Timetable forces disclosure of US Basel II thinking
WASHINGTON - The challenging US schedule for implementing the international Basel II bank safety rules has prompted US banking supervisors to give early disclosure of their current thinking on the qualifications needed for the advanced risk measurement approaches.
The four federal banking supervisors responsible for implementing Basel II said jointly in late January they were establishing a set of aims to aid the qualification process within the tight schedule that envisages the `bifurcated' US Basel II policy taking effect from January 2008.
In the US, the complex, risk-focused Basel II capital adequacy rules are expected by industry analysts to apply to 20 or more of the country's largest banks, representing the bulk of US banking assets. These banks will have to adopt the most sophisticated Basel II methods of measuring their credit and operational risks. The rest of the US banking system, comprising thousands of smaller banks, will remain on the current, and simpler, Basel I capital rules that date from 1988.
The four federal agencies - the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision - said improving their own familiarity with banks' implementation plans would greatly aid the qualification process.
In turn, the agencies intend proposing a set of requirements for banks in terms of their qualifications for using sophisticated risk measurement methods, namely the advanced internal ratings-based (IRB) approach for credit risk and advanced measurement approaches (AMA) for operational risk. These requirements will be contained in the notice of proposed rule-making on Basel II that the agencies plan to issue in mid-2005.
The agencies plan to issue a final Basel II rule, with updated guidance, in the middle of next year. From January 2007 they plan `parallel running', under which a bank must conduct a test run of its IRB and AMA systems for at least a full year prior to going live with them.
"These milestones present enormous challengers for institutions and supervisors," the agencies said in their statement.
Under US plans, Basel II will be mandatory for a core group, estimated by analysts at around eight, of the very largest banks - those with assets of $250 billion or more. Another group of a dozen or so - the opt-in banks - are expected to choose to adopt Basel II.
January 28 was the deadline for some 30 US banks taking part in a Basel II quantitative impact study, known as QIS 4, to complete their forms. QIS 4, which was organised by the US supervisors, aims to assess the effects on the banks of adopting Basel II. Regulators say they don't expect all 30 banks to adopt the new capital rules.
In their January statement the US supervisors set out aims that include ensuring that the agencies `normalised' decisions on AMA and IRB implementation into their supervisory processes. This will involve increased use of different skills by the supervisors, especially in terms of quantitative experts.
The qualifying process will be continuous and implementation plans will be critical in communications between a bank's home and host country supervisors. The agencies intend incorporating implementation plans into quality assurance efforts. And the development of an effective implementation plan is expected to be a necessary, but not sufficient, condition of a bank qualifying to use AMA and IRB. The statement lists the details of what's required of a bank in order to qualify.
US Federal Reserve Board governor Ben Bernanke said in January that difficult challenges lie ahead in implementing Basel II. Getting myriad details right will be critical to the success of the regime, he said.
But Kevin Bailey, deputy comptroller at the Office of the Comptroller of the Currency, has said pragmatic solutions will be found to the thorny issues that surround AMA implementation and which divide US regulators.
