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Last Friday, the US Federal Reserve Board finally approved the final rules for implementing Basel II in the US for core banks - those with at least $250 billion in total assets or at least $10 billion in foreign exposure. Of the other US regulators, the Comptroller of the Currency and the Office of Thrift Supervision (links to their press releases) approved the Basel II rules on the previous day, and the Federal Insurance Deposit Corporation is expected to approve the plan when it meets today.
The Fed say that their implementation is “technically consistent in most respects with international approaches” but will include US-specific safeguards. Key in these is the retention of the current leverage ratio and prompt corrective action (PCA) requirements. The agencies have also retained the requirement that core banks must adopt the Basel II Advanced Approaches to calculating risk-based capital. The US ruling will be optional for non-core banks.
“Basel II is a modern, risk-sensitive capital standard that will protect the safety and soundness of our large, complex, internationally active banking organizations. The new framework is designed to evolve over time and adapt to innovations in banking and financial markets, a significant improvement from the current system,” said Federal Reserve Board Chairman Ben S. Bernanke.
The implementation plan is that banking organisations satisfactorily complete a four-quarter parallel run with a further series of three transitional periods of least one year (during which there would be floors on any reduction in risk-based capital requirements) before being allowed to operate under Basel II without floors limits. The Fed also committed to work with the other agencies to conduct ongoing analysis of the framework to ensure Basel II is working as intended.
“To ensure that banks maintain strong capital ratios, we will diligently monitor Basel II during every step of its implementation,” Federal Reserve Board Governor Randall S. Kroszner said. “Our goal is for banks to have strong risk-based capital ratios that are substantially more representative of risk profiles, and more sensitive to changes in those risk profiles than they are today. If our analysis shows that any part of this goal is not being met, we will consider ways to improve the framework.”
All the agencies have also committed to adopt a risk-based capital rule for all non-core banking organisations based on the Basel II standardised approach.
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