Publication of Revised Capital Framework and U.S. implementation plans

Federal Reserve Bulletin, Summer, 2004

The Basel Committee on Banking Supervision on June 26, 2004, released its document "International Convergence of Capital Measurement and Capital Standards: A Revised Framework." The Framework (also referred to as Basel II) represents the outcome of the work of the Basel Committee, with active participation by the United States banking and thrift institution agencies (Agencies), over recent years to secure international convergence on revisions to regulations and standards governing the capital adequacy of internationally active banking organizations. The Framework will form the basis upon which the Agencies, and representatives of the other Basel Committee member countries, develop proposed revisions to existing capital adequacy regulations and standards.

The Framework is available on the Basel Committee's web site at www.bis.org, the Office of the Comptroller of the Currency's (OCC) web site at www.occ.treas.gov, the Federal Reserve Board's (Federal Reserve) web site at www.federalreserve.gov, the Federal Deposit Insurance Corporation's (FDIC) web site at www.fdic.gov, and the Office of Thrift Supervision's (OTS) web site at www.ots.treas.gov.

U.S. Implementation Plans

As noted, the Framework would form the basis upon which the Agencies develop proposed revisions to their existing risk-based capital adequacy regulations. As previously announced, the Agencies expect that only a small number of large, internationally active U.S. banking organizations would be required to use the Framework, and that those institutions would use only the most advanced approaches for determining their risk-based capital requirements. Application of the Framework's advanced approaches to other qualifying U.S. banking organizations would be at the banking organization's option.

The Agencies have developed a comprehensive plan to incorporate the advanced risk and capital measurement methodologies of the Framework into regulations and supervisory guidance for U.S. institutions. This plan would ensure that U.S. implementation efforts are consistent with the Framework; reflect the unique statutory, regulatory, and supervisory processes in the United States; and appropriately seek and consider comments on individual aspects of the plan from all interested parties.

Before implementation, it is expected that institutions using Framework-based regulations and guidance will first be subject to a year of parallel running; for example, application of the advanced approaches in tandem with the current risk-based capital regime, beginning in January 2007. The Agencies anticipate that the Framework would become fully effective in the United States in January 2008. The Agencies plan to apply prudential floors to risk-based regulatory capital calculations in the two years immediately after adoption of the Framework. Qualified institutions that opt in to the Framework subsequent to the initial implementation period would be subject to a similar phase-in schedule (for example, parallel running and floors).

Given the investments needed to qualify for the advanced approaches of the Framework, the Agencies believe that it would be prudent for banking organizations that expect to adopt the Framework on or near the effective date to begin planning their implementation efforts. To facilitate such efforts, the Agencies have described below the significant milestones in the development of Framework-based regulations, guidance, and policies. Additional information on these activities will be forthcoming.

Supervisory Guidance

The Agencies are developing supervisory guidance for various portfolios and risk exposures addressed by the Framework. This guidance is intended to provide U.S. institutions and supervisors with a clear description of the essential components and characteristics of the measurement and management structure for these risks and to describe relevant supervisory expectations for banking organizations adopting a Framework-based process for the determination of minimum regulatory risk-based capital requirements.

The Agencies have previously published, for notice and comment, draft supervisory guidance on Internal Ratings-Based Systems (IRB) for Corporate Credit and on the Advanced Measurement Approaches (AMA) for Operational Risk. See 68 Federal Register 45949 (August 4, 2003). The Agencies expect to publish, for notice and comment, draft supervisory guidance on IRB Systems for Retail Credit in the third quarter of 2004. Over the course of the next year, the Agencies will publish for comment additional guidance on other aspects of IRB Systems.

Institutions that expect to adopt the Framework are encouraged to consider the supervisory standards articulated in the guidance in developing their implementation plans for the adoption of Framework-based systems. Specifically, institutions should begin to self-assess the extent to which their systems and processes comply with or differ from proposed supervisory standards. The Agencies expect to publish additional information regarding the process that will be used to assess individual institutions' efforts to meet IRB and AMA qualifying standards.