Another Reason to Disagree Over Basel

[Dover]

Another Reason to Disagree Over Basel
Loan woes amplify regulatory division on implementation

American Banker | Tuesday, January 6, 2009

By Steven Sloan

WASHINGTON — Nothing about the Basel II capital rule has been simple, and its latest flaws, exposed by massive losses in the mortgage market, have further divided regulators.

In one corner is Federal Deposit Insurance Corp. Chairman Sheila Bair, who has long warned of the dangers of relying on banks' internal models to set capital requirements. She is advocating applying the brakes while regulators address Basel II's problems.

"I question whether we should be moving to implement this year, given all the other challenges the banking industry faces and the uncertainty that Basel II implementation would have on capital levels," Ms. Bair said in an interview Monday. "I question whether the models are a reliable gauge for setting capital adequacy. … We should be extremely cautious."

In the other corner, Gov. Randall Kroszner of the Federal Reserve Board and Comptroller of the Currency John Dugan said implementation should proceed while regulators around the globe consider revisions.

"Basel II is an ongoing process," Mr. Kroszner said. "I don't think anyone thought we'd never have to adapt to new information and market movements. … Any risk-based framework has to be a living organism."

Mr. Dugan said changes are intended to enhance Basel II, not overhaul it.

"We have always said it's not perfect and should be adjusted continually to address issues that arise," he said. "So I would not call the changes under discussion a move away from Basel II, but rather an effort to significantly strengthen and improve it."

Regulatory divisions are nothing new for Basel II....cont'd

http://www.americanbanker.com/article.html?id=200901054F9MBAL9&email=y


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Basel II Accord

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices. Generally speaking, these rules mean that the greater risk to which the bank is exposed, the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability.

The final version aims at:

* Ensuring that capital allocation is more risk sensitive;
* Separating operational risk from credit risk, and quantifying both;
* Attempting to align economic and regulatory capital more closely to reduce the scope for regulatory arbitrage.

http://en.wikipedia.org/wiki/Basel_II



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[unlawflcombatnt]

1. How about if__

we told all commercial banks they had to hold 10% in reserves at all times for all demand deposits AND savings deposits -- with no exceptions.

To us laymen, this sounds completely reasonable.