#07-31
The Rocky Road to Implementation of Basel II in the United States
Richard J. Herring
Abstract: This paper contends that the problems US officials have encountered in their efforts to implement Basel II reflect inherent weaknesses in the structure of the approach. It begins with a brief overview of the original Basel Accord on Capital Adequacy (Basel I) and a summary of the Basel II approach, with emphasis on the Pillar I weights on credit risk. Next an analysis of the Fed’s bifurcated approach to implementation of Basel II is followed by an examination of three unanticipated obstacles: (1) perceived competitive inequities within the U.S.; (2) the surprisingly lower and variable capital charges revealed in the fourth quantitative impact study; and (3) the request by four leading banks for permission to implement the simpler, Standardized Approach rather than the Advanced Internal Ratings Approach (A-IRB). These reflect the erosion of several crucial predeal understandings as described by Kane (2007a, b). The paper concludes with a consideration of whether it may have been possible to achieve equivalent improvements in risk management with lower compliance costs and less uncertainty about the impact on financial stability.
Keywords: G18, G21
JEL classifications: Basel II, capital regulation, competitive equity
