After eight years of contentious wrangling, federal regulators said Friday that they would issue a single, uniform Basel II capital rule for the 11 largest banks as soon as early September.
A plan to issue a simpler version for small banks, the so-called Basel IA proposal, was killed.
The deal hashed out last week by the leaders of the four bank and thrift agencies also bowed to large banks that demanded there be no restriction on how much the industry's total capital may fall after Basel II is fully implemented. As a trade-off, the large banks will be required to use Basel II's advanced approach, as regulators had proposed.
Citigroup Inc., JPMorgan Chase & Co., and other banking companies had argued that they should be able to use the less complicated standardized approach, which will be available to foreign banks adopting Basel II.
Just a week ago it seemed that regulators were at an impasse, with the Federal Deposit Insurance Corp. insisting on the 10% capital-reduction cap and the Federal Reserve Board defending the mandatory advanced approach. It appeared that after so much work Basel II would crater if a compromise were not worked out quickly.
"Our biggest concern is that the whole process would fall apart," Comptroller of the Currency John Dugan said Friday. "We wanted to move forward with the advanced approaches and move forward to completion."
It is unclear if the scheduled Jan. 1 effective date remains realistic, Mr. Dugan said, but there is a misperception that missing that date would mean pushing implementation back an entire year.
"We could easily do it by quarters," he said.
The regulators also said they would study Basel II's impact on capital levels two years after implementation, or in 2009. This was widely seen as a way to appease FDIC Chairman Sheila Bair, the strongest supporter of a capital floor.
She told reporters in a conference call Friday that she supports the final rule.
"I think this is better in the sense that we now have a defined course of action," Ms. Bair said.
But removing that capital floor could reignite anger among small banks concerned that Basel II eventually would let the large ones operate with less capital and gain an advantage.
"We still remain concerned about the domestic competitive landscape and the safety and soundness of core banks," said Karen Thomas, the director of government relations for the Independent Community Bankers of America.
John Reich, the director of the Office of Thrift Supervision, acknowledged that fear.
"I think a lot of the smaller institutions are going to be concerned," Mr. Reich said. He vowed to "make certain that nothing that we have agreed to here today results in any competitive disadvantage."
Small banks were pleased that regulators killed Basel IA and opted to let small banks use Basel II's standardized approach.
Basel IA was designed to give small banks some of the benefits of Basel II without requiring them to comply with such a complex rule. But the small banks said Basel IA was still too difficult.
"Basel IA was met with less than overwhelming acceptance, so I think we are going back to the drawing board on Basel IA, and the standardized approach may be substituted for Basel IA," Mr. Reich said.
Bob Davis, the managing director of government relations at America's Community Bankers, said Basel IA's elimination "will address many of ACB's concerns to have a more sophisticated option for Basel I banks, short of the complicated advanced approach."
Pressure on the agencies had been mounting. In addition to calls from bankers to hurry up and finish the rule, the top lawmakers on the Senate Banking Committee sent a letter last week urging a speedy resolution. They also probed Fed Chairman Ben Bernanke on Thursday about Basel II's fate.
On Friday, regulators downplayed the impact of outsiders.
"We, individually and collectively, have felt self-inflicted pressure to bring this to a conclusion as quickly as possible," Mr. Reich said. "I don't think we needed any external massaging to feel that this was something we needed to do as quickly as possible."
