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
II.
Scope
The
agencies have identified three
groups of banks:
(i)
large or internationally active banks that are required
to adopt the advanced approaches (core banks);
(ii)
banks that voluntarily decide to adopt the advanced
approaches (opt-in banks); and
(iii)
banks that do not adopt the advanced approaches (general
banks).
Each
core and opt-in bank is required to
meet certain
qualification requirements to the satisfaction of its
primary Federal supervisor, which in turn will consult
with other relevant supervisors, before the bank may use
the advanced approaches for risk-based capital purposes.
Pillar
1 of the New Accord requires all banks subject to the
New Accord to calculate capital requirements for
exposure to credit risk and operational risk.
The
New Accord sets forth three approaches to calculating
the credit risk capital requirement and
three approaches
to calculating the operational risk capital requirement.
Outside the United States, countries that are replacing
Basel I with the New Accord generally have required all
banks to comply with the New Accord, but have provided
banks the option of choosing among the New Accord’s
various approaches for calculating credit risk and
operational risk capital requirements.
For
banks in the United States, the agencies have taken a
different approach.
This
final rule focuses on the largest and most
internationally active banks
and requires those banks to comply with the most
advanced approaches for calculating credit and
operational risk capital requirements (the IRB and the AMA).
The
final rule allows other U.S. banks to “opt in” to the
advanced approaches.
The
agencies have decided at this time to
require large,
internationally active U.S. banks to use the most
advanced approaches of the New Accord.
The
less advanced approaches of the New Accord lack the
degree of risk sensitivity of the advanced approaches.
The
agencies have the view that risk-sensitive regulatory
capital requirements are integral to ensuring that
large, sophisticated banks and the financial system have
an adequate capital cushion to absorb financial losses.
Also,
the advanced approaches provide more substantial
incentives for banks to improve their risk measurement
and management practices than do the other approaches.
The
agencies do not believe that competitive equity concerns
are sufficiently compelling to warrant permitting large,
internationally active U.S. banks to adopt the
standardized approaches in the New Accord.
A.
Core and Opt-In Banks
Under
section 1(b) of the proposed rule, a DI would be a
core
bank if it met either of two independent threshold
criteria:
(i)
consolidated total assets of $250 billion or more, as
reported on the most recent year-end regulatory reports;
or
(ii)
consolidated total on-balance sheet foreign exposure of
$10 billion or more at the most recent year end.
To
determine total on-balance sheet foreign exposure, a
bank would sum its adjusted cross border
claims, local country claims, and cross-border
revaluation gains calculated in accordance with the
Federal Financial Institutions Examination Council (FFIEC)
Country Exposure Report (FFIEC 009).
Adjusted cross-border claims would equal total cross
border claims less claims with the head office or
guarantor located in another country, plus redistributed
guaranteed amounts to the country of head office or
guarantor.
The
agencies also proposed that a DI would be a core bank if
it is a subsidiary of another DI or BHC that uses the
advanced approaches.
Under
the proposed rule, a U.S.-chartered BHC23
would
be a core bank if the BHC had:
(i)
consolidated total assets (excluding assets held by an
insurance underwriting subsidiary) of $250 billion or
more, as reported on the most recent year-end regulatory
reports;
(ii)
consolidated total on-balance sheet foreign exposure of
$10 billion or more at the most recent year-end; or
(iii)
a subsidiary DI that is a core bank or opt-in bank.
The
agencies included a question in the proposal seeking
commenters’ views on using consolidated total assets
(excluding assets held by an insurance underwriting
subsidiary) as one criterion to determine whether a BHC
would be viewed as a core BHC.
Some
of the commenters addressing this issue supported the
proposed approach, noting it was a reasonable proxy for
mandatory applicability of a framework designed to
measure capital requirements for consolidated risk
exposures of a BHC.
Other
commenters, particularly foreign banking organizations
and their trade associations, contended that the BHC
asset size threshold criterion instead should be $250
billion of assets in U.S. subsidiary DIs.
These
commenters further suggested that if the Board kept the
proposed $250 billion consolidated total BHC assets
criterion, it should limit the scope of this criterion
to BHCs with a majority of their assets in U.S. DI
subsidiaries.
The
Board has decided to retain the proposed approach using
consolidated total assets (excluding assets
held
by an insurance underwriting subsidiary) as one
threshold criterion for BHCs in this final rule.
This
approach recognizes that BHCs can hold similar assets
within and outside of DIs and reduces potential
incentives to structure BHC assets and activities to
arbitrage capital regulations.
The
final rule continues to exclude assets held in an
insurance underwriting subsidiary of a BHC from the
asset threshold because the advancedapproaches were not
designed to address insurance underwriting exposures.
The
final rule also retains the threshold criterion for core
bank/BHC status of consolidated total on-balance sheet
foreign exposure of $10 billion or more at the most
recent year-end.
The
calculation of this exposure amount is unchanged in the
final rule.
In the
preamble to the proposed rule, the agencies also
included a question on potential regulatory burden
associated with requiring a bank that applies the
advanced approaches to implement the advanced approaches
at each subsidiary DI — even if those subsidiary DIs do
not individually meet a threshold criterion.
A
number of commenters addressed this issue.
While
they expressed a range of views, most commenters
maintained that small DI subsidiaries of core banks
should not be required to implement the advanced
approaches.
Rather, commenters asserted that these DIs should be
permitted to use simpler methodologies, such as the New
Accord’s standardized approach.
Commenters asserted there would be regulatory burden and
costs associated with the proposed push-down approach,
particularly if a stand-alone AMA is required at each
DI.
The
agencies have considered comments on this issue and have
decided to retain the proposed approach.
Thus,
under the final rule,
each
DI subsidiary of a core or opt-in bank is itself a core
bank required to apply the advanced approaches.
The
agencies believe that this approach
serves
as an important safeguard against regulatory capital
arbitrage
among affiliated banks that would otherwise be subject
to substantially different capital rules.
Moreover, to calculate its consolidated IRB risk-based
capital requirements, a bank must estimate risk
parameters for all credit exposures within the bank
except for exposures in portfolios that, in the
aggregate, are immaterial to the bank.
Because the consolidated bank must already estimate risk
parameters for all material portfolios of wholesale and
retail exposures in all of its consolidated
subsidiaries, the agencies believe that there is limited
additional regulatory burden associated with application
of the IRB approach at each subsidiary DI.
Likewise, to calculate its
consolidated AMA risk-based
capital requirements,
a bank must estimate its
operational risk exposure using a unit of measure
(defined below) that does not combine business
activities or operational loss events with demonstrably
different risk profiles within the same loss
distribution.
Each
subsidiary DI could have a demonstrably different risk
profile that would require the generation of separate
loss distributions.
However, the agencies recognize there may be situations
where application of the advanced approaches at an
individual DI subsidiary of an advanced approaches bank
may not be appropriate.
Therefore, the final rule includes the proposed
provision that permits a core or opt-in bank’s primary
Federal supervisor to determine in writing that
application of the advanced approaches is not
appropriate for the DI in light of the bank’s asset
size, level of complexity, risk profile, or scope of
operations.
B.
U.S. Subsidiaries of Foreign Banks
Under
the proposed rule, any U.S.-chartered DI that is a
subsidiary of a foreign banking organization would be
subject to the U.S. regulatory capital requirements for
domestically-owned U.S. DIs.
Thus,
if the U.S. DI subsidiary of a foreign banking
organization met any of the threshold criteria, it would
be a core bank and would be subject to the advanced
approaches.
If it
did not meet any of the criteria, the U.S. DI could
remain a general bank or could opt in to the advanced
approaches, subject to the same qualification process
and requirements as a domestically-owned U.S. DI.
The
proposed rule also provided that a top-tier U.S. BHC,
and its subsidiary DIs, that was owned by a foreign
banking organization would be subject to the same
threshold levels for core bank determination as a
top-tier BHC that is not owned by a foreign banking
organization.
The preamble noted that
a U.S. BHC that met the conditions in
Federal Reserve SR letter 01-01
...
[SR
01-01, “Application of the Board’s Capital Adequacy
Guidelines to Bank Holding Companies Ownedby Foreign
Banking Organizations,” January 5, 2001.]
... and
that was a core bank would not be required to meet the
minimum capital ratios in the Board’s capital adequacy
guidelines, although it would be required to adopt the
advanced approaches, compute and report its capital
ratios in accordance with the advanced approaches, and
make the required public and regulatory disclosures.
A
DI subsidiary of such a U.S. BHC also would be a core
bank and would be required to adopt the advanced
approaches and meet the minimum capital ratio
requirements.
Under
the final rule, consistent with SR 01-01,
a
foreign-owned U.S. BHC that is a core bank and that also
is subject to SR 01-01 will, as a technical matter, be
required to adopt the advanced approaches, and compute
and report its capital ratios and make other required
disclosures.
It
will not, however, be required to maintain the minimum
capital ratios at the U.S. consolidated holding company
level unless otherwise required to do so by the Board.
In
response to the potential burden issues identified by
commenters and outlined above, the Board notes that the
final rule allows the Board to exempt any BHC from
mandatory application of the advanced approaches.
The
Board will make such a determination in light of the
BHC’s asset size (including subsidiary DI asset size
relative to total BHC asset size), level of complexity,
risk profile, or scope of operation.
Similarly, the final rule allows a primary Federal
supervisor to exempt any DI under its jurisdiction from
mandatory application of the advanced approaches.
A
primary Federal supervisor will consider the same
factors in making its determination.
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