News and Analysis
Basel Basics
Large and Small Bank Competitive Issues
Domestic and Foreign Bank Competitive Issues
Home/Host Country Implementation Issues
SEC Implementation of the Basel Framework
Basel Implementation Initiatives in Securities Finance
Past Webinars and Conferences
Section 1 — Basel Basics
In our experience, until recently US financial institutions have appropriately focused on the financial modeling, database creation, and IT requirements of Basel
II. However, as implementation of US Basel II (and Basel IA) grows nearer, banks, broker-dealers, US branches and subsidiaries of foreign banks and investment banks are considering the issues and opportunities
surrounding the implementation of the US Basel Accord.
This resource is intended to enable lawyers, compliance personnel and business executives within financial institutions to become more conversant with the central themes of Basel II (both the Bank for
International Settlements (“BIS”) version and as proposed in the US), as well as proposed US Basel IA, and to focus on the issues that are likely to be most relevant to their institutions.
This page is intended to provide: a framework of the three pillars of Basel II and IA, with a focus on the Basel II NPR and the Basel IA NPR.
Core Documents
4Basel
II Preamble (External Link)
4Basel
II Final Rule (External Link)
4"Proposed Supervisory Guidance for Internal Ratings-Based
Systems for Credit Risk, Advanced Measurement Approaches for Operational Risk, and the Supervisory Review Process (Pillar 2) Related to Basel II Implementation," Federal Register, February 28, 2007
4"Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Domestic Capital Modifications," by
Office of the Comptroller of the Currency, Federal Reserve System, Federal Deposit Insurance and Office Thrift Supervision, December 5, 2006
4"Risk-Based Capital Standards: Advanced Capital Adequacy Framework and Market Risk; Proposed Rules and Notices,"
Federal Register, September 25, 2006
4Basel Committee on Banking Supervision Report: "International
Convergence of Capital Measurement and Capital Standards: A Revised Framework Comprehensive Version," June 2006
Goodwin Procter Financial Services Alerts
4"Banking
Agencies Publish Final Rulemaking for US Basel II," November
6, 2007
4"Banking Agencies Publish Supplemental Guidance on
Basel II—Internal Ratings-Based Systems for Credit Risk – Part II," March 27, 2007
4"Certain Significant Issues and Opportunities
with Implementation of the US Basel Accord to be Addressed in Conference in New York on December 13, 2006," November 14, 2006
4"Basel Committee Publishes Industry Practice in Key
Areas of Operational Risk Advanced Approach," October 17, 2006
4"Federal Banking Agencies Proposed Basel II
Securitization and Equity Exposure Rules," October 3, 2006
4"Federal Banking Agencies Propose Amended Market
Risk Capital Rules," September 26, 2006
4"Federal Bank Regulators and SEC Testify on Capital Rules; Banking Agencies
also Address CRE Guidance," September 19, 2006
4"Banking Agencies Issue Notice of Proposed
Rulemaking for US Basel II" and "Basel Committee Issues Paper on Business Continuity," September 12, 2006
4"FDIC Publishes Article on Operational Risk
Management," July 11, 2006
4"FRB-Philadelphia Publishes Study on Basel II
Competitive Impact on US Credit Card Lending," January 3, 2006
Section 2 — Large and Small Bank Competitive Issues
The US has over 9000 banks, of which approximately 20 are expected to use the Basel II framework. Some studies (particularly Quantitative Impact Study 4) have
indicated that the BIS version of Basel II would allow the US Basel II banks to have a substantial competitive capital advantage over their smaller US counterparts.
Congress and the regulators have sought to restore competitive equality, and to ensure the safety and soundness of the US banking system, by tempering the
capital reductions of Basel II (e.g., by maintaining a leverage ratio) and also have developed Basel IA for the US banking institutions that do not adopt Basel II. Certain large US banks have resisted these
changes as contrary to the spirit of Basel.
Section 3 — Domestic and Foreign Bank Competitive Issues
Basel II is an international accord, applying to banking institutions in the US and approximately 95 countries including in Europe and Asia. There is significant
competitive tension between making large US banks competitive with small US banks, on the one hand, and on the other, keeping large US banks competitive with their foreign counterparts.
The BIS version differs from the US version in that the BIS version permits banking institutions to select from three different levels (as opposed to only the
most advanced level proposed in the US). Moreover, the proposed US version contains certain provisions (e.g., maintaining the leverage ratio) that are designed to limit the reduction of capital in US banks
implementing Basel II, and that would not apply to non-US banks.
Section 4 — Home/Host Country Implementation Issues
A further element of competitive tension exists between consolidated and country-specific supervision, and the attempts by regulators to address that tension.
This issue is particularly relevant for any institution that seeks to adopt one approach to Basel II in its home country, and another in a host country. As risk management and capital have become increasingly
integrated, the BIS has devoted considerable time to balancing the goals of having consolidated, enterprise-wide supervision from an institution's “home” country with the sometimes conflicting interest that
host countries have in protecting their citizens and institutions in their dealings with foreign institutions.
This topic is also of relevance to US subsidiaries and branches of foreign institutions with respect to the oversight of their operations by US regulators.
Multi-national institutions also want to ensure that they are subject to consistent regulation and oversight across their organizations. The approach may vary depending on whether a multi-national
organization’s operations in a host country are conducted through a nonbank entity, a bank branch, a separately capitalized bank subsidiary, or through a minority investment.
Goodwin Procter Financial Services Alert
4"Basel Committee Issues
Revised Guidance on Home-Host Information Sharing," June 6, 2006
Section 5 — SEC Implementation of the Basel Framework
The SEC already has adopted final rules enabling some large broker-dealers to opt-in to the BIS Basel II framework under certain conditions. Opting-in allows the
broker-dealers to calculate net capital using the Basel II framework, rather than the historical net capital rules. These rules permitted by the SEC differ from the approach currently proposed by US bank
regulators, which may cause practical implementation problems for broker-dealers.
The largest US broker-dealers, including Merrill Lynch, Morgan Stanley, Goldman Sachs and Bear Stearns, have opted into this framework. Whether, and to what
extent, the SEC’s version of Basel II will be homogenized with whatever is ultimately adopted as the US version is yet to be determined.
Goodwin Procter Financial Services Alert
4"SEC Allows Alternative Net Capital Computations for Broker-Dealers That Are Part of Consolidated Supervised Entities," June 15, 2004
Section 6 — Basel Implementation Initiatives in Securities Finance
Although US Basel II as a whole is still in the proposed rulemaking stage, the US banking regulators by special exception allowed US banking institutions to
obtain the capital benefits of Basel II in certain areas of securities finance, most notably securities lending. By employing a Value-at-Risk model, these institutions have substantially reduced their risk
capital requirements. Certain requirements are necessary to obtain the benefits made available by this exception. There has recently been additional statutory and regulatory relief in other areas as well, such
as securities borrowing, bankruptcy and ERISA.
Section 7 —
Past Webinars and Conferences
4"Basel
Basics – Framework Overview," by Gregory J. Lyons and Thomas J. LaFond, December
13, 2006
4"Basel IA: An Industry Response," Webinar, December 8, 2005
4"ANPR for Basel IA: Practical Implications," Webinar, November 4, 2005
News and Analysis
4"Basel Committee Issues Report on Issues Concerning
Banks’ Economic Capital Models and Survey on Banks’ Implementation of Compliance
Principles," September 9, 2008
4"Banking
Agencies Publish Final Supplemental Guidance on Basel II – Supervisory Review
Process," July 22, 2008
4"Basel
Committee on Banking Supervision Publishes Summary of Report of Liquidity
Working Group," March 4, 2008
4"Basel
II Final Credit Risk Mitigation, Securitization, Equity Exposure, Operational
Risk and Disclosure Rules," November
27, 2007
4"Banking
Agencies Publish Final Rulemaking for US Basel II," November
6, 2007
4"Basel
Committee Publishes Consultative Document on Incremental Default Risk in the
Trading Book," October 23, 2007
4"Comptroller
Dugan Discusses Timing on US Basel Initiatives," October 23, 2007