The federal banking agencies adopted a proposed rulemaking to provide a risk-based capital framework that uses Basel II’s standardized approach for credit risk and basic indicator approach (the “BIA”) for operational risk (the “Proposal”). The Proposal, seeking to address risk sensitivity, regulatory burden and competitive equity, will be optional for all banks that are not core banks required to adopt the previously approved Advanced Approach. The agencies are seeking comment on all aspects of the Proposal and, in light of the recent market turmoil, are particularly interested in comments on the use of external ratings. All comments will be due 90 days after publication in the Federal Register.
The Proposal focuses on Pillar 1 of Basel II--minimum regulatory capital requirements. The primary difference between the Proposal and the current capital rules is calculation of risk-weighted assets.
Total risk-weighted assets would be the sum of total risk-weighted assets for general credit risk, unsettled transactions, securitization exposures, equity exposures and operational risk.
With respect to total risk-weighted assets, the Proposal increases the number of risk weight categories from 5 to 16, providing a range from zero to 1250 percent. The Proposal also expands the types of exposures that may be risk-weighted based on external ratings, inferred ratings and, to a limited extent, issuer ratings. In addition, the Proposal assigns risk weights to an expanded range of recognized financial collateral and eligible guarantors based on external ratings. With respect to operational risk under the BIA, the Proposal provides that risk-weighted assets for operational risk equal 15 percent of the average positive annual gross income computed over the previous three years multiplied by 12.5.