WASHINGTON --
Comptroller of the Currency John C. Dugan told the Senate Banking Committee
today that the goal of the Basel II Capital Framework and a separate
initiative for smaller institutions will substantially enhance safety and
soundness.
Basel II will promote
significant advances in risk management that will benefit supervisors and banks
alike and substantially enhance safety and soundness, Mr. Dugan said in
testimony before the Senate panel.
However, the Basel
Framework will inevitably require adjustments to address supervisory concerns,
Mr. Dugan said. While the recent Quantitative Impact Study 4 (QIS-4) of the
Capital Frameworks impact on large U.S. banks showed widely different results
for participating institutions and suggested the possibility of substantial
reductions in capital, the Comptroller said it is important now to see how live
systems operate in a transition period.
We need to observe
live systems in operation and subject them to rigorous supervisory scrutiny
before we will be able to rely on Basel II for regulatory capital purposes, he
said.
To accomplish that, Mr.
Dugan said, the upcoming Basel II rulemakings will provide a meaningful
transition period during which regulators can observe and scrutinize Basel II
systems while strictly limiting, through a system of simple and conservative
capital floors, potential reductions in capital requirements.
I believe that, once
the Basel II framework is implemented completely and rigorously supervised in
the controlled environment of the transition period, and once we have had the
opportunity to make necessary changes to the framework based on the knowledge
we gain during that period, the concerns raised by QIS-4 will be addressed, he
said.
For smaller banks, the
banking agencies have proposed a separate process to increase the risk
sensitivity of our risk-based capital rules without unduly increasing
regulatory burden. The Basel 1A
framework would increase the number of risk-weight categories to which credit
exposures may be assigned, expand the use of external credit ratings, and
employ a range of other techniques aimed at increasing the risk sensitivity of
capital requirements.
Comptroller Dugan said
he believes that Basel II and Basel IA should be subject to overlapping comment
periods, which he said is essential for regulators to assess the potential
competitive effects of these proposals on the U.S. financial services industry.
The Comptroller said that safety and soundness considerations demand
that capital regulations move from todays measurements to a system that more
closely aligns capital with risk.
Doing nothing to revise our capital rules would,
over time, threaten the safety and soundness of the banking system, especially
with regard to our largest banks that engage in increasingly complex
transactions and hold increasingly complex assets, he said.
Although both processes [Basel II and Basel IA] will take time and
will inevitably change to address supervisory concerns, I believe both will
substantially enhance safety and soundness.
Mr. Dugan said.
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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.