The A-IRB approach must be changed, says FDIC study

Risk-based capital requirements for banks under Basel II would fall below the levels needed for current prompt corrective action (PCA) purposes, according to a new study by the Federal Deposit Insurance Corporation (FDIC).

“We believe that during most of a typical economic cycle, risk-based risk requirements for Basel II banks would be far below the levels for PCA. Consequently, the US regulators will have to choose between ignoring the output of Basel II’s formulas or significantly weakening the current PCA framework,” the FDIC said in a study released on December 8.

In the study, Estimating the Impact of Basel II’s Internal-Ratings Based Approach (A-IRB) in the US, the FDIC said contrary to descriptions of

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