Regulator OKs Basel II plan for smaller banks

By Karey Wutkowski

WASHINGTON (Reuters) - The majority of U.S. banks would have the option to adopt alternative risk-based capital adequacy rules based on the Basel II agreement, under a proposal agreed to by a top banking regulator.

The long-awaited "standardized" capital rules would apply to almost 8,500 banks and are intended to be less complex and costly to implement than the "advanced" requirements applying to about a dozen of the largest, internationally-active U.S. banks.

The Federal Deposit Insurance Corporation on Wednesday approved an interagency proposal that it says could better align risk with capital requirements and improve risk management practices.

"The standardized approach proposal is expected to add greater risk sensitivity without creating excessive complexity and burden, and, thus, should minimize competitive inequities between large and small banks," said FDIC Chairman Sheila Bair in a statement.

Basel II aims to ensure banks worldwide meet similar requirements for matching reserves to the risks they face.

The Federal Reserve is holding a meeting on Thursday to discuss the proposed standardized approach rules.

The standardized approach is optional and allows smaller banks that already carry capital well above regulatory minimums to avoid the compliance burden of the new framework.

The biggest U.S. banks such as Bank of America (BAC.N: Quote, Profile, Research), Citigroup Inc (C.N: Quote, Profile, Research) and JPMorgan Chase & Co (JPM.N: Quote, Profile, Research) are required to use the "advanced" version of Basel II rules issued last year. The big banks, which are trying to pick up the pieces from the housing market bust, face an October deadline to tell U.S. regulators how they will implement the new rules.