US Federal Reserve Board gives green light for Basel II

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WASHINGTON, DC – The US Federal Reserve Board approved the final rules for the implementation of Basel II on Friday, following similar announcements from the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS). The Federal Deposit Insurance Corporation (FDIC) is also expected to approve the rules later today.

Ben Bernanke, chairman of the Federal Reserve Board, claims Basel II will help protect the soundness of the modern financial market. “Basel II is a modern, risk-sensitive capital standard that will protect the safety and soundness of our large, complex, internationally active banking organisations. The new framework is designed to evolve over time and adapt to innovations in banking and financial markets, a significant improvement from the current system,” he says.

Fed member Randall Kroszner highlights current financial instability as evidence of the importance that banks employ better risk management techniques under the advanced measurement approach of the Basel II capital requirements.
The advanced approaches to assessing risk that the 11 core US banks will have to adopt will require them to assess the creditworthiness of individual borrowers, such as lower credit-quality mortgage borrowers, says Kroszner. This will also apply to individual loans and investments, such as highly structured asset-backed securities. Banks will have to hold capital commensurate with these risks, he adds.

US banks will adopt Basel II over a three-year transition period starting January 1 2009. The 2009 start date will leave the US banks at least a year behind their international rivals in other jurisdictions in implementing the new capital rules.