US supervisors approve Basel II final rule

WASHINGTON, DC – The four main US regulators – the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS), the Federal Deposit Insurance Corporation (FDIC) and the Board of Governors of the Federal Reserve System – published the Basel II capital requirements final rule on November 1, just in time for Thanksgiving. Judging by the comments OpRisk & Compliance has received, most bankers, industry commentators and consultants will be spending the holiday wading through the 6oo-plus page document line by line to decipher exactly what has been changed from the Notice of Proposed Rulemaking (NPR) published in September 2006.

Bankers' initial response, however, seems to be relief, as they are eager to get on with preparing their implementation plans.

At first glance, the supervisors appear to have taken on board comments received after the publication of the NPR. The treatment of op risk mitigants appears to be more lenient than in previous versions of the US rules and the original Basel II document. The controversial proposal to modify the Basel framework if there is a 10% drop in aggregate capital among top-tier banks has also disappeared. However, the hated leverage ratio remains. The FDIC and its chairman Sheila Bair, one of the sharpest critics of the Basel accord, lobbied hard to ensure it did.

"The op risk measurement was such a challenge and the rule gives the opportunity for innovation and research, but at the same time the regulators are mindful of certain pitfalls, and maintaining certain minimum standards is really commendable," says Kabir Dutta, principal at CRA International. "They give institutions the opportunity to try new things but they cannot just use something that is utterly meaningless."

But such high-level rules might not be sufficient when it comes to implementing AMA programmes.

"The proposed final rule has a lot of flexibility in it. The key is to counterbalance the specificity in terms of the minimum standards with the flexibilities to still allow for innovation and allow operational risk management to evolve," says Ken Swenson, principal, risk management consulting at CRA International. "One could view this as more a principles-based, rather than a rules-based, document. The other documents, the ANPR and the NPR, released before this were accompanied by a supervisory guidance document that gave more specificity. And based on our discussions with AMA core and AMA opt-in banks, issuance by the banking agencies of accompanying supervisory guidance for the advanced approaches would be the crowning achievement."

The question remains whether such a document will be issued to aid banks with their implementation.

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