ABA backs use of Basel II standardised approach in US

The endorsement of the standardised approach – which is not a part of the Basel II approach in the US at this time – was included in a letter the ABA wrote to US regulators. It was written to support the position of leading banks after a recent meeting between Citigroup, JP Morgan Chase, Wachovia, Washington Mutual and the Federal Deposit Insurance Corporation (FDIC).

In its letter, addressed to the heads of the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency and the Office of Thrift Supervision, the ABA noted the need for a capital framework that reflected financial risks, but raised concerns over how the Accord is put into practice.

Currently, banks compelled to implement Basel II are obliged to adopt the advanced internal ratings-based approach (AIRB), while many would prefer to use the standardised approach. Since the release of the draft NPR (notice of proposed rulemaking) in March, several banks have voiced their concern over the way Basel II is being implemented in the largest and most internationally active US banks.

The ABA said that without the option to use the standardised approach, Basel II is a compliance exercise that will provide little benefit to banks that implement it in the US.

“Many of these banks view Basel II as evolving into an exercise that may yield little, if any, opportunity for banks to realise the benefits from a more risk-efficient employment of capital,” said the ABA in its letter.

Basel Ia was cited by one industry source as the main cause of unhappiness on the part of larger banks; US regulators made several concessions after a powerful lobbying effort on behalf of smaller banks, a move that has angered the banks forced to implement Basel II.

Further tampering with the Accord is likely to invoke international criticism. The US has already taken the controversial act of deferring implementation on Basel II for its largest banks for another year, despite international pressure.

The FDIC was scheduled to meet on the Basel II NPR later this month, though industry insiders feel it is unlikely that the corporation will place the NPR on the agenda until it meets in October.