Trust Updates Archive
Basel II and Fiduciary Capital
(June 29, 2004, CHICAGO, IL)--Following the release of the new
international guidelines for measuring capital adequacy, federal
banking and thrift regulators announced their intention to adopt
the new methodology.
Federal regulators expect that the new capital guidelines will only
be applicable to "a small number of large international active U.S.
banking organizations." Sources at the Federal Reserve say this includes
less than 20 U.S. banks. However, international regulators emphasize that
the new guidelines provide an incentive for all banks to lower their capital
requirements by "adopting more comprehensive and accurate measures of risk."
While the new guidelines focus heavily on measuring credit risks at
commercial banks, operational risk is an important component in determining
bank capital needs. Operational risk includes asset management.
Federal guidelines for calculating fiduciary capital were shelved
in the 1990s by federal regulators who opted to wait for the Basel Committee
on Bank Operations to complete the new risk capital guidelines. With
the closing of Security Trust Company in 2003, regulators will be looking
to the new operational risk guidelines as the basis for determining fiduciary
capital for independent trust companies.
A proposed rule by federal regulators on how they will be incorporating
the Basel guidelines is expected in mid 2005, according to a interagency
Under the new guidance, financial institutions will need to have
collected loss data for at least five years in order to use operational
risk to calculate fiduciary capital requirements. However, for transition
purposes, a three-year historical data window may be acceptable, according
to the new guidelines. Once loss data have been collected and quantified,
computation is a relatively simple mathematical issue. What is less straightforward
is how the data are to be collected and quantified. Banks should use the
method that works best for them, according to federal regulators. They
stress that "measurement is an evolving process." As for providing guidelines
on collecting loss data and quantifying it, regulators say they are looking
to the industry to develop these.
The Basel Committee, an international advisory group, was established
in 1974 by the central banks of the Group of Ten (G-10). The Committee's
Capital Accord, introduced in 1988, brought an international framework
to capital measurement. The new proposal, referred to as Basel II, is part
of the Committee's ongoing efforts to refine that process. Countries currently
represented on the Committee are Belgium, Canada, France, Germany, Italy,
Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United
Kingdom, and the United States.
The new capital guidelines can be downloaded at www.occ.treas.gov/ftp/release/2004-52a.pdf. For more details on Basel Committee and Basel II, go to www.bis.org. (See also TRN July 2003.)
-- Copyright ©2004 A.M. Publishing, Inc., Trust Regulatory News
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