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Basel Committee to finalize regulatory framework by end of year

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Basel Committee to finalize regulatory framework by end of year

The Basel Committee on Banking Supervision hopes to finalizeits global regulatory framework by the end of the year, implementing revisionsthat would address internal models at global banks and reduce overallvariability in risk-weighted assets.

William Coen, secretary general of the BaselCommittee, said Oct. 7 the revisions are also committed to not increasingcapital requirements, although he warned that "outlier" institutionsin the committee's view could see higher requirements.

"We will get to the right result, I have everyconfidence. The need to provide certainty and clarity to the regulatoryrulebook is imperative," he said at the Institute of InternationalFinance's annual membership meeting in Washington, D.C.

In a written statement provided by the committee, thepackage was described as incorporating "various policy levers" thatwould balance an increase in some weights with a decrease in others.

For example, the package hopes to implement creditrisk standardization that would increase capital requirements on riskierexposures while decreasing requirements for lower-risk exposures.

But overall, the revisions will address thecommittee's concerns over internal ratings-based approaches and "thedegrees of freedom the banks had in investigating those components," Coensaid. The committee is still deciding on the exact method by which riskcomponents will be reported, but two possible options would be incorporating afoundation internal ratings-based approach or removing the option of usinginternal ratings-based approaches entirely.

The Basel Committee also hopes to replace the capitalfloor established by the Basel I framework, which was originally designed tomitigate model risk and measurement error.

In targeting credit risk accounts, the Basel Committee isaddressing, by their estimates, an average of three quarters of a bank'sminimum capital requirements. But the committee also wants to extend theirstandardization to operational risk, which accounts for an average of 15%. Thepackage will likely employ a simple accounting proxy to a bank's internal lossdata in reporting.

Frédéric Oudéa, CEO of , was sitting next to Coen during his remarks andnoted shortly after that the Basel Committee's work was an "extraordinaryeffort." He also said supervisory efforts should make a clear distinctionas to what regulators are looking for.

"I don't think that asystem where regulatory capital is different from the way you look at risk canwork," Oudéa said."This is something I don't buy."

The struggle to align the evaluation of risk andregulatory capital is one the Federal Reserve faces with its calibration of itsstress tests. In September, Governor Daniel Tarullo introduced a that would overhaul thesurcharge for global systemically important banks, something the BaselCommittee is also evaluating.

Coen made a point ofdistancing the work of the Basel Committee from the supervisory efforts of theFed, saying Basel produces minimum requirements while the Comprehensive CapitalAnalysis and Review process evaluates other factors.

"I think CCARworks for the U.S. context," Coen said. "I don't necessarily see itbeing exported outside of the U.S., and I don't think there's a desire to doso."