Assessing Banks’ Cost of Complying with Basel II

This policy brief assesses the implications of Basel II for bank regulatory compliance costs. In spite of widespread complaints by bankers about the costs of complying with Basel II rules, the academic literature has given surprisingly little attention to quantifying these costs. The brief discusses estimates of Basel II compliance costs based on commonly utilized rules of thumb and on survey data collected by the Office of the Comptroller of the Currency (OCC). In addition, it utilizes OCC bank-level compliance-cost estimates to speculate about the potential for economies of scale in Basel II compliance. There is unavoidable imprecision associated with compliance-cost estimates. Nevertheless, costs of implementing Basel II ultimately should matter for the U.S. banking industry, both in terms of how the overall magnitudes of compliance costs may influence banks’ strategic-path choices as well as their on-going operating decisions.