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assessment criteria which assist the OCC in its application of a common methodology to
evaluate the risk profile of individual group entities to ensure that risks can be measured
consistently and ; the forward looking and proactive nature of the OCC's approach which
enables it to gauge how risks will change over the next 12 months.
Impact of Basel II on US Financial Regulation and Supervision
Basel II is important not only because it is a common standard for measuring capital adequacy
but also because it is based on the risks of an institution’s investments.152 It therefore allows
for greater facilitation of harmonisation and easier comparisons between different countries,
particularly at a time when globalisation and the increase of multinational firms has made this
necessary. The risk based capital standards not only mandate institutions that assume greater
risk to have higher levels of capital but also take into consideration risks associated with
operations that are not included on a bank’s balance sheet, such as those risks resulting from
obligations to make loans.153 Basel II has been pursued by the Federal Reserve due to the
increasing inadequacies of Basel I regulatory capital rules particularly in the context of the
growing complexity of products and services provided by large internationally active
banks.154 A more risk-capital framework has been called for and it is believed that Basel II
would provide such framework for such internationally active banks.155 As banking involves
the acceptance and management of risks, it is of great importance that bank supervisors
ensure that an adequate level of capital is maintained to insulate itself against potential losses.
Minimum regulatory capital requirements are vital to ensuring that such protection is
facilitated.156
On the 25th of September, 2006, the Office of the Comptroller of the Currency, Treasury
(OCC); Board of Governors of the Federal Reserve System (Board); Federal Deposit
Insurance Corporation (FDIC); and Office of Thrift Supervision, Treasury (OTS), which are
collectively known as the Agencies, issued a notice of proposed rule making ( NPR or
proposed rule).157 This notice welcomes comments on the New Advanced Capital Adequacy
Framework that will replace the present general risk-based capital standards which have been
applied to large, internationally active US banks.158 The proposed framework would also
implement the “International Convergence of Capital Measurement and Capital Standards : A
Revised Framework,” which was published in June 2004 by the Basel Committee on Banking
Supervision (Basel II) in the US.159 Basel II consists of three pillars namely: capital adequacy
requirements, centralized supervision and market discipline.
152
153
154
155
156
157
158
159
2007 p 131
The Federal Reserve System, Purposes and Functions p 73
ibid
See 'An Update on Basel II Implementation in the US', 'Reasons for Basel II', 'Remarks by Governor Susan
Schmidt Bies at the Global Association of Risk Professionals Basel II Summit, New York, February 27 2007
<http://www.federalreserve.gov/boarddocs/speeches/2007/20070226/default.htm> last visited February 27
2007
ibid
ibid
See 'Proposed Supervisory Guidance for Internal Ratings-Based Systems for Credit Risk, Advanced
Measurement Approaches for Operational Risk, and the Supervisory Review Process (Pillar 2) Related to
Basel II Implementation.
<http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070215/attachment.pdf> last visited 20th
February 2007
ibid
Ibid; Even though Basel II lists various possible approaches for calculating regulatory risk-based capital
requirements under Pillar 1, the US has proposed only the advanced approaches for implementation.