proposal are unlikely to find them in dozens of comment letters filed by financial institutions on the latest plan.

Though many companies, including Bank of America Corp., Wachovia Corp., Washington Mutual Inc. and Citigroup Inc., weighed in on the topic with letters last week, they stuck largely to previous criticisms of the leverage ratio, capital floors, and regulators' insistence on using only the advanced approach.

Suggestions on fixing the plan largely centered on eliminating or scaling back those provisions.

In particular, an overwhelming number of large banks continued their efforts to get the option of using the less complex standardized approach, arguing that it allows greater flexibility.

"No single choice is ideal for effective management and supervision of all banks, even when considering categories of only large, regional, or community institutions. Choices should be available to all," Ronald Cathcart, the executive vice president and chief enterprise risk officer at Wamu, wrote in a comment letter dated March 20.

Wachovia's chief risk officer, Donald Truslow, and its chief financial officer, Thomas Wurtz, argued that if regulators gave bankers several options, the proposal's risk sensitivity would improve, and U.S. implementation of Basel II would fall more in line with international implementations.

"We support the proposal to update the general capital rules to make them more risk sensitive. The best way to do this would be to make the standardized approach available to banks that do not adopt the [advanced] approach," they wrote in a March 26 letter.

Regulators approved the latest version of Basel II in September, maintaining the emphasis on the advanced approach and capital floors that would prevent the industry's aggregate regulatory capital from falling more than 10% during the first three transitional years of implementation.

The banking agencies themselves remain divided on some issues. The Federal Reserve Board has argued that the simpler standards are insufficient for large and complex banks, but Federal Deposit Insurance Corp. Chairman Sheila Bair has said such a choice makes sense.

Bankers argued in the letters that U.S. regulators' emphasis on the advanced approach would put domestic banks at a competitive disadvantage against foreign institutions. Most other countries, including much of the European Union, are implementing a version based on an international agreement hammered out in 2004 that lets banks choose from among several standards.

But B of A said that even though large foreign banks have the option of using simpler versions of Basel II, their regulators are still pushing them to implement the advanced approach.

"Although the choice is available in principle for all banks, the international accord made it clear that larger banks were expected to implement approaches consistent with their complexity and risk management processes," Joe Price, the Charlotte company's chief financial officer, and Amy Woods Brinkley, its chief risk officer, wrote in a March 26 letter. "Bank of America would fit into this category and is committed to implement the [advanced] approaches for credit and operational risk as soon as possible."

Still, Mr. Price and Ms. Brinkley urged regulators to allow the other options for banks that are not as committed to the advanced approach. "Nonetheless, we believe the full range of options should be available in the U.S. With these options, banks could select the alternatives that are most appropriate for their business processes."

KeyCorp was the only company to offer a strong defense of the advanced approach.

Products being held "on and off balance sheets of large U.S. banks … [have] become sufficiently complex that the standardized approach is, objectively speaking, inadequate," Robert Kula, the Cleveland company's executive vice president of risk management, wrote in a March 26 letter.

Bankers also took aim at the industry capital floors, which regulators defend as a tool to prevent drastic capital drops once Basel II is implemented.

"The 10% floor introduces uncertainty in long-term business planning and capital management strategies," David Bushnell, Citi's senior risk officer, wrote in a March 19 letter. "Some banks will choose to manage this problem by holding additional excess capital that could otherwise support loans and investments that would contribute to economic growth."

Peter Aceto, the chief risk officer and chief of staff at ING Bank FSB, said the floors are counter to Basel II's mission of tying capital to risk.

"By imposing this artificial limitation on U.S. banks, this proposal defeats the premise of the Basel II framework," he wrote in an undated letter.

The bankers did not hold the leverage ratio in much higher regard. The FDIC is championing the basic formula of capital to assets, but bankers argue it would eliminate risk sensitivity.

"The lack of risk sensitivity in the leverage ratio will in certain circumstances cancel out the risk sensitivity of Basel II," Terry Bulger, an executive vice president and chief risk officer at LaSalle Bank Corp., a Chicago unit of ABN Amro Holding NV, wrote in a Feb. 13 letter.

Most bankers urged regulators to revise the proposal to make it less restrictive and more in tune with the version being adopted in other countries.

"We believe these disparities may erode the benefits of Basel II, create competitive challenges for U.S. banks, … introduce unnecessary complexity, and substantially increase banks' cost of implementation and compliance burden," Stefan Gavell, the head of regulatory and industry affairs at State Street Corp., wrote in a March 26 letter.

Despite the criticisms, bankers continue to urge regulators to finalize Basel II.

"Further delay in U.S. implementation would ... increase implementation costs for core banks," Thomas Gibbons, chief risk officer at the Bank of New York Co., wrote on March 23.