The New Basel Capital Accord: A Return to Bank Supervisory Judgments

The New Basel Capital Accord: A Return to Bank Supervisory Judgments

Order Code RL31984
CRS Report for Congress
Received through the CRS Web
The New Basel Capital Accord:
A Return to Bank Supervisory Judgments
Updated December 9, 2004
Walter W. Eubanks
Specialist in Economic Policy
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

The New Basel Capital Accord:
A Return to Bank Supervisory Judgments
Summary
The new Basel Capital Accord (Basel II) is of interest to Congress for three
reasons: first, because it would change the safety and soundness standards for U.S.
banks, it may be of direct legislative concern as well as requiring new regulatory
oversight. Second, it has serious implications for the world financial system in ways
that would affect the U.S. economy. Third, while its proposed risk-based capital
system is intended to make the international financial system stronger and more
efficient, Basel II could also raise the burden of the capital standards on small U.S.
banks while lowing it for larger banks, especially if Basel II bifurcates the standards
favoring larger banks. Consequently, the United States Financial Policy Committee
for Fair Capital Standards Act of 2003 (H.R. 2043) was introduced in the House of
Representatives. It would establish a mechanism for developing U.S. positions on
issues before the Basel Committee.
The Basel accords regulate capital standards for international banking and other
financial institutions. Risk-based capital standards are based on the idea that a bank
is less likely to fail if its owners are required to put more of their own money at risk
as the institution takes on additional risk. Basel II sets a more comprehensive
framework for judging and containing bank risk than Basel I, and is more closely
tuned to changes in risk that affect capital adequacy. Basel II also relies more heavily
on bankers’ and regulators’ judgments of risk- and capital-determining models than
the set formulas of Basel I. Basel II is now slated for implementation in January
2008 and at least initially, will apply to the largest 10 U.S. banks, but more banks
may voluntarily participate.
Basel II has three reinforcing safety and soundness principles called “pillars.”
The first pillar is the minimum capital requirement. It is the set of rules a bank uses
to calculate its minimum capital, taking into account each asset’s unique credit risk,
or probability of default. The second pillar is a supervisory review process, which
requires a bank to maintain its own internal assessments of its risks relative to capital.
Pillar two also sets a dynamic requirement that risk and capital evaluations take
place over the business cycle as well as under simulated stressful market conditions.
The models and methods must be validated or, alternatively, provided by a bank’s
specific governmental supervisors. The third pillar, market discipline, requires that
each bank disclose sufficient information about itself to financial markets that
creditors will be able to assess a bank’s risk posture accurately and adjust borrowing
and capital costs accordingly, thereby pressuring bank management (and signaling
regulators) to adopt strong safety and soundness practices.
This report provides basic information on the accords and issues surrounding
expected adoption of Basel II. First, it describes how capital assessments were made
before these accords. Second, it discusses the situation that led to Basel I and how
that accord changed matters. Third, it reviews three major problems with Basel I that
Basel II is designed to address. Fourth, it describes Basel II’s “pillars” or principles.
This report will be updated as developments warrant.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Before Risk-Based Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Basel I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Major Problems with Basel I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Risk Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Regulatory Arbitrage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Operational Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
The Basel II Capital Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pillar One . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Pillar Two . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Pillar Three . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Measuring Capital Adequacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Standard Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
The Foundation Internal Rating-based Approach . . . . . . . . . . . . . . . . 11
The Advanced Internal Rating-based Approach . . . . . . . . . . . . . . . . . 11
How the Accords Compare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Remaining Concerns about Basel II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Cost and Complexity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Procyclicality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Market Competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Prompt Corrective Action (PCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Congress and Basel II Implementation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The United States Policy Committee for Fair Capital Standards Act
(H.R. 2043) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
List of Figures
Figure 1. Bank Equity Capital, 1934 - 2002 (Percentage) . . . . . . . . . . . . . . . . . . 3
List of Tables
Table 1. Basel I Asset Weighting Percentages . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Table 2. Minimum Capital Required for a $100.00 Commercial Loan
Before Basel I, After Basel I, and Basel II . . . . . . . . . . . . . . . . . . . . . . . . . 12

The New Basel Capital Accord:
A Return to Bank Supervisory Judgments
Introduction
The Basel Capital Accords are international safety and soundness agreements
that provide a framework for determining capital adequacy for internationally active
financial institutions. The name, Basel Accord, comes from Basel, Switzerland, the
home of the Bank for International Settlements (BIS). In 1974, BIS established the
Basel Committee on Banking Supervision, made up of representatives from the
monetary authorities of 13 countries — Belgium, Canada, France, Germany, Italy,
Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United
Kingdom, and the United States — to consider capital adequacy issues and find
practical ways to determine and mitigate bank risk, given different national systems
of supervision and deposit insurance. The first accord was adopted in 1988, and is
credited with providing stability to the international banking system, both through
defining consistent safety and soundness standards, and by promoting better
coordination among regulators and financial supervisors in participating nations.
The United States and other banking systems are now operating under the first
Basel Capital Accord (Basel I). For some time, however, financial regulators in the
United States and other industrial countries have recognized that Basel I is
insufficiently sensitive in measuring the risks and determining capital needs of
today’s increasingly complex and dynamic banking operations. Consequently, a new
accord (Basel II) has been negotiated. “Basel II” promises to have increased
sensitivity to risk, and regulatory flexibility in determining a financial institution’s
capital adequacy. The new accord is to be implemented beginning 2008.1
Basel II is of interest to Congress2 for four reasons: first, because it would
change the safety and soundness standards for U.S. banks, it is potentially of direct
legislative concern as well as requiring new regulatory oversight. Second, it has
serious implications for the world financial system in ways that would affect the U.S.
economy. Third, while its proposed risk-based capital system is intended to make the
financial system stronger and more efficient, Basel II could also impose new costs
1 Damian Palatta, “U.S. Regulators Conductiing Two Basel II Studies,”American Banker
Online, Nov. 5, 2004, p. 1, at [http://www.americanbanker.com/search.html?kw=Basel
+II&query=+(ke+Basel+II+OR+tx+Basel+II+OR+ft+Basel+II)&articleid=5&connid=48
48311&limit=(jn+american+banker)].
2 U.S. Congress, House Financial Services Committee, Subcommittee on Domestic and
International Monetary Policy, Trade and Technology, hearing, Feb. 27, 2003, at
[http://financialservices.house.gov/hearings.asp?formmode=detail&hearing=182].

CRS-2
on U.S. banks, especially if the 7,000 or so that are relatively small by international
standards are covered. Finally Congress may eventually be called upon to make
Basel II a part of U.S. banking laws, as it did with Basel I.3
On May 9, 2003, the United States Financial Policy Committee for Fair Capital
Standards Act (H.R. 2043) was introduced in the House of Representatives and
referred to the Financial Services Committee.4 The act would establish a mechanism
for developing uniform U.S. positions on issues before the Basel Committee on
Banking Supervision. At present, there is some disagreement among U.S. banking
regulators on implementing Basel II.
This report provides the basic information needed to understand the Basel
Accords and the issues surrounding the expected adoption of Basel II. First, it gives
basic background on capital standards and describes how adequacy assessments were
made before these accords. Second, it discusses the situation that led to Basel I and
gives some details on that accord. Third, it addresses three of the major problems
with Basel I that Basel II promises to improve. Fourth, it describes Basel II’s
“pillars,” or principles of regulation. Fifth, it discusses Basel II’s approaches to
measuring capital, followed by a rough comparison with the requirement of the
accords. The report concludes with a discussion of next steps toward implementing
Basel II in the United States.
Before Risk-Based Capital
In general, capital is the owners’ investment in an institution and it rises and
falls with the worth of a bank’s assets. The more capital a bank has, the greater the
cushion against insolvency in bad economic conditions. Thus, regulators who are
guarding the credit systems of their countries have an interest in requiring that
owners have some minimum level of capital — their own investment — at risk, to
avoid failures or taxpayer-funded rescues.5 Capital is costly, however, in part
because it restricts the amount of profitable borrowing a bank can engage in. Thus,
owners have an interest in maintaining a low amount of capital, and that amount may
be lower (and the risk taken higher) where governmental backing is higher, an
insurance effect known as “moral hazard.” Held capital requirements are said to be
“risk-based” when they rise as institutions take on new or higher risk. The Basel
Accords are attempts to base capital requirements on risks taken and thereby align
3 Basel I became U.S. law as Title III of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), (P.L. 104-316).
4 U.S. Congress, House Committee on Financial Services, United States Financial Policy
Committee for Fair Capital Stands Act, H.R. 2043, 108th Cong., 1st sess.,
[http://www.congress.gov/cgi-lis/query/z?c108:h.r.2043:].
5 Capital requirements are not to be confused with reserve requirements. Minimum reserve
requirements pertain to the amount of deposits a depository institution must hold to assure
liquidity, and for monetary policy purposes. Minimum capital requirements pertain to
owners’ investment in the firm and are relevant to solvency.

CRS-3
institutions’ profit incentives with their own safety and soundness, apart from any
national supports, insurance, or guarantees.
In the United States prior to the 1980s, there was no formal numerical standard,
or across-the-board capital regulation in effect. Instead, regulators assessed capital-
asset ratios on a case-by-case basis. In those times, the bank regulators’ judgments
on the quality of management (based on observing decision making processes and
results), the nature of investment portfolios, and the economic environment, were
critical to determining the level of capital a bank was required to maintain. The
regulatory determination was essential because the advent of deposit insurance in the
1930s lowered the need for bank capital.6 That is, because depositors were insured,
they did not need to closely monitor the safety and soundness of a bank; knowing that
most depositors had no reason to worry about getting their funds returned to them in
event of a bank failure, the bank owners could take greater risks, and reap greater
rewards, with no concern that depositors would withdraw funds. The somewhat
ironic result of deposit insurance was that capital-asset ratios for all banks were in a
long historical decline until the end of World War II and then moved in a narrow
range until the mid-1970s, as shown in Figure 1.
Figure 1. Bank Equity Capital, 1934 - 2002
(Percentage)
Source: FDIC.
Bank examiners’ strict enforcement of capital requirements in the 1950-1970
period played a major role in maintaining bank safety. However, in the late 1970s,
even as bank failures began to grow along with discussions of interest rate
6 Trade-offs between capital adequacy and deposit insurance in financial terms are examined
in Alex J. Pollock, “Cheap Capital: Call It Deposit Insurance,” American Banker, June 5,
1991, p. 4.

CRS-4
deregulation,7 regulators allowed bank capital ratios to remain steady at near
historically low levels with deteriorating economic conditions. In 1981, declining
bank capital raised the specter of multiple bank failures. Since one way to lower the
risk of failure is to raise capital, two regulators, the Federal Reserve (Fed) and the
Office of the Comptroller of the Currency (OCC) announced that they were raising
capital requirements. They raised them still higher in 1983 in view of congressional
recognition of the problem large U.S. banks had with nonperforming Third World
loans.8 The Federal Deposit Insurance Corporation (FDIC) adopted an identical
standard in 1985. Bank capital rose in response to the new standards. But it was not
until after full implementation of Basel I in the early 1990s and the failures and
shutdowns of under-capitalized banks in the 1980s and early 1990s, that capital ratios
rose rapidly. By the end of 2002, bank capital was up to 9.22% of total assets or
almost $78 billion.
Basel I
The current Basel I Capital Accord was published in July 1988 and fully
implemented by the end of 1992. Even though U.S. banking regulators began
implementing Basel I in 1988, Basel I did not become U.S. law until 1991 when the
Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA)9 was
enacted. Under Basel I, the capital that is held against a bank’s assets can be of two
components — core (“tier 1”) capital and supplementary (“tier 2”) capital. Core
capital consists of common shareholders’ equity (issued and fully paid), disclosed
reserves, most retained earnings, and perpetual noncumulative preferred stock.
Supplementary capital includes subordinated debt, limited-life preferred stocks, and
loan loss reserves.10 These two components must sum to the overall minimum
capital requirement of 8% of a bank’s assets.
Basel I standards are also roughly risk-based: banks must hold more core and
supplementary capital against assets deemed riskier, and may hold less against assets
deemed safer. The accord divides bank assets into categories, or “buckets,” and
applies risk weights to each bucket. Table 1 lists the main buckets. An asset with
a 100% weight requires 8% capital. For example, unsecured corporate and consumer
loans have a weight of 100%, meaning that the bank must hold capital equivalent to
7 See CRS Report RL30816, The Anticipated Effects of Depository Institutions Paying
Interest on Checking Accounts, by Walter W. Eubanks, for a discussion of interest rate
deregulation and safety and soundness of depository institutions.
8 See U.S. Congress, House Committee on Banking, Finance, and Urban Affairs, Task force
on the International Competitiveness of U.S. Financial Institutions, The Basel Accord, 101st
Cong., 2nd sess., H.Rept. 101-7 (Washington: GPO, 1991), pp. 318-322. At the same time
bank capital requirements were being raised, regulators for the distressed savings and loan
industry were lowering them to avoid having to close failures and pay off depositors — a
practice known as forbearance. The ultimate losses were much higher as a result.
9 105 Stat. 2236
10 Goodwill — an accounting construct measuring the market value of a bank’s reputation
and a major point of contention in the savings and loan failures — is not included in any
capital.

CRS-5
8% of their value. At the low extreme, cash, and debt due to or guaranteed by
national government carries a bucket weight of zero, meaning that no capital is
required for such investments.
Specialized assets outside the designated categories, such as derivative
instruments, or foreign exchange options, must be converted and placed into a
category. Specialized assets that are judged to be of normal credit risk are assigned
a weight of 100%, while other assets with contingent components are converted into
credit-risk equivalent values. As an extreme case, loans a bank has made that have
been defaulted and not yet written off, may receive weights as high as 300%, which
would require a bank to set aside capital equal to 24% of the value of the asset.
Another case would be a letter of credit in a highly fluctuating foreign currency,
which would likely get a higher than normal weight.
Table 1. Basel I Asset Weighting Percentages
Percentage of the
Percentage
Regulatory Capital
of Asset
Requirement
Required to
Major Asset Categories or Buckets
100% weight = 8%
be Financed
capital
by Capital
Zero
Zero
Cash; amounts due from central banks;
claims guaranteed by central governments;
gold.
20%
1.6%
Assets collateralized by government
securities, or conditionally guaranteed by
central governments; claims on depository
institutions; cash in process of collection;
guarantees of public-sector entities
(including government-sponsored
enterprises).
50%
4%
Revenue bonds; credit equivalents of
interest rate and exchange rate contracts
that are off-balance sheet items; residential
first mortgages.
100%
8%
All other claims on private obligators
[bonds]; business and consumer loans;
government obligations paid solely by
private parties; fixed assets and real estate;
investments in subsidiaries; all other
assets.
100% +
Above 8%
Defaulted assets and other assets with
above normal risk.
Source: Summary of the regulations set forth in 12 C.F.R Part 3, 1991. The actual categories are very
detailed and have been modified over time.

CRS-6
In addition to the risk-based capital, as a back-up regulatory requirement, U.S.
banks must also maintain a minimum leverage ratio. A leverage ratio measures the
relative significance of debt to shareholder financing for a bank, and implies a
minimum amount of shareholder equity (tier 1) relative to debt (including deposits)
plus equity. Under FDICIA, Congress mandated that regulators must require prompt
corrective action when a bank’s minimum leverage ratio falls below 4%, or 5%,
depending of the type of banking institution. That is, banks must maintain the
equivalent of at least 4% of their financing in the form of core capital. Institutions
that are below this ratio are subject to mandatory supervisory action to rebuild their
capital. If capital levels and ratios are not restored to standard, it could lead to
regulators taking punitive action and even placing the bank in conservatorship to
avoid a failure or lower the costs in event of failure.
In short, Basel I transformed capital supervision into a system of weighted risk
categories or buckets that is applied to most banks. This framework for risk-based
capital adequacy requirements is currently used by 110 countries. Because at the
time it was introduced, it required most banks to raise their level of capital, it
strengthened the stability of the international banking system. Most importantly for
purposes of international trade and investment flows, it helped to remove a source of
competitive inequality among banks that varied dramatically from nation to nation
reflecting different ties, guarantees, or other backing by national governments.
Major Problems with Basel I
Most arguments for switching from Basel I are based on the observation that
Basel I’s “bucket” system is overly simple, leads to inefficient uses of capital, and
doesn’t necessarily lower the costs of bank failures. Technological advances in
communications and finance, combined with geographical and financial instrument
diversification, and global market integration, have made banking systems too
dynamic and complex for Basel I. Large, internationally active banks now use far
more complex risk models and have developed advanced reserve and capital
management techniques. In this rapidly changing environment, the Basel I
framework is unable to yield accurate or timely information on major banks’ safety
and soundness.
Three specific problems have effectively undermined Basel I: risk mitigation
management, regulatory arbitrage, and a perceived increase of operational risk. None
is adequately accounted for in Basel I. Consequently, banks tend to hold
inappropriate levels of regulatory capital given the riskiness of their assets — in
some cases, regulatory capital is insufficient, in others it is excessive to assure safety.
Risk Mitigation
Risk mitigation is an internal step banks can take to control their risks. Many
prudently managed banks take credit (and interest rate and other) risk mitigating
measures by investing in offsetting assets such as loan insurance, derivative hedges,
collateral liens, and other proven investments that protect lenders from losses. Under
Basel I, acquiring an asset whose risk of default decreases as another asset’s default

CRS-7
risk increases would increase a bank’s capital requirement instead of reducing it,
even though the bank is sounder as a result of the transaction.
Large banks employ a variety of sophisticated business models to measure their
actual exposure to losses in strong and weak markets, taking into account the hedges,
collateral and recourse agreements, and other risk-mitigating tools. The Market Risk
Amendment to Basel I recognized the problem of the fixed credit risk buckets in
deterring measures against excessive market risk, and the impracticality of such
detailed examinations as would be necessary to determine the effectiveness of all
banks’ internal risk mitigation measures; it allowed certain, very large qualifying
banks to use their risk models to help determine minimum capital requirements. The
problem remains that credit risk mitigation is not taken into account under Basel I.
Regulatory Arbitrage
The idea behind risk-weighted capital rules is to encourage lower risk lending
by raising the cost of higher risk lending. In general, the higher the quality of a loan
or investment, the lower the return. If risk-weighting is accurate, the disincentive to
invest in the high-quality, low-risk assets is reduced. However, the limited number
of categories in Basel I gives banks an incentive to take on higher risk assets within
each very broad bucket, without shifting into a higher capital-consuming bucket.
This is called “regulatory arbitrage,” or “gaming the system.”
Within a risk category, Basel I encourages banks to hold high risk, high yielding
assets and sell low-risk ones into the capital market. For example, usually investors
distinguish among commercial loans by demanding higher yields for higher risks.
Basel I’s bucket approach does not. It places a capital charge of 8% on all
commercial loans, even though a triple A-rated commercial loan carries a lower yield
than a B-rated one. Since both loans carry the same capital charge, Basel I gives the
bank an incentive to carry more B-rated than triple A-rated commercial loans because
they have higher yields. For greater profits, banks are likely to sell triple A-rated
loans to acquire higher yielding B-rate or even lower rated loans. As a result of this
regulatory arbitrage, some banks are likely to be holding less capital than actual risk
implies. Adding more categories helps only to a point; ultimately, individual loan
risk evaluations are required to make accurate capital needs assessments.
Operational Risk
Operational risks can produce losses resulting from inadequate or failed internal
processes, people, and systems, or from external events including legal and
compliance-related risks. Operational risks include poor accounting, lapses of
governance controls, settlement failures, poor or fraudulent managers and traders,
and security and process failures. Despite the fact that some of these risks are
captured under credit risk, operational risks have historically played major roles in
depleting capital from failed banks which have met the minimum credit risk-based
requirements. Operational risk is a major cause of bank failures. It is not, however,
explicitly taken into account in Basel I. Fraud contributed to eight of the 11 U.S.
bank failures in 2002, and was the direct cause of failure in several of these cases.
There is considerable controversy over how to form a capital charge for operational

CRS-8
risk because it is not clear how such a charge would actually work to deter fraud.
The general approach for most corporations is to require sufficient disclosure that
fraud has a better chance of being detected.11 Nonetheless, for some regulated U.S.
financial corporations, explicit capital charges are required as an “add-on” to all other
capital charges12 and the lack of such charges in Basel I is considered to be a serious
omission.
The Basel II Capital Framework
Between 1992 and 2001, numerous new and old risk-based capital questions
related to risk management and supervision were put to the Basel Committee. The
Committee’s cumulative responses are presented in the form of Basel II The
expectation is that for some banks Basel II will replace the current Basel I Capital
Accord beginning implementation in January 2008. The Basel II Capital Accord is
expected to improve safety and soundness by being a more comprehensive
framework which is more accurately sensitive to risk and, therefore, able to adjust
measures of capital adequacy more rapidly than the current framework. It also
represents a shift in regulatory philosophy toward greater use of market signals in
determining the adequacy of capital. Basel II has three reinforcing principles, known
as “pillars.”
Pillar One
The first pillar is the minimum capital requirement, which may be seen as
essentially an improved Basel I. It is the rule a bank uses to calculate its per-loan
minimum capital, taking explicitly into account each loan’s unique credit risk.13 For
example, unlike the bucket approach of Basel I where all assets in a bucket — such
as commercial loans — are assigned the same specific risk weights, in Basel II a
commercial loan with a “triple A” rating is assigned a lower risk weight than a B-
rated commercial loan. Other types of loans are also differentiated according to their
perceived risk. The specific risk assignment is set by the bank and its regulators
based on the credit history of the borrower in that institution. Thus, the pillar one
refinements specifically take into account and correct for the Basel I problems with
regulatory arbitrage.
Basel II also takes into account risk-mitigation measures taken in bank assets.
While the capital requirement is determined for each asset, risk-offset relationships
that can be demonstrated to the satisfaction of the regulators are not penalized. Some
provisions, of course, may prove not entirely effective because of disputes,
contractual impairments, and counter party failures. Nonetheless, regulators would
11 This is the approach of the Securities and Exchange Commission, for example.
12 This is the approach taken by the Office of Federal Housing Enterprise Oversight with
respect to the large housing government-sponsored enterprises.
13 This is the risk that a borrower fails to make the contractual payments on a timely basis
or fails to fully discharge the terms of the contract.

CRS-9
have the flexibility to reward banks by lowering capital charges for such risk-
mitigation arrangements.
In addition to credit risk, Basel II explicitly accounts for operational risk under
pillar one. In the most recent version of the Basel II proposal, banks will have to set
aside a minimum of 12% of the total credit-risk capital with no cap. That is, if a
bank’s credit- risk or current regulatory capital totals 8% of its total assets, it would
have to add 12% of that, or about 1% of assets, for operational risks, ending up with
a total regulatory capital requirement of 9%. Some have argued that operational risk
is already included in the credit risk-based calculations. Others have argued that the
capital charge for operational risk should be at the discretion of bank supervisors and
therefore not an explicit universal requirement. Furthermore, other analysts argued
that a capital charge for operational risk does not necessarily mitigate operational risk
itself, because it is not directly linked to operationally risky behavior. Operationally
risky behavior may be only indirectly countered by supervisory review process, and
market disclosure of bank operations. This remains a controversial matter and the
basis for calculating operational risk is not yet final.
Pillar Two
The second pillar represents a major return to bank supervisory judgments. It
is the supervisory review process, which is less tangible than pillar one, but
somewhat more determinable than in the pre-Basel era. Pillar two requires banks to
maintain internal assessments of risks relative to capital. This is a process rather than
a static quantitative assessment as in pillar one. Pillar two is a dynamic requirement
that risk and capital self-evaluations must take place over the business cycle as well
as in a period of noncyclical stress.14 The bank supervisory agencies have a key role
to play under this pillar. They must validate the methodology and processes used in
these bank self-examinations. “The focus is on ensuring that the bank has strong
risk-assessment capabilities and that the supervisor and the bank jointly assess and
evaluate that capacity.”15
Pillar two provides an opportunity for flexibility in risk-based capital
requirements. It is under pillar two that the rigidity of Basel I (one size fits all) gives
way to negotiations in the interpretation of empirical data between the bank and its
supervisors of the safety and soundness of the institution. Larger banks routinely use
risk models to assess their safety and soundness profile and to determine the
advisability of new business, or of concentrations of risks in continuing business.
For smaller banks, however, sophisticated risk-modeling may not be as beneficial.
In the latter case, the supervisory agency could simply require a bank to operate under
14 Business cycle stresses measure the effects of credit risk changes as the economy
fluctuates, while noncyclical stresses, which have cyclical components, measure interest rate
risk and other exogenous changes. An example of a noncyclical stress would be a sudden
two percentage points rise in market interest rates.
15 Roger W. Ferguson, Jr., vice chairman of the Board of Governors of the Federal Reserve
System, before the Subcommittee on Domestic and International Monetary Policy, Trade
and Technology, Committee on Financial Services, House of Representatives, Feb. 27, 2003,
[http://www.federalreserve.gov/boarddocs/testimony/2003/200302272/default.htm].

CRS-10
the rules of Basel I based on the dialogue and evidence pertaining to the individual
bank’s special risk profile, geographic location, and loan concentration, among other
factors.
Pillar Three
The third pillar represents a major change from previous safety and soundness
rules: supervisory use of market signals and market discipline. That is, pillar three
is a requirement that a bank make public sufficient information about itself and its
own determining factors in its capital requirements, among other disclosures, that
creditors and investors in financial markets will be able to assess a bank’s risk
posture accurately and adjust borrowing and capital costs accordingly. The idea
behind this requirement is to bring market discipline to bear so that bank
management and their regulators have a cost incentive to adopt strong safety and
soundness practices. Comparison across banking institutions could be more easily
made by depositors and investors, as well as regulators. This knowledge, in turn,
would affect the willingness of investors to invest, or alter the cost to the bank of
investments and thereby the bank’s profitability.
It is under pillar three that a bank may be required to issue subordinated debt.16
Subordinated debt consists of bonds that are paid after other debts are satisfied and
just ahead of shareholders. If a bank is perceived to operate in an increasingly risky
way, buyers of subordinated debt would require a greater return than regular debt
holders and the price of the debt would fall (or, the yield would rise) relative to other
debt, signaling regulators of market perceptions. Thus, without issuing new stock,
a bank and its regulators can, by issuing “sub-debt,” have a reasonable indicator of
the financial market assessment of its strength. The lower the market yields on such
debt, the sounder the bank is seen to be. The idea is to add “more sets of eyes” to
analysis of a bank’s risks.
Measuring Capital Adequacy
U.S. bank supervisors have already decided they will implement one of the three
approaches Basel II offers to measure bank capital adequacy. To the extent that
Basel II is more flexible than Basel I, most of that flexibility comes from the
approaches used to measure capital adequacy. The three approaches to calculating
the minimum allowable amount of bank owners’ investment in the bank are: the
standard approach, the foundation internal ratings-based approach, and the advanced
internal rating-based approach. These three approaches are briefly described in this
section to better understand the principles behind Basel II.
The Standard Approach. The standard approach is very close to the
calculus under Basel I. Under this approach, to calculate the capital adequacy of
bank risk-weighted assets, the total exposure to losses from an asset is multiplied by
the supervisory determined risk weight. Compared to Basel I, the major differences
16 See CRS Report RL30820, Subordinated Debt: A Potential Tool for Greater Market
Discipline of the Financial System, by Marc Labonte, for a discussion of the relationship
between this kind of debt and the safety and soundness of the banking system.

CRS-11
are that capital required for credit risk is no longer capped at 8% when the risk
weighting equals 100%, and the standard moves away from the uniform 100% risk
weights for all corporate credits. A corporate claim could receive a risk weight of
20%, 40%, 100% or 150% depending on its external credit rating. There are at least
five other modifications in the weighting structure, and more may be added.17 The
general notion is that degree of riskiness can be more finely differentiated under
Basel II.
U.S. regulators appear unlikely to implement the standardized approach. They
have said that credit risk measured under this approach would generally not be
appreciably different from what is measured under the current rules for most U.S.
banks, and the marginal changes in capital requirements would not justify the costs
of implementation.18
The Foundation Internal Rating-based Approach. U.S. bank regulators
have also ruled out the foundation internal ratings-based approach because of
technological and other costs.19 For these approaches, banks must meet stringent
qualifying criteria. National supervisors would use quantitative as well as qualitative
measures to determine which banks may apply for the Basel II framework. The
evaluative process would include rating system design, risk- rating system operation,
corporate governance, and most critically, validation of internal estimates. In the
foundation version, regulatory capital is determined by a bank’s own assessment of
the risk of default on each of its assets. This is called probability of default (PD). In
this approach, the banks have to supply few direct inputs. Regulatory agencies
supply most of the supervisory standards that the bank must meet. These supervisory
rules are similar but not identical to the standardized approach.
The Advanced Internal Rating-based Approach. U.S. bank supervisors
have indicated an interest in selecting the advanced internal rating-based approach
for U.S. banking regulation because it allows use of banks’ existing internal
assessments and management technology to calculate regulatory capital requirements.
Like the foundation approach, the first measure is the probability of default (PD) of
each asset. Next the bank must estimate the loss severity. This estimate is also
called the “loss given default” (LGD). The third measure has two elements: first is
the amount at risk in the event of default (exposure at default, or EAD). This is the
nominal value of the assets at the time of default. The second element is the maturity
(M), which is considered an explicit risk component. An element that is in Basel II,
but not included in U.S. regulators’ planned adaptation, is a bank’s exposure to a
17 Christoph Sidler and Gabriel David, “Impact of the New Basel Accord,” White Paper:
Basel II, eds.com/financial, Jan. 2003, p. 9.
18 Testimony of John D. Hawke, Jr., Comptroller of the Currency, before the U.S. Congress,
House Financial Services Committee, Subcommittee on Domestic and International
M o n e t a r y P o l i c y , T r a d e a n d T e c h n o l o g y , F e b . 2 7 , 2 0 0 3 , a t
[http://financialservices.house.gov/media/pdf/022703jh.pdf], p. 21.
19 Business cycle stresses measure the effects of credit risk changes as the economy
fluctuates, while noncyclical stresses, which have cyclical components, measure interest rate
risk and other exogenous changes. An example of a noncyclical stress would be a sudden
two percentage points rise in market interest rates.

CRS-12
single borrower or group which is called “granularity” (G). For each exposure, the
risk weights would be a function of PD, LGD and EAD.
To calculate the capital charge, the bank’s portfolio would be broken down into
five categories: corporate, retail, bank, sovereign, and equity. Supervisory approval
is needed before a bank can use its own internal ratings-based approach for these five
categories. After the bank determines the probabilities of default (PDs), and the
losses given default (LGDs) for all exposures, these are mapped into regulatory risk
weights for the portfolio. These risk weights are adjusted to include expected and
unexpected (a deviation measure) losses. The minimum capital charge is determined
by multiplying the risk weights by the amount expected to be outstanding at the time
of default (EAD) and 8%.
How the Accords Compare
Table 2 compares the capital charges that a bank would be required to hold
under pre-Basel standards, under Basel I and under Basel II, using a single category
of bank asset — a $100 commercial loan — with different risk ratings. The three
credit ratings are AAA, the safest rating, BBB, a middle risk rating, and a B rating,
a low investment grade and the riskiest on this chart. Table 2 shows that before
Basel I, the minimum capital requirement for these three risk grades of commercial
loans would have been determined by the judgment of the bank examiners and
supervisory agency. Under Basel I, a more rigid system would have required a fixed
8% of the loan regardless of the actual and varying risk of default. Under Basel II a
range of possible capital amounts would result. The exact amount would rest on the
judgment of the bank and its examiners and supervisory agencies and would vary
according to general economic conditions for any given credit rating. Consequently,
for the B-rated $100.00 commercial loan a capital requirement could range from
$3.97 to $41.65, a wide range that implies considerable supervisory discretion.
Table 2. Minimum Capital Required for a $100.00 Commercial
Loan Before Basel I, After Basel I, and Basel II
AAA Credit Risk
BBB Credit Risk
B Credit Risk
Before Basel I
Supervisory
Supervisory
Supervisory
Judgment
Judgment
Judgment
After Basel I
$8.00
$8.00
$8.00
Basel II Advance
$0.37 to $4.45 and
$1.01 to $14.13
$3.97 to $ 41.65
Internal Ratings-
Supervisory
and Supervisory
and Supervisory
Baseda
Judgment
Judgment
Judgment
Source: FDIC
a. Calculations reflect representative lower and upper bounds to be held in support of the $100.00
commercial loan. The quality of these loans refers to one-year default possibilities (DPs)
corresponding to the historical average for the given rating. The calculations include an operational
risk charge, which is determined by using the basic indicator approach where capital charge is equal
to 15% of the institution’s average gross income over the previous three years. Return on assets

CRS-13
(1.41%) is a proxy for average gross income. This is multiplied by the amount of the loan ($100.00)
as an estimate of operational risk (.15* $1.41=$.21). Lower bound reflects a LGD of 10% (high
recovery) with a one-year maturity(M) loan. Upper bound reflects an LGD of 90% and a five-year
maturity loan.
Remaining Concerns about Basel II
Basel II is, in some ways, a work in progress: specific adaptation to banks within
the nations that subscribe to the accord is up to national regulators, particularly their
central banks. The broader framework, particularly the added bank management and
supervisory involvement in determining minimum bank capital, is expected to bring
about much greater sensitivity to risk and flexibility in containing it than Basel I.
U.S. regulators, led by the Fed, have indicated their intent to adopt the advance
internal rating approach for only the 10 most important, internationally active banks,
but expect that other major banks will also join the system. The Fed expects 20 large
banks will be operating under Basel II by the implementation date of January 2008.
These institutions are already operationally disposed to this system, running complex
risk-assessment models, and handling risk through a wide variety of hedges and other
insurance. They account for about 99% of the foreign assets held by the top 50
domestic banking organizations and approximately two-thirds of U.S. domestic
banking assets.20 Nonetheless, implementation of Basel II raises important issues.
Cost and Complexity
If the regulators should apply Basel II to banks that are not operationally
disposed to the system, Basel II could prove to be a very costly regulatory burden.
Most banks, especially the 7,000 or so that are relatively small by international
standards, would have to incur significant new costs to prepare for even the least
costly standard approach to capital determinations. Cost considerations are the
primary reason that U.S. regulators plan to implement Basel II in only the largest U.S.
banks.
Under Basel II, senior executives of all covered banks are required to sign off
and be accountable for the integrity of the internal management systems and
processes that generate the data for determining capital requirements. These
executives must ensure that their internal systems can stand up to regulatory scrutiny
and will be held liable (it is not clear yet what liability means in terms of
enforcement) if they do not. Covered banks must already have made or be willing
quickly to make major investments to upgrade their core processing systems and
information technology architectures. In addition, internal audit and control
functions must be able to collect extensive internal loss data and be operational in
time to meet the January 2008 implementation deadline. In short, these banks must
already have taken on the cost of re-engineering their management governance
structure and their operations in the context of Basel II. Several very large banks are
20 See Roger W. Ferguson, Jr. remarks at the Basel Sessions 2003, Institute of International
Finance, New York, New York, June 17, 2003, available online from the Federal Reserve
site at [http://www.federalreserve.gov/boarddocs/speeches/2003/20030617/default.htm].

CRS-14
already in position for Basel II, primarily because their complex operations already
required sophisticated models and risk-containment procedures as a business matter.
Smaller banks, however, are far less likely to be ready for implementation.
Procyclicality
Some bank supervisors as well as academics have expressed concerns about the
pro-cyclical characteristics of the Advance Measurement Approach in the United
States.21 Procyclicality means that banks would be able to disproportionately expand
lending when economic activity is expanding and similarly be forced to
disproportionately contract lending when economic activity is contracting. This is
the case because in economic expansions lending is less risky and the framework
would recommend less need for capital. In economic contractions when lending
tends to be more risky, the framework would recommend higher levels of capital,
slowing or possible preventing banks from lending. While there is logic to the
pattern it could also be contrary to the intent of monetary policy to ease credit and
expand lending to reverse a contraction, or to tighten credit and slow lending when
the economy is over heated and likely to become inflationary. Procyclicality, in other
words, has a destabilizing tendency on the economy.

While procyclicality is not a new issue, Basel II appears to be more procyclical
than its predecessor. That is, Basel II is argued by many financial analysts to require
much more bank capital during economic recessions than Basel I.22 The main reason
is that during recessions, credit ratings of many commercial firms’ securities —
including loans made by and securities held by banks — may be downgraded; this
could result in a dramatic increase in required bank capital. As table 2 demonstrates,
if a $100.00 commercial loan with a triple-A rating in an economic expansion
requiring as low as $0.37 bank capital were downgraded to a B rating, it would
require as much as $41.65 worth of capital.
Presumably, Basel II compensates for this procyclical bias though the
supervisory review process (pillar two): supervisory review could make capital
adjustments called “cyclical buffers.” The amount of these adjustments would come
from stress tests, among other factors. The stress tests are simulations of sharply
adverse economic conditions (sometimes called “depression scenarios”). For each
bank, the stress tests supply information — such as how long the bank’s current level
of capital would last under adverse conditions — that is used as guidance to ease
required capital sufficiently to at least partially offset the procyclical bias of the pillar
one capital requirements. Supervisory review places a critical responsibility on bank
supervisors in times of recessions. The fact is that the more accurately regulatory
21 Testimony of Donald E. Powell and John D. Hawke, Jr., before the U.S. Congress, House
Financial Services Committee, Subcommittee on Domestic and International Monetary
P o l i c y , T r a d e a n d T e c h n o l o g y , F e b . 2 7 , 2 0 0 3 ,
[http://financialservices.house.gov/media/pdf/022703jh.pdf].
22 Testimony of D. Wilson Ervin, Strategic Risk Manager of Credit Suisse First Boston,
before the U.S. Congress, House Committee on Financial Services, Subcommittee on
Domestic and International Monetary Policy, Trade and Technology, Feb. 27, 2003, p. 6,
[http://financialservices.house.gov/media/pdf/022703de.pdf].

CRS-15
capital is tied to risk, the greater the regulatory incentive for appropriately-priced risk
taking. Supervisory calming of risk-taking fears in adverse climates is critical to the
efficient use of capital.
Market Competitiveness
The implementation of Basel II in the United States potentially could change the
competitive positions of regional banks, smaller banks, and foreign banks as some
of these banks switch from Basel I to Basel II. Both some small as well as regional
bankers believe that they will be placed at a competitive disadvantage with the Basel
II banks because, under most circumstances, Basel II allows lower overall capital
charges. Specifically, under Basel II, lower capital requirements are likely on such
important lines of business as residential mortgages, loans to small businesses and
retail loans. Lower capital is not across-the-board, however: Basel II banks will face
higher capital charges on commercial real estate and operational risk, in addition to
incurring the higher cost of developing the risk-management structure to operate
under Basel II.
Internationally, all the banks to be part of Basel II are big players in the
international financial markets. Some of the largest competitors that U.S. banks face
both domestically and abroad are U.S. nonbank financial firms, for example General
Electric. These nonbank global competitors, which will not be under Basel II, could
have competitive advantages in their lines of business, particularly when they
securitize loans. Such companies, however, do come under market scrutiny and,
while their capital is not formally regulated, their costs of borrowing do rise and fall
with market perceptions of their risks. At least domestically, those risks are
supposed to be disclosed in regular information filings with the Securities and
Exchange Commission (SEC).
Other countries’ regulatory agencies are reviewing their capital adequacy
standards in light of Basel II.23 Like the United States, they will have the option of
adopting parts or the entire Basel II framework. Because international banks also
participate in the domestic market with smaller banks, concerns have been raised that
implementation of the new capital accord may not level the banking playing field
(combined international and domestic) as intended. For example, if U.S. regulators
only apply the new accord to a few banks, while the European Union applies it to all
banks, capital charges for European banks as a whole could be lower than U.S.
banks, at least during economic expansions. In such circumstances, smaller U.S.
banks could find themselves and any expansion plans somewhat constrained, at least
until they were able to take on the costs and complexities to qualify for Basel II’s
advanced treatment.
23 The European Commission, “Capital Adequacy: Commission welcome Significant
progress on new Basel Capital Accord,” press release, Nov. 7, 2002, at
[http://europa.eu.int/rapid/].

CRS-16
Prompt Corrective Action (PCA)
As already noted, in placing Basel I in U.S. banking law, Congress did not rely
solely on risk-based capital requirements to assure the safety and soundness of
banks, or to reduce the cost of bank failures. Under FDICIA, Congress took away
some discretion from regulators. Banks and their regulators must take prompt
corrective action when a bank minimum leverage ratio falls below 4% or 5%,
depending of the type of banking institution. Institutions that are below this ratio are
subject to mandatory supervisory action to rebuild their capital. Used as a trigger for
intervention, the leverage ratio reduced the opportunity for bank supervisors to
practice forbearance toward undercapitalized banks.
Prompt corrective action is likely to be adjusted for implementation of Basel II.
First, it is not likely that the new Basel accord will bring about such a large decrease
in required capital that PCA leverage tests become binding constraints. That is, it is
unlikely that under Basel II, banks’ required capital would fall to 4% or below. The
Basel Committee already limits any reduction in capital as a result of shifting to
Basel II, to 10% of the existing minimum capital requirement, in the first year of
adoption. In the second year, the minimum capital floors would be 80% of pre-
implementation levels. Thus, in the first two years of implementation, the decline in
required capital could only allow capital to fall 20% lower than what it is currently.
Congress and Basel II Implementation
Although Congress may choose to act on them, the Basel Accords are not
international treaties needing congressional approval. They are international banking
recommendations in the framing of which U.S. bank regulators — with the Federal
Reserve taking the lead as the nation’s central bank — have been major participants.
Basel I was originally a proposal of the Federal Reserve of New York to the Basel
Committee in 1986. Its standards were adopted by the monetary authorities in the G-
10 countries as guidelines in 1987. The agreement to use Basel I as a common
approach to evaluate bank capital adequacy came in 1988 with an effective date at
the end of 1992. As pointed out earlier, Congress made the agreement part of U.S.
banking law in 1991, long after it was implemented by U.S. bank supervisors. The
leverage ratio requirement coupled with prompt corrective action was a major
modification that is applicable to U.S. banks and not other signatories. Similarly in
the case of Basel II, U.S. regulators have been both instigators and participants.
William J. McDonough, retired president of the Federal Reserve Bank of New York,
was also chairman of the Basel Committee on Bank Supervision at the BIS when
Basel II was being developed.
The United States Policy Committee for
Fair Capital Standards Act (H.R. 2043)
On May 9, 2003, the United States Policy Committee for Fair Capital Standards
Act (H.R. 2043) was introduced by Representative Spencer Bachus and referred to
the House of Representatives Financial Services Committee. The act would establish
the United States Financial Policy Committee for Fair Capital Standards. The

CRS-17
purpose of the policy committee would be to develop uniform U.S. positions on the
proposals made to and issues before the Basel Committee on Banking Supervision
that, if implemented, may directly or indirectly affect U.S. financial institutions. The
committee the law would establish consists of the heads of the major federal banking
regulatory agencies: the Secretary of the Treasury, who would chair the committee;
the chairman of the Board of Governors of the Federal Reserve System; the
Comptroller of the Currency; and the chairman of the Federal Deposit Insurance
Corporation. By making the Secretary of the Treasury the chair of this committee,
this law would enhance the role of the Treasury Department relative to the Federal
Reserve in decision-making concerning implementing Basel II.
If H.R. 2043 becomes law, Basel I is not likely to be a guide to the
implementation of Basel II. In the case of Basel I, Congress waited until U.S. bank
regulators implemented the accord before it adopted the Basel I capital standards with
modifications into U.S. banking law. H.R. 2043 would require the United States
Financial Policy Committee to report to Congress on its evaluations of the impact of
Basel II on the following: the cost and complexity of the proposal; the impact of the
proposal on small, medium, and large financial institutions; the impact of the
proposal on real estate markets; the effect of an operational risk standard on the
resilience of the nation’s financial system, and competition; the impact of the
proposal on competition between banks and other financial institutions; the need for
additional training for supervision and examination personnel; any comments filed
by the public after notice and opportunity to comment for a period of not less than
60 days; and the relative impact of compliance by domestic banks.
The planned implementation of Basel II in the United States will bifurcate bank
regulatory capital standards, which some regulators believe will give a greater
advantage to some larger banks operating under Basel II. U.S. financial regulators,
led by the Federal Reserve, intend to require Basel II for only the most important,
internationally active banks, and presume that other major banks will also eventually
join the system. On August 4, 2003, U.S. federal banking regulators jointly issued
an advance notice of proposed rulemaking (ANPR).24 According to the ANPR, the
overwhelming majority of commercial banks in the United States will continue to
operate under Basel I. The agencies expect to identify only 10 large international
banks to be designated core banks. Another 10 banks may voluntarily opt into the
new standards after meeting infrastructure and other supervisory and disclosure
requirements. These 20 banks combined account for about 99% of foreign assets
held by the top 50 domestic banking organizations and approximately two-thirds of
U.S. domestic banking assets.25 This means that the overwhelming share of the
international banking business will be under Basel II, but an overwhelming majority
of U.S. banks are not likely to be. Because of the up-front costs that Basel II would
impose on banks, most U.S. banking institutions are likely to remain exempt. Basel
24 U.S. Department of the Treasury, “Internal Ratings-Based Systems for Corporate Credit
and Operational Risk Advanced Measurement Approaches for Regulatory Capital,” Federal
Register, vol. 68, no. 149, Aug. 4, 2003, pp. 45948-45988.
25 Roger W. Ferguson, Jr. Basel II: Scope of Application in the United States, statement
before the Institute of International Bankers, New York, New York, June 10, 2003,
[http://www.federalreserve.gov/boarddocs/speeches/2003/200306102/default.htm].

CRS-18
II could enable the larger banks under it to expand lending at more competitive
rates.26
Concerns about competitiveness, safety, and soundness have caused U.S.
regulators to announce on December 3, 2004, the launching of two more Basel II
studies.27 The first study is a quantitative impact study (QIS-4). It incorporates the
most advanced options for measuring credit and operational risks, which the U.S.
Basel II banks are expected to adopt. In this study, bankers must enter nearly 100
points of data on risk exposures in a spreadsheet. The banks must provide the
regulators with data on things like residential mortgages, undrawn credit lines, and
operational risk data such as fraud, and natural disasters that could disrupt their
businesses. The second study concerns bank portfolios. It too involves spreadsheets
on roughly a dozen types of portfolios. The regulators expect close to 30 banks and
thrifts to participate. The results of both studies should be in by the end of January
2005 and will be used by the regulators in preparing the Basel II implementation
proposal around mid-2005.
26 See George French et al., Risk-Based Capital Requirements for Commercial Lending :
The Impact of Basel II, Apr. 21, 2003, [http://www.fdic.gov/bank/analytical/fyi/2003
/042103fyi.html].
27 Damian Paletta, “U.S. Regulators Conducting Two Basel II Studies,” American Banker,
Online, Nov. 5, 2004, p.1.
[http://www.americanbanker.com/article.html?id=20041104U640KSWA&from=washregu]