On July 20, The Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation (collectively, the Agencies) reached an agreement regarding implementation of the Basel II Accord (established by the Basel Committee on Banking Supervision) in the United States. Basel II set forth several methodologies for determining a bank’s risk-based capital requirements for credit, market and operational risk.

The agreement retains the proposed rulemaking’s transitional floor periods and provides that after the end of the second transition year, the Agencies will publish a study that evaluates the new framework. If material deficiencies are noted, banks will not be permitted to exit the third transitional period until such deficiencies are either addressed by changes to the regulation or a primary supervisor disagrees with the evaluation and provides a public report stating its rationale.

The Agencies also agreed to eliminate language in the proposed rule concerning a 10 percent limitation on aggregate reductions in risk-based capital requirements and replace an earlier proposed rule to adopt the “Basel IA” option with a new proposed rule that would provide all non-core banks with the option to adopt a standardized approach under the Basel II Accord.

The agreement is expected to lead quickly to finalization of a rule implementing the advanced approaches for computing large banks’ risk-based capital requirements.