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Questioning Basel II

Daniel Tarullo raises important questions about the advisability of the A-IRB approach in The New Accord.

Center for American Progress Senior Fellow Daniel Tarullo will testify today to the Senate Banking, Housing, and Urban Affairs Committee on the New Basel Capital Accord.

Basel II, also called The New Accord, brings together recommendations by bank supervisors and central bankers from 13 countries to revise international standards for measuring the adequacy of a bank’s capital. The Advanced Internal Ratings (A-IRB) approach is meant to promote greater consistency in how banks approach risk management.

According to Tarullo, there are still important questions about the advisability of the A-IRB approach in Basel II:

  • Banking agencies have not yet demonstrated that they can predict what the impact of the A-IRB approach will be on bank capital and competition among U.S. banks adhering to different capital methodologies.
  • Distinguished academic economists of all political persuasions continue to question the very foundations of the A-IRB approach.
  • The implementation of the A-IRB approach in individual banks will be highly opaque to anyone outside the bank, with the possible exception of a team of unusually expert regulators dedicated to that bank alone.
  • The approach is a monitoring nightmare—from the difficulty in monitoring how the banks are implementing A-IRB, to the near impossibility of public and Congressional monitoring of how well the regulators are doing their job under A-IRB, to the enormous challenge for U.S. regulators in determining how successfully their foreign counterparts are in administering this enormously complex approach to capital regulation.
  • There is no plausible plan for reaching international agreement on the nearly continuous revisions of A-IRB that will be necessary if it is to satisfy its stated aim of utilizing state-of-the-art risk assessment techniques in calculating minimum regulatory capital.

Read the full testimony:

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