Comment requested on revised non-Basel II capital adequacy standards

Several US banking oversight and regulatory agencies, including the Federal Reserve Board, have requested public comment within 90 days on proposed changes to current US capital adequacy standards. The revised standards would, in the future, apply to banks that will not fall under the scope of Basel II.

The Fed’s call for feedback reflects widespread concern about disparities in regulatory treatment of US banks and the competitive inequalities this may prompt. Many smaller banks will continue to operate under less sophisticated local regulation while larger internationally-active firms will begin their compliance with Basel II in 2009. "We will endeavour to reduce gaps between the two frameworks as much as possible," said John Dugan, the US comptroller of the currency.

According to Dugan, the primary goal of the request was to increase the risk sensitivity of domestic risk-based capital rules without unduly increasing regulatory burden. Changes to capital adequacy are being considered jointly by the Fed, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC) and the Office of Thrift and Supervision (OTS).

Comments on a number of issues related to non-Basel II capital adequacy have been requested, including changes around the number and magnitude of risk weights, the use of external credit ratings and treatment of securitisation – all of which have been flashpoints in previous discussions about more closely aligning capital requirements with risk.

Last month, US regulators announced that the compliance date for Basel II has been pushed back by three years, because of mixed results from the fourth quantitative impact study (QIS4), which was completed in January 2005. The exercise raised concerns over a potentially sharp decrease in capital requirements for some banks, possibly leaving then vulnerable to idiosyncratic shocks. Under the revised implementation schedule announced on September 30, Basel II requirements will be phased in between 2009 and 2011.