Chairman Bachus, Congressman Sanders, and members of the
Subcommittee, thank you for inviting the Office of the Comptroller of the
Currency (OCC) to participate in this hearing on proposed revisions to the 1988
Capital Accord developed by the Basel Committee on Banking Supervision.
I want to assure the Subcommittee that the OCC, which has
the sole statutory responsibility for promulgating capital regulations for
national banks, will not endorse a final Basel II framework for U.S. banks
until we have determined through our domestic rulemaking process that any
changes to our domestic capital regulations are practical, effective, and in
the best interests of the U.S. public and our banking system.
My written testimony provides a detailed discussion of the
background and content of Basel II and the important issues with which this
Subcommittee is properly concerned. I would like to use this time to make three
important points that may help to put todays testimony into proper focus.
First, all of the U.S. banking agencies share
a concern about the potential effect of Basel II on the capital levels of large
U.S. banks. Our banking system has
performed remarkably well in difficult economic conditions in recent years, and
I believe that is due in significant part to the strong capital position our
banks have maintained. While a more
risk sensitive system of capital calculation might be expected to have the
effect of reducing the capital of some banks, we would not be comfortable if
the consequence of Basel II were to bring about very large decreases in
required minimum capital levels.
By the same token, if Basel II were to threaten significant
increases in the capital of some banks it could undermine support for the
proposal and might threaten the competitiveness of those banks. As things stand today, we simply do not have
sufficiently reliable information on the effect of these proposals on
individual institutions or on the banking industry as a whole. Before we can
make a valid assessment of whether the results are appropriate and acceptable,
we have to know, to a much greater degree of reliability than we now have, just
what the results of Basel II will be.
The OCC shares the view of the Subcommittee that significant
additional quantitative impact analyses will be necessary. Ideally, this should take the form of
another study by the Basel Committee itself.
However, even if the Basel Committee does not undertake such a study, I
believe that it is absolutely essential that the U.S. agencies make such an
assessment prior to the adoption of final implementing regulations. I strongly believe that we cannot
responsibly adopt final rules implementing Basel II until we have not only
determined with a high degree of reliability what the impact will be on the
capital of our banks, but have made the judgment that the impact is acceptable
and conducive to the maintenance of a safe and sound banking system in the U.S.
Second, some have perceived there to be
significant differences among the U.S. banking agencies. Mr. Chairman, you and
some of your colleagues have introduced H.R. 2043, a bill that would establish an
interagency committee whose purpose would be to resolve such differences. While
I am sympathetic to the concerns that underlie this legislation, I respectfully
suggest that it is not necessary at this time.
I believe the agencies have worked exceedingly well together
on the Basel II project for the past four years, and I am confident that we
will continue to do so. To be sure, we
have not always agreed on every one of the multitude of complex issues that
Basel II has presented, but where there have been differences, we have worked
our way through them in a highly professional and collaborative manner. The
forthcoming Advance Notice of Proposed Rulemaking for implementation of Basel
II in the U.S. is an example of the collegial and collaborative manner in which
the agency staffs have worked. In addition, we are now in the final stages of
internal review on draft interagency guidance that we will jointly issue
concurrently with the ANPR to clarify and elaborate our expectations for those
of our banks that will be subject to Basel II, and that guidance has been
developed in a process in which every agency had substantial input.
Finally, as I said earlier, I believe we are
all committed to a process that has real integrity to it. The current Basel Committee timeline presents a daunting challenge to both the U.S.
banking agencies and the banking industry.
While it is clearly necessary to address the acknowledged deficiencies
in the current Basel Capital Accord, the banking agencies must better
understand the full range and scale of likely consequences before finalizing
any proposal. We have identified in our
written testimony a lengthy and formidable list of critical milestones that the
agencies must meet under the current Basel II timeline.
[Optional
material: They include: Basel Committee consideration of comments received by it on
its latest consultative paper; the issuance of an ANPR and draft supervisory
guidance in the U.S. with a 90-day period for comments; full consideration of
those comments; the issuance of a definitive paper by the Basel Committee; the
drafting and issuance for comment in the U.S. of a proposed regulation
implementing Basel II; the conduct of a further quantitative impact study;
consideration of the comments received on the NPR; and finally the issuance of
a definitive U.S. implementing regulation.]
If we find that our current target implementation of
January 1, 2007, is simply not doable and my personal opinion is that
realization of that target may be very difficult -- we will take additional
time. But it is too early to draw that conclusion yet. The important point is that we will take
great care not to let the time frame shape the debate. If we determine that changes to the
proposal are necessary, we will make those views known to the Basel Committee,
and we will not implement proposed revisions until those changes are made.
[Optional Material: Id like to make one more point.
Some have viewed the new Basel II approach as leaving it up to the banks to
determine their own minimum capital putting the fox in charge of the chicken
coop. This is categorically not the case. While a banks internal models and
risk assessment systems will be the starting point for the calculation of
capital, bank supervisors will be heavily involved at every stage of the
process. We will publish extensive
guidance and standards that the banks will have to observe. We will not only validate the models and
systems, but will assure that they are being applied with integrity. In my view
the bank supervisory system that we have in the U.S is unsurpassed anywhere in
the world in both its quality and in the intensity with which it is applied,
and we are not going to allow Basel II to change that. In fact, if we dont
believe at the end of the day that Basel II will enhance the quality and
effectiveness of our supervision we should have serious reservations
about proceeding in this direction.
Moreover, while
Basel II has largely been designed by economists and mathematicians, and while
these quants will play an important role in our oversight of the
implementation of Basel II, the role of our traditional bank examiners will
continue to be of enormous importance.
Such values as asset quality, credit culture, managerial competence, and
the adequacy of internal controls cannot be determined by mathematical models
or formulas. Nor can many of the risks that banks face be properly evaluated
except by the application of seasoned and expert judgment. I can assure you that those national banks
covered by Basel II will continue to be closely monitored and supervised by
highly qualified and experienced national bank examiners, who will continue to
have a full-time on-site presence.]
I am pleased to have had this opportunity to provide our
views on this important initiative, and I would be happy to answer any
questions you may have.
# # #
The
OCC charters, regulates and examines approximately 2,100 national banks and 52
federal branches and agencies of foreign banks in the United States, accounting
for 55 percent of the nations banking assets.
Its mission is to ensure a safe, sound and competitive national banking
system that supports the citizens, communities and economy of the United
States.