Acting Comptroller of the Currency Julie L. Williams Testifies before House Subcommittees On Basel II Framework Issues

WASHINGTON — In testimony before two House subcommittees of the Committee of Financial Services, acting Comptroller of the Currency Julie L. Williams discussed the impact of the recent results of the fourth qualitative impact study (QIS-4) on the implementation of the Basel II Framework and the bank regulatory agencies' commitment to modernize the current Basel I capital rules for those banks that will not be governed by the Basel II rules.

Ms. Williams said in testimony before the Subcommittee on Financial Institutions and Consumer Credit, and the Subcommittee on Domestic and International Monetary Policy, Trade and Technology that in 2004, the U.S. banking agencies undertook QIS-4 with the specific goal of gaining a better understanding of how Basel II might affect minimum risk-based capital within the U.S. banking industry, before its adoption.

"In brief, the QIS-4 submissions evidence both a material reduction in the aggregate minimum required capital for QIS-4 participants and a significant dispersion of results across institutions and portfolio types," Ms. Williams said. "Aggregating over the QIS-4 participants, the decrease in effective minimum required capital was 17 percent, while the median decrease among participants was 26 percent."

Ms. Williams noted that the dispersion in results—both across institutions and across portfolios—was much wider than the agencies anticipated or than can be readily explained. She pointed out that changes in effective minimum required capital for individual institutions ranged from a decrease of 47 percent to an increase of 56 percent. She also added the caution that these calculations do not imply that any particular institution would need to actually increase its capital in order to be capital-compliant, since individual institutions in fact hold capital in excess of regulatory minimums.

"Based on this preliminary assessment of QIS-4 results, the agencies concluded that a delay in the notice of proposed rulemaking was the only responsible course of action available to us," Ms. Williams said. "For that reason, on April 29th, we announced that we would not publish an NPR on the schedule that we had previously forecast."

Ms. Williams told the subcommittees that the agencies would conduct a more complete assessment of the QIS-4 results that will clarify the steps that need to be taken in order to make Basel II a reality for U.S. financial institutions. "If we believe that changes in the Basel II framework are necessary, we have consistently said that we will seek to have those changes made by the Basel Committee," she said.

The Acting Comptroller also said that the U.S. banking agencies have undertaken a separate but related effort to update and revise existing, domestic risk-based capital rules for those institutions not subject to Basel II-based rules. The agencies are developing these two regulatory capital regimes in tandem, to ensure that appropriate risk sensitivity and consideration of competitive effects are factored appropriately into each proposal, she said.

Ms. Williams also addressed H.R. 1226 and said she shared the desire of the bill's sponsors to ensure consistency among the banking agencies in their approach to Basel II. She expressed her confidence that the close cooperation of the banking agencies since the beginning of the process that led to the adoption of the Basel II process in resolving differences and reaching consensus will continue, and expressed her belief that legislation is not needed to achieve the intended results.

Ms. Williams concluded her testimony by emphasizing three commitments that have been and remain central to the OCC's ongoing analysis and implementation of the Basel II Framework: an open rule making process in which comments are invited and considered, good suggestions are heeded, and legitimate concerns are addressed; a reliable quantitative analysis prior to adoption of a rule, through which the agencies can assess the likely impact of Basel II on the minimum regulatory capital requirements of the banks; and a prudent implementation in which the agencies make well reasoned and well understood changes to bank capital requirements and incorporate in those changes appropriate conservatism.

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• Testimony (PDF)