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Highlights

Concerned about the potential impacts of the proposed risk-based capital rules, known as Basel II, Congress mandated that GAO study U.S. implementation efforts. This report examines (1) the transition to Basel II and the proposed changes in the United States, (2) the potential impact on the banking system and regulatory required capital, and (3) how banks and regulators are preparing for Basel II and the challenges they face. To meet these objectives, GAO analyzed documents related to Basel II and interviewed various regulators and officials from banks that will be required to follow the new rules.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Office of Thrift Supervision To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue a new Notice of Proposed Rule Making (NPR) before finalizing the Basel II rule, if the final rule differs materially from the NPR or if a U.S. standardized approach is an option in the final rule. While this step may add months to the process, the additional time may help provide more transparency and allow banks and stakeholders to provide feedback before the rule is finalized.
Closed - Implemented
The Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and office of Thrift Supervision issued the final rule for Basel II on November 2, 2007. This final rule moved the US requirements closer to the international Basel Accord and did not include the standardized approach as an option, therefore, there was no need to issue a new notice of proposed rulemaking and go through an additional comment period.
Office of the Comptroller of the Currency To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue a new Notice of Proposed Rule Making (NPR) before finalizing the Basel II rule, if the final rule differs materially from the NPR or if a U.S. standardized approach is an option in the final rule. While this step may add months to the process, the additional time may help provide more transparency and allow banks and stakeholders to provide feedback before the rule is finalized.
Closed - Implemented
The Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and office of Thrift Supervision issued the final rule for Basel II on November 2, 2007. This final rule moved the US requirements closer to the international Basel Accord and did not include the standardized approach as an option, therefore, there was no need to issue a new notice of proposed rulemaking and go through an additional comment period.
Federal Deposit Insurance Corporation To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue a new Notice of Proposed Rule Making (NPR) before finalizing the Basel II rule, if the final rule differs materially from the NPR or if a U.S. standardized approach is an option in the final rule. While this step may add months to the process, the additional time may help provide more transparency and allow banks and stakeholders to provide feedback before the rule is finalized.
Closed - Implemented
The Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and office of Thrift Supervision issued the final rule for Basel II on November 2, 2007. This final rule moved the US requirements closer to the international Basel Accord and did not include the standardized approach as an option, therefore, there was no need to issue a new notice of proposed rulemaking and go through an additional comment period.
Federal Reserve System To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue a new Notice of Proposed Rule Making (NPR) before finalizing the Basel II rule, if the final rule differs materially from the NPR or if a U.S. standardized approach is an option in the final rule. While this step may add months to the process, the additional time may help provide more transparency and allow banks and stakeholders to provide feedback before the rule is finalized.
Closed - Implemented
The Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and office of Thrift Supervision issued the final rule for Basel II on November 2, 2007. This final rule moved the US requirements closer to the international Basel Accord and did not include the standardized approach as an option, therefore, there was no need to issue a new notice of proposed rulemaking and go through an additional comment period.
Office of Thrift Supervision To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue public reports at least annually on the progress and results of implementation efforts and any resulting regulatory adjustments. This reporting should include an articulation of the criteria for judging the attainment of their goals for Basel II implementation and for determining its effectiveness for regulatory capital-setting purposes. These reports should also include analyses of (1) the results of the parallel runs and transition periods and a comparison of Basel II and Basel I results for the core banks and (2) the effect(s), if any, of Basel II or differences between U.S. and international rules on the competitiveness of U.S. banks.
Closed - Implemented
As part of the final rule for the advanced approaches for Basel II, the regulators said they would jointly evaluate the effectiveness of the capital framework and committed to issuing a series of annual reports during the transition periods that will provide timely and relevant information on the implementation of the advanced approaches.
Office of the Comptroller of the Currency To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue public reports at least annually on the progress and results of implementation efforts and any resulting regulatory adjustments. This reporting should include an articulation of the criteria for judging the attainment of their goals for Basel II implementation and for determining its effectiveness for regulatory capital-setting purposes. These reports should also include analyses of (1) the results of the parallel runs and transition periods and a comparison of Basel II and Basel I results for the core banks and (2) the effect(s), if any, of Basel II or differences between U.S. and international rules on the competitiveness of U.S. banks.
Closed - Implemented
As part of the final rule for the advanced approaches for Basel II, the regulators said they would jointly evaluate the effectiveness of the capital framework and committed to issuing a series of annual reports during the transition periods that will provide timely and relevant information on the implementation of the advanced approaches.
Federal Deposit Insurance Corporation To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue public reports at least annually on the progress and results of implementation efforts and any resulting regulatory adjustments. This reporting should include an articulation of the criteria for judging the attainment of their goals for Basel II implementation and for determining its effectiveness for regulatory capital-setting purposes. These reports should also include analyses of (1) the results of the parallel runs and transition periods and a comparison of Basel II and Basel I results for the core banks and (2) the effect(s), if any, of Basel II or differences between U.S. and international rules on the competitiveness of U.S. banks.
Closed - Implemented
As part of the final rule for the advanced approaches for Basel II, the regulators said they would jointly evaluate the effectiveness of the capital framework and committed to issuing a series of annual reports during the transition periods that will provide timely and relevant information on the implementation of the advanced approaches.
Federal Reserve System To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, address the impediments regulators face in moving to Basel II, and as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, FDIC, OCC and OTS should issue public reports at least annually on the progress and results of implementation efforts and any resulting regulatory adjustments. This reporting should include an articulation of the criteria for judging the attainment of their goals for Basel II implementation and for determining its effectiveness for regulatory capital-setting purposes. These reports should also include analyses of (1) the results of the parallel runs and transition periods and a comparison of Basel II and Basel I results for the core banks and (2) the effect(s), if any, of Basel II or differences between U.S. and international rules on the competitiveness of U.S. banks.
Closed - Implemented
As part of the final rule for the advanced approaches for Basel II, the regulators said they would jointly evaluate the effectiveness of the capital framework and committed to issuing a series of annual reports during the transition periods that will provide timely and relevant information on the implementation of the advanced approaches.
Office of Thrift Supervision At the end of the last transition period, the heads of the Federal Reserve,FDIC, OCC, and OTS should reevaluate whether the advanced approaches of Basel II can and should be relied on to set appropriate regulatory capital requirements in the longer term. Depending on the information collected during the transition, any reevaluation should include a range of options, including consideration of additional minor modifications to U.S. Basel II regulations as well as whether more fundamental changes are warranted for setting appropriate required regulatory capital levels.
Closed - Implemented
In the final rule for the advanced approaches, the regulators committed to publishing an interagency study at the end of the second transition year that will evaluate the advanced approaches to determine if there are any material deficiencies. For any federal supervisor to authorize any bank to exit to the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools or, if such deficiencies are found, they must first be remedied by changes to regulation.
Office of the Comptroller of the Currency At the end of the last transition period, the heads of the Federal Reserve,FDIC, OCC, and OTS should reevaluate whether the advanced approaches of Basel II can and should be relied on to set appropriate regulatory capital requirements in the longer term. Depending on the information collected during the transition, any reevaluation should include a range of options, including consideration of additional minor modifications to U.S. Basel II regulations as well as whether more fundamental changes are warranted for setting appropriate required regulatory capital levels.
Closed - Implemented
In the final rule for the advanced approaches, the regulators committed to publishing an interagency study at the end of the second transition year that will evaluate the advanced approaches to determine if there are any material deficiencies. For any federal supervisor to authorize any bank to exit to the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools or, if such deficiencies are found, they must first be remedied by changes to regulation.
Federal Deposit Insurance Corporation At the end of the last transition period, the heads of the Federal Reserve,FDIC, OCC, and OTS should reevaluate whether the advanced approaches of Basel II can and should be relied on to set appropriate regulatory capital requirements in the longer term. Depending on the information collected during the transition, any reevaluation should include a range of options, including consideration of additional minor modifications to U.S. Basel II regulations as well as whether more fundamental changes are warranted for setting appropriate required regulatory capital levels.
Closed - Implemented
In the final rule for the advanced approaches, the regulators committed to publishing an interagency study at the end of the second transition year that will evaluate the advanced approaches to determine if there are any material deficiencies. For any federal supervisor to authorize any bank to exit to the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools or, if such deficiencies are found, they must first be remedied by changes to regulation.
Federal Reserve System At the end of the last transition period, the heads of the Federal Reserve,FDIC, OCC, and OTS should reevaluate whether the advanced approaches of Basel II can and should be relied on to set appropriate regulatory capital requirements in the longer term. Depending on the information collected during the transition, any reevaluation should include a range of options, including consideration of additional minor modifications to U.S. Basel II regulations as well as whether more fundamental changes are warranted for setting appropriate required regulatory capital levels.
Closed - Implemented
In the final rule for the advanced approaches, the regulators committed to publishing an interagency study at the end of the second transition year that will evaluate the advanced approaches to determine if there are any material deficiencies. For any federal supervisor to authorize any bank to exit to the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by then-existing tools or, if such deficiencies are found, they must first be remedied by changes to regulation.
Office of Thrift Supervision To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, and address the impediments regulators face in moving to Basel II, as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should clarify and reach agreement on certain issues in the final rule, including first, how to treat portfolios at Basel II banks that may lack the data to meet regulatory standards for the advanced approaches. To ensure that portfolios with insufficient data are treated prudently and consistently, regulators should consider options such as a higher risk-weight, or substituting Basel IA or the Basel Committee's standardized approach for these portfolios. Secondly, how to calculate the 10-percent reduction in aggregate minimum regulatory capital and what will happen if the 10-percent reduction is triggered. And lastly, what the criteria will be for determining an appropriate average level of required capital and appropriate cyclical variation in minimum required capital.
Closed - Implemented
The heads of the Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision reached agreement on issues needed to finalize the rule, which was issued in November 2007. They determined a method to prudently treat portfolios with insufficient data, removed the provision regarding the 10 percent reduction in aggregate minimum regulatory capital, and plan to consider potential cyclical implications of the advanced approaches in the study they will conduct.
Office of the Comptroller of the Currency To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, and address the impediments regulators face in moving to Basel II, as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should clarify and reach agreement on certain issues in the final rule, including first, how to treat portfolios at Basel II banks that may lack the data to meet regulatory standards for the advanced approaches. To ensure that portfolios with insufficient data are treated prudently and consistently, regulators should consider options such as a higher risk-weight, or substituting Basel IA or the Basel Committee's standardized approach for these portfolios. Secondly, how to calculate the 10-percent reduction in aggregate minimum regulatory capital and what will happen if the 10-percent reduction is triggered. And lastly, what the criteria will be for determining an appropriate average level of required capital and appropriate cyclical variation in minimum required capital.
Closed - Implemented
The heads of the Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision reached agreement on issues needed to finalize the rule, which was issued in November 2007. They determined a method to prudently treat portfolios with insufficient data, removed the provision regarding the 10 percent reduction in aggregate minimum regulatory capital, and plan to consider potential cyclical implications of the advanced approaches in the study they will conduct.
Federal Deposit Insurance Corporation To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, and address the impediments regulators face in moving to Basel II, as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should clarify and reach agreement on certain issues in the final rule, including first, how to treat portfolios at Basel II banks that may lack the data to meet regulatory standards for the advanced approaches. To ensure that portfolios with insufficient data are treated prudently and consistently, regulators should consider options such as a higher risk-weight, or substituting Basel IA or the Basel Committee's standardized approach for these portfolios. Secondly, how to calculate the 10-percent reduction in aggregate minimum regulatory capital and what will happen if the 10-percent reduction is triggered. And lastly, what the criteria will be for determining an appropriate average level of required capital and appropriate cyclical variation in minimum required capital.
Closed - Implemented
The heads of the Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision reached agreement on issues needed to finalize the rule, which was issued in November 2007. They determined a method to prudently treat portfolios with insufficient data, removed the provision regarding the 10 percent reduction in aggregate minimum regulatory capital, and plan to consider potential cyclical implications of the advanced approaches in the study they will conduct.
Federal Reserve System To help reduce the uncertainty about the impact of Basel II on required levels of regulatory capital, improve the transparency of the process, and address the impediments regulators face in moving to Basel II, as part of the process leading to the parallel run and during the proposed transition period(s), the heads of the Federal Reserve, Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should clarify and reach agreement on certain issues in the final rule, including first, how to treat portfolios at Basel II banks that may lack the data to meet regulatory standards for the advanced approaches. To ensure that portfolios with insufficient data are treated prudently and consistently, regulators should consider options such as a higher risk-weight, or substituting Basel IA or the Basel Committee's standardized approach for these portfolios. Secondly, how to calculate the 10-percent reduction in aggregate minimum regulatory capital and what will happen if the 10-percent reduction is triggered. And lastly, what the criteria will be for determining an appropriate average level of required capital and appropriate cyclical variation in minimum required capital.
Closed - Implemented
The heads of the Federal Deposit Insurance Corporation, Federal Reserve Board, Office of the Comptroller of the Currency, and Office of Thrift Supervision reached agreement on issues needed to finalize the rule, which was issued in November 2007. They determined a method to prudently treat portfolios with insufficient data, removed the provision regarding the 10 percent reduction in aggregate minimum regulatory capital, and plan to consider potential cyclical implications of the advanced approaches in the study they will conduct.

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