WASHINGTON - Large banks are working hard to prepare for Basel II, though many expect major changes to its timetable and structure in the next few months.
Bankers and observers said the industry has no choice. Half of the 20 banks expected to implement Basel II are required to do so because of their size, and the rest are so financially committed to the process it would be hard to shift gears.
"The big banks seem to be going ahead with it," said Tanya Azarchs, a managing director in the financial services ratings group at Standard & Poor's Corp. "They've invested a lot in it already" and "are proceeding cautiously, trying to figure out where it is going next."
Federal Reserve Board Governor Susan S. Bies and other central bank officials have been trying to reassure bankers that their work will not go to waste.
"I recognize that this is not a trivial matter, and I sympathize with the challenges you face in deciding which investments and upgrades you should make to your systems and personnel," she said in a speech Wednesday in Boston. "When it comes to Basel II, we recognize that certain details relating to systems and processes will depend on what the final U.S. rule and guidance contain."
Analysts estimate that banks have already spent billions upgrading systems and creating internal models.
Close to 20 financial services companies are expected to present separate Basel II implementation plans to their primary regulators by the end of the month. Many of these banks have spent much of the last year - some even longer - preparing for the international capital standards.
The process gained serious momentum last June. That is when international regulators agreed on a framework and U.S. regulators quickly responded by creating committees and working groups to apply the new capital rules domestically.
But since then Basel II has hit several snags, including public disagreements among banking regulators and conflicting findings in studies on how Basel II will affect bank competition.
The most recent - and perhaps most devastating - shock to the process came April 29, when the Federal Reserve Board, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, and Office of Thrift Supervision, announced that they would delay a proposal to apply Basel II domestically. A study (known as QIS 4) to measure what Basel II's impact would be at 30 banks revealed wide swings in capital requirements would occur.
But regulators would not push back the June 30 deadline for implementation plans, forcing banking companies to continue planning.
"When the delay was announced, we immediately turned around and said, 'OK, we need to let people know why we are still doing this,' " said Donna Ferretti Tihalas, a senior vice president and the Basel II program manager at Bank of America Corp. "It's totally consistent with better risk management around this bank."
Ms. Tihalas is one of the few industry executives working on Basel II preparations to openly discuss internal planning in detail.
She joined the country's second-largest bank from her post at FleetBoston Financial Corp. after last year's acquisition, and was quickly put in charge of coordinating Basel II. B of A has 40 people in four cities working full time on the new capital standards, with responsibilities ranging from data collection to internal systems upgrades. Hundreds of others are involved in the process as part of their everyday roles, she said.
U.S. regulators have set up the new capital rules so that banks with more than $250 billion of assets or $10 billion of foreign receivables will have to comply. Other banks may opt in. Between 15 and 20 banks are expected to adopt Basel II by 2008, when it is scheduled to go into effect. But that time frame is in flux.
B of A, with close to $1 trillion of assets, is considered a "mandatory" bank. But before it can adopt Basel II, all of its systems still need to be approved by its primary regulator, the Office of the Comptroller of the Currency.
Basel II has changed shape several times since negotiations began on its design in 1998. The new capital standards would be much more risk-focused than current ones and attempt to align regulatory capital requirements with banks' own estimates.
To get ready, Ms. Tihalas said B of A is working to create a companywide risk management system instead of setting up a separate risk management structure for each business line.
"We need to have consistency … across the corporation," she said. "More consistent data management leads to a better linkage across customers. We still need to get that message out to the lines of business."
To coordinate the portfolios B of A has split business lines into several different teams, including global capital markets and investment banking, global business and financial services, and consumer banking. Each of those groups could have subgroups.
The teams' overarching Owner's Council includes B of A chief financial officer Marc Oken; global risk executive Amy Brinkley; and global technology, service, and fulfillment executive Barbara Desoer. They work as both a sounding board and a policy committee.
The periodic council meetings are held in Charlotte and B of A officials around the world typically listen in by teleconference.
In the last year Ms. Tihalas and several other members of the Basel II team have met monthly in Charlotte with examiners from the OCC, Fed, and FDIC to discuss B of A's progress. Occasionally, when specific questions come up, the agencies have flown in senior officials from Washington to discuss strategies.
Another reason that bankers are expected to push forward despite a U.S. delay is that the capital standards are still on schedule in some other countries. This has forced Ms. Tihalas to keep abreast of implementation schedules in other countries.
For example, she said she regularly holds conference calls with other staff members around the world, sometimes at midnight or 6 a.m.
"I know that our success with the international team and regulators is because we have been willing to do middle-of-the-night phone calls rather than doing things by paper all the time," she said.
She has also written letters to foreign regulators describing B of A's approach to Basel II and then worked with foreign bank officials to answer follow-up questions.
As bankers continue to work under the assumption that Basel II will be ready by 2008, much of the talk in the industry now has been whether the process has hit a wall. In January, two former Fed staffers presented a study that argued Basel II would have a substantial competitive impact on smaller banks. In April, the FDIC asserted backup examination authority over Basel II banks it does not primarily oversee.
Both events caused friction between the industry, regulators, and Capitol Hill. That is why some still wonder how long it will take for Basel II to be finished.
"When people ask me these days what I think the biggest risk is, I say the biggest risk is a loss of momentum," Ms. Tihalas said.
Ms. Bies, who is scheduled today to give her seventh speech since late April about the importance of pushing ahead, has consistently relayed that regulators are aware that banks are being asked to do a lot, and without clear instructions.
Regulators are involved in a review of QIS-4 to determine if it was bank data or regulatory formulas that caused the uneven capital break.
Ms. Bies' efforts might be succeeding on one front; most observers expect that despite the missteps this year, Basel II will eventually be applied.
"There is always the risk that it falls apart," said David Fanger, an analyst and a senior vice president at Moody's Investors Service Inc. "It is a political construct. You think about the number of political actors involved in that construct, it's a huge number. To see the thing through to completion is always challenging. But we are a significant percentage of the way there. I think it's much more likely now than it was two years ago."
