WASHINGTON
Comptroller of the Currency John C. Dugan told a conference of international
bankers today that the continued safety and soundness of the banking system
demands that regulators move away from the simplistic risk-based capital system
now in use for internationally active banks to one that substantially enhances
risk management and more closely aligns capital with risk.
I say this not because
economists have dreamed up complex capital models in an academic exercise that
attracts kudos from quantitative experts, he said in a speech to a conference
sponsored by the Institute of International Bankers.
Instead, I say it as
the head of an agency that supervises multi-billion dollar institutions in
some cases more than a trillion dollars that take substantial levels of
calculated risks as financial intermediaries to provide enormous amounts of
funding fuel for our economy.
The Comptroller told
the conference sponsored by the Institute of International Bankers that while
he strongly supports the Basel II approach, the recent Quantitative Impact
Study 4, or QIS 4, shows that additional work is needed. QIS 4 projected both a
material drop in capital and a substantial dispersion of results across
institutions and portfolios.
The agencies concluded,
he said, that the questions raised by QIS 4 can be fully answered only by
observing live Basel II systems based on a definite set of agency rules,
subject to meaningful supervisory validation and scrutiny but only with
adequate safeguards.
The U.S. agencies, he
said, have insisted that a stringent set of safeguards be applied during the
transition period, including a one-year delay in the adoption of Basel II; an
extension of the transition period to three years; and strict limits on
potential reductions in capital requirements during the transition period.
Moreover, he said, if the agencies conclude during the
transition period that the fully implemented Basel II rule does not adequately reflect risk, or results in unacceptable declines
in capital requirements like what we observed in QIS 4, then we have
committed to make further changes and potentially fundamental ones, if
necessary to address those problems to fulfill our safety and soundness
responsibilities.
The Comptroller also
said the agencies will maintain the leverage ratio as a fundamental capital
backstop for unanticipated risks faced by banks, including the risk that Basel
II may not work as intended.
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The Office of the
Comptroller of the Currency was created by Congress to charter national banks,
to oversee a nationwide system of banking institutions, and to assure that
national banks are safe and sound, competitive and profitable, and capable of
serving in the best possible manner the banking needs of their customers.