WASHINGTON -- Comptroller of the Currency
John C. Dugan told a House subcommittee today that the Basel II capital
framework is intended not only to align capital requirements more closely to
the complex risks inherent in large, internationally active banks, but to
require those institutions to substantially improve their risk management
systems and controls.
The inadequacies of the
current Basel I capital regime for the largest internationally active banks are
a matter of great concern to the OCC, he said, because the agency supervises
the five largest banks in the United States, some of which hold more than $1
trillion in assets.
These institutions
have complex balance sheets, take complex risks, and have complex risk
management needs that are fundamentally different from those faced by community
and mid-sized banks, Mr. Dugan said in testimony before the House Financial
Services Subcommittee on Financial Institutions and Consumer Credit. The Comptrollers testimony also covered
proposed interagency guidance on commercial real estate lending.
Mr. Dugan stressed in
his testimony that the OCC and the other agencies are interested in comments
from all interested parties on both the Basel II proposal and the proposed
guidance.
The agencies have and will continue to foster an open process as we
move forward with these proposals, Mr. Dugan said, adding that the agencies
will consider all comments, heed good suggestions, and address legitimate
concerns.
Mr. Dugan also emphasized that the rule includes a number of
precautions, including capital floors for the three year transition period, to
make sure it does not result in unacceptable drops in capital levels.
If during this period we find
that the final rule would produce unacceptable declines in the absence of these
floors, then we will have to fix the rule before going forward and all the
agencies have committed to do just that, he added.
The Comptroller noted that while the Basel II proposal is complex, it is
intended to be mandated for only a dozen very large banks. For most banks, he said, the simpler Basel 1A approach that
the agencies plan to issue soon will provide a way to more closely align
capital with risk without unduly increasing regulatory burden.
Mr. Dugan told the
subcommittee that the commercial real estate guidance was proposed for three
reasons: the painful experience of just
20 years ago that showed commercial real estate lending has the real potential
to fail banks; the recent and dramatic surge in concentrations in commercial
real estate lending among community and midsize banks; and the finding that
risk management practices in many of these banks had not kept pace with the surge
in concentrations.
Mr. Dugan said the
basic premise of the proposed guidance is that where commercial real estate
loan concentrations exist, banks should have risk management systems and
capital appropriate to the risk of those concentrations.
But our message to
banks is not: Cut back on commercial real estate loans, the Comptroller
said. Instead it is this: You can have concentrations in commercial
real estate loans, but only if you have appropriate risk management and capital
to address the increased risk.
His oral and written statements are available on the OCC's web site at www.occ.treas.gov.
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The
Office of the Comptroller of the Currency was created by Congress to charter
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assure that national banks are safe and sound, competitive and profitable, and
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