Monday, June 25, 2012

Fed Goes "All In" on Basel III Standards, But Prefers a Phased Approach


Author: David Schwartz J.D. CPA David Schwartz J.D. CPA

The Board of Governors of the Federal Reserve System voted on June 7 to approve proposed rules intended to implement the regulatory capital standards promulgated under “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems.” These proposals are also intended to harmonize the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 with Basel III requirements.  These proposals are a comprehensive set of three capital requirements that, if approved, would be applicable to all insured banks and thrifts, savings and loan holding companies, and bank holding companies with consolidated assets over $500 million.

 
In summary, the Fed's proposal is made up of three components:
 
(1) “Regulatory Capital Rules:  Regulatory Capital, Implementation of Basel III, Minimum Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action” establishes new risk-based and leverage capital ratios and defines what constitutes "capital" for purposes of the ratios' numerator.  If adopted, these proposals are planned to be phased in from 2013 through 2019; 
 
(2) “Regulatory Capital Rules:  Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” revises and harmonizes the Fed's rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses that have been identified over the past several years (i.e., the denominator of the capital ratios, effective on January 1, 2015);  and 
 
(3) “Regulatory Capital Rules:  Advanced Approaches Risk-based Capital Rule; Market Risk Capital Rule” includes revisions to the advanced approaches risk-based capital rules under Basel II that apply only to the largest or most internationally active U.S. banking organizations.  This change would enhance the risk sensitivity of the current rule for internationally active firms to better address counterparty credit risk and interconnectedness among financial institutions, and bring them in line with Basel III and Dodd-Frank. It also would apply the advanced approaches rule and market risk capital rule to savings and loan holding companies that meet the relevant size, foreign exposure, or trading activity thresholds.


 The proposals have been published in separate releases to reflect the distinct objectives of each proposal, to allow interested parties to better understand the various aspects of the overall capital framework, including which aspects of the rule would apply to which banking organizations, and to help interested parties better focus their comments on areas of particular interest. The BCBS quantitative liquidity requirements and the BCBS capital surcharge for global systemically important banks are not part of this rulemaking. 

 
The Basel Committee recently expressed some doubts about ability of the US regulators to meet the January 2013 Basel III implementation deadline.  With comments on the June 7 release due September 7, 2012, and the phased in approach contemplated in the proposals, it seems that the Fed is satisfied that it will have set Basel III implementation in motion by 2013, if not fully in effect. 
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