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. Reservation of Authority
The proposed rule restated the authority
of a bank’s primary Federal supervisor to require a bank to hold an overall amount
of capital greater than would otherwise be required under the rule if the agency
determined that the bank’s risk-based capital requirements were not commensurate with
the bank’s credit, market, operational, or other risks.
In
addition, the preamble of the
proposed rule noted the agencies’ expectation that there may be instances when the rule would
generate a risk-weighted asset amount for specific exposures that is not
commensurate with the risks posed by such exposures.
Accordingly,
under the proposed rule, the
bank’s primary Federal supervisor would retain the authority to require the bank
to use a different risk-weighted asset amount for the exposures or to use different risk
parameters (for wholesale or retail exposures) or model assumptions (for modeled equity or
securitization exposures) than those required when
calculating the risk-weighted asset amount for those
exposures.
Similarly, the proposed rule provided explicit authority
for a bank’s primary Federal supervisor to require the bank to assign a different
risk-weighted asset amount for operational risk, to change elements of its operational risk
analytical framework (including distributional and dependence assumptions), or to make other
changes to the bank’s operational risk management processes, data and assessment
systems, or quantification systems if the supervisor found that the risk-weighted
asset amount for operational risk produced by the bank
under the rule was not commensurate with the operational
risks of the bank.
Any agency that exercised a reservation of
authority was expected to notify each of the other agencies
of its determination.
Several
commenters raised concerns with
the scope of the reservation of authority, particularly as it would apply
to operational risk.
These commenters asserted, for example, that the agencies should
address identified operational risk-related capital deficiencies
through Pillar 2, rather than
through requiring a bank to adjust input variables or techniques used for the
calculation of Pillar 1 operational risk capital
requirements.
Commenters were concerned that excessive agency Pillar 1
intervention on operational risk might inhibit
innovation.
While the agencies agree that innovation
is important and that general supervisory oversight likely would be sufficient in
many cases to address risk-related capital deficiencies, the agencies also believe
that it is important to retain as much supervisory flexibility as possible as they move
forward with implementation of the final rule.
In general, the proposed reservation of
authority represented a reaffirmation of the current authority of a bank’s primary Federal
supervisor to require the bank to hold an overall amount of regulatory capital or maintain
capital ratios greater than would be required under the
general risk-based capital rules.
There
may be cases where requiring a bank to assign a different risk-weighted asset
amount for operational risk may not sufficiently address problems associated with
underlying quantification practices and may cause an ongoing misalignment between the
operational risk of a bank and the risk-weighted asset amount for operational risk generated by
the bank’s operational risk quantification system.
In view
of this and the inherent flexibility provided for
operational risk measurement under the AMA,
the agencies
believe it is appropriate to articulate the specific measures a primary Federal
supervisor may take if it determines that a bank’s risk-weighted asset amount for operational
risk is not commensurate with the operational risks of the
bank.
Therefore, the final rule retains the reservation of
authority as proposed.
The
agencies emphasize that any decision to exercise this
authority would be made judiciously and that a bank bears the
primary responsibility for maintaining the integrity, reliability, and accuracy of its risk
management and measurement systems.
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