15 November 2007

US FED approved final rules on Basel II

The Federal Reserve Board approved final rules to implement new Basel II risk-based capital requirements in the United States for large, internationally active banking organizations. Basel II would be mandatory for large, internationally active core banking organizations with at least $250 billion in total assets or at least $10 billion in foreign exposure and optional for others. 

The new U.S. Basel II rule is technically consistent in most respects with international approaches and includes a number of prudential safeguards as originally proposed in September 2006.  These safeguards include a requirement that banking organizations satisfactorily complete a four-quarter parallel run period before operating under the Basel II framework, a requirement that an institution satisfactorily complete a series of transitional periods before operating under Basel II without floors, and a commitment by the agencies to conduct ongoing analysis of the framework to ensure Basel II is working as intended.  Importantly, Basel II in the United States will be implemented with retention of the leverage ratio and prompt corrective action (PCA) requirements, which will continue to bolster capital and complement risk-based measures.

Following a successful parallel run period, a banking organization would have to progress through three transitional periods (each lasting at least one year), during which there would be floors on potential declines in risk-based capital requirements.

Those transitional floors would limit maximum cumulative reductions of a banking organization’s risk-based capital requirements to 5 percent during the first transitional floor period, 10 percent during the second transitional floor period, and 15 percent during the third transitional floor period. 

Press release

Statement by Chairman Ben S. Bernanke

Statement by Governor Randall S. Kroszner

Federal Register Notice