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
Summary
The Office of the Comptroller of
the Currency (OCC), the Board of Governors of the
Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), and the Office of Thrift
Supervision (OTS) (collectively, the agencies) are adopting a new risk-based
capital adequacy framework that requires some
and
permits other qualifying banks
*to use an internal ratings-based approach to calculate
regulatory credit risk capital requirements and advanced
measurement approaches to calculate regulatory
operational risk capital requirements.
The
final rule describes the
qualifying criteria for banks required or seeking
to operate under the new framework and the applicable
risk-based capital requirements for banks that operate
under the
framework.
* For simplicity, and
unless otherwise indicated, this final rule uses the
term “bank” to include banks,
savings associations,
and bank holding companies (BHCs).
The terms “bank holding
company” and “BHC” refer only to bank holding companies
regulated by the Board and do not include savings and
loan holding companies regulated by the OTS.
Table of Contents
I. Introduction
A. Executive
Summary of the Final Rule
B. Conceptual
Overview
1. The IRB
approach for credit risk
2. The AMA for
operational risk
C. Overview of
Final Rule
D. Structure of
Final Rule
E. Overall
Capital Objectives
F. Competitive
Considerations
II. Scope
A. Core and
Opt-In Banks
B. U.S.
Subsidiaries of Foreign Banks
C. Reservation
of Authority
D. Principle of
Conservatism
III. Qualification
A. The
Qualification Process
1. In general
2. Parallel run
and transitional floor periods
B. Qualification
Requirements
1. Process and
systems requirements
2. Risk rating
and segmentation systems for wholesale and retail
exposures
Wholesale
exposures
Retail exposures
Definition of
default
Rating
philosophy
Rating and
segmentation reviews and updates
3.
Quantification of risk parameters for wholesale and
retail exposures
Probability of
default (PD)
Loss given
default (LGD)
Expected loss
given default (ELGD)
Economic loss
and post-default extensions of credit
Economic
downturn conditions
Supervisory
mapping function
Pre-default
reductions in exposure
Exposure at
default (EAD)
General
quantification principles
Portfolios with
limited data or limited defaults
4. Optional
approaches that require prior supervisory approval
5. Operational
risk
Operational risk
data and assessment system
Operational risk
quantification system
6. Data
management and maintenance
7. Control and
oversight mechanisms
Validation
Internal audit
Stress testing
8. Documentation
C. Ongoing
Qualification
D. Merger and
Acquisition Transition Provisions
IV. Calculation of Tier 1 Capital and Total Qualifying
Capital
V. Calculation
of Risk-Weighted Assets
A.
Categorization of Exposures
1. Wholesale
exposures
2. Retail
exposures
3.
Securitization exposures
4. Equity
exposures
5. Boundary
between operational risk and other risks
6. Boundary
between the final rule and the market risk rule
B. Risk-Weighted
Assets for General Credit Risk (Wholesale Exposures,
Retail
Exposures,
On-Balance Sheet Assets that Are Not Defined by Exposure
Category,
and Immaterial
Credit Exposures)
1. Phase 1 –
Categorization of exposures
2. Phase 2 –
Assignment of wholesale obligors and exposures to rating
grades and
retail exposures
to segments
Purchased
wholesale exposures
Wholesale lease
residuals
3. Phase 3 –
Assignment of risk parameters to wholesale obligors and
exposures
and retail
segments
4. Phase 4 –
Calculation of risk-weighted assets
5. Statutory
provisions on the regulatory capital treatment of
certain mortgage loans
C. Credit Risk
Mitigation (CRM) Techniques
1. Collateral
2. Counterparty
credit risk of repo-style transactions, eligible margin
loans, and
OTC derivative
contracts
Qualifying
master netting agreement
EAD for repo-style
transactions and eligible margin loans
Collateral
haircut approach
Simple VaR
methodology
3. EAD for OTC
derivative contracts
Current exposure
methodology
4. Internal
models methodology
Maturity under
the internal models methodology
Collateral
agreements under the internal models methodology
Alternative
methods
5. Guarantees
and credit derivatives that cover wholesale exposures
Eligible
guarantees and eligible credit derivatives
PD substitution
approach
LGD adjustment
approach
Maturity
mismatch haircut
Restructuring
haircut
Currency
mismatch haircut
Example
Multiple credit
risk mitigants
Double default
treatment
6. Guarantees
and credit derivatives that cover retail exposures
D. Unsettled
Securities, Foreign Exchange, and Commodity Transactions
E.
Securitization Exposures
1. Hierarchy of
approaches
Gains-on-sale
and CEIOs
The
ratings-based approach (RBA)
The internal
assessment approach (IAA)
The supervisory
formula approach (SFA)
Deduction
Exceptions to
the general hierarchy of approaches
Servicer cash
advances
Amount of a
securitization exposure
Implicit support
Operational
requirements for traditional securitizations
Clean-up calls
Additional
supervisory guidance
2. Ratings-based
approach (RBA)
3. Internal
assessment approach (IAA)
4. Supervisory
formula approach (SFA)
General
requirements
Inputs to the
SFA formula
5. Eligible
disruption liquidity facilities
6. CRM for
securitization exposures
7. Synthetic
securitizations
Background
Operational
requirements for synthetic securitizations
First-loss
tranches
Mezzanine
tranches
Super-senior
tranches
8.
Nth-to-default credit derivatives
9. Early
amortization provisions
Background
Controlled early
amortization
Non-controlled
early amortization
Securitization
of revolving residential mortgage exposures
F. Equity
Exposures
1. Introduction
and exposure measurement
Hedge
transactions
Measures of
hedge effectiveness
2. Simple
risk-weight approach (SRWA)
Non-significant
equity exposures
3. Internal
models approach (IMA)
IMA
qualification
Risk-weighted
assets under the IMA
4. Equity
exposures to investment funds
Full
look-through approach
Simple modified
look-through approach
Alternative
modified look-through approach
VI. Operational
Risk
VII. Disclosure
1. Overview
Comments on the
proposed rule
2. General
requirements
Frequency/timeliness
Location of
disclosures and audit/attestation requirements
Proprietary and
confidential information
3. Summary of
specific public disclosure requirements
4. Regulatory
reporting
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