Chairman Shelby, Senator Sarbanes, and members of the
Committee, thank you for inviting the Office of the Comptroller of the Currency
(OCC) to participate in this hearing on proposed revisions to the 1988 Capital
Accord developed by the Basel Committee on Banking Supervision.
I want to assure the Committee that the OCC, which has the
sole statutory responsibility for promulgating capital regulations for national
banks, will not sign off on a final Basel II framework for U.S. banks until we
have determined through our domestic rulemaking process that any changes to our
domestic capital regulations are practical, effective and in the best interests
of the U.S. banking system.
My written testimony provides a detailed discussion of the
background and content of Basel II and the important issues with which this
Committee is properly concerned. I would like to use this time to make four
important points that may help to put todays testimony in proper focus.
First, all of the U.S. banking agencies share
a concern about the potential effect of Basel II on the capital levels of large
U.S. banks. Our banking system has
performed remarkably well in difficult economic conditions in recent years, and
I believe that is due in significant part to the strong capital position our
banks have maintained. While a more
risk sensitive system of capital calculation might be expected to have the
effect of reducing the capital of some banks, we would not be comfortable if
the consequence of Basel II were to bring about very large decreases in
required minimum capital levels. By the same token, if Basel II were to
threaten significant increases in the capital of some banks it could undermine
support for the proposal and might threaten the competitiveness of those
banks. As things stand today, we simply
do not have sufficiently reliable information on the effect of these proposals
on individual institutions or on the banking industry as a whole. Before we can
make a valid assessment of whether the results are appropriate and acceptable,
we have to know, to a much greater degree of reliability than we now have, just
what the results of Basel II will be.
The OCC believes that significant additional quantitative
impact analyses will be necessary.
Ideally, this should take the form of another study by the Basel
Committee itself. However, even if the
Basel Committee does not undertake such a study, I believe that it is
absolutely essential that the U.S. agencies make such an assessment prior to
the adoption of final implementing regulations. I strongly believe that we cannot responsibly adopt final rules
implementing Basel II until we have not only determined with a high degree of
reliability what the impact will be on the capital of our banks, but have made
the judgment that the impact is acceptable and conducive to the maintenance of
a safe and sound banking system in the U.S.
I believe all of the U.S. banking agencies share that
objective, and we expect to work closely together to resolve any open
issues.
Second, some have perceived there to be
significant differences among the U.S. banking agencies, and have suggested
that some external mechanism is needed to resolve such differences. I believe that is an erroneous conclusion.
On the contrary, I believe the agencies have worked
exceedingly well together on this project for the past four years and will
continue to do so. To be sure, we have
not always agreed on every one of the multitude of complex issues that Basel II
has presented, but that is no more than one would reasonably expect when a
group of experts have brought their individual perspectives to bear on
difficult issues. Where there have been
differences, we have worked our way through them in a highly professional and
collaborative manner.
The Advance Notice of Proposed Rulemaking for implementation
of Basel II in the U.S. that the agencies will soon jointly issue is another
example of a highly collegial and collaborative process. Our staffs have been laboring together
diligently to get us prepared for this first round of rulemaking. In addition, we are now in the final stages
of internal review on draft interagency guidance that we will jointly issue
concurrently with the ANPR to clarify and elaborate on our expectations for
those of our banks that will be subject to Basel II, and that guidance has been
developed in a process in which every agency had substantial input. While reaching agreement on some of the
proposed requirements was no small feat, I believe that every agency will
concur with the outcome.
Considerable consultation and deliberation still lie ahead
before we can even consider final adoption of implementing regulations. But I
have every confidence that the agencies will continue to approach the issues in
the same constructive spirit that has prevailed to this point.
Third, as I said earlier, I believe we are all
committed to a process that has real integrity to it. The current Basel
Committee timeline presents a daunting challenge to both the U.S. banking
agencies and the banking industry.
While it is clearly necessary to address the acknowledged deficiencies
in the current Basel Capital Accord, the banking agencies must better
understand the full range and scale of likely consequences before finalizing
any proposal. We have identified in our
written testimony the milestones that the agencies must meet under the current
Basel II timeline. They include: Basel
Committee consideration of comments received by it on
its latest consultative paper; the issuance of an ANPR and draft supervisory
guidance in the U.S. with a 90-day period for comments; full consideration of
those comments; the issuance of a definitive paper by the Basel Committee; the
drafting and issuance for comment in the U.S. of a proposed regulation
implementing Basel II; the conduct of a further quantitative impact study;
consideration of the comments received on the NPR; and finally the issuance of
a definitive U.S. implementing regulation.
Each of these steps is
critical in a prudential consideration of Basel II in the
U.S., and the agencies will be working closely together at every step.
If we find that our current target implementation of
January 1, 2007, is simply not doable and my personal opinion is that
realization of that target may be very difficult -- we will take more time. But
it is too early to draw that conclusion yet.
The important point is that we will take great care not to let the time
frame shape the debate. Equally
important is that the time frame will be secondary to our responsibility
to fully consider all comments received during our notice and comment
process. If we determine through this
process that changes to the proposal are necessary, we will make those views
known to the Basel Committee, and we will not implement proposed revisions
until those changes are made.
Finally, some have viewed the new Basel II
approach as leaving it up to the banks to determine their own minimum capital
putting the fox in charge of the chicken coop. This is categorically not the
case. While a banks internal models and risk assessment systems will be the
starting point for the calculation of capital, bank supervisors will be heavily
involved at every stage of the process.
We will publish extensive guidance and standards that the banks will
have to observe. We will not only
validate the models and systems, but will assure that they are being applied
with integrity. In my view the bank supervisory system that we have in the U.S
is unsurpassed anywhere in the world in both its quality and in the intensity
with which it is applied, and we are not going to allow Basel II to change
that. In fact, if we dont believe at the end of the day that Basel II will
enhance the quality and effectiveness of our supervision we should have
serious reservations about proceeding in this direction.
Moreover, while
Basel II has largely been designed by economists and mathematicians, and while
these quants will play an important role in our oversight of the implementation
of Basel II, the role of our traditional bank examiners will continue to be of
enormous importance. Such values as
asset quality, credit culture, managerial competence, and the adequacy of
internal controls cannot be determined by mathematical models or formulas. Nor
can many of the risks that banks face be properly evaluated except by the
application of seasoned and expert judgment.
I can assure you that those national banks covered by Basel II will continue
to be closely monitored and supervised by highly qualified and experienced
national bank examiners, who will continue to have a full-time on-site
presence. The new process will not replace them; it will simply give them even
better tools to assess the true nature and measure of the risks confronting the
banks for which they are responsible.
I am pleased to have had this opportunity to provide our
views on this important initiative, and I would be happy to answer any
questions you may have.
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The
OCC charters, regulates and examines approximately 2,100 national banks and 52
federal branches and agencies of foreign banks in the United States, accounting
for 55 percent of the nations banking assets.
Its mission is to ensure a safe, sound and competitive national banking
system that supports the citizens, communities and economy of the United
States.