Basel II Pillar II guidance issued by US regulators

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WASHINGTON, DC – The US federal bank and thrift regulatory agencies have jointly issued final guidance on the Supervisory Review Process of Capital Adequacy (Pillar 2) under the Basel II advanced capital framework. This guidance provides the clarification necessary to support the implementation of the advanced approaches final rule. The final guidance takes effect on September 2, 2008.

This guidance only applies to banking organisations that use the advanced approaches final rule to calculate their risk-based capital requirements. In general, the guidance focuses on three areas: the comprehensive supervisory review of capital adequacy; compliance with regulatory capital requirements, and the internal capital adequacy assessment process (ICAAP).

It also highlights the fundamental objectives of a sound ICAAP, which are: identifying and measuring material risks, setting and assessing internal capital adequacy goals that relate directly to risk, and ensuring the integrity of internal capital adequacy assessments. Capital must meet or exceed regulatory minimum requirements, regardless of ICAAP results.

The guidance also supports the agencies' existing ability to intervene when necessary to prevent an individual bank's regulatory capital from falling below the level needed to support all material risks to which the bank is exposed.

This guidance neither supersedes nor alters the functioning of the Prompt Corrective Action or leverage capital requirements.

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