Q 5: The agencies seek comment on this approach to ensuring that overall capital objectives are achieved.
Whilst we recognize that one of the original objectives of Basel 2 was to maintain capital within the system at a constant level and understand the background of the transitional floors, we believe that the changes to calibration should occur at a Basel Committee level wherever appropriate, thereby reducing international fragmentation and the associated (and well known) issues associated with home:host divergence. Any material change in calibration, as outlined in the NPR, could impact on the mutual recognition status between home and host regulators (the UK and USA in this instance) and, potentially, undermine attempts, through the AIG, to allow greater flexibility between jurisdictions on consolidation. Equally, the US authorities need to consider any capital implications around Pillar 2, before making arbitrary decisions around the calibration of Pillar 1.
Q 6: The agencies seek comment on all potential competitive aspects of this proposal and on any specific aspects of the proposal that might raise competitive concerns for any bank or group of banks.
On implementation, the US will be working on three Basel approaches – Basel 1, 1a and Basel 2 Advanced. Such a structure, like the EU, leads to different capital requirements at the product level which may give rise to competitive inequality, undermining the level playing field that firms wish to retain. The differences may benefit internationally active banks or, equally, firms that migrate to Basel 1a. With regard to potential consolidation created by these rules, we believe that the current round of consolidation is driven more by legal changes, scale, efficiency and trends towards globalization. It is too early to say whether Basel 2 will accelerate this trend.