FEDERALIST SOCIETY FINANCIAL SERVICES PRACTICE GROUP[dagger]: PANEL DISCUSSION: "THE IDEAL BASEL", THE

Fordham Journal of Corporate & Financial Law, 2008 by Fisher, Keith R

We've been here before. I think a lot of people know there are a lot of serious problems here, but so far no one's been willing to really say, in the government, to really come forward that the emperor has no capital. And we have to fix it before it gets implemented.

Thank you.

KEITH FISHER: Thank you, Mike.

Our next panelist is Karen Shaw Petrou, who is the managing partner of Federal Financial Analytics, which is involved in a variety of consulting services to financial institutions, non-bank financial services firms, as well as banks, government agencies, third-party vendors and so forth. The company also publishes various electronic information services on matters of concern to the financial services industries.78

Prior to founding the company and its predecessor firms in the mid1980s, Ms. Petrou served as vice president for Bank of America in its Washington, D.C. office, and she was also working on a doctorate in political science at UC Berkeley. She does have an MA. from UC Berkeley. Of tremendous interest to me is that at one time she danced with the studio company of the Alvin A. Lee American Dance Theater, which in my judgment eminently qualifies her to speak about Basel II.79

Karen.

KAREN PETROU: Thank you so much. The varied experiences do bring one to the Basel Accord, and to what the ideal one should be.

I think what we've been talking about to some degree is in a vacuum because, ideal or not-and I agree with Mike that much about the international accord is, if one could understand it, far from ideal-it is a reality. It is in place, as Senator Hagel said, everywhere else but here.80 So, I'd like to talk today about a U.S. response to this reality that I think will help respond both to this current market condition, some of which I think are the result of keeping Basel I in place too long without due regard for the phenomenal ability of financial markets not only to innovate, but to exploit every regulatory weakness-what is called regulatory capital arbitrage in Basel-speak. But then also to suggest some ways that we may be able to move quickly to a new capital regime-call it the Standardized Option Basel IA; call it what you like-but that I think will give us a way forward that is not, as I think we run all too much danger right now, of letting the perfect be the enemy of the good in that proverbial phrase.

While we seek a perfect Basel Accord, do we continue to do nothing?81 It has been suggested that perhaps we should just keep the Basel I regime in place with its leverage requirement, but I think we will find that increasingly dangerous precisely because the cycle is turning, and these rules are dangerous in that context. Let me explain why.

First, the market reality. Basel II is final everywhere else but here.82 It's on a somewhat sliding implementation scale,83 but everybody is doing the standardized option outside the United States at some point this year [2007], with the advanced ones coming into play more gradually starting in the beginning of 2008, with parallel runs that bring it into full effect two years thereafter.84