The Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the agencies) have adopted a new risk-based capital adequacy framework that is based on the Basel ii framework.

The agencies:

1. The Board of Governors of the Federal Reserve System (Board)

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded.

Today, the Federal Reserve’s duties fall into four general areas:

• Conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
• Supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• Providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

Most developed countries have a central bank whose functions are broadly similar to those of the Federal Reserve. The oldest, Sweden’s Riksbank, has existed since 1668 and the Bank of England since 1694. Napoleon I established the Banque de France in 1800, and the Bank of Canada began operations in 1935. The German Bundesbank was reestablished after World War II and is loosely modeled on the Federal Reserve. More recently, some functions of the Banque de France and the Bundesbank have been assumed by the European Central Bank, formed in 1998.

2. The Office of the Comptroller of the Currency (OCC)

The Office of the Comptroller of the Currency (OCC) charters, regulates, and supervises all US national banks. It also supervises the federal branches and agencies of foreign banks.

Headquartered in Washington, D.C., the OCC has four district offices plus an office in London to supervise the international activities of national banks.

The OCC was established in 1863 as a bureau of the U.S. Department of the Treasury. The OCC is headed by the Comptroller , who is appointed by the President, with the advice and consent of the Senate, for a five-year term. The Comptroller also serves as a director of the Federal Deposit Insurance Corporation (FDIC) and a director of the Neighborhood Reinvestment Corporation.

The OCC's nationwide staff of examiners conducts on-site reviews of national banks and provides sustained supervision of bank operations.

The agency issues rules, legal interpretations, and corporate decisions concerning banking, bank investments, bank community development activities, and other aspects of bank operations.

3. The Federal Deposit Insurance Corporation (FDIC)

The Federal Deposit Insurance Corporation (FDIC) preserves and promotes public confidence in the U.S. financial system by insuring deposits in banks and thrift institutions for at least $250,000; by identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.

An independent agency of the federal government, the FDIC was created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s. Since the start of FDIC insurance on January 1, 1934, no depositor has lost a single cent of insured funds as a result of a failure.

The FDIC receives no Congressional appropriations – it is funded by premiums that banks and thrift institutions pay for deposit insurance coverage and from earnings on investments in U.S. Treasury securities.

With an insurance fund totaling more than $45 billion, the FDIC insures more than $5 trillion of deposits in U.S. banks and thrifts – deposits in virtually every bank and thrift in the country.

Savings, checking and other deposit accounts, when combined, are generally insured to $250,000 per depositor in each bank or thrift the FDIC insures. The standard insurance amount of $250,000 per depositor is in effect through December 31, 2013. On January 1, 2014, the standard insurance amount will return to $100,000 per depositor for all account categories except IRAs and other certain retirement accounts, which will remain at $250,000 per depositor. Deposits held in different categories of ownership – such as single or joint accounts – may be separately insured. The FDIC's Electronic Deposit Insurance Estimator can help you determine if you have adequate deposit insurance for your accounts.

The FDIC insures deposits only. It does not insure securities, mutual funds or similar types of investments that banks and thrift institutions may offer. (Insured and Uninsured Investments distinguishes between what is and is not protected by FDIC insurance.)

The FDIC directly examines and supervises about 5,160 banks and savings banks, more than half of the institutions in the banking system. Banks can be chartered by the states or by the federal government. Banks chartered by states also have the choice of whether to join the Federal Reserve System. The FDIC is the primary federal regulator of banks that are chartered by the states that do not join the Federal Reserve System. In addition, the FDIC is the back-up supervisor for the remaining insured banks and thrift institutions.

The FDIC employs about 5,000 people. It is headquartered in Washington, D.C., but conducts much of its business in six regional offices and in field offices around the country.

4. The Office of Thrift Supervision (OTS)

The OTS is the federal bank regulator and supervisor of a dynamic and diverse industry of savings associations and their subsidiaries spread across the nation.

The OTS also oversees domestic and international activities of the holding companies and affiliates that own these thrift institutions.

The OTS is an office within the Department of the Treasury.

The OTS supervises a national thrift industry that is built on the bedrock of the American dream of homeownership—supplying affordable home financing for Americans from all walks of life.

The industry has a long history dating back to 1831 with the establishment of the first savings association, the Oxford Provident Building Association, which made home loans and offered savings accounts.

Three advantages of the federal thrift charter foster this diversification:

Branching – The thrift charter offers institutions a distinctive capability to branch nationwide, without restriction or condition, under a single charter.

Consolidated Supervision – The thrift charter is unique because savings and loan holding companies and their thrift subsidiaries can operate under the consolidated regulatory supervision of a single federal regulator - the OTS.

Uniform Regulatory Framework – Uniform federal laws under the thrift charter require safe and sound operations, and appropriate consumer protections, without subjecting insitutions to the wide array of different or conflicting state and local statues.

Basel ii in the USA

"Basel II is a modern, risk-sensitive capital standard that will protect the safety and soundness of our large, complex, internationally active banking organizations. The new framework is designed to evolve over time and adapt to innovations in banking and financial markets, a significant improvement from the current system" Federal Reserve Board Chairman Ben S. Bernanke

For banking organizations that meet the relevant qualifying criteria, Basel II would replace the current U.S. rules implementing the Basel Capital Accord of 1988 (Basel I).

Basel II would be mandatory for large, internationally active banking organizations (so-called “core” banking organizations with at least $250 billion in total assets or at least $10 billion in foreign exposure) and optional for others.

Under Basel II, core banking organizations would be required to enhance the measurement and management of their risks, including credit risk and operational risk, through the use of advanced approaches for calculating risk-based capital requirements.

Core banking organizations also would be required to have rigorous processes for assessing their overall capital adequacy in relation to their total risk profile and to publicly disclose information about their risk profile and capital adequacy.

Under Basel II, risk-based capital requirements will vary on the basis of a banking organization’s actual risk profile and experience, which should lead institutions to make better decisions about extending credit, mitigating risks, and determining overall capital needs.

Banking organizations with a higher risk profile will have higher regulatory capital requirements than those with a lower risk profile.

The new U.S. Basel II rule is technically consistent in most respects with international approaches and includes a number of prudential safeguards as originally proposed in September 2006. These safeguards include a requirement that banking organizations satisfactorily complete a four-quarter parallel run period before operating under the Basel II framework, a requirement that an institution satisfactorily complete a series of transitional periods before operating under Basel II without floors, and a commitment by the agencies to conduct ongoing analysis of the framework to ensure Basel II is working as intended.

Importantly, Basel II in the United States will be implemented with retention of the leverage ratio and prompt corrective action (PCA) requirements, which will continue to bolster capital and complement risk-based measures.

Following a successful parallel run period, a banking organization would have to progress through three transitional periods (each lasting at least one year), during which there would be floors on potential declines in risk-based capital requirements.

Those transitional floors would limit maximum cumulative reductions of a banking organization’s risk-based capital requirements to 5 percent during the first transitional floor period, 10 percent during the second transitional floor period, and 15 percent during the third transitional floor period.

A banking organization would need approval from its primary federal regulator to move into each of the transitional floor periods, and at the end of the third transitional floor period to move to full Basel II.

The federal banking agencies will publish a study after the end of the second transition year that examines the new framework for any material deficiencies.

    Structure of Final Rule

    Capital Objectives

    Competitive Considerations

Scope

    Basel ii Scope - Core and Opt-In Banks, U.S. Subsidiaries of Foreign Banks

    Reservation of Authority

    Principle of Conservatism

Qualification

    The Qualification Process

    Parallel run, transitional floor

    Qualification Requirements    

Exposures

   Wholesale Exposures

    Retail Exposures

    Definition of Default

    Rating Philosophy

Quantification of Risk Parameters for Wholesale and Retail Exposures

    Probability of Default (PD)

    Loss Given Default (LGD)

    Expected Loss Given Default (ELGD)
    
    Supervisory Mapping Function
    
    Exposure at Default (EAD)

    General Quantification Principles

    Operational Risk

    Operational Risk Data and Assessment System

Securitization

    Securitization Exposures

    Ratings-Based Approach (RBA), Internal Assessment Approach (IAA), 

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