Reshaping of Basel II Begins with FASB Push

By Steven Sloan



Banking regulators issued a 36-page proposal last week, and while it never mentioned the words “Basel II,” it amounted to a first step toward reworking the tortured capital accord. Last week’s proposal would correct a flaw in the Basel accord, which did not require banks to hold capital against off-balance-sheet assets, by forcing them to raise potentially hundreds of billions more in capital against such assets when an accounting change takes effect in January. Though the banking agencies do not expect to make the most significant changes to the Basel II capital rule until the financial crisis subsides, they were forced to act after the Financial Accounting Standards Board issued a rule in June designed to force off-balance-sheet assets back on to the banks’ books. Since the FASB had no power over capital standards, the banking regulators were left to figure out how to determine capital levels once the accounting change takes effect. Karen Shaw Petrou, the managing director of Federal Financial Analytics, agrees the FASB played a role. But she also points to the international Basel Committee on Banking Supervision, which has urged national regulators to require more capital for off-balance-sheet assets. “They’ve had to deal with the issue … that has been resolved at the global level but has yet to be reckoned with in the domestic rules,” Petrou said. “This one they [banking regulators] can’t duck. This one can’t go into another 800-page rule.”  Talks among the agencies over how Basel II should be revised are ongoing, and some participants say the changes will not be that extensive. Still, there is concern that if the discussion does not go public soon, final Basel II implementation could have to be postponed beyond 2011. “We need to put out the next round of proposed rulemakings and get all that work done so we have something ready to go when the industry is in a position to take it,” Petrou said. “If we start thinking about what to do when the industry is fully restored, we’re not looking at even starting to think about this until 2011 or 2012, at which point the next crisis could be upon us.”