I am pleased to welcome this panel of distinguished regulators before the Banking Committee this morning for this oversight hearing on the new Basel Capital Accord.
I would like to begin by commending Chairman Shelby for holding this hearing. The new Basel Accord is a highly complex proposal with potentially significant consequences for the United States and international financial systems. It therefore is appropriate for the Committee to hold an oversight hearing to review its likely impact before the international agreement is concluded and before the process of trying to implement it in the United States begins.
The first Basel Accord was concluded in 1988 and fully implemented by 1992. It was an effort to establish international standards for the measurement of bank capital in order to bring about greater uniformity of regulation and reduce risk in the international financial system. While generally acknowledged to have been a significant step forward, there appears to be agreement that the system for measuring risk under Basel I may be inadequate today, particularly for large, complex financial institutions. As former Federal Reserve Board Governor Laurence Meyer has observed, "large, complex banking organizations now routinely structure their portfolios in ways that arbitrage around the current capital standard. These banks can often lower their capital requirements with little, if any reduction in their actual risk taking. As a result, reported capital ratios may - and often do - overstate a bank's true financial strength."
The proposed Basel II Accord is an effort to capture in a more sophisticated way the financial risks undertaken by banking institutions and to assign capital requirements appropriate to those risks. While there appears to be agreement about the broad goals of the Basel II Accord, if press accounts are to be believed, there are significant differences of view among the bank regulators about the agreement, and within the U.S. banking industry itself.
Most of the discussion has focused on whether the proposed Accord would raise or reduce capital; whether it would place one set of U.S. banking institutions at a competitive disadvantage to another, or whether U.S. institutions generally would be placed at a disadvantage relative to foreign institutions; and whether the agreement is too complex and difficult to implement.
These are important questions, and it seems to me appropriate to have a public discussion about them prior to the conclusion of an agreement. While there can be no absolute certitude about the impact of the agreement on the largest U.S. and foreign financial institutions given their complexity, it seems to me reasonable for the Congress and the public to have a greater appreciation of its domestic and international impact before the Accord is concluded. One of the key questions that will need to be addressed today is whether the regulators believe they have a sufficient grasp on the impact of the proposed agreement to conclude it internationally and implement it domestically. I would have a concern about any agreement that would result in a significant reduction in the capital held by the largest U.S. financial institutions.
Mr. Chairman, I look forward to the testimony of our witnesses.