Furthermore, some national supervisors may set higher capital requirements than implied by Basel I, perhaps even higher than those implied by Basel II, depending on the risk environment. For those banks that do experience reductions in capital as a result of Basel II, some observers have questioned whether the lower requirements might provide certain advantages and make it easier for those banks to acquire other banks that do not share in the same benefits. History suggests that this particular concern may be unfounded. In a paper published this past February by the Federal Reserve, researchers reported that they did not find convincing evidence that past changes in capital requirements have had a substantial impact on mergers between banks. The issue of competition between banks has also come up in the context of competition between countries. Here, we should remember that Basel II is intended to help ensure that international competition in banking markets is driven by the strengths of each bank, rather than by differences in each country’s rules. One way that the Committee has sought to promote a consistent application of the new framework is by providing banks and supervisors with detailed requirements where necessary. As I have already mentioned, these details may add to the appearance of length and complexity in Basel II, but that is a small price to pay for greater consistency and a more level playing field.
Nonetheless, we have worked hard over the past years to clarify the rules, to simplify those thought to be the most complex, and to provide options for those wishing to use a simpler approach. In fact, as the Basel Committee demonstrated in an annex to the third consultative paper, supervisors can select  BIS Review 68/2004  3  options that would result in a very simple set of rules that can be specified in just 12 pages of text. That is approximately half the length of the original 1988 Accord. The “simplified standardised approach”, as we call it, is intended to be useful for those countries that do not wish to adopt all of the options available under the new framework. The trade-off, however, reflects the fact that the policy balance at stake is between simplicity and risk-sensitivity; if one chooses simpler rules, the cost is less sensitivity to risk and hence greater conservatism in capital requirements. Competition and consistency of application Another broad concern that the Committee has worked to address is Basel II’s impact on global competition. In particular, some have asked whether banks that choose Basel II’s advanced approaches will enjoy benefits over those that choose simpler approaches. Others have wondered whether banks that remain on the 1988 Accord for some time will be disadvantaged. To respond to these concerns, we should understand that adopting an advanced approach does not automatically reduce a bank’s capital requirements. Basel II is intended to align capital requirements more closely to risk.