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Comptroller
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Date: February 28, 2007 |
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PURPOSE This bulletin briefly summarizes proposed supervisory guidance documents related to the September 2006 notice of proposed rulemaking on new risk-based capital requirements in the United States for large, internationally active banking organizations (Basel II NPR)1. The proposed guidance documents, with related requests for comment, were published jointly today in the Federal Register by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (agencies). BACKGROUND As described in the NPR, Basel II sets forth a three-pillared framework encompassing regulatory risk-based capital requirements (Pillar 1); supervisory review of capital adequacy (Pillar 2); and market discipline through enhanced public disclosures (Pillar 3). The proposed framework in the Basel II NPR would require some and permit other qualifying banks to calculate their regulatory risk-based capital requirements using an internal ratings-based (IRB) approach for credit risk and the advanced measurement approaches (AMA) for operational risk. The Basel II NPR also provides a framework for supervisory review under Pillar 2. The agencies are soliciting comment on all aspects of the supervisory documents. Because of their length, the documents are not attached to this bulletin but can be accessed through the OCC’s Web site using the following link: Proposed Guidance. Comments on the documents are due on or before May 29, 2007. PROPOSED GUIDANCE The proposed supervisory guidance documents are companion guidance to the Basel II NPR and are designed to provide additional detail that should help banks better understand the qualification requirements in the NPR. However, their publication for comment does not imply that the outcome of the Basel II NPR has already been determined. The documents are subject to change, as needed, based on, among other things, the public comment on the guidance and the agencies’ decisions regarding any final rule. The proposed guidance is composed of three documents. The first two documents set forth the agencies’ expectations on IRB systems for credit risk and AMA approaches for operational risk. The structure of the documents generally follows the key components of a bank’s IRB and AMA systems outlined in the Basel II NPR and should be read alongside the Basel II NPR to obtain a full perspective of the underlying requirements for banks seeking to implement Basel II in the United States. Both documents include revisions based on comments the agencies received from earlier public solicitations of comment. The IRB guidance updates and consolidates the proposed supervisory guidance on corporate and retail exposures published in 2003 and 2004. It also provides new guidance on systems a bank may need to differentiate the risks of other credit exposure types, such as equity and securitization exposures, as well as to recognize the benefits of financial collateral in mitigating counterparty credit risk in certain transactions or to use the double default treatment for certain wholesale exposures. Chapter 1 provides guidance on governance of a bank’s overall advanced systems for credit risk. Chapters 2 through 5 cover the components of a bank’s IRB systems for wholesale and retail exposures. Chapters 6 and 7 provide guidance on data management and maintenance and the control and validation framework of those systems. Chapter 8 provides guidance on stress testing. Chapters 9 through 11 provide guidance on the other systems a bank may need to differentiate risks in certain transactions subject to counterparty credit risk, equity exposures, and securitization exposures. The AMA guidance updates the proposed AMA Guidance published in 2003. The agencies have revised the guidance to clarify issues and simplify, wherever possible, supervisory standards. Some of the specific revisions to the AMA Guidance include clarifying supervisory expectations regarding the responsibilities of a bank’s board of directors and management in developing and overseeing the implementation of the bank’s AMA framework, the use of scenario analysis, the key elements used to support operational risk management and measurement, and eligible operational risk offsets. Certain other standards have been expanded or added to clarify expectations or to address supervisory concerns. The third document sets forth proposed supervisory guidance on the Pillar 2 supervisory review. The process of supervisory review described in this proposed guidance document reflects a continuation of the longstanding approach employed by the agencies in their supervision of banks. However, new methods for calculating regulatory risk-based capital requirements – such as those in the proposed framework – and development of improved risk monitoring and management tools within the industry often bring changes in the relative emphasis placed on the various aspects of supervisory review. This proposed guidance highlights aspects of existing supervisory review that are being augmented or more clearly defined to support the proposed framework. FOR FURTHER INFORMATION
Contact: For IRB Guidance – Fred Finke, Senior Basel Policy Liaison (202-874 4468);
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