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
Parallel run and transitional floor periods
Under
the proposed and final rules, once a bank has adopted
its implementation plan, it must complete a satisfactory
parallel run before it may use the advanced approaches
to calculate its risk-based capital requirements.
The
proposed rule defined a satisfactory parallel run as a
period of at least four consecutive calendar quarters
during which a bank complied with all of the
qualification requirements to the satisfaction of its
primary Federal supervisor.
Many
commenters objected to the proposed requirement that the
bank had to meet all of the qualification requirements
before it could begin the parallel run period.
The
agencies recognize that certain qualification
requirements, such as outcomes analysis, become more
meaningful as a bank gains experience employing the
advanced approaches.
The
agencies therefore are modifying the definition of a
satisfactory parallel run in the final rule.
Under
the final rule, a satisfactory parallel run is a period
of at least four consecutive calendar quarters during
which the bank complies with the qualification
requirements to the satisfaction of its primary Federal
supervisor.
This
revised definition, which does not contain the word
“all,” recognizes that the qualification of banks for
the advanced approaches during the parallel run period
will be an iterative and ongoing process.
The
agencies intend to assess individual advanced approaches
methodologies through numerous discussions, reviews,
data collection and analysis, and examination
activities.
The
agencies also emphasize the critical importance of
ongoing validation of advanced approaches methodologies
both before and after initial qualification decisions.
A
bank’s primary Federal supervisor will review a bank’s
validation process and documentation for the advanced
approaches on an ongoing basis through the supervisory
process.
The
bank should include in its implementation plan the steps
it will take to enhance compliance with the
qualification requirements during the parallel run
period.
Commenters also requested the flexibility, permitted
under the New Accord, to apply the advanced approaches
to some portfolios and other approaches (such as the
standardized approach in the New Accord) to other
portfolios during the transitional floor periods.
The
agencies believe, however, that banks applying the
advanced approaches should move expeditiously to extend
the robust risk measurement and management practices
required by the advanced approaches to all material
exposures.
To
preserve these positive risk measurement and management
incentives for banks and to prevent “cherry picking” of
portfolios, the final rule retains the provision in the
proposed rule that states that a bank may enter the
first transitional floor period only if it fully
complies with the qualification requirements in section
22 of the rule.
As
described above, the final rule allows a simplified
approach for portfolios that are, in the aggregate,
immaterial to the bank.
Another concern identified by commenters regarding the
parallel run was the asymmetric treatment of mergers and
acquisitions consummated before and after the date a
bank qualified to use the advanced approaches.
Under
the proposed rule, a bank qualified to use the advanced
approaches that merged with or acquired a company would
have up to 24 months following the calendar quarter
during which the merger or acquisition was consummated
to integrate the merged or acquired company into the
bank’s advanced approaches capital calculations.
In
contrast, the proposed rule could be read to provide
that a bank that merged with or acquired a company
before the bank qualified to use the advanced approaches
had to fully implement the advanced
approaches for the merged or acquired company before the
bank could qualify to use the advanced approaches.
The
agencies agree that this asymmetric treatment is not
appropriate.
Accordingly, the final rule applies the merger and
acquisition transition provisions both before and after
a bank qualifies to use the advanced approaches.
The
merger and acquisition transition provisions are
described in section III.D. of this preamble.
During
the parallel run period, a bank continues to be subject
to the general risk based capital rules but
simultaneously calculates its risk-based capital ratios
under the advanced approaches.
During
this period, a bank will report its risk-based capital
ratios under the general risk-based capital rules and
the advanced approaches to its primary Federal
supervisor through the supervisory process on a
quarterly basis.
The
agencies will share this information with each other.
As
described above, a bank must provide its board-approved
implementation plan to its primary Federal supervisor at
least 60 days before the bank proposes to begin its
parallel run period.
A bank
also must receive approval from its primary Federal
supervisor before beginning its first transitional floor
period.
In
evaluating whether to grant approval to a bank to begin
using the advanced approaches for risk-based capital
purposes, the bank’s primary Federal supervisor must
determine that the bank fully complies with all the
qualification requirements, the bank has conducted a
satisfactory parallel run, and the bank has an adequate
process to ensure ongoing compliance with the
qualification requirements.
To
provide for a smooth transition to the advanced
approaches, the proposed rule imposed temporary limits
on the amount by which a bank’s risk-based capital
requirements could decline over a period of at least
three years (that is, at least four consecutive calendar
quarters in each of the three transitional floor
periods).
Based
on its assessment of the bank’s ongoing compliance with
the qualification requirements, a bank’s primary Federal
supervisor would determine when the bank is ready to
move from one transitional floor period to the next
period and, after the full transition has been
completed, to exit the last transitional floor period
and move to stand-alone use of the advanced approaches.
Table
A sets forth the proposed transitional floor periods for
banks moving to the advanced approaches:
During
the proposed transitional floor periods, a bank would
calculate its risk weighted assets under the general
risk-based capital rules.
Next,
the bank would multiply this risk-weighted assets amount
by the appropriate floor percentage in the table above.
This
product would be the bank’s “floor-adjusted”
risk-weighted assets.
Third,
the bank would calculate its tier 1 and total risk-based
capital ratios using the definitions of tier 1
and
tier 2 capital (and associated deductions and
adjustments) in the general risk-based capital rules for
the numerator values and floor-adjusted risk-weighted
assets for the denominator values.
These
ratios would be referred to as the “floor-adjusted
risk-based capital ratios.”
The
bank also would calculate its tier 1 and total
risk-based capital ratios using the advanced approaches
definitions and rules.
These
ratios would be referred to as the “advanced approaches
risk-based capital ratios.”
In
addition, the bank would calculate a tier 1 leverage
ratio using tier 1 capital as defined in the proposed
rule for the numerator of the ratio.
During
a bank’s transitional floor periods, the bank would
report all five regulatory capital ratios described
above – two floor-adjusted risk-based capital ratios,
two advanced approaches risk-based capital ratios, and
one leverage ratio.
To
determine its applicable capital category for PCA
purposes and for all other regulatory and supervisory
purposes, a bank’s risk-based capital ratios during the
transitional floor periods would be set equal to the
lower of the respective floor-adjusted risk-based
capital ratio and the advanced approaches risk-based
capital ratio.
During
the proposed transitional floor periods, a bank’s tier 1
capital and tier 2 capital for all
non-risk-based-capital supervisory and regulatory
purposes (for example, lending limits and Regulation W
quantitative limits) would be the bank’s tier 1 capital
and tier 2 capital as calculated under the advanced
approaches.
Thus,
for example, to be well capitalized under PCA, a bank
would have to have a floor-adjusted tier 1 risk-based
capital ratio and an advanced approaches tier 1
risk-based capital ratio of 6 percent or greater, a
floor-adjusted total risk-based capital ratio and an
advanced approaches total risk-based capital ratio of 10
percent or greater, and a tier 1 leverage ratio of 5
percent or greater (with tier 1 capital calculated under
the advanced
approaches).
Although the PCA rules do not apply to BHCs, a BHC would
be required to report all five of these regulatory
capital ratios and would have to meet applicable
supervisory and regulatory requirements using the lower
of the respective floor-adjusted risk-based capital
ratio and the advanced approaches risk-based capital
ratio.
Under
the proposed rule, after a bank completed its
transitional floor periods and its primary Federal
supervisor determined the bank could begin using the
advanced approaches with no further transitional floor,
the bank would use its tier 1 and total risk based
capital ratios as calculated under the advanced
approaches and its tier 1 leverage ratio calculated
using the advanced approaches definition of tier 1
capital for PCA and all other supervisory and regulatory
purposes.
Although one commenter supported the proposed
transitional provisions, many
commenters objected
to these transitional provisions. Commenters urged the
agencies to
conform the transitional provisions to those in the New
Accord.
Specifically, they requested that the three transitional
floor periods be reduced to two periods and that the
transitional floor percentages be reduced from 95
percent, 90 percent, and 85 percent to 90 percent and 80
percent. Commenters also requested that the transitional
floor calculation methodology be conformed to the
generally less restrictive methodology of the New
Accord.
Moreover, they expressed concern about the requirement
that a bank obtain supervisory approval to move from one
transitional floor period to the next, which could
potentially extend each floor period beyond four
calendar quarters.
The
agencies believe that the prudential transitional
safeguards are necessary to address concerns identified
in the analysis of the results of QIS-4.28
Specifically, the transitional safeguards will ensure
that implementation of the advanced approaches will not
result in a precipitous drop in risk-based capital
requirements, and will provide a smooth transition
process as banks refine their advanced systems.
Banks’
computation of risk-based capital requirements under
both the general risk-based capital rules and the
advanced approaches during the parallel run and
transitional floor periods will help the agencies assess
the impact of the advanced approaches on overall capital
requirements, including whether the change in capital
requirements relative to the general risk-based capital
rules is consistent with the agencies’ overall capital
objectives.
Therefore, the agencies are adopting in this final rule
the proposed level, duration, and calculation
methodology of the transitional floors, with the revised
process for determining when banks may exit the third
transitional floor period discussed in section I.E.,
above.
Under
the final rule, as under the proposed rule, banks that
meet the threshold criteria in section 1(b)(1) (core
banks) as of the effective date of this final rule, and
banks that opt in pursuant to section 1(b)(2) at the
earliest possible date, must use the general risk-based
capital rules both during the parallel run and as a
basis for the transitional floor calculations.
Should
the agencies finalize a standardized risk-based capital
rule, the agencies expect that a bank that opts in after
the earliest possible date or becomes a core bank after
the effective date of the final rule would use the
risk-based capital regime (the general risk-based
capital rules or the standardized risk-based capital
rules) used by the bank immediately before the bank
begins its parallel run both during the parallel run and
as a basis for the transitional floor calculations.
Under
the final rule,
2008 is
the first possible year for a bank to begin its parallel
run and 2009 is the first possible year for a bank to
begin its first of three transitional floor periods.
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