After five years of hard work, international banking regulators are close to completing the framework for a new accord on minimum capital requirements. If the regulators can work out the remaining details and conflicts before mid- 2004, banks will be scheduled to implement the Basel II rules by the end of 2006.
These new standards, aiming for a closer match between the capital that banks hold and the risks they take, should in theory lead to more stable, efficiently run institutions. Bankers concur that the original pact—the 1988 Basel accord—is badly out-of-date. But agreement on specifics has been difficult to reach, and the implementation deadline has already been pushed back once. There may be further delays.1
How should US banks respond to the impending new rules? US regulators require only the largest banks (by assets) and those with significant assets abroad to follow them. Just a few such banks have begun comprehensive programs to ensure compliance, including the upgrading of their risk-rating systems.2 By contrast, some—mainly European—banks have used early drafts of Basel II to prepare for what they see, despite the uncertainties, as inevitable changes in capital standards. Banks in emerging markets are lagging behind. Those...