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 statement.

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

No statement in this issue is offered as or should
be construed as legal opinion or advice.

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