Acting Comptroller of the Comptroller John Walsh cautioned Wednesday that regulators should not take a one-size-fits-all approach to applying pending Basel III capital standards to U.S. banks.
In remarks to the Exchequer Club, Walsh said regulators are still wrestling with key questions, including whether all banks should be required to adopt the stricter definition of capital under Basel III and whether smaller banks should be exempted.
"The questions themselves suggest how important Basel III is to the industry, and why it is so important that banks begin focusing now on implementation," Walsh said. "We're still early in the process of developing rules to implement the new framework, and there will undoubtedly be many interpretive issues that we will need to resolve prior to full implementation."
Under the agreement, Basel is meant to be applied to all internationally active banks, but application by the U.S. would be discretionary, Walsh said.
Even if application is limited, however, there are questions about whether capital instruments of banks — internationally active or not — should be loss absorbing based on what was seen in the financial crisis. He said regulators have not reached a decision.
"If we do decided to go with a wider application, we would need to make appropriate exceptions for smaller institutions that receive different treatment under Dodd-Frank," Walsh said. "But this pending question underscores why banks of all sizes should pay close attention to the Basel III rulemaking process."
The other looming question is how regulators will coordinate implementation of Basel III, along with requirements of the Dodd-Frank Act.
In some cases, Basel and Dodd-Frank coincide by, for example, requiring more stringent prudential standards, including capital and liquidity, or specific requirements related to the leverage ratio. But Walsh said there will still be obstacles to harmonizing the two.
"It will be a challenge to meet all these objectives sensibly because the two sets of requirements are complicated; the two frameworks do not mesh perfectly; and there is a fundamental question of how banks of different size should be affected," Walsh said.