WASHINGTON DC – The Federal Deposit Insurance Corporation (FDIC) has approved the alternative risk-based capital framework based largely upon the standardised approach in the Basel II Accord. The Federal Reserve is believed to be holding a meeting today to make its final decision.
The standardised approach (TSA) capital framework is available to all US banks except the largest global banks, which are required to follow the advanced measurement approach. The new rules will cover over 8,000 banks and mark a decisive step forward for the US regulators after a great deal of discussion and delay.
In support of the proposal Sheila Bair, chairman of the FDIC, said: “The standardised approach proposal is expected to add greater risk sensitivity without creating excessive complexity and burden and, thus, should minimise competitive inequities between large and small banks.”
She added: “The agencies are also seeking comment on whether the standardised approach should be made available to large banks. Given the turbulence in the credit markets, I take some comfort in the fixed risk weights established under the standardised approach, as they provide supervisors with some control over unconstrained reductions in risk-based capital.”
Some of the key aspects of the proposal include: adding more risk buckets to the existing rules; expanding the use of external ratings to a broader range of exposures; expanding the recognition of credit risk mitigants, such as collateral and guarantees; establishing a more risk-sensitive approach for residential mortgages based largely on loan-to-value measures; increasing the capital requirements on certain off-balance sheet exposures, including liquidity lines to asset-backed commercial paper exposures; and requiring a capital charge for operational risk using the basic indicator approach under the Basel II capital framework.
The agencies are seeking comment on various aspects of the proposed framework, including possible enhancements and alternatives to the use of external credit ratings, especially for structured finance exposures. Comments will be accepted for 90 days from the date of publication in the Federal Register once all of the agencies have approved the interagency Notice of Proposed Rulemaking.