Big banks may push for simpler Basel rules

By John Poirier - Analysis

WASHINGTON (Reuters) - Some big U.S. banks that once demanded flexible international capital standards have been chastened by the subprime credit crisis and now hope to qualify for a simpler and cheaper capital adequacy plan designed for small American banks.

The Federal Reserve and the other U.S. banking regulators are expected to issue on Thursday a so-called "standardized" version of the Basel II international capital adequacy framework for smaller banks that were not required to adopt a more costly and complex set of requirements.

The biggest U.S. banks such as Bank of America, Citigroup Inc (C.N) and JPMorgan Chase & Co (JPM.N) are required to use a different, "advanced" version of Basel II rules issued last year. The big banks, which are trying to pick up the pieces from a housing market bust, face an October deadline to tell U.S. regulators how they will implement the new rules.

At least two of the big banks -- Wells Fargo Corp (WFC.N) and Washington Mutual Inc WM.N -- would like regulators to let them adopt the simpler, standardized regulations, according to a source familiar with the Basel process in Washington.

Representatives of Washington Mutual and Wells Fargo said they remain committed to meeting the October deadline.

The two banks may find support from Sheila Bair, chairwoman of the Federal Deposit Insurance Corp and a critic of the advanced Basel II rules. Bair contends that the advanced approach would let the most complex banks lower their capital too much and rely too heavily on internal ratings systems.

"I think some breathing room for the larger banks might be appropriate by letting them use the standardized for some period of time," Bair said at an FDIC meeting earlier this year. Bair is responsible for the FDIC's $53 billion deposit insurance fund which would be tapped if a big bank failed.

While the simpler, standardized rules rely on the external ratings that have come under fire during the credit crisis spawned by the collapse in the subprime mortgage market, the FDIC has said the standardized proposal would address many of the concerns with those ratings.

NOT CHEAP

The advanced rules, issued last year before the credit market meltdown, were initially cheered by big banks because they would allow annual capital cuts over three years following a successful 12-month parallel computer test run.

They also force big banks to use complicated computer models to analyze their credit, operational and market risks and to make those risks more transparent to investors.

Implementing the rules has not been cheap.

Some industry experts estimate that the 10 core U.S. banks, which each have at least $10 billion in assets and $250 million in international business, have already spent hundreds of millions of dollars preparing for Basel II.

"Banks themselves may be more interested in the simplified version just because of the cost of compliance in implementing the advanced approach," said Philip Angeloff, a bank regulation attorney at the Clifford Chance law firm.

In April, the FDIC's Basel expert, Jason Cave, told regulators the simpler, standardized proposal would address many of the subprime-related concerns with external credit rating agencies, structured finance and the mortgage market.