WASHINGTON — With less than six months remaining before the proposed Basel II capital rule is slated for implementation in the United States, banking regulators remain at odds — leaving industry representatives doubtful that a Jan. 1, 2008, launch date is feasible.
The first year of implementation is designed to be a trial run that would give regulators and banks a feel for how the rule works before it goes live in 2009. But regulators have already missed a series of deadlines as they try to cobble together the Basel II rule, including a June 29 benchmark for a final text.
Regulators remain divided on provisions including capital floors and mandatory adherence to the so-called advanced approach, and industry representatives are increasingly skeptical that consensus will be reached soon.
"It would be very difficult to start the [trial] parallel runs on schedule," said Rob Strand, the senior economist at the American Bankers Association. "We don't have the final rules, and without the final rules, banks can't do their fine-tuning. No bank will be ready to start without knowing what the rules are."
Karen Shaw Petrou, the managing partner of Federal Financial Analytics Inc., agreed that banks would simply not have enough time to comply with a final rule.
"I think it would be very difficult to implement if anything is published with a Jan. 1 effective date," she said. "That would be such a short time frame for such a profound rule."
Regulators have repeatedly insisted they remain on track. In a speech to the New York Bankers Association on Thursday, Federal Reserve Board Gov. Randall Kroszner did not mention the January deadline but reassured the audience that completing Basel II is a priority.
"As most of you know, the process for developing a revised international capital accord … has been a long — and some might say painful — trek for both bankers and supervisors," he said. "The substantial work to date by both the banking industry and supervisors has laid the foundation for moving the implementation process along, and I am optimistic about the current forward momentum in the United States to develop and implement a final rule for Basel II."
Mr. Kroszner refused to take questions from reporters after his speech, but as the implementation date nears, other officials in Washington sound less optimistic. The Treasury Department jumped into the fray last month when Secretary Henry Paulson included Basel II's completion as a priority in his review of bank regulation.
A spokeswoman for the Treasury said officials there would not push for specific policies but would use their heft to encourage a speedy resolution.
"We can't do anything as far as" pushing for a particular position, she said. "People respect the Treasury, and obviously we are the president's policymakers on financial matters, and we certainly wanted to use that position to urge a resolution."
Despite Mr. Paulson's stature, substantial doubt exists that he will succeed in bringing focus to a rancorous regulatory debate that has taken eight years. The Fed and the Federal Deposit Insurance Corp., for example, are independent agencies shielded from most political pressure.
"As a legal matter, it doesn't look like there's much he can do," said Daniel Tarullo, a professor at Georgetown University Law School and former adviser to President Clinton. "Just as a matter of being personally influential, he could talk to people at the FDIC."
Most observers agree that if Basel II is to be implemented, the FDIC must shift positions. Its chairman, Sheila Bair, has doggedly defended floors that would limit how much capital could decline in the first three years of implementation.
This stance puts her at odds with regulators who are not as attached to the floors, which they see as alien to Basel II's mission of aligning capital with risk. But observers said they doubt Mr. Paulson can persuade Ms. Bair to change her mind for the sake of completing the rule.
"She's very independent-minded. I think she'll do what she thinks best and will ignore everything else," said Chris Cole, a regulatory counsel at the Independent Community Bankers of America.
Beyond capital floors, regulators still disagree over a mandate that all banks following Basel II use the advanced approach to determining capital requirements. Banks have howled that the provision would put them at a competitive disadvantage to European banks, which have the option of using the less complex standardized approach.
Mr. Kroszner did not mention the standardized approach during his speech Thursday but highlighted the advantages of the advanced approach.
"The advanced approaches of Basel II are designed to substantially reduce the perverse incentive effects and opportunities for regulatory capital arbitrage present in Basel I," he said. "In short, Basel II significantly increases the risk sensitivity of the capital rule. Under the advanced approaches, capital requirements for an exposure will vary on the basis of a bank's actual risk experience."
But again, Ms. Bair is alone in her tough criticism of the advanced approach. In a speech at a risk management conference in Paris nearly three weeks ago, she said regulators lack enough information to be so wedded to the advanced approach.
"To be honest and frank, we don't yet know whether Basel II's advanced approaches will work," she said. "We don't know whether, or when, the risk inputs will become reliable. We don't know whether the level of minimum capital requirements will be sufficient. And nobody knows how to build enough stress into the capital calculations to address the nontransparent and ever-changing risks that banks are taking."
Unless the logjam can be broken soon, Ms. Petrou said regulators may give up and simply issue their own four versions of Basel II.
"They have the statutory directive to make the rules as consistent as possible, but again, they're facing a bunch of bad decisions," she said. "Do they do nothing together or something separately?"
