Deal reached on applying Basel II rules

US bank regulators finally reached agreement on Friday on the implementation of the Basel II capital rules, which will bring the regime for large US banks more in line with that already adopted in Europe.

The agreement, which could significantly reduce the amount of capital large banks would be required to hold, ends years of wrangling among the four US regulators that has infuriated large banks and alarmed politicians in the US and exasperated banks and regulators in Europe.

In a victory for the big US banks, the Federal Deposit Insurance Corporation has dropped its insistence that the rules be redrawn if they resulted in a fall in total capital of more than 10 per cent.

The regulators have also agreed to drop several other differences between the US and European regimes, which large banks said would have been very costly for them to implement.

While officially leaving the process up to the regulators, the US Treasury has been putting increasing pressure on them to reach agreement.

Bob Steel, the Treasury undersecretary, said it was a challenging issue requiring a complex balance of safety, soundness and global competitiveness concerns.

“Resolution on this matter is an essential component of any effort to modernise our regulatory structure and to strengthen American capital markets’ competitiveness.”

The FDIC, which insures bank deposits, has been concerned that the Basel II regime, which varies capital requirements according to the riskiness of assets, could lead to a sharp reduction in required capital at some US banks.

But the large US banks, including JPMorgan Chase and Citigroup, objected that they would be investing in complex processes without getting the full gains from lower capital requirements.

The FDIC position had been supported by the thousands of small banks in the US that are not required to comply with Basel II. They said they would be put at a competitive disadvantage when compared with bigger rivals.

Some lawmakers took their side and criticised the Federal Reserve Board, which regulates many of the largest US banks and was the cheerleader for Basel II, when it became clear that small banks could be significantly affected.

But others politicians, such as Chuck Schumer, the Democratic New York senator, backed the big banks, which complained about their competitive disadvantage compared with rivals in Europe.

The big US banks will still be subject to a slower implementation than in Europe, which started running the new standards in January. They will also have to comply with the leverage ratio, a US law that sets a strict floor on banks’ capital as a proportion of assets.

The regulators agreed to publish a study of the new framework in 2011, during the transition period, and if “material deficiences” were found the regulations would be changed before banks moved to full adoption.

However, if one of the regulators disagreed, the banks it supervised could move to full implementation once it had published a report explaining its reasoning.

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