April 06, 2006
Basel II: Coming to a Bank Near You?
Posted by Elizabeth Brown

I am attending the Spring Meeting of the ABA Business Law Section this week. There was a good panel discussion of the Basel II and Basel IA Accords, which will dramatically affect the banking industry. The Federal Reserve released its proposed rules for implementing Basel II on March 30th.  The original objective of Basel II to allow banks to use risk based capital requirements rather than the traditional leverage requirements is certainly worthwhile.  As a result, banks eligible to use Basel II will be able to maintain lower levels of regulatory capital than they normally would have been required to maintain under Basel I if they take steps to manage their risks.  Since return on equity for banks is driven by regulatory capital, these banks will have a competitive advantage over banks who are not able to use Basel II's standards.

The proposed rules by the Federal Reserve would permit only the largest internationally active banks in the United States to use the Basel II standards. Thus, some banks because of their size will not be eligible.  Other banks, such as Merrill Lunch Bank USA, a very large industrial loan bank, are not eligible because who their parent company is.  U.S. banks will not be eligible to use the Basel II capital requirement standards until 2009 while banks from some other countries will be eligible to begin using them on Jan. 1, 2007. As a result, financial services firms will face a competitive playing field that will be made more unequal because of the impact of the new regulations.

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