OCC: Basel capital requirements top priority, Dodd-Frank complicates
John Walsh, acting chief executive of the Office of the Comptroller of the Currency, said updating and implementing Basel Committee on Banking Supervision capital requirements for banks are a top concern, but that Dodd-Frank regulations convolute matters. He spoke before the Special Seminar on International Finance Wednesday in Tokyo and addressed changes proposed for the global financial system in the wake of the financial crisis. Walsh also mentioned the Basel committee's development of a suitable liquidity framework to help maintain short-term and long-term bank stability. This will focus on two aspects: Liquidity Coverage Ratio reflecting shorter-term aspects of liquidity and net stable funding ratio reflecting longer-term aspects. The LCR requires a bank to hold sufficient high-quality liquid assets to cover its total net cash flows over 30 days. The NSFR requires the available amount of stable funding to exceed the required amount of stable funding over a one-year period of extended stress. "The draft framework has been found wanting, and efforts to refine it are continuing," Walsh said. "But its importance is beyond question, and the committee’s liquidity initiatives reflect broad agreement that liquidity is a first-order concern for financial firms." However, in June, JPMorgan Chase (JPM) Chief Risk Officer Barry Zubrow testified before Congress detailing the excessive amounts of cash upcoming Basel III requirements will keep in the vaults of major banks. The U.S. is making little progress with Basel III phase-in, due to begin Jan. 1, 2013, in that draft regulations are not even available. Large financial institutions were scheduled to start the process in 2011. In a race to adopt financial reform under the Dodd-Frank Act, big banks have placed Basel III implementation on the sidelines, it appears. The EU, on the other hand, published draft regulation as planned on July 20, 2011. Walsh noted that the U.S. faces the Dodd-Frank Act as an additional complication to adopting Basel rules. "Dodd-Frank added additional capital and liquidity requirements that align reasonably, but not precisely, with the various Basel agreements," he said. The requirements include heightened standards for all banks with more than $50 billion in assets, floors under risk-based capital requirements and elimination of the use of external credit ratings from financial regulations. The OCC is one of the three federal banking regulators in the U.S., along with the Federal Reserve and Federal Deposit Insurance Corporation. It regulates about 2,000 banks and thrifts institutions at the federal level, accounting for 70% of the $13.6 trillion in total banking and thrift assets in the country. The Basel Committee put forward a variety of proposed enhancements for the capital treatment of risks that were prominent during the financial crisis. Most recently, it's been establishing methods to assess the systemic importance of banks, together with a system of capital requirements that would lead the most systemically important banks – the globally systemically important banks, or G-SIBs – to hold significantly more capital than other banks. Prior to the financial crisis, the Basel Committee developed the framework for capital adequacy requirements known as Basel II. While many countries were in the process of implementing Basel II, but it had not yet taken effect in the United States. regulators and the industry were not doing enough to ensure adequate liquidity under conditions of stress at the time, Walsh said. Problems at a number of major financial institutions in the depths of the crisis revealed significant deficiencies of bank capital and liquidity. "It is hard to argue (Basel) was the source of these problems, but given the depth of those problems, it was essential for the Basel committee to undertake a fairly broad reconsideration of the capital framework, and to try to identify aspects that might warrant improvement in view of the lessons learned during the financial crisis," Walsh said. The U.S. is continuing to implement Basel II in its largest banks, and is working on rules to address Basel III, as well as some of the earlier enhancements known as Basel 2.5 dealing with trading activities and securitization. "Interweaving all these national and international requirements, and meeting our statutory mandates and our commitments in Basel, will be the challenge of the next six to 12 months," Walsh said. Write to Justin T. Hilley. Follow him on Twitter @JustinHilley.