ABA believes that it is critically important that a workable Basel IA standard be developed and implemented. To be workable, Basel IA must provide meaningful improvements in risk sensitivity with minimal increases in regulatory burdens. However, we conclude that the proposed standard does not satisfy this criterion or offer a useful alternative to the current risk-based capital rules. Few banks would choose the Basel IA option as proposed. The proposed standard needs to be amended to reflect the way banks manage and mitigate risk. To be a worthwhile alternative for more than a limited number of mortgage-oriented banks, the Basel IA rule should be amended from the proposal to:

• provide lower risk weights for residential mortgage (first and subordinate liens) and commercial real estate loans;
• reduce the risk weights and relax the qualification requirements for small business loans and multi-family residential mortgages;
• expand recognition of collateral and guarantees, to include all that can be legally perfected and objectively valued (whether or not it is connected with a rating); and
•  allow banks, as an option, to factor into risk weightings consumer credit scores, loan seasoning, and reappraisals of property value.

At the same time, the current Basel I standard provides a strong capital requirement that optimally minimizes the reporting burden for many banks and should therefore be retained as the base capital standard for those banks that elect to continue to be subject to it.

For a number of large regional and some nationwide institutions, neither Basel I nor Basel IA is a viable option. These banks will need much more risk-sensitive regulatory capital when some banking firms move to the Advanced Approaches under Basel II. They might elect to adopt the Basel II Advanced Approaches themselves, were it not for the prohibitive cost. To have an optimal set of capital standards for these banking firms, it is critical that the Standardized Approaches under the Framework be developed.

ABA has been instrumental in encouraging the regulators to consider revising the risk-based capital standard that will apply to the overwhelming majority of banks. Seeing that the Basel II standard is likely to significantly lower risk-based capital requirement for adopting banks, in April 2005, ABA wrote to the regulators to request the revision to maintain competitive equity within the banking industry. The regulators acknowledged our request and announced an intention to initiate a review of the rule. In May 2005, ABA again wrote to the regulators to request that the Basel IA rule be installed by 2007, ahead of Basel II. For all banks, this would help preserve competitive balance within the industry. Basel II banks would benefit from having a more accurate base to compare against during the Basel II phase-in period.

Statements of ABA Position