US Basel II Home-Host plans still unclear

The US agencies announced on 30 September that they would begin parallel running of Basel II starting in January 2008 and include a minimum three-year transition period (until 2011) with "floors" to limit any calculated reduction in risk-based capital requirements. The one year delay and additional limits were introduced to provide added protection to the US banking system after US results from the fourth Quantitative Impact Study (QIS4) showed much lower than anticipated minimum capital requirements.

In a speech to a Basel II summit in Geneva, US Federal Reserve Governor, Susan Schmidt Bies, sought to allay fears of complications to cross-border Basel II implementation resulting from the US delay. However, Governor Bies fell short of providing any clear answers and could only confirm that US agencies would continue to work with the Basel Committee and international supervisors to minimise the inevitable difficulties.

Recently, Daniel Bouton, outgoing Chairman of the Steering Committee on Regulatory Capital at the Institute for International Finance expressed the need for urgent and clear answers concerning delays in cross-border implementations. "As yet, there has not been clear guidance as to how the practical implications of staggered implementation will be addressed. It is important that international regulators coordinate their efforts in order to provide clarity in these areas swiftly."

Defending the US position Governor Bies said, "We recognise that some may have concerns about the recent announcement by the US agencies to implement Basel II with a one-year delay and with an extra year of transitional floors. Understandably, internationally active organisations may worry that cross-border implementation will be complicated by the timing differences between the United States and other Basel member countries. While not downplaying potential challenges, the US agencies, in deciding to adjust implementation plans, thought it was important to ensure that implementation in the United States be conducted in a prudential manner and without generating competitive inequalities in our banking markets."

"As we did before our September 30 announcement of altered US implementation plans, the US banking agencies continue to work with institutions and foreign supervisors to minimise the difficulties in cross-border implementation. Our support includes extensive discussion with other countries in the Basel Accord Implementation Group, specifically formed to help address home-host implementation issues. We also have held numerous informal, bilateral discussions with institutions and foreign supervisors, and those will of course continue as implementation moves ahead. One should also remember all Basel member countries have their own rollout timelines and national discretion issues, not just the United States - which is entirely appropriate. To assist institutions in resolving their cross-border challenges, we are eager to hear specifics from institutions so that we can develop targeted solutions."

The full text of Governor Bies speech including analysis of US data from the Basel II QIS4 and matter of home-host implementation is available on the US Federal Reserve website.