The Basel Committee on Banking Supervision will determine whether the Federal Reserve’s recently finalized market risk capital rule and three other capital requirement proposals are compliant with Basel standards.

A Basel review team says it hasn’t had time to assess whether these latest developments are compliant with the Basel standards, but that its findings will form part of the final assessment. The Federal Reserve, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are seeking public comment on the three rules by September 7.

Last week the Federal Reserve finalized a set of market risk capital rules, effective Jan. 1, 2013, that requires large banks to hold more capital against their trading books. It’s intended to force big banks to better capture the risk posed by complex financial products.

The Board says its three proposals regarding capital levels are “intended to help ensure banks maintain strong capital positions, enabling them to continue lending to creditworthy households and businesses even after unforeseen losses and during severe economic downturns.”

Banks with total assets of at least $250 billion or balance sheet foreign exposure of at least $10 billion are required to adopt Basel II standards, while all other banks remain subject to the Basel I standards, unless they elect subjection to Basel II.

On Monday, the Basel review team identified overarching issues related to the U.S. implementation of the Basel-like standards. The Fed’s activities last week represent a potentially significant acceleration of the slow U.S. adoption of Basel 2.5 and Basel III.

Among the issues the review team will review is the Dodd-Frank mandate that U.S. agencies remove reliance on external credit ratings from regulations and replace them with alternatives for calculating specific risk capital requirements for debt, securitization and equity positions. The Fed’s finalized market risk capital rules exclude even the mentioning of credit agencies.

“The review team will engage with the U.S. agencies to assess whether the proposed rulemaking is at least as robust as the corresponding Basel requirements,” the review team said.

The team will also evaluate the U.S. regulators’ definition of “core banks” and their selection of Basel II approaches.

Last week’s proposals, the Fed says, are divided into three parts to minimize burden on smaller and mid-sized banking organizations and allow firms to focus on the aspects of the proposed revisions that are most relevant to them.

The first rule applies to all banking organizations with total assets of at least $500 million, and savings and loan holding companies. Consistent with the international Basel framework, it proposes a new minimum common equity tier 1 ratio of 4.5% of risk-weighted assets and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets. Additionally, and it raises the minimum tier 1 capital ratio from 4% to 6% of risk-weighted assets.

Applying to all banking organizations, the second rule harmonizes the Fed's rules for calculating risk-weighted assets to enhance bank risk sensitivity and address weaknesses identified over the past several years. Banks and regulators use risk weighting to assign different levels of risk to different classes of asset — riskier assets require higher capital cushions and less risky assets require smaller capital cushions.

The final proposal enhances the risk sensitivity of the current regulatory capital rules for internationally active firms to better address counterparty credit risk and interconnectedness among financial institutions.

The Basel committee team says the first stage of its assessment — the qualitative review of the U.S. self-assessment — has progressed according to schedule. “However, due to the delay in publishing the final Basel 2.5 rule and the proposed Basel III rule, the review team’s completion of the U.S. review within the agreed timelines has become increasingly challenging,” it notes.

The on-site component of the review, in which the review team will meet face-to-face with the U.S. agencies, is scheduled for June 25 to 29.

jhilley@housingwire.com

@JustinHilley