US OCC head says next 6 months critical for Basel

By John Poirier

WASHINGTON (Reuters) - The next six months is critical for the future implementation of the Basel international capital accords for U.S. banks, a top U.S. banking regulator told Reuters on Wednesday.

Comptroller of the Currency John Dugan, speaking at the Reuters Regulation Summit in Washington, said regulators are trying to work in good faith through the "knotty issues."

The rules are aimed at determining how much capital banks need to hold to counter a downturn in economies or other financial shocks.

Late last year, U.S. bank regulators issued for public comment proposed guidelines on how best to implement two versions of the capital standards designed for both large, internationally active banks and smaller, domestic lenders, known as Basel II and Basel IA respectively.

Smaller banks have warned that Basel II could hurt less-sophisticated institutions by setting higher minimum capital standards for them than for larger competitors.

"I do think that the next six months is really the critical inflection point for the Basel II and IA process in terms of trying to come to a resolution of the best way forward," Dugan said. "I'm optimistic that we will come out with something that makes sense."

Tensions between regulators, lawmakers and the lending industry about how to implement the new accord have often broken out into the open and delayed the process.

U.S. and other national bank regulators are working with banks around the world through the Basel Committee on Banking Supervision, an international panel of central bankers, on an updated set of minimum capital standards for financial institutions.

The original Basel rules, adopted in 1988, are considered outdated, and the new versions are intended to better reflect current credit, market and operational risks.

U.S. regulatory agencies are currently seeking public comment on two sets of Basel rules that could apply to different size banks.

For example, the proposed Basel IA would allow smaller financial institutions to use loan-to-value ratios to determine risk-weights for residential mortgages.

The smaller banks have been concerned that sophisticated risk models in the proposed Basel II bank rules would give large banks a competitive advantage in making or holding home loans, traditionally a key business for small institutions.

In the United States, the Basel II rules, which are complicated and costly to implement, are expected only to apply to around 20 large, internationally active institutions.

Some banks in Europe started implementing Basel rules in January.

"I think there will be some lessons to be learned" from how European banks are transitioning, Dugan said.