FDIC to seek comments for standardised approach

The FDIC has bowed to industry pressure to include the standardised approach in the NPR, despite the Fed’s insistence that AMA is vital to safeguarding the financial system.

The standardised approach will be included in the options open for public comment on the draft text for Basel II implementation in the US. The decision was reached at the FDIC board meeting on the Basel II Notice of Proposed Rule-Making (NPR) today.

While the FDIC approved the NPR text for the advanced approach, the regulator requested further comments to be gathered to specifically address whether the largest banks should be allowed to use the standardised approach for credit and operational risk, an option many banks and associations have requested.

The news is likely to disappoint governors at the Fed, who, despite pressure from industry, has consistently favoured applying the advanced approach to credit and operational risk. In a letter to Congress made public today, the Fed’s chairman Ben Bernanke argued that the standardised approach differed little from Basel I capital requirements.

"In my opinion, the Basel II credit risk standardised approach is much less risk-sensitive than the Basel II advanced approach and does not make use of the most advanced risk management practices," he said in the letter.

The American Bankers Association has come out in support of the FDIC’s decision. “The standardised approach may present an optimal choice for many banks, large and small. Indeed, a menu of capital options is likely to be the only way to have rules that are a good real-life fit for an industry that includes the smallest community banks and the largest internationally active financial companies,” said Wayne Abernathy, the executive director for financial institutions policy for the ABA.

The FDIC’s approval of the NPR follows a specific request from US lawmakers that no final versions of Basel II were completed before the September 14 Congressional hearing. The Congressional hearing will listen to evidence in favour of allowing the banks obliged to implement Basel II to use the standardised approach for operational and credit risk, which would substantially alter the current text.

Normally, following the NPR, the draft would be subject to a period for public comments, which are taken into account as appropriate into the final rule.

It is likely that as a result of the upcoming congressional hearing, a second draft proposed rule will be published, as the new draft rules for Basel II may differ substantially from the initial rules. The new issues raised in the revised NPR would then have to go through public consultation, potentially delaying US implementation of Basel II another year.

BaselAlert.com