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News Release 2008-26 | March 3, 2008

Comptroller Dugan Tells International Bankers that Basel II U.S. Implementation on a Prudent, Deliberate Path

WASHINGTON—Comptroller of the Currency John C. Dugan today said that many national banks in the United States have indicated they will take advantage of the flexibility provided by the 36-month window for Basel II implementation provided in the final U.S. rule. Mr. Dugan said that the parallel run period included in the rule could begin as early as April 1 of this year, but that no banks have notified the OCC of their intent to start parallel run at that earliest possible date.

"Since parallel run can only begin on the first day of a calendar quarter, the next time an institution could begin that process is July 1," Mr. Dugan said in a speech to the Institute of International Bankers. He stated that it was unclear at this time whether any national bank would begin parallel run on that date.

The U.S. rule provides for a 36-month window—until April 2011—for mandatory institutions to start the first of the transition years; parallel run would have to begin by April 2010 to meet that requirement, he said. That 36-month window likely will mean that starting dates for individual banks will be staggered over time, which will "allow all of us to ease into the process incrementally, which I think could be a good thing."

Mr. Dugan also noted that by October 1 of this year, each mandatory institution is required to submit to its primary supervisor an acceptable, board-approved implementation plan. In the meantime, national banks are developing systems that will be used for Basel II, and the OCC reviews those systems as part of ongoing supervision.

"Because Basel II was designed to build upon a foundation of good risk management practices, much of this ongoing work in the banks reflects the natural refinement of risk management processes and systems," he said. "In a way, qualification for Basel II is incremental—our guiding principle is that Basel II qualification should not be a unique, stand-alone event, but rather should be normalized into the supervisory process."

In his remarks, Mr. Dugan pointed out that the U.S. is taking a sensible and measured approach to the Basel framework, "an approach that incorporates various transitional arrangements and prudential safeguards that will help us be sure that the new standard works the way it’s supposed to."

"These safeguards include a parallel run period that lasts at least four quarters but could be longer for individual institutions; during this period, banks have to show that their risk measurements and management processes meet stringent requirements as they compute minimum capital requirements under both the old and the new approaches," Mr. Dugan said. "This parallel run experience will provide the basis for the OCC’s initial Basel II qualification decisions."

Following initial qualification, he said, a minimum three-year transition period begins, which permits U.S. supervisors to see a bank’s Basel II systems in full operation and ensure that any potential reductions in capital requirements will be strictly limited through a system of simple and conservative capital floors. Banks will continue to be subject to the U.S. agencies’ leverage capital and Prompt Corrective Action requirements.

"If that sounds like belt and suspenders—it is, and appropriately so," Mr. Dugan said.

Mr. Dugan added that the U.S. agencies, together with the Basel Committee and others, are reviewing certain aspects of the treatment of CDOs and securitization. The U.S. rule has been structured to allow adjustments during implementation, if necessary, and to make those changes while the transition safeguards are still in effect. If U.S. supervisors see unacceptable results during the parallel run or the transition periods, "we can and will identify and fix the shortcomings," Mr. Dugan said.

Mr. Dugan pointed out that the Basel II capital framework illustrates a larger point that "with global financial markets, a bank regulatory agency can’t be effective if it focuses narrowly on domestic concerns."

OCC-supervised banks had 1.7 trillion dollars of foreign exposure, and foreign exposure has been growing more than 30 percent per year, he said. The OCC supervises 30 national bank and trust companies that are foreign-owned, with more than $500 billion in assets, as well as 49 federally licensed branches and agencies of foreign banks with combined assets of about $156 billion.

"Issues of liquidity, governance, transparency, data security, or risk measurement and management have been, and continue to be, concerns around the world—concerns that, for that matter, are not unique to the banking sector," Comptroller Dugan said.

Mr. Dugan noted the OCC’s participation in the work of the Joint Forum, which brings together supervisors from the banking, insurance, and securities sectors from 13 major countries to address issues of mutual interest. Mr. Dugan currently is serving a two-year term as Chairman of the Joint Forum. He noted that the work of the Joint Forum has taken on added significance and urgency in light of current market developments. "These next two years promise to be an interesting time to chair the Joint Forum, and I’m pleased to have the opportunity to lead a group that, by its composition and mandate, is positioned to make a unique and valuable contribution to the tone and content of international policy discussions."

"We live in a time when effective supervision and regulation requires that we actively recognize and address the international dimension of banking and finance," Mr. Dugan concluded. "I see the international activities of the OCC—including our active role on international supervisory bodies such as the Joint Forum and the Basel Committee—as essential components of our ability to effectively accomplish our mission."

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