September 26, 2006
Comptroller Dugan Tells Senate Panel that Basel II Capital Framework Will Substantially Improve Large Bank Risk Management and Controls
WASHINGTON — Comptroller of the Currency John C. Dugan told a Senate committee today that the inadequacies of the current Basel I capital regime for the largest internationally active banks are a matter of great concern to the OCC because the agency supervises the five largest banks in the United States, some of which hold more than $1 trillion in assets, have complex balance sheets, take complex risks, and have complex risk management needs that are fundamentally different from those faced by community and mid-size banks.
"The new regime is intended not only to align capital requirements more closely to the complex risks inherent in these largest institutions, but just as important—and this is a total departure from the existing capital framework—it would also require them to substantially improve their risk management systems and controls," Mr. Dugan said in testimony before the Senate Committee on Banking, Housing and Urban Affairs.
This would be accomplished, he said, using a common framework and a common language across banks that would allow regulators to better quantify aggregate risk exposures, make more informed supervisory decisions, disclose more meaningful risk information to markets, and make peer comparisons in ways that simply cannot be done today.
Mr. Dugan told the committee that the agencies took a critical step forward in the process by approving a notice of proposed rulemaking (NPR) that established the basic framework in the United States and includes a number of precautions, including capital floors for the three year transition period, to make sure it does not result in unacceptable drops in capital levels.
Mr. Dugan stressed in his testimony that the OCC and the other agencies are soliciting comments from all interested parties on the Basel II proposal, including whether the dozen Basel II large banks should have the option of using a simpler approach. "This is a legitimate competitive question, given that the largest banks in other Basel II countries have such an option, although, as a practical matter, all such foreign competitors appear to be adopting the advanced approaches," he said.
The OCC has been a frequent critic of many elements of the Basel II framework, he said, but has supported the proposal moving forward towards implementation because a Basel II regime will help both banks and supervisors address the increasingly complex risks faced by the largest institutions.
"While we may not yet have all the details right, and we will surely make changes as a result of the public comments, I fully support the objectives of the Basel II NPR for the supervision of our largest banks," Mr. Dugan concluded. "Likewise, for non-Basel II banks, I fully support our interagency effort to issue the so-called 'Basel 1A' proposal in the near future as a way to more closely align capital with risk without unduly increasing regulatory burden."