He told the Bond Market Association Annual Meeting: "There has been a considerable volume of comment and speculation recently about the future of the Basel Capital Accord reform programme. Some of that comment was stimulated by the decision by the US authorities only to mandate the new proposals for a group of the largest US banks, leaving much of the US system on the domestic 'well-capitalised' approach built on Basel 1.
"I will frankly say that there was some confusion in Europe, and elsewhere, about the implications of this announcement. Were the US authorities signalling broader concerns about the architecture of Basel 2? If only the Advanced Internal Ratings Based approach to credit risk, and the Advanced Measurement approach to operational risk are to be implemented in the US, what would this mean for overseas banks operating here on other versions? What would it mean for US banks not on the Advanced approach yet operating overseas? And indeed what does it imply for the principle of global competitive neutrality, which the Basel Committee holds dear?
"On Wednesday of this week in a speech to the Risk Management Association, Vice Chairman Roger Ferguson of the Federal Reserve Board helpfully clarified some of these issues in what he characterised as a realist's view of the Accord. I am happy to share in his realism. Like Roger, I agree that we must move forward from Basel 1, which is increasingly divorced from the reality of how banks set their own capital needs, and of how supervisors view them. Like him, I am supportive of the overall architecture of Basel 2 - the three pillar approach. I also, and Jerry Hawke of the OCC has been particularly eloquent on this point, wish the new Accord were simpler than it is.
"So I share the Federal Reserve's determination to press ahead with the third Basel Consultation Paper in May, and to reach a final Accord by the end of this year. The alternative is not attractive. Of course there must be more consultation about the details, both internationally and domestically. But we have heard most of the major arguments of principle already, and that further consultation should proceed on the basis that the world's major regulators are supportive of the proposals put forward.
"I also welcome Roger's clarification of the implications of the US proposals for the functioning of Basel 2 internationally. Competitive neutrality is an important principle, and we need carefully to watch the way each major country implements the Accord. His undertaking is that the standards imposed here in the US will not be allowed to compromise the international level playing field. And I note his undertaking that the US authorities will work with other supervisors to ensure that anti-competitive burdens are not placed on overseas banks operating in the US who may be using other versions of the Accord. For our part in the UK, we are ready to work with the US to ensure that outcome.
"I will not hide the fact that we propose to operate somewhat differently in Europe. We believe that the Standardised Approach in Basel 2 is preferable to Basel 1, even for simpler banks, in particular because of the greater risk sensitivity that it brings. But that, as Roger Ferguson says, is partly because the EU and the US start in different places, and because the structure of the US banking system is very different. For other countries which do not currently operate the US 'well-capitalised' standard, Basel 2 will be a great step forward."
Howard Davies concluded: "What is important, as we move forward, is not absolute uniformity, but broad consistency. We must all work for arrangements which promote prudence and fair international competition."
