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The Federal Deposit Insurance Corporation (FDIC) today approved the final rule implementing the Advanced Approaches of the Basel II Capital Accord. The new rules are a significant change in regulatory practice, in that they require some large banks to calculate capital requirements using their own internal, model-driven risk estimates.
The Federal Reserve Board on Friday approved final rules to implement new risk-based capital requirements in the United States for large, internationally active banking organizations. The new advanced capital adequacy framework, known as Basel II, more closely aligns regulatory capital requirements with actual risks and should further strengthen banking organizations’ risk-management practices.
The Office of the Comptroller of the Currency announced today it has approved a final rule implementing the advanced approaches of the Basel II Capital Accord.This rule establishes regulatory and supervisory expectations for credit risk, through the Internal Ratings Based Approach (IRB), and operational risk, through the Advanced Measurement Approach (AMA), and articulates enhanced standards for the supervisory review of capital adequacy and public disclosures for the largest U.S. banks.
NEW ORLEANS, La. – Comptroller of the Currency John C. Dugan said today Federal bank regulators are nearing completion of the supervisory and regulatory framework for Basel II in the United States, with tangible progress to report as it relates to both rulemaking efforts regarding Pillar 1 – minimum capital requirements and Pillar 2 – supervisory review of capital adequacy at individual firms. Equally important, Mr. Dugan indicated that the banks and agencies are moving into a new stage in the Basel process – a stage that focuses on institution-specific implementation efforts and the supervisory scrutiny of those actions.
Summary: The federal bank and thrift regulatory agencies are seeking comment on the attached proposed guidance describing current agency expectations for banking organizations that would adopt the Advanced Internal Ratings-Based Approach (IRB) for credit risk and the Advanced Measurement Approaches (AMA) for operational risk under the proposed new Basel II capital framework. The proposed guidance also establishes the process for supervisory review and the implementation of the capital adequacy assessment process under Pillar 2 of the Basel II framework. The FDIC will accept comments on the proposed guidance through May 29, 2007.
Comptroller of the Currency John C. Dugan told an audience of bank risk managers today that, because their goals are so closely aligned to those of the regulators, the regulations and guidance issued by the agencies can support them in meeting their firms’ objectives. For example, he said, regulators can highlight concerns that are important to risk managers, but which others in the bank might prefer to ignore for competitive reasons. An example is the interagency guidance on non-traditional mortgages, which establishes expectations for prudent underwriting, taking into account some of the unique features and risks these products present.
What GAO Recommends With safeguards, it is appropriate for U.S. banking regulators to proceed with finalizing Basel II and begin the transition period. GAO recommends that they (1) clarify some aspects of the Notice of Proposed Rulemaking (NPR); (2) issue a new NPR if material differences from the current NPR, or a U.S. standardized approach option, are planned for the final rule; (3) issue periodic public reports on progress, results, and any needed adjustments; and (4) at the end of the transition period, reevaluate the appropriateness of Basel II as a long-term framework for setting regulatory capital. The Federal Reserve said it agreed with our recommendations and the other banking agencies said they will consider them as part of the rule-making process.
The federal bank and thrift regulatory agencies on Thursday announced that they will seek public comment on three proposed supervisory guidance documents related to the September 2006 notice of proposed rulemaking (NPR) on new risk-based capital requirements in the United States for large, internationally active banking organizations. The September 2006 NPR detailed the agencies' proposal for implementing the new capital framework issued by the Basel Committee on Banking Supervision in 2004 (Basel II). The proposed U.S. Basel II capital framework would be mandatory for large, internationally active U.S. banking organizations and optional for other institutions. The Basel II NPR includes requirements that banking organizations would need to satisfy to calculate their risk-based capital under the proposed new capital framework. The proposed supervisory guidance provides information to assist bankers, as well as supervisors, in addressing the Basel II qualification requirements.
The Office of Thrift Supervision (OTS) announced that it expects publication in the Federal Register early next week of an interagency notice of proposed rulemaking (NPR) regarding potential revisions to the existing domestic risk-based capital framework (Basel IA). These changes would apply to U.S. banks, bank holding companies, and savings associations.
The Federal Reserve Board on Tuesday released a draft interagency notice of proposed rulemaking that would revise the existing risk-based capital framework by giving the vast majority of banks, bank holding companies, and savings associations the option of either continuing to use the existing Basel I-based capital rule or adopting a more risk sensitive rule, known as Basel IA. However, as proposed, Basel IA would not be available to large, complex international banking organizations subject to the proposed Basel II advanced capital framework. "Basel IA is intended as an option for the wide range of institutions that will not be adopting the advanced approaches of Basel II," said Governor Susan S. Bies. "The goal is to improve the Basel I standards by making them somewhat more risk sensitive while at the same time retaining a relatively simple and straightforward approach suitable for all but the largest and most complex institutions."
The Federal Deposit Insurance Corporation (FDIC) today adopted final regulations that implement the Federal Deposit Insurance Reform Act of 2005 passed by Congress earlier this year to create a stronger and more stable insurance system. Among the final regulations is a new rule on the risk-based assessment system that will enable the FDIC to more closely tie each bank's premiums to the risk it poses to the deposit insurance fund. In addition, the FDIC has new flexibility to manage the deposit insurance fund's reserve ratio within a range, which in turn will help prevent sharp swings in assessment rates that were possible under the design of the former system. "Throughout the FDIC's push for deposit insurance reform, our goals have been to provide for long-term stability and less procyclicality in the deposit insurance system," said FDIC Chairman Sheila C. Bair. "This new system will enable the FDIC to achieve our goals, and also will add incentives for good risk management at insured institutions."
IIB and ABN AMRO discussed the following issues related to the United States' implementation of the Accord in the Basel II NPR published on September 25, 2006, and the European Union's implementation of the Accord in its Capital Requirements Directive (CRD): Definition of default. Commenters noted that the EU and US definitions of default are significantly different. For example, the US considers a wholesale obligor to be in default if any wholesale exposure has been placed in a non-accrual status consistent with the Call Report or Thrift Financial Report Instructions. By contrast, the EU considers a wholesale obligor to be in default when the bank makes a determination that the borrower is unlikely to pay its credit obligations to the credit institution in full without recourse by the credit institution to actions such as realizing collateral.
Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. Thank you for the opportunity to discuss the views of the Office of Thrift Supervision (OTS) on the recently proposed Basel II capital framework and to update you on risk-based capital modernization in the U.S. When I testified before this Committee nearly a year ago, I discussed my views on the development of the Basel II framework as of November 2005. I expressed concern about what we had just learned from the quantitative impact study, QIS-4. In particular, I noted that if we applied the emerging U.S. Basel II standard to the portfolios of some of our largest banks, there could be a potentially significant drop in their capital levels and a wide dispersion of capital requirements between banks. I also stated that even beyond these concerns, we had yet to resolve difficult policy issues in the modernization of our risk-based capital standards.
Comptroller of the Currency John C. Dugan told a Senate committee today that the inadequacies of the current Basel I capital regime for the largest internationally active banks are a matter of great concern to the OCC because the agency supervises the five largest banks in the United States, some of which hold more than $1 trillion in assets, have complex balance sheets, take complex risks, and have complex risk management needs that are fundamentally different from those faced by community and mid-size banks. "The new regime is intended not only to align capital requirements more closely to the complex risks inherent in these largest institutions, but just as important—and this is a total departure from the existing capital framework—it would also require them to substantially improve their risk management systems and controls," Mr. Dugan said in testimony before the Senate Committee on Banking, Housing and Urban Affairs.
Statement of Sheila C. Bair Chairman Federal Deposit Insurance Corporation on the Interagency Proposal Regarding the Basel Capital Accord; before the Committee on Banking, Housing and Urban Affairs; U.S. Senate; 10:00 A.M.; Room 538, Dirksen Senate Office Building September 26, 2006 Chairman Shelby, Senator Sarbanes and members of the Committee, I appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation (FDIC) concerning the Basel II international capital accord. The U.S. banking system is a network of institutions that are highly leveraged and whose financial health bears directly on the health of our broader economy. Significant problems or a lack of financial flexibility at many small banks, or at one or more large systemically important banks, can have contagion effects that impose significant costs on the deposit insurance funds and the overall economy.
Summary: The federal bank and thrift regulatory agencies have jointly issued the attached notice of proposed rulemaking (NPR) on possible modifications to the risk-based capital standards for market risk. The proposed rule would incorporate improvements to the current trading book regime as proposed by the Basel Committee on Bank Supervision and the International Organization of Securities Commissions in the joint document The Application of Basel II to Trading Activities and the Treatment of Double Default Effects, published in July 2005. The proposed rule would also apply to certain savings associations, which currently are not covered under the rule. The FDIC will accept comments on the NPR through January 23, 2007. Highlights:
- Applies to banks with aggregate trading assets and liabilities equal to 10 percent or more of quarter-end total assets as reported on the most recent quarterly Call Report or Thrift Financial Report, or equal to $1 billion or more.
Summary: The federal bank and thrift regulatory agencies have jointly issued and are seeking comment on the attached notice of proposed rulemaking (NPR) concerning the domestic application of selected elements of the Basel II capital framework. The proposed rule would require some core banks, and permit other banks, to use an internal ratings-based approach to calculate regulatory credit risk capital requirements and an advanced measurement approach to calculate regulatory operational risk capital requirements. The FDIC will accept comments on the proposal through January 23, 2007. Highlights: In the attached NPR, the agencies: - Propose to apply the rule to banking organizations that (i) have consolidated assets equal to $250 billion or more; (ii) have consolidated total on-balance sheet foreign exposures of $10 billion or more; (iii) elect to use the proposed rule; or (iv) are subsidiaries of a bank or bank holding company that uses the proposed rule.
On August 4, 2003, the agencies issued an advance notice of proposed rulemaking (ANPR) (68 FR 45900) that sought public comment on a new risk-based regulatory capital framework based on the Basel Committee on Banking Supervision (BCBS)2 April 2003 consultative paper entitled "The New Basel Capital Accord" (Proposed New Accord). The Proposed New Accord set forth a "three pillar" framework encompassing risk-based capital requirements for credit risk, market risk, and operational risk (Pillar 1); supervisory review of capital adequacy (Pillar 2); and market discipline through enhanced public disclosures (Pillar 3). The Proposed New Accord incorporated several methodologies for determining a bank's risk-based capital requirements for credit, market, and operational risk.
The agencies have published a joint notice of proposed rulemaking entitled Risk¬Based Capital Standards: Advanced Capital Adequacy Framework (the NPR). The NPR describes a new regulatory capital framework for U.S. banks that qualify for and adopt the advanced internal ratings-based (AIRB) approach for credit risk and the advanced measurement approach (AMA) for operational risk (together, the advanced approaches). Included within the NPR are requirements for public disclosure of certain information at the consolidated banking organization level as well as a reference to certain additional regulatory reporting requirements for depository institutions (DIs) and BHCs. The additional regulatory reporting requirements referenced within the NPR, and described more fully herein, comprise the agencies' proposed regulatory reporting requirements.
The federal bank and thrift regulatory agencies announced today that they will request public comment on a notice of proposed rulemaking (NPR) that would implement new risk-based capital requirements in the United States for large, internationally active banking organizations. The NPR details the agencies' plans for implementing the Basel Committee on Banking Supervision's (BCBS) new capital accord (Basel II) that was issued in 2004. The agencies also will request comment on proposed Basel II supervisory reporting templates. The Federal Reserve Board (Board), the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) first adopted risk-based capital standards in 1989. Those standards were based on the Basel Capital Accord that the BCBS originally issued in 1988 (Basel I). For banking organizations that meet qualifying criteria, the Basel II NPR would replace U.S. rules implementing Basel I. The proposed framework would be mandatory for large, internationally active banking organizations and optional for others.
Let me begin by thanking Andrew Hilton and CSFI for inviting me here this evening. These roundtables provide an excellent forum for the open discussion of the critical issues facing the financial sector today, and I applaud the independent thinking that the CSFI brings to these events.
Tonight I would like to discuss one of the most significant recent developments in the financial sector - the Basel II capital accord - which has certainly generated its fair share of controversy and taken quite a few years to get where we are now. In the U.S., a draft Notice of Proposed Rulemaking has at long last been released. Publications of the proposal will mark the final stage in our consultative process, in which comments are widely solicited, seriously evaluated, and in some cases intensely debated prior to the formulation of final implementing regulations. While this marks an important milestone, I can't help but be reminded of the famous Churchill line about this being not even the beginning of the end, but perhaps the end of the beginning. More prosaically, while much work has been done, much work remains before we have an up-and-running, fully supervised, and fully reliable Basel II risk-based capital regime.
In a speech today before the Conference of State Bank Supervisors in Norfolk, Virginia, Federal Deposit Insurance Corporation Acting Chairman Martin Gruenberg outlined overall capital objectives contained in the proposed rule for proceeding with Basel II in the U.S. Basel II is a new, international standard for the way the largest banks calculate their capital levels. "Basel II was intended to bring about technical improvements in the risk-sensitivity of bank capital in the United States while broadly maintaining the overall level of risk-based capital requirements," Acting Chairman Gruenberg told the group. "I think those are both worthy goals, and the achievement of both goals is essential for the safety and soundness of the U.S. banking system."
An interagency notice of proposed rulemaking (NPR) that would implement Basel II risk-based capital requirements in the United States for large, internationally active banking organizations was made public Thursday by the Federal Reserve Board. The proposed rule would require the largest internationally active banks to enhance the measurement and management of their risks, including credit risk and operational risk. It also would require these banks to have rigorous processes for assessing overall capital adequacy in relation to their total risk profile and to publicly disclose information regarding their risk profile and capital adequacy.
"Given the increasing complexity of the activities at our largest banks, and the related risks of those activities, I fully support efforts to develop a more appropriately risk-sensitive capital framework for those institutions," said Board Chairman Ben S. Bernanke. "The current Basel I framework has become increasingly inadequate for capturing the risks at large, complex U.S. banking organizations."
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In testimony before the Senate Banking Committee this morning, FDIC Chairman Donald Powell underscored the need to maintain Prompt Corrective Action (PCA) regulations, particularly existing U.S. leverage requirements, as part of the U.S. implementation of the Basel II Framework, an international effort to modernize the bank capital regime.
WASHINGTON- Comptroller of the Currency John C. Dugan approved today an advance notice of proposed rule making (ANPR) seeking public comment on a proposal intended to improve risk-based capital rules for U.S. institutions without the expense and complexity of the Basel II framework. The U.S. banking agencies plan to address implementation of the Basel II framework in a separate rulemaking. "Our primary goal is to increase the risk sensitivity of our domestic risk-based capital rules without unduly increasing regulatory burden," Comptroller Dugan said. "This is no small challenge and we cannot easily accomplish that goal without substantial input from the banking industry and other interested parties." Current risk-based capital rules are the same for all banks. The OCC has heard concern voiced by a number of banks and industry groups that banks operating under Basel II might gain a competitive edge over banks that would not be governed by the Basel II framework.
">U. S. Implementation of Basel II: Objectives of Basel Accord Advance a “three- pillar ” approach –Pillar 1 - - minimum capital requirement –Pillar 2 - - supervisory oversight –Pillar 3 - - heightened market discipline Develop a measure of capital that is: –more risk sensitive than the current approach –better suited to the complex activities of internationally-active banks –capable of adapting to market and product evolution
assessments of capital adequacy
The four Federal banking agencies (the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision) today announced their revised plans for the U.S. implementation of the "International Convergence of Capital Measurement and Capital Standards: A Revised Framework," otherwise known as Basel II. The agencies previously announced on April 29, 2005 that they were delaying issuance of a notice of proposed rulemaking (NPR), pending additional analysis of the quantitative impact study (QIS4) submissions. The agencies intend to move forward with an NPR for domestic implementation of Basel II, but plan to introduce additional prudential safeguards in the NPR to address concerns identified in the analysis of the results of the QIS4 conducted with the industry. The agencies expect that the U.S. Basel II proposal will be available in the first quarter of 2006.
The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved an interagency advance notice of proposed rulemaking (ANPR) to solicit comments on the way that the vast majority of banks and thrifts in the U.S. calculate their minimum capital requirements. This framework is sometimes referred to as Basel I-A because it is anticipated to apply to banks that do not adopt the international Basel II Capital Accord. That standard, which is expected to only cover the largest and most complex banks and thrifts in the U.S., is moving through a separate rulemaking process, with a proposed rule targeted to become available the 1st quarter of 2006. The Basel II standard is intended to strengthen the regulation of large, complex banking companies by making their capital requirements more sensitive to changes in risk. The prospect of reductions in risk-based capital requirements under the Basel II standard has given rise to competitive equity concerns among smaller banks and thrifts. The ANPR that the Board approved today is intended, in part, to provide these institutions an opportunity to comment formally about these competitive issues, and what the federal banking regulators should do about them.
WASHINGTON -- Comptroller of the Currency John C. Dugan told the Senate Banking Committee today that the goal of the Basel II Capital Framework – and a separate initiative for smaller institutions – will substantially enhance safety and soundness.“Basel II will promote significant advances in risk management that will benefit supervisors and banks alike and substantially enhance safety and soundness,” Mr. Dugan said in testimony before the Senate panel. However, the Basel Framework will inevitably require adjustments to address supervisory concerns, Mr. Dugan said. While the recent Quantitative Impact Study 4 (QIS-4) of the Capital Framework’s impact on large U.S. banks showed widely different results for participating institutions and suggested the possibility of substantial reductions in capital, the Comptroller said it is important now to see how live systems operate in a transition period. “We need to observe live systems in operation – and subject them to rigorous supervisory scrutiny – before we will be able to rely on Basel II for regulatory capital purposes,” he said. To accomplish that, Mr. Dugan said, the upcoming Basel II rulemakings will provide a meaningful transition period during which regulators can observe and scrutinize Basel II systems while strictly limiting, through a system of simple and conservative capital floors, potential reductions in capital requirements.
I. Introduction Good morning, Chairman Shelby, Ranking Member Sarbanes, and Members of the Committee. Thank you for the opportunity to discuss the views of the Office of Thrift Supervision on the development of the Basel II capital framework in the United States for our larges U.S. financial institutions and the parallel modernization of Basel I for our institutions. The development of Basel II has been underway, internationally, for a number of years. In the Uni
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