Sarbanes-Oxley legislator sceptical about value of Basel II

Questioning witnesses in the supporting panel for the new Accord, and in particular Governor Susan Schmidt Bies of the Federal Reserve Board, Senator Sarbanes said he had a "very deep concern that we are just marching along even though the QIS had terrible results".

The US results of the fourth Quantitative Impact Study (QIS4) have received considerable disapproval across the US banking sector. Half of the risk assessments from participating banks showed that Basel II would result in a 25% or more reduction in capital requirements. This matter has called into question the decision recently by the Federal banking agencies to proceed down the road of implementing the new Accord.

Governor Bies said that all of the Federal banking agencies agreed that the results of QIS4 would not be acceptable for implementing Basel II. However, she defended QIS4 as just one step of a "work in progress" and as a "test along the way of a process that is going to stretch forward for 6 more years". US banks she said would need "more specific guidance" and that the results of QIS4 should not be considered indicative of the true picture of what capital requirements would be.

When questioned by Senator Sarbanes as to the analysis of the QIS4 results and their validity for calculating capital requirements, Governor Bies admitted that some of the QIS4 results were significantly flawed.

"We had some banks who basically for some of the elements didn't have an estimate and estimated a loss event for an extreme loss and plugged a zero because they didn't have a number. To put in a zero for the extreme losses which is why you need capital, we wouldn't allow that to be used. But in the model that they submitted it's there as a zero. That's part of the reason these numbers went down."

Senator Sarbanes condemned the decision to move ahead on the back of the QIS4 results and said "Suppose you didn't do Basel II, what would be the bad result of that?" He also drew general agreement from the meeting of his statement that the current US banking system under Basel I was not "over-capitalised".

Addressing the representatives of the Federal banking agencies, Senator Sarbanes said, "I think you need to tell your international partners there is serious problems here. You probably ought to say to them, look, the Congress may nix this altogether. We probably have to go back and do some careful rethinking. These consequences that were shown in the QIS are unacceptable."