19
In relation to Pillar 1, the proposed framework as described in the NPR, would require some
qualifying banks and permit others 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.160 As well as giving guidelines for the
supervisory review process and requiring a process for the supervisory review of capital
adequacy under Pillar 2, the NPR also highlights requirements for improved public
disclosures under Pillar 3.161
Three documents lay out the proposed supervisory guidance for implementing proposed
revisions to the risk-based capital standards in the US and this new capital framework would
be compulsory for large internationally active US banking organisations and optional for
other institutions.162 Two of these documents relate to the Basel II advanced approaches for
calculating risk-based capital requirements namely, the advanced internal ratings-based (IRB)
approach for credit risk and the advanced measurement approaches (AMA) for operational
risk.163 Under the IRB framework, internal estimates of certain risk components would be
used as key inputs by banks in determining their regulatory risk-based capital requirement for
credit risk.164 As well as updating and consolidating previously proposed supervisory
guidance on corporate and retail exposures, the IRB Guidance also provides new guidance on
systems which a bank may require in order to distinguish risks posed by other types of credit
exposure.165
The second guidance document provides supervisory guidance on the AMA for operational
risk and updates the proposed AMA Guidance published in 2003.166 The third document,
issued for the first time, sets out proposals for guidance on the Basel II supervisory review
process for assessing capital adequacy.167
Conclusion
Meta Risk regulation: The Way Forward?
Compliance will always remain vital in determining the success of meta regulation. In order
to ensure the least deviation between what is expected of a firm and its actual compliance
with rules, the issue of monitoring will therefore, be crucial. Whilst enforced self regulation (a
form of meta regulation), provides the benefits of flexibility derived from self regulation, it
also attempts to avoid the weaknesses of its voluntary nature. In considering more ambiguous
factors such as the external environment of the firm, the risk based approach to supervision
160
161
162
163
164
165
166
167
Ibid; The internal ratings -based approach and advanced measurement approaches are both known as the
advanced approaches.
ibid
See 'Agencies Seek Public Comment on Proposed Supervisory Guidance for Basel II'
<http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070215/default.htm>
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
See 'Agencies Seek Public Comment on Proposed Supervisory Guidance for Basel II'
<http://www.federalreserve.gov/boarddocs/press/bcreg/2007/20070215/default.htm>