Professional Documents
Culture Documents
Executive Summary
Risk-based capital is equity, qualifying reserves, and qualifying capital that must be
maintained by a bank to cover risks associated with conducting day-to-day business
Basel II, A Revised Framework on International Convergence of Capital Measurement and Capital Standards
Proposed in 1999 in response to the banking crisis in the 1990s and the criticisms of Basel I
Recent changes and developments impacting the current risk-based capital framework
Intended to promote financial stability in the U.S. by improving accountability and transparency in the financial system
Intended to improve the banking sectors ability to absorb shocks arising from financial and economic stress
Common objective To promote prudential capital standards for the banking sector
Challenges
Are such standards applicable to all banks?
How will the reliance on credit ratings be addressed?
How do supervisors ensure a level international playing field?
Three events triggered movement toward an international regime re: capital adequacy in the
1970s/1980s
U.S. bank regulators published capital ratios for banks in 1982 and indicated that large banks with
primary capital to asset ratios of less than 5% would be considered undercapitalized
Fed and OCC applied capital ratios (7%) to U.S. multinational banks in 1983 and moved quickly with
the other bank regulators to impose capital requirements on all U.S. banks
By 1985 nearly all Basel Committee countries placed substantial regulatory reliance on capital ratios
Basel Committee published its first consultative paper on international capital standards in
December of 1987
Basel I
Basel I Overview: International Convergence of Capital Measurements and
Capital Standards
Effective since 1988 and implemented by all Basel Committee members by the end
of 1992, Basel I established two fundamental objectives:
The proposed framework should be fair and have a high degree of consistency in its
application to banks in different countries with a view to diminishing an existing source
of competitive inequality among international banks
Tier 1 Capital core capital including equity capital and disclosed reserves
Tier 2 Capital - all other qualifying capital
Basel I
Basel I Overview: International Convergence of Capital Measurements and Capital
Standards
Riskless 0%
Low risk 20%
Moderate risk 50%
High risk no less than 100%
In general, corporate and consumer exposures are assigned to the 100% risk-weight category
Established the minimum capital requirements of financial institutions with the goal of minimizing
credit risk
Set a universal standard whereby 8% of a banks risk-weighted assets must be covered by Tier 1 and Tier 2 capital reserves
Tier 1 capital must cover 4% of a banks risk-weighted assets; this ratio was seen as minimally adequate to protect against credit
risk in deposit insurance-backed international banks in all Basel Committee member states
Exposure
Amount
Risk
Weight
Credit
Conversion
Factor for offbalance sheet
exposures
8%
Capital
Requirement
Basel I
Basel I Risk Weights and Credit Conversion Factors
Under Basel I, risk-based capital for securitization exposures is determined based on risk weights mapped
to measures of creditworthiness, and credit conversion factors for off-balance sheet items
In 2001, references to credit ratings were introduced to the U.S. framework, and specific rules for residual interests and direct
credit substitutes were adopted
Unrated exposures are generally assigned a 100% risk weight unless they are retained interests, direct credit
substitutes or other recourse positions
Basel I Credit Conversion Table
Basel I Risk-Weight Tables1
Risk weight
Long-term rating category
Example (In percent)
Highest or second highest investment grade AAA, AA
20
Third highest investment grade
A
50
Lowest investment grade
BBB
100
One category below investment grade
BB
200
Short-term rating category
Highest investment grade
Second highest investment grade
Lowest investment grade
1 Source:
Risk weight
Examples (In percent)
A-1, P-1
20
A-2, P-2
50
A-3, P-3
100
Instruments
1. Direct credit substitutes, e.g. general guarantees of indebtedness (including standby letters of
credit serving as financial guarantees for loans and securities) and acceptances (including
endorsements with the character of acceptances)
2. Certain transaction-related contingent items (e.g. performance bonds, bid bonds, warranties and
standby letters of credit related to particular transactions)
3. Short-term self-liquidating trade-related contingencies (such as documentary credits
collateralised by the underlying shipments)
4. Sale and repurchase agreements and asset sales with recourse,1 where the credit risk remains
with the bank
5. Forward asset purchases, forward forward deposits and partly-paid shares and securities,1 which
represent commitments with certain drawdown
6. Note issuance facilities and revolving underwriting facilities
7. Other commitments (e.g. formal standby facilities and credit lines) with an original maturity of
over one year
8. Similar commitments with an original maturity of up to one year, or which can be unconditionally
cancelled at any time
Credit
Conversion
Factors
100%
50%
20%
100%
100%
50%
50%
0%
Basel I
Special Rules for unrated retained interests, direct credit substitutes and recourse positions
Recourse positions
Arrangements in which a bank retains, in form or in substance, of any credit risk directly or indirectly
associated with an asset it has sold (in accordance with generally accepted accounting principles (GAAP))
that exceeds a pro rata share of the banks claim on the asset
Retained interests
If a bank has no claim on an asset it has sold, then the retention of any credit risk is recourse
On-balance sheet assets that represent an interest (including a beneficial interest) created by a transfer of
the banks assets that qualifies as a sale (in accordance with GAAP) of financial assets, whether through a
securitization or otherwise, and that exposes a bank to credit risk directly or indirectly associated with the
transferred assets that exceeds a pro rata share of the banks claim on the assets, whether through
subordination provisions or other credit enhancement techniques
Retained interests are a special category of recourse positions
Arrangements (e.g. letters of credit) in which a bank assumes, in form or in substance, credit risk associated
with an on- or off-balance sheet credit exposure that was not previously owned by the bank (third-party
asset) and the risk assumed by the bank exceeds the pro rata share of the banks interest in the third party
asset
Basel I
Special Rules for unrated retained interests, direct credit substitutes and recourse positions
In general, the credit-equivalent amount for an unrated recourse obligation or direct credit
substitute is the full amount of the credit-enhanced assets for which the bank directly or indirectly
retains or assumes credit risk multiplied by a 100% conversion factor
A bank that absorbs the first 10% of loss on a transaction, must maintain capital against the full amount of
the assets being supported
A bank must maintain risk-based capital for a residual interest (excluding a credit-enhancing interestonly strip) equal to the face amount of the residual interest (net of any existing associated deferred
tax liability recorded on the balance sheet), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the assets transferred
Interim rule was implemented as of October 2003 and made permanent as of July 2004
Allowed sponsoring banking organizations to remove the consolidated ABCP program assets from
their risk-weighted asset bases for the purpose of calculating their risk-based capital ratios
Under the exclusion, sponsoring banking organizations would continue to hold risk-based capital
against all other risk exposure arising in connection with ABCP programs, including direct credit
substitutes, recourse obligations, residual interests, long-term liquidity facilities, and loans, in
accordance with each agencys existing risk-based capital standards
Provided for a 10% credit conversion factor for eligible liquidity facilities (50% for commitments over
one year)
After September 30, 2005, liquidity facilities were required to meet certain eligibility criteria in order
to qualify for the 10% or 50% Credit Conversion Factor (otherwise they were treated as direct credit
substitutes and risk-weighted not less than 100%)
Liquidity could not fund against assets that were more than 90 days past due or in default
A liquidity facility could qualify as eligible liquidity if the ineligible assets were covered by eligible credit enhancement
Funded credit enhancements such as overcollateralization, cash reserves, subordinated securities, and funded spread
accounts
Surety bonds and letters of credit issued by third parties with credit ratings of at least A
One months worth of excess spread if the excess spread is required to be captured when it falls below 4.5% and there is no
material adverse change in the banks ABCP underwriting standards
If the assets funded against were externally rated, the liquidity could not fund against the assets if the assets
were rated below investment grade at the time of the proposed liquidity funding
With primary regulatory approval, banks were permitted to use their own internal credit ratings systems to determine the
appropriate amount of capital for PWCE (a special category of direct credit substitute). Use of these systems could not
result in a risk weight of less than 100%
U.S. regulators issued guidance on the use of internal credit ratings systems for calculating capital on PWCE provided by
banks; a weakest link approach was used to determine the capital charge
If all of the exposures in the ABCP conduit were internally rated investment grade or better, the capital charge was 8% of the amount of
the PWCE
If not, then a formula-driven approach was used to calculate capital as follows
Basel II
Basel II Overview: A Revised Framework on International Convergence of Capital
Measurement and Capital Standards
Proposed in 1999 in response to the banking crisis in the 1990s and the criticisms of Basel I
The fundamental objective of the Basel Committee's work to revise the 1988 Accord was to develop
a framework that would further strengthen the soundness and stability of the international banking
system while maintaining sufficient consistency that capital adequacy regulation would not be a
significant source of competitive inequality among internationally active banks
Basel II
Three Pillars of Basel II2
Credit
Risk
Pillar 1
Pillar 2
Pillar 3
Minimum capital
requirements
Supervisory
review
Market discipline
(via disclosure)
Operational
Risk
Market
Risk
Standardized
approach
Basic indicator
approach
Foundation
internal
ratings-based
approach
Standardized
approach
Advanced
internal
ratings-based
approach
(A-IRB)
Advanced
measurement
approaches
(AMA)
Risk Measurement
Approaches
Currently proposed in the U.S.
Standardized approach as an
option for non-core banks
Other approaches available in
the international accord
Required in the U.S. final rule for
core banks, opt-in available to
non-core banks
2 Source:
GAO
Supervisory roles:
Evaluate banks internal
capital adequacy
assessments and
compliance with minimum
capital requirements
Intervene early to
prevent capital f rom f alling
below minimum levels
Basel II
Hierarchy of approaches for securitization exposures
According to Basel II, banks must apply the following hierarchy of approaches to determine
the risk-based capital requirement for a securitization exposure
Basel II
Hierarchy of approaches for securitization exposures
An investing bank is eligible to use the RBA for a securitization exposure if the exposure has one or more
external or inferred credit ratings
Basel II
Hierarchy of approaches for securitization exposures
An unrated securitization exposure has an inferred credit rating if another securitization exposure issued by
the same issuer and secured by the same underlying exposures has an external credit rating and this rated
reference exposure
Securitization exposures with an inferred credit rating are treated the same as securitization exposures with
an identical external credit rating
If a securitization exposure has multiple external credit ratings or multiple inferred credit ratings, a bank is
required to use the lowest credit rating (the credit rating that would produce the highest risk-based capital
requirement)
The risk-based capital requirement per dollar of securitization exposure depends on four factors
Basel II
Hierarchy of approaches for
securitization exposures
3 Source:
Basel Committee on Banking Supervision Enhancements to the Basel II Framework, dated July 2009
Securitization Exposures
Resecuritization Exposures
Senior,
Non-senior, Non-granular
Senior
Non-senior
Granular
Granular
7
12
20
20
30
8
15
25
25
40
10
18
35
35
50
12
20
35
40
65
20
35
35
60
100
35
50
50
100
150
60
75
75
150
225
100
100
100
200
350
250
250
250
300
500
425
425
425
500
650
650
650
650
750
850
Deduction
Securitization Exposures
Resecuritization Exposures
Senior,
Non-senior, Non-granular
Senior
Non-senior
Granular
Granular
7
12
20
20
30
12
20
35
40
65
60
75
75
150
225
Deduction
Basel II
Hierarchy of Minimal Capital Requirements Approaches
A bank must receive written approval from its primary Federal regulator to use the IAA
A bank must satisfy the following requirements to qualify for the IAA
The banks internal credit assessments of securitization exposures must be based on publicly available credit rating criteria used by
an NRSRO
The banks internal credit assessments of securitization exposures used for risk-based capital purposes must be consistent with those
used in the banks internal risk management process, management information reporting systems, and capital adequacy assessment
process
The bank's internal credit assessment process must have sufficient granularity to identify gradations of risk
Each of the bank's internal credit assessment categories must correspond to an external credit rating of an NRSRO
The bank's internal credit assessment process, particularly the stress test factors for determining credit enhancement requirements,
must be at least as conservative as the most conservative of the publicly available credit rating criteria of the NRSROs that have
provided external credit ratings to the commercial paper issued by the ABCP program
The bank must have an effective system of controls and oversight that ensures compliance with these operational requirements and
maintains the integrity and accuracy of the internal credit assessments
The bank must have an internal audit function independent from the ABCP program business line and internal credit
assessment process that assesses at least annually whether the controls over the internal credit assessment process function
as intended
The bank must review and update each internal credit assessment whenever new material information is available, but no less
frequently than annually
A bank that elects to use the IAA for any securitization exposure to an ABCP program must use the IAA to compute risk-based capital
requirements for all securitization exposures that qualify for the IAA
Basel II
Hierarchy of Minimal Capital Requirements Approaches
A banks exposure must satisfy the following requirements to qualify for the IAA
The bank initially rated the exposure at least the equivalent of investment grade
The ABCP program has robust credit and investment guidelines for the exposures underlying the securitization exposure
The ABCP program performs a detailed credit analysis of the sellers of the exposures underlying the securitization exposure
The ABCP programs underwriting policy for the exposures underlying the securitization exposure establishes minimum asset
eligibility criteria that include the prohibition of the purchase of assets that are significantly past due or of assets that are defaulted,
as well as limitations on concentration to individual obligors or geographic areas and the tenor of the assets to be purchased
The aggregate estimate of loss on the exposures underlying the securitization exposure considers all sources of potential risk, such as
credit and dilution risk
Where relevant, the ABCP program incorporates structural features into each purchase of exposures underlying the securitization
exposure to mitigate potential credit deterioration of the underlying exposures
Basel II
Hierarchy of Minimal Capital Requirements Approaches (contd)
SFA can be applied to a securitization exposure if the securitization exposure is not a gain-on-sale or a CEIO, does not qualify for
the RBA, and is not an exposure to an ABCP program for which the bank is applying the IAA
A bank qualifies to use the SFA if the bank is able to calculate a set of risk factors relating to the securitization, including the
risk-based capital requirement for the underlying exposures as if they were held directly by the bank
The SFA capital requirement for a securitization exposure depends on the following inputs :
A bank must deduct from total capital any part of a securitization exposure that incurs a 1,250% risk weight under the SFA. Any
part of a securitization exposure that incurs less than a 1,250% risk weight must be risk weighted rather than deducted
Under SFA, capital for retained interests and other residual interests is equal to the amount of such exposures if the amount of
such exposure is less than Kirb
If a bank is not able to use the above approaches, the bank must deduct the exposure from total capital
Basel II
Exceptions to the General Hierarchy of Approaches
Banks are required to hold a dollar in capital for every dollar in residual interest, regardless of the effective risk-based capital
requirement on the underlying exposures
Unless one or more of the underlying exposures does not meet the definition of a wholesale, retail, securitization, or equity
exposure, the total risk-based capital requirement for all securitization exposures held by a single bank associated with a single
securitization (including any regulatory capital requirement that relates to an early amortization provision, but excluding any
capital requirements that relate to the banks gain-on-sale or CEIOs associated with the securitization) cannot exceed the sum
of (i) the banks total risk-based capital requirement for the underlying exposures as if the bank directly held the underlying
exposures; and (ii) the banks total ECL for the underlying exposures
For banks that have multiple securitization exposures providing duplicative coverage of the underlying exposures of a
securitization (such as when a bank provides a program-wide credit enhancement and multiple pool-specific liquidity facilities
to an ABCP program)
The applicable risk-based capital treatment under the securitization framework that results in the highest capital requirement
is applied to overlapping positions
Interest-only mortgage-backed securities must be assigned a risk weight that is no less than 100%
A sponsoring bank that qualifies as a primary beneficiary and must consolidate an ABCP program as a variable interest entity
under GAAP generally may exclude the consolidated ABCP program assets from risk-weighted assets4
A special set of rules applies to transfers of small business loans and leases with recourse by well-capitalized depository
institutions
4 Source:
The bank must hold risk-based capital against any securitization exposures of the bank to the ABCP program
The January 2010 Risk Based Guidelines; Capital Adequacy Guidelines; Capital Maintenance; Regulatory Capital; Impact of Modifications to Generally Accepted Accounting Principles;
Consolidation of Asset-Backed Commercial Paper Programs; and Other Related Issues; Final Rule removed the ABCP exclusion
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
Enacted July 21, 2010, the intention of this act is to promote the financial stability of the
United States by improving accountability and transparency in the financial system, to end
too big to fail, to protect the American taxpayer by ending bailouts, to protect consumers
from abusive financial services practices, and for other purposes
Applicable sections that impact risk-based capital for securitizations
No later than 1 year after the enactment of this section, each Federal agency shall, to the extent applicable,
review
Any regulation issued that requires the use of an assessment of the credit-worthiness of a security or money market instrument
Any references to or requirements in such regulations regarding credit ratings
Each agency shall modify any such regulations identified by the review to remove any reference to or
requirement of reliance on credit ratings and to substitute in such regulations such standard of creditworthiness as each respective agency shall determine as appropriate for such regulations
Such agencies shall seek to establish, to the extent feasible, uniform standards of credit-worthiness for use
by each agency, taking into account the entities regulated by each agency and the purposes for which such
entities would rely on such standards of credit-worthiness
Notice of Proposed Rulemaking on Section 939A still pending. Expected 1Q12
Market Risk Rules NPR released in December of 2011
Dodd-Frank Act
Dodd-Frank Wall Street Reform and Consumer Protection Act
Applicable sections that impact risk-based capital for securitizations
Collins Amendment final rule was adopted on June 14, 2011. Compliance with capital floor calculated on an
enterprise-wide basis, and floor possibly subject to change with future changes to Basel I rules
Minimum Leverage and Risk-Based Capital Requirements
Investments in Financial Subsidiaries
Section 941
Requires that a securitizer retain an economic interest in a material portion of the credit risk for any asset
that it transfers, sells, or conveys to a third party
Basel II.5
Resecuritizations
Securitization exposure in which the risk to the underlying exposures is tranched and at least
one or more of the underlying exposures is a securitization exposure
ABCP Programs
Assumption: ABCP Conduit does not hold securitization exposures that are resecuritization
exposures:
Basel II.5
Modification of RBA Tables under IRB
Approach
Securitization Exposures
Long-term
Rating
Senior position
None of the underlying exposures are
themselves resecuritization exposures.
Resecuritization Exposures
Senior,
Granular
Non-senior,
Granular
Non-granular
Senior
Non-senior
AAA
12
20
20
30
AA
15
25
25
40
A+
10
18
35
35
50
12
20
35
40
65
A-
20
35
35
60
100
BBB+
35
50
50
100
150
BBB
60
75
75
150
225
BBB-
100
100
100
200
350
BB+
250
250
250
300
500
BB
425
425
425
500
650
BB-
650
650
650
750
850
Below
Deduction
Securitization Exposures
Short-term
Rating
Resecuritization Exposures
Senior,
Granular
Non-senior,
Granular
Non-granular
Senior
Non-senior
A1
12
20
20
30
A2
15
25
25
40
A3
10
18
35
35
50
Below
Deduction
Basel II.5
Changes to securitization risk weights under Standardized Approach
Long-term Rating
Securitization Exposures
Resecuritization Exposures
AAA to AA-
20
40
A+ to A-
50
100
BBB+ to BBB-
100
225
BB+ to BB-
350
650
Short-term Rating
Deduction
Securitization Exposures
Resecuritization Exposures
A-1 / P-1
20
40
A-2 / P-2
50
100
A-3 / P-3
100
225
Deduction
Basel II.5
Treatment of ABCP liquidity facilities
Standardized Approach
IRB Approach
Credit conversion factor (CCF) for short-term securitization liquidity facilities increased from 20% to 50%.
This means 50% CCF applies to all undrawn ABCP liquidity facilities regardless of the length of commitment
Clarification of When a Liquidity Facility is a Senior Exposure
Senior Liquidity Facility must cover all of the ABCP and other senior debt supported by the pool such that no
cash flows from the underlying pool could be transferred to other creditors until liquidity draws are paid in
full
Market Disruption
Favorable treatment eliminated. The favorable CCFs for market disruption liquidity facilities (0% Standardized Approach / 20% - IRB Approach) have been eliminated
Basel III
Basel III Overview: A Global Regulatory Framework for More Resilient Banks and Banking Systems
Improve the banking sectors ability to absorb shocks arising from financial and economic stress, whatever the source, thus
reducing the risk of spillover from the financial sector to the real economy
Improve risk management and governance
Strengthen banks transparency and disclosures
Leverage Ratio
C apital C onsevation Buffer
Minimum common equity plus
capital conservation buffer
Phase-in of deductions from
C ET1 (including amounts
exceeding the limit for DTAs,
MSR and financials)
Minimum Tier 1 C apital
Minimum Total C apital
Minimum Total C apital plus
conservation buffer
C apital intstruments that no
longer qualify as non-core Tier 1
capital or Tier 2 capital
2012
Supervisory
monitoring
2013
2014
2015
2016
Parallel run
1 Jan 2013 - 1 Jan 2017
Disclosure starts 1 Jan 2015
3.5%
4.0%
4.5%
4.5%
2017
2018
Migration
to Pillar I
4.5%
4.5%
4.5%
0.625%
1.25%
1.875%
2.50%
20%
40%
60%
80%
100%
100%
4.5%
8.0%
5.5%
8.0%
6.0%
8.0%
6.0%
8.0%
6.0%
8.0%
6.0%
8.0%
6.0%
8.0%
8.0%
8.0%
8.0%
8.625%
9.25%
9.875%
10.5%
Observation
period
begins
Observation
period
begins
Source: Basel III: A global regulatory framework for more resilient banks and banking systems
As of
1 January
2019
Introduce
minimum
standard
Introduce
minimum
standard
Basel III
Changes to capital rules affecting securitizations
Securitizations formerly deducted from capital now receive a 1250% risk-weight, which results in increased
capital requirements
Expected future margin income from a securitization transaction resulting in gain on sale does not count in
the calculation of common equity
Mortgage servicing rights and other similar assets in excess of 15% of common equity must be deducted
from common equity capital. Remainder of these assets risk-weighted at 250%
Exposure haircuts twice as large as haircuts for corporate bonds resecuritizations not eligible collateral
Market Risk
New specific risk haircuts for securitizations and resecuritizations that are higher than similarly rated
government and corporate securities
Basel III
Leverage Ratio
TIER 1 CAPITAL
Common Equity
3% of
Basel III imposes a leverage ratio (essentially a requirement to maintain a specified amount of equity (Tier 1) capital) that is
similar in many respects to the leverage ratio already imposed upon U.S. banks
One major difference, however, is that the current U.S. leverage ratio is a measurement of Tier 1 capital as a percentage of onbalance sheet assets. The Basel III leverage ratio is a measurement of Tier 1 capital to on-balance sheet assets plus off-balance
sheet credit and liquidity commitments
If adopted in its current form, this could greatly increase the cost to banks of providing letters of credit and unfunded
commitments
Unconditionally cancellable commitments are included in the leverage ratio at 10% of their face amount. All other unfunded
commitments are included at 100% of their face amount
If a bank cannot, or chooses not to, use the SSFA, securitization position is assigned a risk weighting factor of
100%, which translates to a 1250% risk weight
Weighted average capital requirement that would be assigned to the underlying exposures under the general riskbased capital rules (Basel I)
SSFA Designed to Apply Higher Capital to Risky Junior Positions and Lower Capital to Most Senior
Positions
1250% risk weight assigned to positions that absorb losses up to the amount of capital that would be required for
the underlying exposures under the general risk-based capital rules.
For remaining positions, capital decreases as seniority increases, subject to the supervisory floor.
Kg = Weighted average capital requirement of the underlying exposures calculated using the general
risk-based capital rules.
Parameter A (Attachment Point of Position) = Threshold at which credit losses would first be
assigned to the position.
Dollar Amount of Subordinated Positions
Dollar Amount of Asset Pool
Parameter D (Detachment Point of Position) = Threshold at which credit losses would result in a total
loss to the investor in the position.
Value of
Parameter A
Supervisory calibration parameter, p = 1.5 for resecuritization positions; 0.5 for other securitization
positions.
ea-u ea-1
Where
______________
a(u-l)
1
P - Kg
u
l
e
=
=
=
D - Kg
A - Kg
2.71828 (base of natural logarithms)
Minimum risk weighting factor that increases over time as cumulative losses increase on the underlying asset pool
50
1.6
50
100
8.0
100
150
52.0
150
n/a
100.0
J uly: B asel Co mmittee issues B asel Capital A cco rd (B asel I), internatio nal risk-based
capital requirements fo r banks in G10 co untries, to be fully implemented by 1992.
1989
1990
1991
1992
1993
1994
1995
J a nua ry: B asel Co mmittee amends B asel I to inco rpo rate market risks. The M arket Risk
A mendment intro duces the use o f institutio ns' internal mo dels o f risk to determine
regulato ry capital requirements.
J une : B asel Co mmittee pro po ses fo r co mment incremental revisio ns to B asel I fo r credit
risk (standardized appro ach), plans to develo p an alternative internal ratins-based (IRB )
appro ach, and the pro po sed capital charges fo r o ther majo r risks, including o peratio nal risk.
1996
1997
1998
1999
2000
2001
J a nua ry: B asel Co mmittee releases revised pro po sal based o n co nsultatio n with industry
and superviso rs. The Co mmittee aims to enco urage impro ved risk management practices in
part thro ugh capital incentives fo r banks to mo ve to the mo re risk-sensitive IRB appro ach.
2002
2003
2004
A pril- M a y: B asel Co mmittee releases results o f a glo bal quantitative impact study (QIS-3)
and issues third co nsecutive paper fo r co mment.
J une : B asel Co mmittee issues final revised framewo rk fo r B asel II (New B asel A cco rd). It
reiterates o bjectives o f bro adly maintaining the level o f aggregate required capital while also
pro viding incentives to ado pt the mo re advanced appro aches. The framewo rk includes
changes such as a 1.06 scaling facto r by which capital requirements fo r credit risk wo uld be
multiplied in o rder to maintain capital neutrality with previo usly estimated results.
2005
B ank regulato rs - OCC, OTS, Federal Reserve, and FDIC (hereafter "regulato rs") - implement
B asel I with a transitio n perio d to 1992.
Regulato rs fully phase in B asel I as part o f bro ader changes to capital regulatio n. The pro mpt
co rrective actio n pro visio ns o f FDICIA require adequately capitalized and well-capitalized
institutio ns to meet o r exceed B asel I risk-based capital requirements as well as a leverage
requirement.
S e pt e m be r: OCC, Federal Reserve, and FDIC issue final rule implementing the M arket
Risk A mendment, requiring institutio ns with significant trading activity to use internal mo dels
to measure and ho ld capital in suppo rt o f market risk expo sure.
A ugus t : Regulato rs release advance NP R o n B asel II fo r co mment. The pro po sed rule
requires the advanced appro aches fo r credit and o peratio nal risk to be applied by o nly the
large and/o r internatio nally active banks and ho lding co mpanies. Existing capital rules wo uld
be retained fo r all o ther banks.
J une : SEC releases alternative net capital rule the permits certain bro ker-dealers to use
internal mathematical mo dels to calculate market and derivatives-related credit risk. To apply
the rule, a bro ker-dealer's ultimate ho lding co mpany must co nsent to gro up-wide supervisio n
and repo rt capital adequacy measures co nsistent with B asel standards.
J a nua ry: Regulato rs issue interagency statement o n qualificatio n pro cess fo r advanced
appro aches based o n New B asel A cco rd.
A pril: Regulato rs anno unce delay in B asel II rulemaking pro cess, after results o f a
quantitative impact study (QIS-4) estimated material reductio ns in aggregate capital
requirements and significant variatio ns in results acro ss institutio ns and po rtfo lio s.
Regulato rs later state that such results wo uld be unacceptable in an actual capital regime.
S e pt e m be r: Regulato rs anno unce 1-year delay in implementatio n and additio nal
safeguards to prevent unacceptable declines in required capital as estimated in QIS-4. The
agencies retain the leverage requirement, add a transitio n year, and establish stricter
transitio n perio d limits o n capital reductio ns fo r individual institutio ns.
O c t o be r: Regulato rs issue B asel IA advance NP R. It revises B asel I to address
co mpetitive inequities between large and small institutio ns by pro viding a mo re risk-sensitive
framewo rk similar to the standardized appro ach under the B asel II internatio nal acco rd.
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J une : B asel Co mmittee releases results o f a glo bal quantitative impact study (QIS-5) o f
estimated changes in minimum required capital under B asel II.
M a rc h: Federal Reserve releases draft B asel II NP R to allo w industry time to co mment and
prepare. In additio n to previo usly anno unced safeguards, it states that agencies wo uld view a
10% o r greater decline in aggregate risk-based capital requirements (co mpared to B asel I) as
a material dro p warranting changes to the B asel II framewo rk.
2006
J une : EU issues final rule implementing B asel II (EU Capital Directive.)
2007
2008
J uly : B asel II enhancements
2009
2010
D e c e m be r: B asel II
D e c e m be r: US M arket Risk NP R
2011
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Speakers
Tim Mohan, Chief Executive Partner, Chapman and Cutler LLP, Illinois