The federal banking and thrift agencies, the Federal Reserve Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision, on July 15 issued final guidance outlining the supervisory review process for banking organizations implementing the new advanced capital adequacy framework known as Basel II. The final guidance relating to supervisory review is aimed at helping banking organizations meet certain qualification requirements in the advanced approaches rule, which took effect April 1. The advanced approaches rule consists of three pillars: minimum risk-based capital requirements (Pillar 1), supervisory review of capital adequacy (Pillar 2),and market discipline through enhanced public disclosures (Pillar 3). The final Pillar 2 guidance details the agencies’ standards for ensuring that each institution subject to the advanced approaches rule has a rigorous process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining appropriate capital levels. According to the agencies, this guidance highlights certain aspects of existing supervisory review that are being augmented or clarified to support the implementation of the supervisory assessment of overall capital adequacy under the advanced approaches final rule.

The supervisory review process described in this guidance outlines the agencies’ standards for (i) satisfying the qualification requirements provided in the advanced approaches final rule, (ii) addressing the limitations of the minimum risk-based capital requirements for credit risk and operational risk, (iii) ensuring that each institution has a rigorous process for assessing its overall capital adequacy in relation to its risk profile and a comprehensive strategy for maintaining appropriate capital levels, and (iv) encouraging each institution to improve its risk identification and measurement techniques. This supervisory guidance applies to any bank, savings association, or bank holding company implementing the advanced approaches final rule.

http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20080715a1.pdf