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US threatens to pull out of Basel bank agreement

Proposals for global capital standards among national and international banks were again in turmoil yesterday after the head of the powerful US Senate Banking Committee said the so-called Basel 2 plans would have to be revisited by his committee and expressed serious reservations about whether the US could ever adopt them.

Senator Richard Selby, the chairman of The Senate Banking, Housing and Urban Affairs Committee, said a number of US banking regulators had expressed concern about the proposals, making an investigation by the Banking Committee almost inevitable.

Speaking on the fringes of the World Economic Forum annual meeting in Davos, Switzerland, Mr Selby said both the Controller of the Currency and the Federal Deposit Insurance Committee had complained about the likely effect of the new rules, which will regulate the amount of capital banks must hold against their credit risk.

In particular, there was concern about the impact of Basel 2 on small business lending, Mr Selby said. The new investigation will delay implementation of the proposals, which have been the subject of debate and disagreement by banks and financial regulators around the world.

If the US eventually decides to opt out of the new rules, a number of other countries would probably follow suit. As one banker here put it: "No way we would agree to more onerous capital standards than our US counterparts. It would put us at a competitive disadvantage."

Philip Middleton, the head of retail banking at Ernst & Young, warned that if America were to pull out of the Basel negotiations, it might "torpedo" the whole process. He said: "If the US withdrew it might provoke the Japanese to rethink and it could become an entirely European affair. While this is likely to be a negotiating tactic, Basel, which has already been delayed, could be delayed further."

The Basel 2 process was launched in 1998 and the regulations are set to be in place by 2006, but many in the international financial community expect that date to be pushed back.