Fifth Third Bancorp Catches Major Basel II error

American Banker

According to recent announcements from the Federal Reserve Board, the Federal Deposit Insurance Corp., and other regulators, there is an error in the Basel II capital requirements formula, a mistake that could have caused bankers and lenders to underestimate their capital needs by 60 percent to 70 percent for retail credit portfolios.

The problem lies in a square root sign that is extended over too many figures, which would have had an effect on capital holdings for mortgages, credit cards, and small business loans.

Government officials claim that the error was made by the publisher of the guidelines, but critics are concerned that many banks have already used the incorrect formula.

Fifth Third Bancorp officials stated that they had caught the formula error in their application of the guidelines, but analysts are concerned that banks that have never used Basel formulas before will be using the incorrect calculations.

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