In the much-awaited Notification of Proposed Rulemaking (NPR), issued this week, the US regulators have made two major changes to their proposed implementation of Basel II in the USA. The change that lobbyists have been pressing for is the abandonment of the ruling that banks could only adopt the most advanced approaches to capital calculation. The other major point is the re-emphasis on a three year transition period during which individual capital requirements would not be allowed to drop more that 5% in any year, and that there would be a floor across the industry for any cumulative change in levels.
As reported in Chase Cooper Regulatory News last month (see "Basel II – US approval slips whilst large banks look for changes"), there has been intensive lobbying from the industry and its associations regarding the adoption of approaches to the calculation of regulatory capital. This has been reflected in the latest NPR and the proposal is that banks may adopt the less complicated standardised approaches to capital calculation. This satisfies those banks that felt that there was little or no capital benefit in the advanced approaches in return for a lot of complicated systems and procedures developments. In a press release, the American Bankers Association (ABA) supported this decision and said "We applaud the FDIC for including the Basel II Standardised Approach in the options up for discussion. It very well may present an optimal choice for many banks, large and small. Indeed, a menu of capital options is likely to be the only way to have rules that are a good real-life fit for an industry that includes the smallest community banks and the largest internationally active financial companies."
However the regulators reiterated their determination that current US bank capital levels would not be eroded. The proposed rules would impose tiered floors to limit the decline in a three-year transition period to no more than 5 percent annually or 15 percent for the full three-year period. This transition period, more severe than the Basel standard, would not begin any sooner than January 2008, a year later than much of the rest of the world. The regulators also said that a 10 percent aggregate decline in risk-based capital among US banks implementing Basel II would trigger another review of the standards.
The NPR now goes into a 120 day public comment period before being finalised.
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