OCC 2003-32	
OCC Bulletin

Subject:      Proposed Revisions to Risk-Based Capital Implementing 
              the new Basel Capital Accord
Description:  Advance Notice of Proposed Rulemaking and Supervisory
              Guidance

Date:         August 4, 2003 

TO:  Chief Executive Officers of All National Banks, Federal Branches 
     and Agencies, Department and Division Heads, and All Examining 
     Personnel

This bulletin briefly summarizes the Advance Notice of Proposed 
Rulemaking (ANPR) and Supervisory Guidance developed for corporate 
credit risk and operational risk that were published today in the 
Federal Register.  Because of their length, the documents are not 
attached to this bulletin, but they can be accessed at 
http://www.archives.gov/federal_register/.  These documents seek 
comment on all aspects of the U.S. proposals to implement revisions 
to the Basel Capital Accord that are currently under consideration 
by the Basel Committee on Banking Supervision.  The Basel Committee’s 
proposed revisions are contained in a consultative document, “The 
New Basel Capital Accord” (Basel II), issued on April 29, 2003.  
The consultative paper can be found at www.bis.org. 


SUMMARY

The Office of the Comptroller of the Currency (OCC), the Board of 
Governors of the Federal Reserve System, the Federal Deposit 
Insurance Corporation, and the Office of Thrift Supervision (the 
agencies) have jointly developed three documents that provide the 
first comprehensive discussion of how Basel II might be implemented 
in the United States.  Comments are requested on all three documents.  
In the ANPR, specific questions are posed, and commenters are urged 
to provide feedback on those issues.  While the three documents have 
been issued together, they are very different in terms of focus and 
scope of coverage.  

The ANPR focuses primarily on the regulatory framework that will 
implement Basel II in the United States.  The ANPR identifies the 
criteria (assets greater than $250 billion or foreign exposures 
greater than $10 billion) that will be used to determine whether a 
bank will be required to apply the advanced capital approaches under 
Basel II.  The ANPR describes the requirements for these “mandatory” 
banks, including the relevant implementation time frames.  In 
addition, the ANPR discusses the two other categories of banks—those 
banks that choose to opt-in to the proposed new capital framework 
and those banks that are non-Basel II banks.  Opt-in banks will be 
required to meet the same supervisory standards as mandatory banks, 
while non-Basel II banks in the United States will continue to be 
subject to the current risk-based capital rules.

The ANPR summarizes the requirements for all credit portfolios—
wholesale, retail, equity, securitization, and purchased receivables—
and for operational risk.  It describes the expectations for 
supervisory review (Pillar 2) and disclosure (Pillar 3).  The ANPR 
also reviews the status of substantive areas where supplementary 
supervisory guidance is not yet available, such as retail credits 
and securitization and discusses how such proposals might be further 
refined and incorporated into the U.S. regulatory capital framework.  
The last section of the ANPR discusses additional regulatory 
considerations and seeks input on costs and benefits stemming from 
the proposed framework.

Reviewers should focus particularly on the questions the agencies 
are asking in the ANPR.  Since Basel II has not yet been finalized 
by the Basel Committee, there are both general and technical 
concerns with the proposal that have not been fully resolved.  For 
example, in working to translate Basel II into a working program for 
U.S. banks, questions have arisen about the range of implications of 
the proposal, how best to implement the proposals, and how best to 
address continued open issues.  As a result, the ANPR highlights a 
number of areas in which the agencies are seeking specific feedback, 
including the competitive effects of Basel II implementation, the 
appropriateness of the expected plus unexpected loss framework 
underlying the Internal Ratings-Based Approach (IRB) and Advanced 
Measurement Approaches (AMA) regulatory capital calculation, and the 
effect of proposed changes to transitional floors to the regulatory 
capital calculation.  The agencies plan to use the feedback on these 
questions, and all comments received, as they consider finalization 
of Basel II and development of a Notice of Proposed Rulemaking.  The 
ANPR also highlights the need for an additional quantitative impact 
study before the proposal is finalized in the United States.

In addition to the ANPR, the OCC and other agencies are also 
publishing supervisory guidance for the advanced approaches for 
corporate credit risk and operational risk.  These guidance papers 
describe in more detail the standards that banks will be required 
to meet in order to qualify for the proposed advanced approaches.  
Like the ANPR, comments are encouraged on both of the supervisory 
guidance documents.

The supervisory guidance for credit risk covers only corporate credit 
exposures.  The guidance discusses the critical components of the 
IRB for corporate credits and identifies the standards that banks 
must meet in order to use the IRB framework to calculate regulatory 
capital.  It is divided into four chapters:  ratings; quantification; 
data maintenance; and control and oversight mechanisms.  The 
guidance emphasizes the interdependent relationship among these four 
components of an IRB system.  Recognizing that credit risk 
management is evolving and that banks pursue a range of different 
approaches in managing credit, the guidance affords banks flexibility 
in designing and implementing their IRB systems.  Guidance on 
additional areas of credit risk, such as retail credit, is currently 
being developed.  

The supervisory guidance for operational risk describes the AMA that 
“mandatory” and opt-in U.S. banks would be expected to adopt.  The 
guidance highlights the importance of both risk management and risk 
measurement in an AMA operational risk framework.  The supervisory 
standards cover a number of different areas, including corporate 
governance, risk quantification, testing and verification, and data 
maintenance.  Much of the document focuses on the critical inputs 
to the operational risk framework, including internal data, external 
data, scenario analysis, and business environment and control 
factors.  These elements will help generate the operational risk 
exposure result that is the foundation for the regulatory capital 
charge.  The authors of this guidance recognize that the measurement 
and management of operational risk are still an evolving science.  
As a result, institutions would be allowed a certain degree of 
flexibility in developing their operational risk frameworks, 
provided the supervisory standards are met.

Comments and questions about the ANPR and the supervisory guidance 
documents may be directed to the persons listed below:

·  For the ANPR:  Roger Tufts at (202) 874-4925, Tanya Smith at 
   (202) 874-4735, or Ron Shimabukuro at (202) 874-5090.
·  For “Supervisory Guidance on Internal Ratings-Based Systems for 
   Corporate Credit,” Jim Vesely at (202) 874-5170.
·  For “Supervisory Guidance on Operational Risk Advanced 
   Measurement Approaches for Regulatory Capital,” Tanya Smith at 
   (202) 874-4735.


__________________________________
Emory W. Rushton
Senior Deputy Comptroller and Chief National Bank Examiner


Attachments—

·  68 FR 45900: Advance Notice of Proposed Rulemaking
   [http://a257.g.akamaitech.net/7/257/2422/14mar20010800/
edocket.access.gpo.gov/2003/03-18977.htm]

·  68 FR 45949: Draft Supervisory Guidance with Request for Comment
   [http://a257.g.akamaitech.net/7/257/2422/14mar20010800/edocket.
access.gpo.gov/2003/03-18976.htm]