U.S. Fed proposes implementing Basel II requirements for large international banks

Rule would require large banks operating in the U.S. to enhance risk measurement, management

By: James Langton
March 30, 2006 March 30, 2006
16:58

The U.S. Federal Reserve Board published a notice of proposed rulemaking that would implement Basel II risk-based capital requirements for large, internationally active banking organizations operating in the U.S.

The proposed rule would require the largest internationally active banks to enhance the measurement and management of their risks, including credit risk and operational risk. It also would require these banks to have rigorous processes for assessing overall capital adequacy in relation to their total risk profile and to publicly disclose information regarding their risk profile and capital adequacy.

“Given the increasing complexity of the activities at our largest banks, and the related risks of those activities, I fully support efforts to develop a more appropriately risk-sensitive capital framework for those institutions,” said board chairman Ben Bernanke. “The current Basel I framework has become increasingly inadequate for capturing the risks at large, complex U.S. banking organizations.”

The notice builds on an advance notice of proposed rulemaking issued by U.S. regulators in August 2003. It includes a number of prudential safeguards, including transition periods and temporary floors on potential declines in risk-based capital requirements. A bank would need approval from its primary federal supervisor to move to each of the transitional floors, and at the end of the transition period to move to full Basel II.

“As a central bank and a supervisor of banks and bank and financial holding companies, the Federal Reserve is committed to ensuring that the Basel II framework delivers a strong and risk-sensitive base of capital,” said governor Susan Bies. “That is why the proposal contains safeguards to ensure strong capital levels during and after the transition to Basel II, and why we will remain vigilant in monitoring Basel II’s impact on an ongoing basis.”

The Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision are also considering the proposal.