'Unacceptable' for final Basel II rule to reproduce QIS 4 results, says Dugan

"If a final rule were to produce the same capital results [as QIS 4], that outcome would plainly be unacceptable to the US supervisory agencies," Dugan said, referring to the latest US quantitative impact study results that were released last month. Dugan, who was speaking at a banking conference in Washington D.C. yesterday, added that there is a committment in the US to make further, potentially fundamental, changes to Basel II if necessary.

Dugan said that QIS 4 results - which projected that Basel II would prompt a median average drop of 26% in minimum required capital and a wide dispersion of results across institutions and portfolios - raised questions.

Consequently, US agencies will observe live Basel II systems, Dugan said, "based on a definite set of agency rules, subject to meaningful supervisory validation and scrutiny". He highlighted the transition period safeguards as critically important in protecting the US banking system. These safeguards are: delaying adoption of Basel II by one year, extending the transition period to three years, and limiting potential reductions in capital requirements during the transition period via the use of so-called capital floors.

Commenting on the the use of such floors, one chief risk officer at a US bank told RiskNews that he viewed the imposition of floors as a "disappointing move away from a principles-based approach".