Global Risk Regulator

Basel II NPR could ask for comment on simpler methods; FDIC's Bair hopes for agency agreement before Congressional hearings

WASHINGTON, August 15 – A top US banking regulator hopes that federal agencies will ask for comment on the possibility of allowing US banks the option of using simpler approaches to risk measurement in forthcoming proposals on implementing the controversial Basel II global bank safety rules in America.

"I think everybody can show some flexibility because we aren't making the decision at this point," Federal Deposit Insurance Corporation (FDIC) chairman Sheila Bair said in an interview with the Dow Jones Newswires service which was published yesterday. There will be a four-month period for comment by lawmakers, bankers and other interested parties when the proposals are published as a final version of a notice of proposed rulemaking, or NPR. After the comment period, the agencies will decide on their final version of the rules, which are intended to come into operation in January, 2009.

]]> Bair, who also said the federal banking supervisory agencies are trying to reach a consensus on the Basel II proposal before Congress holds a hearing on the issue next month, was commenting on recent demands that US proposals on Basel II should be eased.

Four big US banks, backed by state banking supervisors and the American Bankers Association, the leading industry trade body, have asked the federal supervisors responsible for developing the Basel II rules in the US to allow banks the choice “of alternative methodologies, including the standardised approach”.

The request challenges a fundamental principle adopted by US regulators some four years ago in their initial plan for Basel II. This is that the small number of large, internationally active US banks that would operate under Basel II would be permitted to use only the most advanced approaches to assessing their credit and operational risks. The standardised approach is the simplest of the three methods of assessing credit risk under the complex, risk-focused Basel II bank capital adequacy rules. It’s described as an improved version of the approach used in the current, and simpler, Basel I international capital rules that date from 1988.

Washington regulators unite to win backing for Basel II in the US

LONDON, June 12 -- Top Washington bank regulators have begun pitching hard to win public support for the adoption of the new Basel capital adequacy rules in the US. John Dugan, the new head of the Office of the Comptroller of the Currency (OCC), an agency that has often been critical of the internationally-negotiated new rules to bolster bank safety (Basel II), gave strong backing to US implementation at a dinner for bankers in London on Wednesday evening.
Describing the Basel II capital accord as “one of the most significant recent developments in the financial sector,” Comptroller Dugan said he “strongly” agreed with the thrust of the new rules. His comments follow similarly strong backing for Basel II from Ben Bernanke, the new chairman of the Federal Reserve Board, in Chicago in mid-May. The chairman said it was time to move forward to the next stage of implementing Basel II. “This framework will modernize bank supervision and bring supervisory practice into line with best industry practice. Substantial benefits will ensue -- most importantly, a safer and sounder banking system,” Bernanke said.

]]> This strong support from the two most senior regulators comes as an extended period of public comment on the proposed rules gets under way in the US. Four US regulatory agencies – the Fed, OCC, Federal Deposit Insurance Corporation (FDIC) and Office of Thrift Supervision (OTS) – have jointly developed a Notice of Proposed Rulemaking (NPR), which is the next step in the process of adoption of the US version of Basel II. The Fed has already made the NPR publicly available. The formal comment period will start shortly, when the Office of Management and Budget has completed an economic impact analysis of the rulemaking.

US lawmakers reiterate concerns about Basel II

WASHINGTON, June 9 – US lawmakers yesterday reiterated their concerns about the controversial Basel II bank safety rules at Senate hearings on White House nominations for key banking supervision posts.

Members of the Senate’s banking committee urged again that the new capital adequacy rules for banks should not to result in reductions in the amounts of capital banks need to absorb shock losses, while worrying that the latest US proposals for implementing Basel II could make it harder for US banks to compete abroad.

The committee held the hearings on President George W Bush’s nominations to four regulatory posts, including that of Federal Reserve Board governor Donald Kohn to the vice chairmanship of the Fed, and of Sheila Bair to the chairmanship of the Federal Deposit Insurance Corporation (FDIC), the agency that insures customer deposits. Governor Kohn is a veteran of the US central banking system who was tapped by Bush for the job following the resignation of Roger Ferguson as Fed vice chairman.

]]> Bair is currently professor of financial regulation policy at the University of Massachusetts-Amherst. She was previously Assistant Treasury Secretary for financial institutions. Bair would replace Donald Powell as FDIC chairman. He left the agency in November to co-ordinate efforts to rebuild the hurricane-hit US Gulf Coast areas.

The other two nominations are for James Lockhart as director of the Office of Federal Housing Enterprise Oversight and Kathleen Casey as a member of the Securities and Exchange Commission.

Banking committee members generally commended all four nominations.

US hearings this week could take Basel II temperature

WASHINGTON, June 6 – US Senate hearings scheduled this week on President George W Bush’s nominations for important posts in the nation’s banking supervision system could test the political temperature following the latest US proposals for implementing the controversial Basel II bank safety rules.

On Thursday, June 8, the Senate’s banking committee will hold hearings on Bush’s nomination of Donald Kohn as vice chairman of the Federal Reserve Board, which oversees the US central banking system, and of Sheila Bair as chairman of the Federal Deposit Insurance Board (FDIC), which insures customer deposits at US banks.

]]> Kohn, a monetary policy specialist who is a member of the Fed’s Board of Governors and a veteran of the Federal Reserve system, has been nominated to fill the vacancy left by Roger Ferguson’s resignation as Fed vice chairman.

Bair is currently dean’s professor of financial regulation policy at Isenberg School of Management at the University of Massachusetts-Amherst. She was previously Assistant Treasury Secretary for financial institutions. Bair would replace Donald Powell, who left the FDIC in November to co-ordinate efforts to rebuild hurricane-hit US Gulf Coast areas.

Both Republican Senator Richard Shelby, who chairs the Senate banking committee, and Senator Paul Sarbanes, the committee’s senior Democratic Party member, have threatened to stop implementation of the complex Basel II bank capital adequacy rules if it resulted in capital levels at US banks dropping dramatically. Their fears were aroused by the results of a test, known as the fourth quantitative impact study, or QIS4, of the risk-focused Basel II rules on US banks. QIS4 produced worryingly large declines in the amounts of capital that banks need to hold to absorb shock losses, compared with current capital requirements.

The Fed and the FDIC, which share responsibility for US Basel II policy with two other federal agencies, the Office of the Comptroller of the Currency and the Office of Thrift Supervision, have differed in the past on details of the policy.

Regulators leave Basel II scaling factor unchanged on QIS5 results

BERLIN, May 24 – Global banking regulators have decided to leave the current calibration factor for the Basel II capital rules unchanged after reviewing the results of the most recent test of the complex rules.

The current calibration – a 1.06 scaling factor for credit risk-weighted assets – will be maintained, the Basel Committee on Banking Supervision, the body of top banking supervisors from North America, Europe and Japan that in effect regulates international banking, said today.

]]> The scaling factor is designed to ensure fulfilment of the regulators’ aim that the overall level of capital in the world’s banking system remains broadly the same with the adoption of the risk-focused Basel II regime, while allowing scope for individual banks to align their capital more accurately to the risks they face.

The Basel Committee said the results of the test, known as the fifth quantitative impact study, or QIS5, showed that for the Group of 10 (G10) leading economies the minimum required capital under Basel II, including the scaling factor, would decrease relative to current Basel I capital rules. The Committee’s review also took account of the results of the QIS4 test carried out in some countries.

For internationally active and diversified banks, there would be an average 6.8% decrease, based on the results for the approach to credit and operational risk that participating banks are likely to adopt after implementation.

Netherlands Bank’s Wellink is next Basel Committee chairman

BASEL, Switzerland, May 19 (Global Risk Regulator) – Netherlands Bank president Nout Wellink will be the new chairman of the Basel Committee on Banking Supervision, succeeding current chairman Jaime Caruana from July 1.

Caruana relinquishes the chairmanship of the Basel Committee, the body of top banking supervisors from North America, Europe and Japan that in effect regulates international banking, on the conclusion of his term as governor of the Bank of Spain.

]]> The central bank governors of the Group of 10 (G10) leading economies, who set up the Basel Committee in 1975, said they appreciated the strong leadership shown by Caruana over the three-year term of his Basel Committee chairmanship.

The G10 governors said Caruana brought many important projects to a successful conclusion, including the revised capital adequacy framework known as Basel II. He also implemented many important initiatives to improve coordination between the Basel Committee and the global supervisory community.

US Basel II safeguards ‘highly appropriate’, says FDIC head

WASHINGTON, May 19 – Safeguards placed on the US implementation of the Basel II bank safety rules are highly appropriate, given the uncertainty about the final outcome in terms of bank capital levels, a top US federal banking supervisor said today.

Federal Deposit Insurance Corporation (FDIC) acting chairman Martin Gruenberg said “some may question the prudential safeguards that the (federal banking supervisory) agencies have put in place for the proposed implementation of Basel II as unduly restrictive.” The FDIC insures customer deposits held by US banks.

]]> The Federal Reserve Board, which oversees the US central banking system, approved a draft of the delayed and revised notice of proposed rulemaking, or NPR, on Basel II, and released it in draft form, at the end of March. But the formal approval process for the NPR is not expected to be completed before the end of next month.

Initial reaction to the Fed’s NPR among bankers was that it made the Basel II rules as proposed for the US more conservative and difficult than elsewhere in the world (see Global Risk Regulator newsletter, April 2006).

Bernanke says more effort needed on challenge to global consistency of Basel II

WASHINGTON, May 18 – Achieving international consistency in the implementation of the Basel II bank safety rules will be a challenge – something that all bank regulators recognise, US Federal Reserve Board chairman Ben Bernanke said today.

“We recognise that some international implementation issues will be more complex than those we currently face,” Bernanke said in remarks prepared for delivery at the Federal Reserve Bank of Chicago’s annual conference on bank structure.

“Inconsistency in international standards of implementation and enforcement, it is sometimes said, will put internationally active US banks at a competitive disadvantage and may also hurt purely domestic US banks vis-à-vis the US subsidiaries of foreign banks.”

]]> “US regulators are working hard through the Basel Committee (the body of top banking supervisors from North America, Europe and Japan that devised Basel II) and with individual firms and national supervisors to address international implementation issues. A great deal more effort and cooperation will be needed, but I believe that, as in the past, we can craft an acceptable set of agreements and work out means of resolving future issues.”

Bernanke urged the banking industry to comment thoroughly on the Basel II notice of proposed rulemaking, or NPR, a draft of which was issued by the Fed at the end of March and which is expected to be finalised in the near future. He also urged banks to comment on the proposed changes, dubbed Basel IA, to the current Basel I capital adequacy rules that are intended to apply to the vast majority of US banks that won’t be subject to the complex, risk-focused Basel II rules.

UK regulators expect political tussles as key Solvency II test begins

LONDON, May 3 – With a key second test starting this week of Europe’s Solvency II proposals for making insurance firms safer, Britain’s regulators confirm they expect political wrangles over the treatment of technical provisions under the regime.

“There will be political problems, but we’re hoping they will be resolved satisfactorily,” said Peter Hinton, actuary with the prudential standards division of the Financial Services Authority (FSA), the UK’s integrated financial sector watchdog.

]]> He was responding at the end of last week to questions about how differences between the UK and French approaches to a key aspect of technical provisions – the amounts that insurers have to calculate to ensure they can meet future claims on the insurance policies they’ve issued – might affect the development of Solvency II.

Credit rating agency Standard & Poor’s warned last month that a political storm is brewing over so-called prudential margins in technical provisions that goes to the heart of the way that insurance is regulated in different countries in the European Union.

The strong public positions of the UK and French insurance regulators exemplify the issue, which threatens to derail Solvency II in the absence of political intervention, according to S&P.

Hinton was speaking at an FSA briefing on the test, which starts this week and is known as the second Solvency II quantitative impact study, or QIS2. The briefing was organised by the International Underwriting Association (IUA) of London, which represents international insurance companies.

Basel IA must weigh sensitivity against burden, says Fed’s Bies

NAPLES, Florida, April 11 – As US regulators develop new rules for the thousands of US banks that won’t be adopting the complex Basel II safety regime, they will analyse carefully the trade-off between risk sensitivity and the greater burden placed on banks, a top supervisor said yesterday.

“As you are aware, this is not necessarily the easiest balance to find,” US Federal Reserve Board governor Susan Schmidt Bies told a Naples, Florida risk management forum organised by America’s Community Bankers, a leading trade body representing smaller US banks.

]]> The proposals are still at an early stage to produce a more risk-sensitive US version, dubbed Basel IA, of the current Basel I bank capital adequacy rules that date from 1988, Bies said. The federal banking supervisory agencies hope to have a notice of proposed rulemaking, or NPR, on Basel IA “by summer”, she added. The aim is to have overlapping comment periods for the Basel IA NPR and the Basel II NPR, a draft of which was approved and released by the Fed on March 30. The delayed and revised Basel II NPR sets out the agencies’ final proposals for applying Basel II from January 2009 to a handful of America’s largest banks, expected to number 20 or so but comprising the bulk of the nation’s banking assets.

“We are also mindful that amendments to Basel I should not be too complex or too burdensome for the multitude of smaller banks to which the revised rules will apply,” Bies said.

International bankers urge quicker Basel II pace

ZURICH, Switzerland, March 30 – International banking industry leaders, fearing the impact of different implementation timetables, stressed today the vital need to quicken the tempo for resolving all outstanding issues in the Basel II bank safety rules.

“There is now a need for all involved in this process, including political leaders on both sides of the Atlantic, to work very closely together to meet the current Basel II implementation challenges,” Institute of International Finance (IIF) vice chairman Cees Maas said. The Washington-based IIF represents nearly 350 leading international financial institutions from more than 60 countries.

]]> Maas, who is also vice chairman of the Dutch ING banking group, was addressing reporters at the IIF’s spring membership meeting in Zurich, hours before US supervisors were due later today to issue their delayed and revised Basel II plans.

Mees said outstanding issues range from the decisions on the regulatory capital levels that the Basel Committee on Banking Supervision, the architect of Basel II, will ultimately determine “to thorny problems of home-host and cross-border jurisdictional issues”.

“Our concerns are well understood by the regulators,” Mees said.

He added the IIF has had “very active and constructive dialogue” with the Basel Committee, the body of top banking supervisors from North America, Europe and Japan that in effect regulates international banking.

Fed’s Bies urges comment on today’s Basel II NPR

NEW YORK, March 29 (Global Risk Regulator) – Bankers and others are strongly encouraged to comment on all aspects of the delayed and revised plans, due out tomorrow, for implementing the controversial Basel II bank safety rules in the US, a top US banking supervisor said yesterday.

“Your comments and those from others will contribute importantly to the assessment of Basel II objectives and its implementation, and will help us as we develop the framework further,” Federal Reserve Board governor Susan Schmidt Bies told a New York conference on operational risk. The Basel II rules, designed by global banking regulators, seek to improve the safety and soundness of banks by more closely linking capital requirements to risk.

]]> An open meeting of the Federal Reserve Board will today review a joint draft by the four federal banking supervisory agencies of the their plans for applying the Basel II rules to 20 or so of America’s largest banks that comprise the bulk of the nation’s banking assets. The draft, in the form of a notice of proposed rulemaking, or NPR, has been drawn up by the Fed, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Office of Thrift Supervision. It will be made available to the public today, shortly before the start of the Fed’s open meeting at 1400 hours Washington time.

“We are pleased that the agencies have reached agreement on the draft NPR, since, as you know, we have spent substantial time and considerable effort on the document,” Bies said.

US Treasury urges regulator cooperation on Basel II

The US Treasury continues to urge federal banking regulators to work cooperatively in their efforts to implement the international Basel II bank safety rules “and move the process forward in a timely fashion,” a top Treasury official said yesterday.

]]> “Our regulatory agencies remain committed to the Basel process and are proceeding as quickly as they can to implement the Basel II accord,” said Randal Quarles, under secretary for domestic finance at the Treasury.

But most importantly the four agencies are working “to make sure it is implemented correctly and in a way that reduces competitive inequalities between financial institutions as much as possible,” Quarles told the annual Washington conference of the Institute of International Bankers (IIB). The IIB is a representative body for the international banking community in the US.

Last week Office of Thrift Supervision (OTS) director John Reich said the agencies plan to make public at the end of March their delayed final plans for applying Basel II to some 24 of the nation’s largest banks from 2009. The OTS, as the supervisor of the nation’s savings and loans industry, is one of the four federal agencies charged with implementing the controversial, risk-focused Basel II capital rules. The other agencies are the Federal Reserve, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation. The agencies have at times been split on the details of applying the Basel II rules. The rules were designed by the Basel Committee on Banking Supervision, the body of top banking supervisors from 13 leading economies, including the US, that in effect regulates international banking.

“As we all know reforming the risk-based capital standards for domestic and international banks through the Basel II process has been a long and painstaking exercise,” the Treasury’s Quarles said.

Roadmap shows way to global rules on insurer solvency

BASEL, Switzerland, February 16 (Global Risk Regulator) – Insurance supervisors today issued a roadmap for the development of international standards on the assessment of insurer solvency. The plan extends over many years.

]]> The roadmap has been drawn up by the International Association of Insurance Supervisors (IAIS). The IAIS is the Basel, Switzerland-based umbrella body that groups insurance supervisors from some 180 jurisdictions with the aim of promoting international standards for the insurance industry.

The paper outlines the elements needed for the future development of shared standards for the assessment of insurer solvency and timeframes for their delivery.

IAIS technical committee chairman Tom Karp said the IAIS places high priority on the work plan which “will support and enhance transparency and convergence of solvency standards for insurers worldwide”.

(“Roadmap for a Common Structure and Common Standards for the Assessment of Insurer Solvency” – www.iaisweb.org)

Bernanke says no big capital reduction wanted with Basel II

WASHINGTON, February 16 – The US Federal Reserve Board “is on the same page” as US lawmakers in not wanting to see a substantial reduction in bank capital as a result of applying the international Basel II bank safety rules, Fed chairman Ben Bernanke said today.

]]> Bernanke, who was sworn in as the new Fed chairman earlier this month, was replying to questions on the Fed’s monetary policy report to Congress, issued yesterday, from members of the Senate’s banking committee. Some committee members are highly sceptical about the controversial and complex risk-based Basel II capital adequacy rules which have had a troubled reception in the US. They will apply only to a handful of the nation’s largest and most complex banks with smaller banks fearing they may be put at a competitive disadvantage as a result.
The Fed and its fellow federal banking supervisory agencies are planning a slow phase-in of the Basel II rules with plenty of consultation, Bernanke said in reply to the committee’s chairman, Republican Richard Shelby. Shelby noted that several witnesses at the banking committee’s Basel II hearings in November claimed that the new rules would result in substantial declines in the capital required to protect banks against surprise losses.