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Highlights

Basel II, the new risk-based capital framework based on an international accord, is being adopted by individual countries. It includes standardized and advanced approaches to estimating capital requirements. In the United States, bank regulators have finalized an advanced approaches rule that will be required for some of the largest, most internationally active banks (core banks) and proposed an optional standardized approach rule for non-core banks that will also have the option to remain on existing capital rules. In light of possible competitive effects of the capital rules, GAO was asked to examine (1) the markets in which banks compete, (2) how new capital rules address U.S. banks' competitive concerns, and (3) actions regulators are taking to address competitive and other potential negative effects during implementation. Among other things, GAO analyzed data on bank products and services and the final and proposed capital rules; interviewed U.S. and foreign bank regulators, officials from U.S. and foreign banks; and computed capital requirements under varying capital rules.

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Recommendations

Recommendations for Executive Action

Agency Affected Recommendation Status
Federal Deposit Insurance Corporation 1. To further limit any potential negative effects, where possible, the heads of the FDIC, Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should move to minimize the uncertainty surrounding certain aspects of Basel II. Specifically, regulators should clarify how they will use certain regulatory flexibility under the advanced approaches rule, particularly with regard to how they will exercise exemptions for core banks from the advanced approaches requirement and the extent to which core banks will be allowed to adopt the standardized approach.
Closed - Implemented
In August 2012, the Federal Reserve (includes the holding company function of the former OTS), OCC (includes the depository institution function of the former OTS), and FDIC issued a notice of proposed rulemaking on Basel III, which addresses some of the issues raised in Basel II. The new rules clarify any ambiguity surrounding aspects of Basell II involving the use of regulatory flexibility under the advanced approaches rule and the exercise of exemptions for core banks from the advanced approach. Specifically, the rulemaking addresses our recommendation because it does not include the option of a primary regulator being able to exempt certain depositories or holding companies that would otherwise qualify from the advanced approaches.
Federal Reserve System 2. To further limit any potential negative effects, where possible, the heads of the FDIC, Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should move to minimize the uncertainty surrounding certain aspects of Basel II. Specifically, regulators should clarify how they will use certain regulatory flexibility under the advanced approaches rule, particularly with regard to how they will exercise exemptions for core banks from the advanced approaches requirement and the extent to which core banks will be allowed to adopt the standardized approach.
Closed - Implemented
In August 2012, the Federal Reserve (includes the holding company function of the former OTS), OCC (includes the depository institution function of the former OTS), and FDIC issued a notice of proposed rulemaking on Basel III, which addresses some of the issues raised in Basel II. The new rules clarify any ambiguity surrounding aspects of Basell II involving the use of regulatory flexibility under the advanced approaches rule and the exercise of exemptions for core banks from the advanced approach. Specifically, the rulemaking addresses our recommendation because it does not include the option of a primary regulator being able to exempt certain depositories or holding companies that would otherwise qualify from the advanced approaches.
Office of the Comptroller of the Currency 3. To further limit any potential negative effects, where possible, the heads of the FDIC, Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should move to minimize the uncertainty surrounding certain aspects of Basel II. Specifically, regulators should clarify how they will use certain regulatory flexibility under the advanced approaches rule, particularly with regard to how they will exercise exemptions for core banks from the advanced approaches requirement and the extent to which core banks will be allowed to adopt the standardized approach.
Closed - Implemented
In August 2012, the Federal Reserve (includes the holding company function of the former OTS), OCC (includes the depository institution function of the former OTS), and FDIC issued a notice of proposed rulemaking on Basel III, which addresses some of the issues raised in Basel II. The new rules clarify any ambiguity surrounding aspects of Basell II involving the use of regulatory flexibility under the advanced approaches rule and the exercise of exemptions for core banks from the advanced approach. Specifically, the rulemaking addresses our recommendation because it does not include the option of a primary regulator being able to exempt certain depositories or holding companies that would otherwise qualify from the advanced approaches.
Office of Thrift Supervision 4. To further limit any potential negative effects, where possible, the heads of the FDIC, Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS) should move to minimize the uncertainty surrounding certain aspects of Basel II. Specifically, regulators should clarify how they will use certain regulatory flexibility under the advanced approaches rule, particularly with regard to how they will exercise exemptions for core banks from the advanced approaches requirement and the extent to which core banks will be allowed to adopt the standardized approach.
Closed - Implemented
In August 2012, the Federal Reserve (includes the holding company function of the former OTS), OCC (includes the depository institution function of the former OTS), and FDIC issued a notice of proposed rulemaking on Basel III, which addresses some of the issues raised in Basel II. The new rules clarify any ambiguity surrounding aspects of Basell II involving the use of regulatory flexibility under the advanced approaches rule and the exercise of exemptions for core banks from the advanced approach. Specifically, the rulemaking addresses our recommendation because it does not include the option of a primary regulator being able to exempt certain depositories or holding companies that would otherwise qualify from the advanced approaches.
Federal Reserve System 5. To improve the understanding of potential competitive effects of the new capital framework, the heads of the FDIC, Federal Reserve, OCC, and OTS should take steps jointly to plan for the study to determine if major changes need to be made to the advanced approaches or whether banks will be able to fully implement the current rule. In their planning, they should consider such issues as the objectives, scope, methodology, and timing needs for the future evaluation of Basel II. The plan should include how the regulators will evaluate competitive differences between core and non-core banks in the United States, between core banks and consolidated supervised entities, and between U.S.-based banks and banks based in other countries.
Closed - Implemented
As a result of the financial crisis that started in 2007, U.S. and international banking regulators reevaluated Basel II and the advanced approaches, in part to revise the regulatory capital structure to increase the resiliency of banks and the banking system. In August 2012, U.S. banking regulators proposed comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking. These proposals would revise the agencies? current general risk-based rules, advanced approaches risk-based capital rules, and leverage capital rules. The proposed changes to the advanced approaches rules incorporate applicable provisions of Basel III and other agreements reached by the Basel Committee on Banking Supervision since 2009. Through their reevaluation of Basel II and the advance approaches and proposed rulemakings, the U.S. banking regulators addressed, in effect, the substantive issues we identified in our recommendation.
Office of the Comptroller of the Currency 6. To improve the understanding of potential competitive effects of the new capital framework, the heads of the FDIC, Federal Reserve, OCC, and OTS should take steps jointly to plan for the study to determine if major changes need to be made to the advanced approaches or whether banks will be able to fully implement the current rule. In their planning, they should consider such issues as the objectives, scope, methodology, and timing needs for the future evaluation of Basel II. The plan should include how the regulators will evaluate competitive differences between core and non-core banks in the United States, between core banks and consolidated supervised entities, and between U.S.-based banks and banks based in other countries.
Closed - Implemented
As a result of the financial crisis that started in 2007, U.S. and international banking regulators reevaluated Basel II and the advanced approaches, in part to revise the regulatory capital structure to increase the resiliency of banks and the banking system. In August 2012, U.S. banking regulators proposed comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking. These proposals would revise the agencies? current general risk-based rules, advanced approaches risk-based capital rules, and leverage capital rules. The proposed changes to the advanced approaches rules incorporate applicable provisions of Basel III and other agreements reached by the Basel Committee on Banking Supervision since 2009. Through their reevaluation of Basel II and the advance approaches and proposed rulemakings, the U.S. banking regulators addressed, in effect, the substantive issues we identified in our recommendation.
Federal Deposit Insurance Corporation 7. To improve the understanding of potential competitive effects of the new capital framework, the heads of the FDIC, Federal Reserve, OCC, and OTS should take steps jointly to plan for the study to determine if major changes need to be made to the advanced approaches or whether banks will be able to fully implement the current rule. In their planning, they should consider such issues as the objectives, scope, methodology, and timing needs for the future evaluation of Basel II. The plan should include how the regulators will evaluate competitive differences between core and non-core banks in the United States, between core banks and consolidated supervised entities, and between U.S.-based banks and banks based in other countries.
Closed - Implemented
As a result of the financial crisis that started in 2007, U.S. and international banking regulators reevaluated Basel II and the advanced approaches, in part to revise the regulatory capital structure to increase the resiliency of banks and the banking system. In August 2012, U.S. banking regulators proposed comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking. These proposals would revise the agencies? current general risk-based rules, advanced approaches risk-based capital rules, and leverage capital rules. The proposed changes to the advanced approaches rules incorporate applicable provisions of Basel III and other agreements reached by the Basel Committee on Banking Supervision since 2009. Through their reevaluation of Basel II and the advance approaches and proposed rulemakings, the U.S. banking regulators addressed, in effect, the substantive issues we identified in our recommendation.
Office of Thrift Supervision 8. To improve the understanding of potential competitive effects of the new capital framework, the heads of the FDIC, Federal Reserve, OCC, and OTS should take steps jointly to plan for the study to determine if major changes need to be made to the advanced approaches or whether banks will be able to fully implement the current rule. In their planning, they should consider such issues as the objectives, scope, methodology, and timing needs for the future evaluation of Basel II. The plan should include how the regulators will evaluate competitive differences between core and non-core banks in the United States, between core banks and consolidated supervised entities, and between U.S.-based banks and banks based in other countries.
Closed - Implemented
As a result of the financial crisis that started in 2007, U.S. and international banking regulators reevaluated Basel II and the advanced approaches, in part to revise the regulatory capital structure to increase the resiliency of banks and the banking system. In August 2012, U.S. banking regulators proposed comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking. These proposals would revise the agencies? current general risk-based rules, advanced approaches risk-based capital rules, and leverage capital rules. The proposed changes to the advanced approaches rules incorporate applicable provisions of Basel III and other agreements reached by the Basel Committee on Banking Supervision since 2009. Through their reevaluation of Basel II and the advance approaches and proposed rulemakings, the U.S. banking regulators addressed, in effect, the substantive issues we identified in our recommendation.

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