| The four main US regulators have released the draft of their notice of proposed rulemaking (NPR) regarding the implementation of Basel II in the US. The unusual step of releasing a draft ahead of the expected formal issue in May has been taken in view of the complexity of the NPR and the concern regarding the impact on the capital adequacy standards of US institutions. This concern was increased by the release of the QIS 4 survey results - although there is a growing view that these may have been over pessimistic.
There is little if anything in the NPR that changes the overall implementation of Basel II. The US regulators are proposing tight supervision of the process, will require increased reporting, and are making local decisions as to risk mitigation opportunities. However these have always been considered areas where national supervisory bodies can apply their own interpretations and methods.
The main differences to the BIS approaches lie in the scope of the regulation and in its transition period. As expected, the NPR is limiting Basel II to the larger banks and has clarified the qualifications, as well as affirming that advanced approaches to credit and operational risk-derived capital only will be used. The NPR confirms that, mainly due to the constrained regulatory timetable, parallel running and cutover start in 2008 and 2009 respectively, one year later than the BIS expectations. It also proposes a more restrictive transition period spread over a minimum of the first 3 years of implementation when capital levels may not fall below 95%, 90% and 85% of current capital rules, and that the federal supervisor would have to agree when a bank can move to the lower level. This is far stricter than the BIS recommendation of a two-year transition period with floor levels of 90% and 80%. On this basis it will be 2012 before US and European banks are operating under the same capital rules.
The NPR for Basel II in the US can be found on the Federal Reserve website.
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