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Basel II Implementation

International Financial Conglomerates – Issues and Challenges Session 7: Cross Border Supervisory Issues Presented by Douglas W. Roeder, Senior Deputy Comptroller for Large Banks Office of the Comptroller of the Currency (OCC) June 2, 2005 . Basel II Implementation.

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Basel II Implementation

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  1. International Financial Conglomerates – Issues and ChallengesSession 7: Cross Border Supervisory IssuesPresented by Douglas W. Roeder,Senior Deputy Comptroller for Large Banks Office of the Comptroller of the Currency (OCC)June 2, 2005

  2. Basel II Implementation • The Basel II Framework set forth in 2004 provides a basis for countries to begin national implementation processes. • Implementation will be complex and lengthy. • Essentially, Basel II presents more complex variants of long-standing cross-border supervision issues.

  3. What will it take for Basel II to be implemented well? • It is highly important that Basel II not be treated as a compliance exercise. • Basel II has to become part of the governance and day-to-day management of the bank. • The advanced approaches under Basel II will involve making complex judgments by both banks and supervisors. • Effective communication is key. • Need to enrich coordinative supervisory framework among home/host supervisors.

  4. What will it take for Basel II to be implemented well? • Host jurisdictions need to think about what information they need in order to rely on systems and controls (e.g., data, models, calculations) outside of their jurisdictions. • Home jurisdictions need to think about effective ways to communicate with host jurisdictions about their assessment of the adequacy of centralized risk measurement and management systems and controls. • Banks need to have realistic expectations, and play their part to communicate effectively with host jurisdictions.

  5. Home-Host Issues • Home-host issues are numerous and complex (group-wide -- advanced approaches; non-home subsidiaries -- simpler approaches). • Industry is justifiably concerned about regulatory burden associated with differences in the application of Basel II. • Examples of home-host issues include: • Scope of application; transitional approaches; differing implementation dates; use of national discretion; significant subsidiaries for AMA; and Pillar 2

  6. Accord Implementation Group (AIG) • AIG efforts should result in greater transparency on home/host supervisory approaches to Basel II implementation, and validation techniques. • Supervisory Working Groups have been organized to facilitate cross-border Basel II implementation at institutions.

  7. High-level Principles • In 2003, AIG published a set of high-level cross-border supervision principles for Basel II implementation. • Underscore the need for greater supervisory coordination and information-sharing. • However, respects and acknowledges legal responsibilities of host jurisdictions. • Strongly encourages home/host supervisors to work closely to reduce burden on banking groups.

  8. High Priority AIG Work • Broaden and deepen the number of cross-border case studies. • Collect information on internal ratings based (IRB) validation practices and methods for both banks and supervisors. • Contribute to Capital Task Force (CTF) work on economic downturn LGDs. • Share information and experiences on: • AMA; Pillar 2; and National Discretion • Broaden interaction with non-G10 countries. Continue work with CPWG on home-host information sharing.

  9. Concluding Thoughts • AIG is accelerating its work activity and will play a key role. • Clear communication and preparedness on part of home supervisor is key to good home/host coordination. • In practice, strengthening coordinated supervisory working arrangements among home/host supervisors will be a challenge and take some time. • Banks also have a critical role in home/host arena.

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