WASHINGTON - Bankers got what they asked for in a proposal issued by international regulators this week: the opportunity to tailor capital requirements to each bank's individual risk profile.
Now, Jonathan L. Fiechter of the Office of the Comptroller of the Currency and other U.S. regulators are asking if bankers are really sure that is what they want - and signaling that the regulators may have concerns about the complicated proposal and the effort that would be required to enforce it.
"The $64,000 question is: Does the industry think that this degree of complexity - which we think is probably necessary if you are going to fine-tune the rule - is an approach they are comfortable with?" said Mr. Fiechter, a senior deputy comptroller and member of the Basel Committee that developed the plan.
To have bank examiners ready to assess and approve such complex systems by 2004, when the rule would take effect, "will take a lot of training on the part of our examiners," Mr. Fiechter said.
As early as today, U.S. bank regulators are expected to release a synopsis of a proposed capital rule issued by the Basel Committee on Banking Supervision. The proposal, 133 pages long and accompanied by more than 400 pages of supporting documents, offers an intricate combination of options for banks to use in determining the amount of capital they must hold against outstanding loans.
Mr. Fiechter said the synopsis will include a number of questions that regulators want bankers to bear in mind as they prepare comments, which are due May 31.
He said that in drafting the proposal, regulators struggled to strike a balance between giving banks options and making the rule too difficult to follow. "The more tailored you make the capital charge, the more complex the rule becomes," he said.
Chief among the questions U.S. regulators will ask, he said, is: "Are they comfortable with the balance we reached in the proposal, or would they rather have something that is a little less risk-sensitive and a little easier to follow?"
Capital requirements for corporate loans are a prime example. Current rules impose a straight 8% charge on all such credits. To set capital requirements for a corporate loan under the proposal issued Tuesday, he said, "we would look at the quality of the company and the maturity of the loan, at what kind of collateral there is and whether the company entered into any credit derivatives or guarantees. As you go down that path it becomes pretty complex."
It may not be only banks' welfare that regulators are looking after. To hear Mr. Fiechter tell it, regulators might be excused for hoping, for their own sake, that banks band together and demand simpler rules.
As written, it "will put a tremendous burden on both our examiners as well as the banks if we are going to get this right," he said in an interview Thursday.
The proposal offers three options for setting capital requirements for credit risk. A simplified version, known as the Standardized approach, would base the capital charge for a specific loan on the credit rating of the borrower as determined by a rating agency such as Standard & Poor's or Moody's.
More complicated versions, known as the Foundation and Advanced internal ratings-based approaches, would let banks use their own risk rating systems to help set capital.
At its most advanced, the internal ratings-based approach requires banks to develop systems that calculate both the probability of a borrower's going into default and the likely loss to the bank in the event of default.
Such approaches would provide new challenges to examiners, Mr. Fiechter warned.
"In the past our examiners have looked at loans on the basis of a pass-fail," he said. "If a bank is troubled we are comfortable assessing whether the loan is substandard, doubtful, or a loss. If a loan was performing and there were not signs of difficulty examiners didn't spend much time on it."
Under the new proposal, Mr. Fiechter said, examiners may need to be able to categorize performing loans much the way ratings agencies classify creditworthiness.
A final rule is expected by yearend. He noted that some observers have questioned regulators' ability to be ready to enforce it by 2004.
"I think that it will be a major challenge, which we have all agreed to undertake, to get our examiners up to speed," he said. "I think it is doable, but it assumes that we are going to be able to devote a lot of our time and resources to this effort. Let's hope we have a great economy over the next four years so we can devote time to this," he said.