Basel II drags on

Basel II, the new rules for bank capital that align capital requirements better with risk, was supposed to happen in 2007. It is indeed happening in much of Europe. But not in the US. In the US, regulators have proposed amendments that would delay implementation until January 2009. Here in India, the date has been pushed back to 2008.

The Economist (February 22) reports:

Banks in America, on the other hand, are glum. Their regulators have taken fright over studies showing that banks' required capital could fall by an average of 16% if they embraced the new accord. European regulators are inclined to let regulatory capital fall (subject to the discretion of national authorities). American regulators are not. They have now proposed changes in America's version of Basel 2 that will delay its implementation until at least January 2009. Under their proposals American banks will be subject to a number of “safeguards” that keep capital cushions plump. These include the “leverage ratio” (see chart), a blunt measure of a bank's lending exposure that is not linked to the riskiness of its activities.

The accord was intended as a single worldwide standard. But it now threatens to be qualitatively different in Europe and America. International banks that straddle the Atlantic are in a bind and America's large banks are especially irritated. On February 7th four of them, including Citigroup and JPMorgan Chase, wrote a letter of complaint to regulators. These extra restrictions, the banks wrote, give foreign competitors an edge, because they can hold less capital for identical assets.

....In fact, each side (Europe and America) can learn from the other. The Europeans should add clarity to Basel 2. The Americans should add a bit of urgency to implementing it. No doubt the accord has flaws, but these can be fixed later.