Basel II – US regulators agree to go with the mainstream on implementation

The four US national regulators, the Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation reached agreement last Friday regarding the implementation of Basel II in the US resolving major outstanding issues.

Although the agencies have agreed to proceed with caution, and have retained the transitional (three phase) floor periods outlined in the NPR, they have agreed to eliminate the contentious clause concerning a 10% limitation on aggregate reductions in risk-based capital requirements (the "alternative minimum capital" clause), and the US implementation now looks like being technically consistent in most respects with international approaches to Basel II.

After the end of the second transition year period, there will be a study to evaluate the new framework for material deficiencies. If this finds there are ones that cannot be addressed by existing tools, banks will not be permitted to exit the third transitional period unless the deficiencies are addressed by changes to the regulation. However, if a primary supervisor disagrees with a finding of material deficiency, it may authorise banks it supervises to exit the third transitional period, but only if it first provides a public report explaining its reasoning.

The agencies also agreed to issue a new rule that would provide all second tier banks with the option to adopt the standardised of the Basel II approaches. This replaces the earlier proposed "Basel IA" option. The agencies will finalise this option before the core banks begin the first transition period year using the advanced approaches of Basel II.

Federal Reserve Board Governor Randall Kroszner said that "We are working diligently to ensure that Basel II implementation in the United States is largely consistent with international approaches. Our forward momentum in developing a final Basel II rule will promote continued improvements in banks' risk-management practices and maintain capital levels in the U.S. banking system that are appropriate and risk sensitive."

Federal Reserve Chairman Ben Bernanke said the agreement paves the way for "a modern, risk-sensitive capital standard to protect the safety and soundness of our large, complex, internationally active banks." "I'm pleased that Governor Kroszner and the policymakers representing the other banking agencies have reached a consensus, one that will pave the way for implementation of a modern, risk-sensitive capital standard to protect the safety and soundness of our large, complex, internationally active banks", he said.

US Treasury Under Secretary for Domestic Finance Robert Steel made the following statement: "The federal financial regulators must be commended today for their work on Basel II. Resolution on this matter is an essential component of any effort to modernize our regulatory structure and to strengthen American capital markets' competitiveness."