WASHINGTON - Federal regulators have done an about-face by agreeing to consider updating the Basel I capital rules for small and regional banks.
Change is not guaranteed, and even if the amendments are made it could take the agencies years to complete their work. But the decision to at least try came amid mounting criticism that new capital rules for larger banks will give them an advantage.
"The biggest banks will be able to deploy their capital more effectively and it will hurt us competitively," said Kathleen Marinangel, the chairman and chief executive of the $207 million-asset McHenry Savings Bank in McHenry, Ill. "I've been fighting very hard to have someone say, 'Yes, we should change Basel I.' "
The rules for the largest banks are called Basel II. They have been in the works since 1998 and are not expected to take effect until early 2008.
The agreement to work on studying changes to Basel I was reached at an interagency meeting this month.
"We all recognize Basel I served us well in the past, but the industry has evolved and financial markets have changed," said Scott M. Albinson, the Office of Thrift Supervision's director of supervision, on Wednesday. "That was one of the big reasons for moving forward with Basel II."
He also said that the proposal would not become an attempt to "undermine" Basel II.
"This is just trying to improve the capital regime for the other 9,000 financial institutions that will not be using Basel II," he said.
Unlike in other countries, U.S. regulators plan to apply the new risk-based capital standards only to the largest banks. It is expected that eight to 10 banks will have to follow Basel II and that another 10 or so will comply voluntarily.
Critics have expressed concern that because only the nation's largest banks will use Basel II, they might get an edge over smaller ones that still have to follow capital models designed in the late 1980s.
It is unclear how regulators might update Basel I. They might give banks more options with the amounts of capital they must hold against different parts of their portfolio, Mr. Albinson said. In Basel I a well-collateralized mortgage loan requires the same capital weighting as a poorly collateralized one.
A change could help offset the advantage some larger banks might achieve if they lower their capital after Basel II. There is still disagreement among regulators and bankers about whether capital levels will drop after Basel II.
"We are trying to assess the need for changes to the current risk-based regime that simply makes sense to undertake," said Kevin Bailey, the Office of the Comptroller of the Currency's deputy comptroller for capital and regulatory policy. "What's clear, though, is that this won't approach the level of complexity in Basel II. It's not going to be a mini-Basel II for small banks."
For example, unlike Basel II, regulators would not require small or regional banks to hold separate capital against operational risk.
In 1998 international bank regulators began working on ways to revamp Basel I. After six years of negotiations, they reached an agreement on May 11 and are scheduled to publish a text on June 26 that national regulators can use to begin domestic implementation.
Later this year regulators are to conduct their fourth impact study on the new rules, and in late 2005 they are expected to request comment on a proposed rule. A final rule is expected to be published in early 2007.
Where this new study of changes to Basel I would fall into that time frame is hard to say. Officials from the Federal Reserve Board, the Federal Deposit Insurance Corp., the OCC, and the OTS all asserted that the project is in its infancy. A proposal could go out for public comment before a final rule is set.
"My thinking is that in a perfect world we would want to implement this in tandem with Basel II," the OTS' Mr. Albinson said.
