WASHINGTON — The proposed Basel II capital rule is still slated for implementation next year, but separate speeches Monday showed that federal banking regulators remain far apart on how to proceed.
Federal Reserve Board Gov. Susan Bies, who will leave the central bank next month, stressed the importance of moving forward with the controversial proposal, but Federal Deposit Insurance Corp. Chairman Sheila Bair made clear that she is unhappy with the way Basel II currently stands.
"I must say that I am not comfortable with the position we find ourselves in today on Basel II," Ms. Bair told the Global Association of Risk Professionals. "I do not find the Basel II status quo appealing, and I am very concerned with the tenor of some of the more recent public debate."
Ms. Bair took particular aim at the Fed's stance that Basel II's final version should only let banks follow the advanced approach for calculating regulatory capital requirements. Citigroup Inc., JPMorgan Chase & Co., Wachovia Corp., and Washington Mutual Inc. are seeking authority to use a simpler standardized approach and appear to have Ms. Bair's backing.
"A standardized or Basel IA-type of approach to setting regulatory capital, along with rigorous Pillar 2 expectations for internal risk management and measurement processes, would be an example of a less burdensome framework that also reduces uncertainties about capital impact," she said.
Ms. Bair signaled support for the standardized approach when the FDIC released the Basel II proposal in September.
Speaking after the FDIC chief, Ms. Bies said giving banks the right to use the standardized approach would raise other issues, further complicating the process.
"The agencies will need to consider a number of important issues: whether such an approach would accommodate the risks those banks take, now and in the future; whether it would provide adequate risk sensitivity; whether taking the time needed to develop an appropriate U.S. version of the standardized approach would unduly delay the Basel II implementation process; whether the standardized approach would be useful on a transition basis in order to give some banks more time to prepare to use the advanced approaches; and, finally, whether the marketplace would find such an option for those banks meaningful and acceptable," she said.
The rift left some industry representatives concerned that banks will continue to be plagued by uncertainty as they head toward next year's implementation.
"It's of concern that they're not seeing eye to eye on this," said Chris Cole, a regulatory counsel at the Independent Community Bankers of America. "It shows they still have a ways to go before this is worked out."
Though Ms. Bair aired disagreements with other regulators, she also saved some criticism for banks that are pushing for lower regulatory capital requirements.
"From day one, back in 1999 with the first consultative paper, Basel II was supposed to be about improvements in risk management and not about dramatic reductions in capital requirements," she said. "This was a sensible guiding principle. If the result of Basel II is much less capital supporting the risks in the banking system, then Basel II may make the banking system more vulnerable to shock — not safer."
Comptroller of the Currency John Dugan is scheduled to share his views on Basel II with the same group in a keynote address today. But Monday's speech was Ms. Bies' last opportunity to speak publicly about the proposal before she leaves the Fed March 30.
The departing Fed governor has spearheaded Basel II in the United States for several years. Ms. Bair ended her speech by acknowledging their differences.
"While you may note some differences in our views on Basel II today, it's important to note that Sue and I share the most important belief on this issue — our belief in the importance on not just getting it done but getting it done right," she said.
