Basel
ii in the United States of America
From the
Basel ii
Compliance Professionals Association (BCPA),
the largest association of Basel ii Professionals in the
world
Final Rule, USA: Risk-Based Capital Standards:
Advanced Capital Adequacy Framework — Basel II
C.
Overview of Final Rule
The
final rule maintains the general
risk-based capital rules’ minimum tier 1 risk
based capital ratio of 4.0 percent and total
risk-based capital ratio of 8.0 percent.
The
components of tier 1 and total capital in the final rule
are also the same as in the general risk-based capital
rules, with a few adjustments described in more detail
below.
The
primary difference between
the general risk-based capital rules and the final rule
is the methodologies used for
calculating risk-weighted assets.
Banks
applying the final rule generally
must
use their internal risk measurement systems
to calculate the inputs for determining the
risk-weighted asset amounts for
(i)
general credit risk (including wholesale and retail
exposures);
(ii)
securitization exposures;
(iii)
equity exposures; and
(iv)
operational risk.
In
certain cases, however, banks must use external ratings
or supervisory risk weights to determine risk-weighted
asset amounts.
Each
of these areas is discussed below.
Banks
using the final rule also are
subject to supervisory review of their capital adequacy
(Pillar 2) and certain
public disclosure requirements to foster transparency
and market discipline (Pillar 3).
In
addition, each bank using the advanced approaches
remains subject to the tier 1 leverage ratio
requirement, approaches remains subject to the prompt
corrective action (PCA) thresholds.
Banks
using the advanced approaches also
remain subject to the market risk rule, where
applicable.
Under
the final rule, a bank must identify whether each of its
on- and off-balance sheet exposures is a wholesale,
retail, securitization, or equity exposure.
Assets
that are not defined by any exposure category (and
certain immaterial portfolios of exposures)
generally are assigned risk-weighted asset amounts equal
to their carrying value (for onbalance
sheet
exposures) or notional amount (for off-balance sheet
exposures).
Wholesale exposures under the final rule include most
credit exposures to companies, sovereigns, and other
governmental entities.
For
each wholesale exposure, a bank must assign four
quantitative risk parameters:
PD
(which is expressed as a decimal (that is, 0.01
corresponds to 1 percent) and is an estimate of the
probability that an obligor will default over a one-year
horizon);
LGD
(which is expressed as a decimal and reflects an
estimate of the economic loss rate if a default occurs
during economic downturn conditions);
EAD
(which is measured in dollars and is an estimate of the
amount that would be owed to the bank at the time of
default);
and M
(which is measured in years and reflects the effective
remaining maturity of the exposure).
Banks
may factor into their risk parameter estimates the risk
mitigating impact of collateral, credit derivatives, and
guarantees that meet certain criteria.
Banks
must input the risk parameters for each wholesale
exposure into an IRB risk-based capital formula to
determine the risk-based capital requirement for the
exposure.
Retail
exposures under the final rule include most credit
exposures to individuals and small credit exposures to
businesses that are managed as part of a segment of
exposures with similar risk characteristics and not
managed on an individual-exposure basis.
A bank
must classify each of its retail exposures into one of
three retail subcategories – residential mortgage
exposures; QREs, such as credit cards and overdraft
lines; and other retail exposures.
Within
these three subcategories, the bank must group exposures
into segments with similar risk characteristics.
The
bank must then assign the risk parameters PD, LGD, and
EAD to each retail segment.
The
bank may take into account the risk mitigating impact of
collateral and guarantees in the segmentation
process and in the assignment of risk parameters to
retail segments.
Like
wholesale exposures, the risk parameters for each retail
segment are used as inputs into an IRB risk based
capital formula to determine the risk-based capital
requirement for the segment.
For
securitization exposures, the bank must apply one of
three general approaches, subject to various conditions
and qualifying criteria:
-
the Ratings-Based Approach
(RBA), which uses external ratings to risk-weight
exposures;
-
the Internal Assessment Approach (IAA), which
uses internal ratings to risk-weight exposures to
asset-backed commercial paper programs (ABCP programs);
-
or the
Supervisory Formula
Approach (SFA), which uses bank inputs that are entered
into a supervisory formula to risk-weight exposures.
Securitization exposures in the form of gain-on-sale or
credit enhancing interest-only strips (CEIOs)
and
securitization exposures that do not qualify for the
RBA, the IAA, or the SFA must be deducted from
regulatory capital.
Banks
may use an internal models approach (IMA) for
determining risk-based capital requirements for equity
exposures, subject to certain qualifying criteria and
floors.
If a
bank does not have a qualifying internal model for
equity exposures, or chooses not to use such a model,
the bank must apply a
simple risk weight approach (SRWA)
in which publicly traded equity exposures generally are
assigned a 300 percent risk weight and non-publicly
traded equity exposures generally are assigned a 400
percent risk weight.
Under
both the IMA and the SRWA, equity exposures to certain
entities or made pursuant to certain statutory
authorities (such as community development laws)
are subject to a
0 to
100 percent risk weight.
Banks
must develop qualifying AMA systems to determine
risk-based capital requirements for operational risk.
Under
the AMA, a bank must use its own methodology to identify
operational loss events, measure its exposure to
operational risk, and assess a risk-based capital
requirement for operational risk.
Under
the final rule, a bank must calculate its tier 1 and
total risk-based capital ios by dividing tier 1 capital
by total risk-weighted assets and by dividing total
qualifying capital by total risk-weighted assets,
respectively.
To
calculate total risk weighted ets, a bank must first
convert the dollar risk-based capital requirements for
exposures produced by the IRB risk-based capital
approaches and the AMA into risk weighted asset amounts
by multiplying the capital requirements by 12.5 (the
inverse of the overall 8.0 percent risk-based capital
requirement).
After
determining the risk weighted asset amounts for credit
risk and operational risk, a bank must sum these
amounts and then subtract any excess eligible credit
reserves not included in tier 2 capital to determine
total risk-weighted assets.
The
final rule contains specific public disclosure
requirements to provide important information to market
participants on the capital structure, risk exposures,
risk assessment processes, and, hence, the capital
adequacy of a bank.
The
public disclosure requirements apply only to the DI or
bank holding company representing the top
consolidated level of the banking group that is subject
to the advanced approaches, unless the entity is a
subsidiary of a non-U.S. banking organization
that is
subject to comparable disclosure requirements in its
home jurisdiction.
All
banks subject to the rule, however, must disclose total
and tier 1 risk-based capital ratios and the components
of these ratios.
The
agencies also proposed a package of regulatory reporting
templates for the agencies’ use in assessing and
monitoring the levels and components of bank risk-based
capital requirements under the advanced approaches.
These
templates will be finalized shortly.
The
agencies are aware that the fair value option in
generally accepted accounting principles as used in the
United States (GAAP) raises potential risk-based capital
issues not contemplated in the development of the New
Accord.
The
agencies will continue to analyze these issues and may
make changes to this rule at a future date as necessary.
The
agencies would address these issues working with the
BCBS and other supervisory and regulatory authorities,
as appropriate.
Return
to Table of Contents
Return to
Index
Read more
about our
Certified Basel
ii Professional (CBiiPro)
program
Read more
about our Certified Pillar 2 Expert
(CP2E)
program
Read more about our
Certified Pillar 3 Expert
(CP3E)
program
Read
more about our Certified
Stress Testing Expert (CSTE)
program
 | |
