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Friday, April 22, 2016

Basel Drops Mandatory Capital Plan From Interest Rate Risk Standard

The Basel Committee announced that it has abandoned plans to impose a new capital regime tied to interest rate risk. Instead, the committee has adopted a more flexible approach that essentially leaves the matter to national regulators.

The standard issued follows a Basel III capital “Pillar 2” approach, which sets forth an optional standardized calculation that can be adopted at national discretion. ABA noted that this approach is far more preferable than the alternate “Pillar 1” proposal, which would have imposed mandatory global requirements for capital and public disclosures. ABA found common ground with U.S. bank regulators, who agreed on the importance of managing interest rate risk, but who emphasized that managing that risk has long been part of U.S. bank supervision.

ABA previously criticized the Pillar 1 approach, calling the proposed mandatory capital standard “overly prescriptive” and a “significant step backwards,” noting that interest rate risk management is already a fundamental part of bank supervision in the U.S. and that a global standard would be, at best, unnecessary

The new standard provides several enhancements to the Pillar 2 framework, including updated guidance on developing interest rate shock scenarios, and enhanced disclosure requirements to promote greater consistency, transparency and comparability in interest rate risk measurement and management. Most significantly, it provides an updated, standardized capital framework that regulators can choose to adopt within their own jurisdictions. U.S. regulators have expressed the view that their current supervisory program already incorporates these concepts.

ABA VP Hugh Carney said
We commend the U.S. bank regulators for emphasizing to the Basel Committee the advantages of an approach that accommodates national differences, defending the rigorous interest rate risk management already in place at U.S. banks.
The standard is expected to be implemented by 2018. ABA anticipates further consultative documents from the committee to capture any new disclosure requirements.

Read the Basel standard.
Read ABA's comment letter.

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