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The US regulatory agencies (Federal Reserve, OTC, OPTS and FDIC) on Tuesday issued the final US guidance outlining the supervisory review process (Pillar 2) for banking organisations implementing the Basel II Advanced Measurement Approach (AMA). This final guidance relates to the supervisory review and is aimed at helping banking organisations meet the qualification requirements in the advanced approaches rule, which took effect on April 1st.
This guidance supplements the advanced approaches final rulings issued last December 7th and details the agencies’ standards for ensuring that each institution subject to the advanced approaches rule has a sufficiently rigorous process for assessing its overall capital adequacy in relation to its risk profile, and a comprehensive strategy for maintaining appropriate capital levels. It covers comprehensive supervisory review of capital adequacy, compliance with regulatory capital requirements, and internal capital adequacy assessment process (ICAAP).
Previous comments received from banks and trade associations viewed the guidance as overly prescriptive and expressed concern that the guidance appeared to suggest that increases in risk should result in greater capital, even if an institution already maintains a substantial capital buffer. The agencies have revised the guidance to clarify that an increase in risk may not necessarily require an increase in capital where the bank already holds capital at a level exceeding what its internal processes and supervisors regard as adequate.
Other previous comments expressed concern that liquidity risk and stress testing were not included. The new guidance now says that institutions should now consider the capital adequacy implications of liquidity risk within the ICAAP. The agencies have also added that they regard stress testing as a critical and, although there are no prescriptive stress testing requirements in Pillar 2, institutions should use stress testing or similar exercises in their ICAAP to consider the consequences of unlikely but severe events and outcomes as an input to the capital adequacy assessment process.
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