Basel 3 July 2012

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Basel iii Compliance ProfessionalsAssociation (BiiiCPA)
1200G Street NW Suite800Washington, DC 20005-6705USA Tel:
202-449-9750Web: www.basel-iii-association.com
Dear Member,
Todaywewill start from the3reallyimportant papersthat havetodowith
theimplementationof the Basel iii frameworkin theUSA.
Thethree noticesof proposed rulemaking (NPRs), taken together, will
restructuretheBoard‘scurrent regulatorycapital rulesintoaharmonized,
comprehensiveframework,and will revisethecapital requirementsto
make them consistent withthe BaselIII capital standardsestablishedby
theBasel Committeeon Banking Supervision (BCBS) and certain
provisionsof the Dodd-Frank Wall Street Reform and Consumer
ProtectionAct (Dodd-Frank Act).
Theproposalsarepublished in separate NPRsto reflect thedistinct
objectivesof each proposal,toallowinterested partiesto better
understandthevariousaspectsoftheoverall capitalframework,including
whichaspectsof therule wouldapplyto whichbanking organizations,
andtohelp interestedparties better focustheir commentson areasof
particular interest.
Theproblem iswedid not learnmore about thequantitativeliquidity
requirementsand thecapital surcharge for global systemically important
banks(thesearenot part of this rulemaking).
I hopewewill havemore detailssoon.
Basel iii ComplianceProfessionalsAssociation (BiiiCPA)
www.basel-iii-association.com

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Basel III in the USA

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Basel III in the USA, Board of Governorsof the Federal Reserve
3:30PM, Thursday, June 7, 2012- MarrinerS.Eccles FederalReserve
Board Building, 20th Street entrancebetweenConstitutionAvenue and
C Streets,N.W., Washington, D.C.
Mattersto be Considered:
Discussion Agenda:
1.Proposed interagencyrulemakings:strengtheningand harmonizingthe
regulatorycapital frameworkfor banking organizations,including
proposedrules for implementingBasel III for banking organizationsand
proposedconsolidatedcapital requirementsfor savingsand loan holding
companies.
2. Final interagencyrulemaking:market risk capital rule.
Proposed Rulemakingsfor an Integrated Regulatory Capital
Framework, Questions and Answers
June7, 2012
Question 1:What doesthe package of proposed rulemakings
contain and whyisit divided into three parts?
Thepackagecontainsthreenoticesof proposedrulemaking(NPRs)
that, taken together, wouldrestructure the Board‘s current regulatory
capital rules intoa harmonized, comprehensiveframework,and would
revisethecapital requirementsto make them consistent withtheBaselIII
capital standardsestablishedby the BaselCommitteeon Banking
Supervision (BCBS) andcertainprovisionsof theDodd-Frank Wall Street
Reform and Consumer ProtectionAct (Dodd-FrankAct).
Theproposalsarepublished in separate NPRsto reflect thedistinct
objectivesof each proposal,toallowinterested partiesto better
understandthevariousaspectsoftheoverall capitalframework,including
whichaspectsof therulewouldapplyto whichbanking
organizations,and tohelp interestedparties better focustheir comments
onareasof particular interest.

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TheBCBS quantitativeliquidityrequirementsand the BCBS capital
surchargefor global systemically important banksare not part of this
rulemaking.
First Paper: The Basel III NPR
1.Thefirst NPR, Regulatory Capital Rules:Regulatory
Capital, Implementation ofBasel III, MinimumRegulatory Capital
Ratios,Capital Adequacy, Transition Provisions,and Prompt Corrective
Action (Basel III NPR), is primarily focused on proposed reformsthat
wouldimprovethe overall qualityand quantityof banking organizations‘
capital.
TheNPR wouldrevisetheBoard‘srisk-basedand leveragecapital
requirements,consistent withthe Dodd-FrankAct and withagreements
reached by the BCBSin Basel III: AGlobal Regulatory Frameworkfor
MoreResilient Banksand BankingSystems (Basel III).
Theproposalincludestransitionprovisionsdesignedtoprovidesufficient
timefor banking organizationstomeet the new capital standards while
supporting lendingtotheeconomy.
Second Paper: The Standardized Approach NPR
2.Thesecond NPR, RegulatoryCapital Rules:StandardizedApproach
for Risk-weightedAssets;Market Disciplineand Disclosure
Requirements(StandardizedApproach NPR), wouldrevise and
harmonizethe Board‘srulesfor calculatingrisk-weightedassetsto
enhancetheir risk sensitivityand addressweaknessesidentifiedover
recent years.
It wouldincorporateaspectsof theBCBS‘sBasel II standardized
frameworkintheInternationalConvergenceof Capital Measurement and
Capital Standards:ARevised Framework (Basel II), Basel III, and
alternativestocredit ratingsfor the treatment of certain
exposures,consistent withtheDodd-FrankAct.

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Third Paper: TheAdvanced Approaches and Market Risk NPR
3. The third NPR, Regulatory Capital Rules:AdvancedApproaches
Risk-basedCapital Rule;Market RiskCapital Rule(Advanced
Approachesand Market Risk NPR), wouldrevise the advanced
approachesrisk-basedcapital rule (in amanner consistent withthe
Dodd-FrankAct) and incorporatecertain aspectsof Basel III that the
Board wouldapply onlyto advanced approachesbanking organizations
(generally, the largest, most complex banking organizations).
This NPR wouldalsocodify the Board‘smarket riskcapital rule and, in
combination withthe other componentsdescribedabove, wouldapply
consolidatedcapitalrequirementstosavingsandloanholdingcompanies
(SLHCs).
Question 2: Which banking organizationsare covered by the
proposed rulemakings?
TheBasel III NPR and the StandardizedApproach NPR wouldapply to
statemember banks, bank holding companiesdomiciledin the United
Statesnot subject tothe Board‘s Small Bank Holding Company Policy
Statement (generally, bank holdingcompanieswithlessthan$500million
in consolidatedassets), and SLHCsdomiciledin theUnitedStates.
Consistent withSection 171of the Dodd- FrankAct, the proposed
rulemakingswouldapplytoall SLHCs regardlessof assetsize.
TheAdvanced Approachesand Market Risk NPR would generallyapply
tobanking organizationsmeeting specified thresholds.
In general, the advanced approachesrisk based capital ruleappliesto
thosebankingorganizationswithconsolidatedtotal assetsof at least$250
billion or consolidatedtotal on-balancesheet foreign exposuresof at least
$10billion(excludinginsuranceunderwritingassets)and their depository
institutionsubsidiaries.

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Themarket risk capital rule generallyappliestothosebanking
organizationswithaggregate trading assetsand tradingliabilitiesequal
toat least 10 percent of quarter-endtotal assetsor $1billion.
Question 3: How are these proposed rulemakingsrelated to the
Dodd-Frank Act?
TheNPRs are consistent withstatutoryrequirementsin theDodd-Frank
Act.
For example, pursuant tosection 171of the Act, the NPRs would establish
minimum riskbased and leverage capital requirements for SLHCs, phase
out certain capital instrumentsover a three-year period, and establish new
minimum generallyapplicablecapital requirements.
In addition, pursuant to section 939Aof theact, theNPRs remove
referencesto, or requirementsof relianceon, credit ratingsin theBoard‘s
capital rulesand replacethem withalternativestandardsof
creditworthiness.
Question 4: What are the main changesto the minimum capital
requirements?
Theproposal includesa new common equity tier 1minimum capital
requirement of 4.5percent of risk-weightedassetsand a common equity
tier 1capital conservation buffer of 2.5 percent of risk-weightedassets.
Theproposal alsoincreasesthe minimum tier 1capital requirement from
4to 6 percent of risk-weightedassets.
Theminimum total riskbasedcapital requirement would remain
unchanged at 8 percent.
Theproposal introducesa supplementaryleverageratiothat incorporates
a broader set of exposuresin thedenominatormeasure of theratiofor
bankingorganizationssubject tothe advanced approachescapital rule.
This supplementaryleverageratiois based on the international leverage
ratio in BaselIII.

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Question 5: What arethe main changesrelated to the definition
of capital being proposed?
Capital instrumentsissuedbybanking organizationswouldbe subject to
a set of strict eligibilitycriteria that wouldprohibit, for example, the
inclusionin tier 1capital of instrumentsthat are not perpetual or that
permit the accumulationof unpaid dividendsor interest.
Trust preferred securities,for example, wouldbe excluded from tier 1
capital, consistent withboth Basel III and the Dodd-Frank Act.
Under the Basel III NPR, banking organizationswould be subject to
generally stricter regulatory capital deductions (the majority of which
wouldbe taken from common equitytier 1capital).
For example, deductionsrelatedtomortgageservicingassets, deferred
tax assets,and certain investmentsin thecapital of unconsolidated
financial institutionswouldgenerallybe more stringent than thoseunder
thecurrent rules.
Question 6: What is the capital conservation buffer and how
would it work?
In order toavoid limitationson capital distributions(includingdividend
payments, discretionarypaymentson tier 1instruments,and share
buybacks) and certain discretionarybonuspayments, under the proposal
bankingorganizationswouldneed to hold a specific amount of common
equitytier 1capital in excessof their minimum risk based capital ratios.
Thefullyphased-inbuffer amount wouldbe equal to 2.5percent of
risk-weightedassets.
Question 7: Will the new capital requirements and capital
conservation buffer be imposed immediately or will there be a
transition period?

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TheBasel III NPR containstransition provisionsdesigned togive ample
timeto adjust to thenew capital requirements, consistent with the
agreement in Basel.
Thenew minimum regulatory capital ratiosand changesto the
calculationof risk weightedassetswouldbe fullyimplementedJanuary
1,2015.
Thecapital conservation buffer framework wouldphase-in between2016
and 2018,withfull implementationJanuary 1,2019.
Question 8: What is common equity tier 1capital and whyare
you proposing a new common equity tier 1requirement?
Common equitytier 1capital is a new regulatory capital component that
is predominantlymade up of retained earningsand common stock
instruments(that complywitha seriesof strict eligibilitycriteria), net of
treasury stock, and net of a series of regulatory capital deductionsand
adjustments.
Common equitytier 1capital may alsoincludelimitedamountsof
common stock issued by consolidatedsubsidiariesto third parties
(minorityinterest). Common equitytier 1capital is the highestquality
form of regulatory capital because of its superior ability toabsorblosses
in timesof market and economic stress.
Question 9: What are the main elements of the Standardized
Approach NPR?
It wouldincreasethe risk sensitivityof the Board‘sgeneral risk-based
capital requirementsfor determiningrisk-weightedassets(that is, the
calculationof thedenominator of a banking organization‘srisk-based
capital ratios) by proposingrevised methodologiesfor determining
risk-weightedassetsfor:
- Residential mortgageexposuresby applying a more risk-sensitive
treatment that wouldrisk-weight an exposurebased on certain loan
characteristicsand itsloan-tovalueratio;

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- Certaincommercial real estatecredit facilitiesthat financethe
acquisition, development, or construction of real property by
assigninga higher riskweight;
- Exposuresthat aremore than 90days past due or on nonaccrual
(excludingsovereignand residential mortgage exposures) by
assigninga higher riskweight;and
- Exposurestoforeign sovereigns,foreign banks, and foreign public
sectorentitiesbybasingtherisk weight for each exposuretype onthe
country riskclassificationof the sovereignentity.
TheNPR wouldalsoreplacetheuseof credit ratingsfor securitization
exposureswitha formula-based approach.
Additionally, theNPR wouldprovidegreater recognitionof collateraland
guarantees.
However,for most exposures,no changesare beingproposed in the
NPR.
Morespecifically, the treatment of exposurestothe U.S.
government, government-sponsoredentities,U.S. statesand
municipalities,most corporations,and most consumer loanswould
remainunchanged.
It would introduce disclosure requirements that would apply to banking
organizations domiciled in the United States with $50 billion or more in
total assets, includingdisclosuresrelatedto regulatory capital.
Thechangesin theStandardizedApproach NPR areproposed to take
effect January 1,2015.
Bankingorganizationsmay choosetocomplywiththe proposed
requirementsprior tothat date.
Question 10:What are the primary objectives of theAdvanced
Approachesand Market Risk NPR?
It wouldrevisethe advanced approachesrisk-basedcapital rule in a
manner consistent withthe Dodd-Frank Act by removingreferencesto

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credit ratingsfrom the securitizationframework, requiring an enhanced
set of quantitativeand qualitativedisclosures(especiallyin regard to
definitionof capital and securitization exposures), implement a higher
counterpartycredit risk capital requirement toaccount for credit
valuation adjustments,and proposecapital requirementsfor cleared
transactionswithcentral counterparties.
TheNPR wouldincorporate the market risk capital rulesintothe
integratedregulatory capital frameworkand proposeitsapplicationto
savingsand loan holdingcompanies that meet the tradingthresholds.
Question 11:How will the Prompt Corrective Action (PCA)
framework change asa result of the proposed rulemakings?
Under the proposal, the capital thresholdsfor thedifferent PCA
categorieswouldbe updatedtoreflectthe proposed changesto the
definitionof capital and the regulatorycapital minimum ratios.
Likewise,the proposal wouldaugment the PCAcapital categories by
incorporatinga common equitytier 1capital measure.
In addition, theproposal wouldincludein the PCAframework the
proposed supplementaryleverageratio for advanced approachesbanking
organizations.
Note thatthenewPCAframeworkwouldtakeeffectstartingonJanuary
1,2015,consistent withthefull transition of theminimum capital
requirementsand theStandardizedApproach for the calculation of risk
weightedassets.

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Basel Committeeon BankingSupervision
Report to G20 Leaders on Basel III
implementation
June2012
Introduction and summary
At their 2010summit in Seoul, the G20
LeadersendorsedtheBasel III regulatory
frameworkasfollows:
―Weendorsed thelandmark agreement
reached bytheBCBSonthenewbank
capital and liquidityframework,which
increasestheresilience oftheglobal banking
system byraising thequality, quantityand
international consistency ofbank capital and
liquidity, constrainsthebuild-up of leverage andmaturitymismatches,
and introducescapital buffers abovetheminimumrequirementsthat can
bedrawnuponin bad times.‖
In November 2011, the Leaders,at their summit in Cannes,emphasised
theimportanceof implementingBaselIII:
―Wearecommitted toimprovebanks' resiliencetofinancial and
economicshocks. Buildingonprogressmadeto date, wecall on
jurisdictionsto meet their commitment toimplement fullyand
consistentlytheBasel II risk-based framework aswell astheBasel II
additional requirementsonmarket activitiesand securitisation byend
2011andtheBasel III capital and liquiditystandards, whilerespecting
observation periodsand review clauses, startingin 2013and completing
full implementation by1January 2019.‖
This interim report details the progressthemembersof theBasel
Committeeon BankingSupervision havemade todate in implementing
theBasel III regulatory framework(includingBaselII and Basel 2.5,
whichnow form integral parts of BaselIII).

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The report also describes various implementation issues identified
through the comprehensive process the Committee has adopted to
monitor members‘implementationof BaselIII.
Compared to the statusat end-September 2011and end-March 2012, when
the Committee published previous reports, significant progress has been
observed.
However,there are jurisdictionswhichhavemissedthe globally-agreed
implementationdatesfor Basel II and 2.5.
There are also jurisdictions that have not made enough progress to date
on Basel III and thus pose concern as to their ability to meet the agreed
Basel III implementationdate.
As of end-May 2012,21of 27Basel member countrieshave implemented
Basel II, whichhad been due tocome intoforce from end-2006.
In addition, Indonesia and Russiahave implemented BaselII‘sPillar 1
(minimum capital requirements).
Argentina, China, Turkey and theUnited Statesare in theprocessof
implementingBaselII.
With regard toBasel 2.5, whichwasdue tobe implementedfrom end
2011, 20 member countrieshave final rulesthat are in force.
Argentina, Indonesia,Mexico,Russia,TurkeyandtheUnitedStateshave
not issued final regulations.
Russiaand theUnitedStateshaveissueddraft regulationswhichpartially
cover Basel 2.5.
SaudiArabia hasissuedfinal regulationsbut thesehavenot yet comeinto
force.
Among the 29 global systemically important banks (G-SIBs) identified in
November 2011, nine are headquartered in jurisdictions that have not yet
fullyimplementedBasel II and/ or Basel 2.5.

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Draft Basel III regulationshavenot yet been issuedby seven Basel
Committeemember jurisdictions:Argentina, Hong Kong
SAR, Indonesia, Korea, Russia, Turkeyand theUnited States.
Themajorityof thesejurisdictionsbelievetheycan issuefinal regulations
in time toimplement by the deadlineof 1January 2013.
However,for others, dependingon their domesticrule-makingprocess,
meetingthedeadlinecould be a significant challenge.
In additiontomonitoring whetheritsmembershaveissuedregulationsto
implement theBaselIII rules,the BaselCommittee hasestablished a
processto review thecontent of the new rules.
This second level of review is meant to ensure that thenational
adaptationsof Basel III are consistent withthe minimum standards
agreedto under Basel III.
TheBasel Committeehasinitiatedpeer reviewsof the domestic
regulationsof theEuropean Union, Japanand theUnited Statestoassess
their consistencywiththe globallyagreed standards.
Thefindingsof these reviewsarepreliminarysincetheformulation of
national standardsis still ongoing and the analysisis not yet completed.
Nevertheless, there isa possibilitythat national implementation will be
weakerthan theglobally-agreedstandardsin some key areas.
TheBasel CommitteeurgesG20 Leadersto call on jurisdictionstomeet
their commitmentsmadein Cannestoimplement Basel III fully and
consistently, and within the agreedtimetable.
AthirdlevelofimplementationreviewconductedbytheBaselCommittee
examineswhetherthere areunjustifiableinconsistenciesin risk
measurement approachesacrossbanksand jurisdictionsand the
implicationsthesemight have for the calculationof regulatorycapital.
This review of banks‘ risk-weightingpracticesincludestheuse of test
portfolio exercises,horizontal reviewsof practicesacrossbanksand
jurisdictions,andjoint on-sitevisitstolarge, internationally-activebanks.

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TheBasel Committeefirmly believesthat full, timely and consistent
implementationof Basel III amongitsmembersis essential for restoring
confidencein theregulatory frameworkfor banks and to help ensure a
safeand stableglobal banking system.
TheCommitteewill providean updated progressreport toG20Finance
Ministersand central bank governors at their meetingin November 2012.
That report will provide
(i)An updateon Basel Committee members‘domestic rule-making,
(ii)Thefinal outcome of the regulatoryconsistencyassessment of the
European Union, Japan and the UnitedStates,and
(iii)Preliminaryfindingsfrom theCommittee‘sdeeperanalysisonbanks‘
risk measurement approachesand regulatorycapital calculations.
This interim report isbased on the informationthat wasavailableto the
Basel Committeeon 31May2012.
Subsequent tothisdate, furtherinformation hasbecomeavailablein both
theEU and USbut there hasbeen insufficient time toassesswhether
theselatestdevelopmentsare compliant withthe Baseltext for this
interim report.
Basel standards
In June 2004, a package of reformsknown asBasel II introducedmore
risk-sensitiveminimum capital requirementsfor banks, includingan
enhancedmeasurement of credit risk, and captureof operational risk.
Basel II alsoreinforcedthe requirementsby settingout principlesfor
bankstoassesstheadequacyof their capitalandfor supervisorstoreview
such assessmentsto ensure bankshave the necessarycapital to support
their risks.
It alsostrengthenedmarket disciplineby enhancingtransparencyin
banks‘financial reporting.

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Thedeadlinefor implementation of theBasel II frameworkby member
jurisdictionswastheend of 2006.
In July2009, enhancementsto themeasurement of risks relatedto
securitisationand tradingbook exposureswereagreed in responseto
earlylessonsfrom the2007/ 08crisis.
An implementationdeadlineof theend of 2011wasset for thesereforms,
referredto asBasel 2.5.
In December 2010,the BaselCommitteepublished Basel III, a
comprehensiveset of reforms toraisetheresilienceof banks. Basel III
addressesboth firm-specific and broader, systemic risksby:
- Raisingthequalityof capital, withafocusoncommon equity, andthe
quantitytoensure banksarebetter ableto absorblosses;
- Enhancingthe coverage of risk, in particular for capital market
activities;
- Introducingadditional capital buffers for the mostsystemically
important institutionsto addresstheissueof ―toobig tofail‖;
- Introducingan internationallyharmonised leverageratiotoserve asa
backstop to the risk-basedcapital measure and tocontain the
build-upof excessiveleveragein the system;
- Stronger standardsfor supervision (Pillar 2), public disclosures (Pillar
3), and risk management;
- Introducingminimum global liquiditystandardstoimprove banks‘
resiliencetoacuteshort term stressand toimprove longer term
funding;and
- Introducingcapital bufferswhichshould be built up in good timesso
that theycan be drawndown during periodsof stress.
Theimplementationperiod startsfrom 1January 2013and includes
transitional arrangementsuntil 1January 2019.

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Thetransitional arrangementsare availableto give bankstime to meet
thehigher standards, whilestill supportinglendingto the economy. The
liquidityrequirements,leverageratio and systemic surchargescome into
forceon a phasedapproach startingfrom 2015and will, therefore,be
assessed later and are not covered in this report.
Design of the Committee‘s Basel III Implementation Review
Programme
In January 2012, the Group of Central Bank Governors and Headsof
Supervision(GHOS), theBasel Committee‘soversight body, endorsed
thecomprehensiveprocessproposedby theCommitteetomonitor
members‘implementationof Basel III.
Theprocessconsistsof the followingthree levelsof review:
- Level 1: ensuring thetimely adoption of Basel III;
- Level 2: ensuringregulatory consistencywithBaselIII; and
- Level 3: ensuringconsistencyof outcomes(initiallyfocusingon
risk-weightedassets).
TheBaselCommitteehaspublished two―Level 1‖ progressreports. It
hasagreed on a detailed ―Level 2‖ assessment processand started
reviewsof the European Union, Japan and theUnited States.
Its ―Level 3‖ reviewsanalyse existingdata on risk measuredby banks‘
modelsand are designingprocessesfor deeper analysis.
TheBasel Committeehasworked in closecollaboration withthe
Financial Stability Board (FSB) given theFSB‘s role in coordinatingthe
monitoring of implementationof regulatoryreforms.
TheCommitteedesigned itsprogrammeto be consistent withtheFSB‘s
Coordination Frameworkfor MonitoringtheImplementationof
Financial Reforms(CFIM) agreed by the G20.
Theobjectivesand the processof each of the three levelsof review are as
follows.

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Level 1:Timely adoption of Basel III
Theobjectiveof the―Level 1‖assessment is to ensure that BaselIII is
transformedintodomestic regulationsaccordingto the agreed
international timelines.
It does not include the review of the content or substance of the domestic
rules. Each Basel Committee member jurisdiction‘s statusis reported in a
simpletable.
Separately, theFinancial Stability Institute(FSI) of the Bank for
International Settlementsissurveying non-Basel Committeemember
countries.
Theoutcome of this workwill be publishedby the FSI in thecoming
months.
Level 2: Regulatory consistency
Theobjectiveof the―Level 2‖ assessmentsis toensurecomplianceof
domesticregulationswiththeinternational minimum requirements.
Delays or failures toadopt domesticregulationsidentifiedby the Level 1
review will feed intothe Level 2 assessment.
All Level 2 assessmentswill be summarised usingthe following
four-gradescale:compliant, largely compliant, materiallynon-compliant
andnon-compliant.
TheCommitteeintendsto produce an overall assessment, aswell as
assessmentsof themain componentsof Basel III.
All Basel Committeemember countrieswill be assessed over time.
TheCommitteedecidedtoprioritiseitsreviews, focusing first on the
homejurisdictionsof global systemicallyimportant banks (G-SIBs).
Thefirstreviewscommencedin February 2012withtheEuropean
Union, Japan and the United States.

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Asummary of the processfor the Level 2reviewsis included in appendix
2of thisreport.
Level 3: Risk-weighted assets consistency
Theobjectiveof the―Level 3‖ assessmentsistoensurethat theoutcomes
of the new rulesare consistent in practiceacrossbanksand jurisdictions.
It extendsthe findingsof Levels1and 2, both of whichfocuson national
rules and regulations,tosupervisoryimplementation at the bank level.
TheCommitteehasestablishedtwoexpert groups, one on the banking
book and the other on the tradingbook.
Thesegroupswill identify areasof material inconsistenciesin the
calculationof risk-weightedassets(RWAs, or the denominator of the
Basel capital ratio).
Depending on the outcome, thework may result in policy
recommendationstoaddressidentified inconsistencies.
Preliminary findings
Level 1
Thetablesin appendix 1show member countries‘implementationstatus
asof end-May 2012.The tablesusethe followingnumber codes:
- ―1‖ for draft regulationnot published,
- ―2‖ for draft regulationpublished,
- ―3‖ for final rule published, and
- ―4‖ for final rule in force.
Summaryinformationabout thenext stepsandtheimplementationplans
beingconsidered by membersare alsoprovided for each jurisdiction.
Separatetablesare produced for each of Basel II, Basel 2.5 and Basel III.

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For Basel II and 2.5, whichshould be implementedalreadyaccordingto
theagreed timetable, countries that havefullyimplementedare shownin
green;thosein the processof implementingare shownin yellow;and
thosethat have not yet issued draft regulationsare shown in red.
Compared to the statusat end-September 2011and end-March 2012, when
the Committee published previous reports, significant progress has been
observed.
However,there are jurisdictionswhichhave missedtheglobally-agreed
implementationdatesfor Basel II and
2.5. There arealsojurisdictionsthat havenot madeenough progressto
date on Basel III and thuspose concern asto their abilityto meet the
agreedBaselIII implementation date.
Basel II
Three-quartersof member countries have implementedtheBasel II
requirements.
Of the remainingsix countries, Indonesiaand Russiahave implemented
Pillar 1(minimum capital requirements) but not Pillar 2 (supervisory
review process) or Pillar 3 (disclosureand market discipline).
Turkeyexpectsto be fullycompliant by July2012.Chinahasissuedfinal
regulationsand iscurrentlyassessingapplicationsfor advanced
approachessubmittedby largebanks.
TheUnited Statesis in ―parallelrun‖ (ie runningboth Basel I and Basel
II calculationfor itslargest banks), although Basel I rules remain the
legal minimum.
Argentina implementedruleson operational risk in April 2012.
Basel 2.5
Again, a majorityof Basel Committeemember countries (20out of 27
Basel Committeemembers) have implemented therequirements, but a

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significant minorityare either still in theprocessof implementationor
havenot started theprocessfor implementation.
Russiaand the United Stateshave issued draft regulationscoveringthe
market riskelementsof the enhancements.
TheUS regulationsweremodified in December 2011to incorporate
restrictionson theuseof credit ratingsasset forth in theDodd-Frank
regulatoryreform legislation.
Other member countries whichhavenot implemented Basel 2.5 are
Argentina, Indonesia, Mexico, Saudi Arabia and Turkey.
Basel III
Three countries – India, Japan and SaudiArabia – havepublishedfinal
regulationsnecessaryfor implementingthe BaselIII packagefrom 1
January 2013.
Full application startsin Japan at the end of March2013to match
Japanesebanks‘fiscal year end.
TheEuropean Union haspublishedseveral roundsof draft directivesand
regulations(CRD4/ CRR) and is expectingto have final rulesby the end
of June.
TheEU level regulationsimplement most elementsof the BaselIII
packagedirectly.
This meansthereis noneed for national regulationstotransposethe
regulationsintotheir domesticlegislation.
Thefollowingseven member jurisdictionshave not issued draft
regulations:Argentina, Hong Kong
SAR, Indonesia, Korea,Russia, Turkey and the UnitedStates.
Themajorityof these countriesbelieve theycan finaliseregulationsin
timefor the agreed start dateof 1January 2013.

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However,for others, dependingon thedomestic rule-making
process,meetingthedeadlinecould be a significant challenge.
Level 2
Thefirst three BaselIII regulatory consistencyassessmentsare currently
under wayfor the European Union, Japan and the United States, which
are beingconductedin parallel.
In the initial phaseof the Level 2 assessment process,the jurisdictions
havebeen askedtocompletea detailed self-assessment questionnaireand
toprovideall componentsoftheregulationsthat implement BaselIII at
thedomesticlevel.
After receivingthe completed questionnaires, peer review teamsof
supervisorshave reviewedthecompleted selfassessment and drafted an
initial list of preliminary findings.
TheEuropean Union, Japan and theUnitedStatesare at different stages
of Basel III implementation.
Given thesedifferences, the depth of thepreliminary Level 2findings
differs.
The reviews are still work in progress and this interim report is based
solely on preliminary findings that are subject to further review as the
analysisprogresses.
Currently, thepeer review teamsarein the processof furtheranalysing
thepreliminaryfindingsbasedon additional clarificationsthat were
receivedfrom the jurisdictionsconcerned.
Thereview teamsare alsoworkingon theassessment of thepotential
materialityof their findings,usingquantitativebank-specific data that
wasprovided by the authorities.
An important element in the second phaseof theassessment will be an
on-sitevisit wherethe teamswill discusstheir findingswiththe

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authoritiestofurther narrowdownthematerialityof thefindingstoarrive
at a final assessment.
Theon-site visits are tentativelyscheduledin June and July. The final
report isexpected tobe submitted totheBasel Committeein September
2012,and will be published shortlythereafter.
Theabsenceof any item among the topicsmentionedabovedoesnot
necessarilymean that thereviewteamwill not add new itemstothelist of
issuesfor further investigationduring theprogresstowardsthe final
report.
European Union
Thereview of the European Union (EU) rulesrelatedto Basel III has
been complicatedbytheabsenceof a stableEU text implementingBasel
III.
As a pragmaticchoice,the review team selectedthe Third Danish
PresidencyCompromiseproposalsfor the basisof thisinterim report.
This choice does not imply any endorsement by the assessment team of
these proposals, but simply responds to the need to use the most recent
draft such that the text remains stable for the time required to complete
theinterim review.
At the timethis interim report wasprepared, the final version of
CRD4/CRR – therulesfor implementingBasel III in theEuropean
Union – werenot yet published.
Thereforethe number and nature of thefindingsset out in theBasel
Committee‘sfinal report may changesubstantiallyfrom those contained
in this interim report to the extent that the final CRD4/CRR rules differ
from theThird DanishCompromise proposals.
BesidesthechangingnatureoftheEU proposals,theassessment hasalso
been difficult due tothe particularitiesof theEU rule-makingprocess.
Thismeant that theEuropean Commission(EC) wasunabletocomplete
therequested self-assessment questionnaire, beyond mapping theBasel

25
frameworktotheJuly2011EC proposalsand providingexplanatorynotes
on thecomplianceof key areasof theEU regulationwith Basel III.
Unlike the other assessments,whichhave benefitedfrom country
self-assessments,theEU review team hasnot been able to draw on a
comprehensiveself-assessment from which tobegin itsassessment
process.
Despitethesedifficulties, thereview team conducteda detailed
preliminaryassessment of theEU framework.
This assessment benefitedfrom face-to-facediscussionsbetweenthe
leaderofthereviewteamandEC staff aswellaswithrepresentativesfrom
theEuropeanBankingAuthority, theEuropeanCentral Bank, theDanish
Presidency, and thenineEU countrieswhicharealsoBCBSmembers.
Theinitialassessment processhasidentifiedalargenumber offeaturesof
thecurrent EU Basel III proposalsthat will require further investigation.
Most of these issueswill probablyproveeither consistent with the Basel
framework,or immaterial in practice.
There seems to be a small number of issues, however, that are potentially
material and will need to be subject toa detailed assessment by the review
team.
TheEU frameworkhasbeen developed withtheprincipleof ―maximum
harmonisation.‖
This is designed with the aim of achieving a high level of harmonisation
of banking rules and limiting divergence between the approaches taken
byindividual national authorities.
While not a matter of direct relevancetothe assessment in the first
instance,theability for an individual national regulator tocomply with
Basel III where EU regulation is found tobe inconsistent will depend on
thedegreeof ―maximum harmonisation‖ at the EU level.

26
In this case, it may worktolimit theroom an individual regulator hasto
adopt compliant regulationson itsown.
The review team has identified the following specific areas of potential
difference. These areas require further review and/ or an assessment of
their potential materiality beforedefinitiveconclusionscan be drawn:
Definition of Capital
There arethree specific issuesthat warrant particular attention:
TheBasel III rulesrequire bankstodeduct significant investmentsin
unconsolidatedfinancial entities,includinginsuranceentities,from the
highestqualityform of capital (Common EquityTier 1– CET1).
TheCRD IV/ CRR proposalsgivecompetent authoritiesthepossibilityto
permit banksnot to deduct insuranceholdingsunder certain conditions.
Thereviewteam will need toassesswhethertheCRD IV/ CRR proposals
are consistent withtheBasel requirementsthat only permit approaches
other than deduction whereit can be demonstrated that thesearemore
conservative (ie wouldproducehigher capital requirements) thanthe
deduction approach.
TheBasel III rulesare explicit that for joint stock companies, only
common shares,whichcomplywitha list of substantivecriteria, can be
includedin CET1.
However, the CRD IV/CRR proposals recognise any capital
instrument, which satisfies a list of substantive criteria in line with Basel
III, aspart of CET1even if they might not be common shares.
Thereview team will need toevaluatewhetherthisdeviationfrom Basel
III hasthepotential tounderminethequalityof capitalthat banksshould
haveto absorb losses.
BaselIII requiresthat all classesof capitalinstrumentsfullyabsorblosses
at the point of non-viabilitybeforetaxpayers are exposed to loss.
Thisrequirement hasbeenacknowledgedintheCRD IV/ CRR proposals
but not reflectedaccordingtothe Basel rules.

27
Going forward, the review team will closely monitor how thisrequirement
is being reflected in the EU regulations, including within the forthcoming
EU resolution and crisis management rules.
Pillar 1:Credit Risk – Internal Ratings-Based (IRB) Approach
Under the Baselrules, a bank electingto usean internal model to
calculate itsregulatory capital requirementsfor credit risk (IRB Bank)
may only permanentlyapply thestandardised approach for non -
significant or immaterialbusinessunitsor asset classes(referredtoasthe
―partial useexemption‖).
TheCRD IV/CRR framework allowsIRB banksto permanentlyusethe
standardisedapproachfor some exposuresunder certain conditionsthat
might not appear tobe related tothe immaterialityor non-significance
describedabove.
In particular, an IRB Bank in the EU is ableto permanentlyapplya zero
risk weight toEU sovereign exposuresafter receivingthe permission of
thecompetent authorities.
Thereview team will need tofurther analyse the consistencyof theCRD
IV/ CRR framework with the Basel rulesregardingthepermanent partial
useavailabletoIRB Banks, with special focus on internationallyactive
banks‘sovereignexposures.
Next steps
Thereview team‘s keyfocusgoingforwardwill be toresolveconsistency
issues,and assessthe materialityof any inconsistency.
Thelatterwill be mainlybased on bank-specificdata.
ThenineEU member countriesof theBasel Committeehaveundertaken
toassist with securingthe data that will be neededfor themateriality
assessment.
Response from the European Commission
Twopreliminarypointsneed tobe made. First, from thepoint of view of
bankingregulation, theEuropean Union (EU) is a singlejurisdiction:

28
lawsadoptedat EU level are agreed by, and applyto, all EU Member
States.
Second, theEU haschosentoapplytheBasel rules toall its banks(as
well to investment firms), not just large, internationallyactivebanks;the
lawthereforeneedstoallownational authoritiestoexerciseacertainlevel
of proportionalityin applying therules.
Thefirst point is particularlyimportant with respect to the ―maximum
harmonisation‖ principlereferred to in the report.
In this context, the assessment fails toprovidevalid argumentson why
thedegreeof harmonisation pursuedin the EU could be consideredan
issuefor any of thespecificareasof potential differencementionedin the
report.
Thesecond point is relevant to all thespecific issueslistedin thereport.
For example, thepossibility for IRB banks to permanentlyusethe
standardisedapproachfor certain exposures wasnever meant to be used
forinternationallyactivebanksandsupervisorswere(andwillcontinueto
be) expected not toapprove it for thosebanks.
Concerningthe specific issues,there are someadditional points.
Firstly, the proposedapproachon significant investmentsin insurance
reflectsthe existenceof strict and harmonised rulesfor insuranceand
financial conglomeratesat EU level, takesintoaccount the recently
revisedJoint Forum'sprinciplesfor financial conglomerates
supervision, providesappropriateincentivesfor insurancecompanies'
capitalisationand preventsdoublecounting of capital.
Theassessment should takethesefactsintoaccount.
Secondly, theconcept of common sharesdoesnot exist in a largenumber
of EU Member States, whichexplainsthe choiceof approach based on
thecharacteristicsof capital instruments, rather than their form.
Nevertheless, publiclylistedbanks are expectedtomeet their CET1
requirement only withsharesmeetingthe 14 criteria.

29
Furthermore,specificmonitoring powershave been conferredupon the
European BankingAuthority in order toidentify any misuseof this
approachby banks.
Lastly, the European Commission expectstoadopt legislation
implementingthe point-of-non-viabilityrequirement before summer of
thisyear.
Japan
By end March2012,theJapaneseauthoritiespublished final rules
implementingBaselIII withrespect to the definitionof capital and risk-
weightedassets(RWA), whilethe BaselII and Basel 2.5regulationhad
alreadybeen transposed intodomestic rules previously.
The documents for the Japan Level 2 review include notices, supervisory
guidelines, inspection manualsand Qs and As issued by the FSA to spell
out thedetailed interpretation, all of which are binding.
Where applicable, the Japanese authorities have provided data for 16
internationally active banks, which account for more than 50% of the
Japanesebanking assets.
Japan hasissued final Basel III regulations.
This means that the review of Japan is more detailed than the reviewsof
the European Union and United States where the assessments are based
on drafts.
Thereview isbasedontheEnglishtranslationof theJapaneserules, most
of which havebeen translatedintoEnglish.
In specificcases,thereviewteamcomparedtheEnglishtranslationof the
documentswiththe original Japanesetext toverify the translation.
Afinal judgment of thepotential discrepanciesin thetranslation will be
subjecttofurther analysis.
TheJapaneseauthoritiesalsohaveprovidedsupplemental information
requestedby theteam.

30
Overall, the preliminaryanalysisof Japan‘sBasel II/ III framework
suggestsbroad consistencywith themajorityof the sectionsof the Basel
rules.
Theanalysis, however, revealed certaindifferencesthat will be the focus
of further review by the assessment team:
(I)TheBasel III capital rulesare not fullyimplemented (additional
guidanceisunder preparation) and deviatein specific areas,while the
rulesfor capital buffersareplanned tobepublishedonlyin 2015,oneyear
aheadof the Basel III schedulefor the implementation;
(II) MostPillar 2 rulesare not in place; and
(III)There are a number of issues in certain aspects of risk
measurement, both in terms of Pillar 1 and 2, for which the review team
will seek further clarification.
Definition of Capital and Capital Buffers
While theJapaneseauthoritieshavealreadyfinalisedtherulesconcerning
thedefinition of capital and RWA, more detailed guidanceto ensure
consistencywiththeBasel III text isnot yet established.
This is particularlyrelevant in theareasconcerningthe recognitionof
stockacquisitionrightsascommon equity Tier 1capital and the
deduction of deferred tax assets.
Theimplementationteam hasalsoidentified potential deviationsin the
areasof the recognition criteria for additional Tier 1instrumentsaswell as
withrespect to the cut-off datefor thegrandfatheringof state aid
instruments,whichneed tobeinvestigatedfurther in order tounderstand
thepotential impact.
For thecapital buffers(capital conservation, countercyclical), the
domesticrulesare not yet in place.
TheJapaneseauthoritiesplantoissuethe rulesby2015,ie, one year
aheadof the international schedulefor implementation(2016).

31
Lossabsorbencyat the point of non-viability (PON) is partially
implemented, suchastheresolutionschemein Japan‘sdeposit insurance
law.
Theauthoritiesare currentlyanalysing how to organise thelinkage
betweenPON requirementsand the domestic resolution schemeand
planto finalisethe details of theframework by theend of 2012.
Pillar 1- Minimum Capital Requirement
For securitisation, several areasof deviation havebeen identified, suchas
in termsof re-securitisation, forABCP exposuresunder theStandardised
Approach and specific aspectsin termsof the InternalAssessment
Approach (IAA) and theSupervisory FormulaApproach (SFA).
Other areasof credit risk will alsobe subject to further analysis. In
termsof counterparty credit riskand cross-product netting, the
Internal Model Method(IMM) is not yet implemented.
While in practicenobank hasadopted theIMM, implementationinto
domesticregulation is still desirable.
Concerningmarket risk, theteam hasidentified areasof non-compliance
with respect to thetreatment of smallertradingbooks(<100billion JPY
andnolarger than 10% of thebank‘stotal assets) and thetreatment of
commodity risk, whereJapaneselegislation onlyallowsbanksto usethe
simplified approach (for thosebanksthat choosetheStandardised
Measurement Method, SMM).
In the former case, bankswithtradingactivitiesslightlybelow the
materialitythresholdwouldbenefit from thisexception.
While thisissue isunlikely tohave systemic implications,capital
adequacycould be slightlyoverstated. Banks‘commodityrisk is
limited, but the ultimatejudgement of materialitywill be subject to
additionalanalysis.
With regard tooperational risk, some of the detailed requirementswith
regard to theAdvanced Measurement Approach (AMA) are not specified
in thenotice.

32
JapanindicatesthateachofthedetailedrequirementsintheBaselAccord
is validated in the processof assessment asnecessary.
Pillar 2 – Supervisory Review Process
In termsof Pillar 2, most of the rulesare currentlynot implementedin
Japan.
While there is a lack of implementation, the authoritiesseem tobe in a
positionto imposeadditional capital chargesby theBankingAct.
In practice, however, the FSAdoesnot generallyappear totake such an
approach.
Rather the FSAexaminestheappropriatenessof banks' comprehensive
risk management and, if necessary, theFSArequiresbankstotake
remedial actiontomitigatethe risksinstead of requiring an additional
capital charge.
Next steps
Theteamwill follow-upwiththeJapaneseauthoritiestoseek clarification
anddata with a view towardscompletinga preliminaryfinal assessment
of complianceand materialityin June.
Thesefindingswill thenbe further discussed and assessedduring the
on-sitevisit scheduled for earlyJulyin order to determine a final
assessment and drafting of the final report, tobe shared withthe
authoritiesin the second half of July.
Thefinal report will be delivered tothe Basel Committeein September.
Response from the Japanese authorities
TheJapaneseauthoritiesappreciatethedetailed analysisdone by the
assessment team todate. In particular, the authoritieswelcomethe
acknowledgement of broad consistencywith the majorityof thesections
of the Basel rules.
TheFSAis in the processof developingQs andAsand supervisory
guidelineswhich will supplement the notices,and oncetheyare

33
published, issuesidentified aslack of implementationrulesin this report
will be rectified.
Wedisagreewiththereport‘sassertionthat our rulesontherecognitionof
additional Tier 1instrumentsdeviatefrom Basel III.
Thecut-off date for the grandfatheringof state aid instrumentsis set on
31March2013instead of 1January2013merely reflectingthefact that the
Japan‘sfiscal year starts in April and endsin March.
With regard tothe credit and securitisationpartsof Pillar 1,some
additional rulesneed to be incorporated intoour domesticrules,and the
FSAintendstodevelop necessarynoticesand guidelinesin thecoming
period.
However,the current rulesdonot result in any material overstatement of
capital ratios.
Most of theadditional elementsneeded are only relevant to advanced
model methodssuch asIMM and IAA, whichnoJapanesebank has
adopted yet.
Regarding the market risk exception for bankswith small trading book,
our impact analysis shows that the impact is very limited and is at most
0.34%of total RWA.
Asforcommodityrisk, banksareallowedtochoosebetweentheIM Aand
simplified SMM, which areboth fullycompliant withtheBasel text.
Banks withmaterial commodity exposuresuse IMA.
In termsof Pillar 2, the overall processand framework is provided in the
supervisoryguidelinesand inspection manualsand forms thebasisfor
on-siteand off-sitereview by the FSA.
There are, however, somespecific areaswheredetails are not well
documented yet (egthoserelated toIMM, residual risk and implicit
support).
TheFSAintendsto develop domesticruleson thoseelementsin thenear
future.

34
United States
As noted above, at thetime of thisinterim assessment, the USauthorities
hadnot published thefinal rule to implement the improvementsto the
Basel II market risk framework(Basel 2.5), nor had theypublished the
proposed regulationsto implement Basel III.
[On 7 June, theFederal Reserve‘sBoard of Governorspublishedfinal
Basel 2.5 and draft Basel III rules. The review team hasnot had time to
assesswhethertheselatestdevelopmentsarecompliant with theBasel
text for the interim report, rather theseand/ orany subsequent textswill
form part of the final assessment.]
Thesearemajor componentsof theBasel Committee‘sreform
programme.
Therefore, the number and nature of findings set out in the final report
may change substantially from those contained in this interim report if
the United Statesmakes progressin its rulemaking processprior to the
finalisation of thisreport.
Thereview team hasidentified a number of overarching issuesrelatedto
theUS implementationof theBasel standards:
Adoption of Basel 2.5 and Basel III regulations
Theabsenceof the final rule on Basel2.5and theproposed ruleon Basel
III representsa potentiallysignificant gap in USimplementation and has
thusfar limitedtheassessment conducted by the review team to the US
adoption of Basel II and tothe proposed US rules for Basel 2.5.
Scope of application
US core banksare required toadopt theadvancedBasel II
standards,while all other banksremain subject to theBasel I
standards,unlesstheyelect tobe subjecttoBaselII standards(theseare
referred to asopt-inbanks).

35
TheBaselFramework is explicitlydirectedat ―internationallyactive‖
banks– though thisexpression hasnot been defined.
Basel Committeemember countries arenot required, therefore, to apply
theframework toall their banks.
However,the review team intendstoassesswhethertheUS definitionof
corebanksinadvertentlyresultsin anynon-coreUS bank withsubstantial
international activitiesnot being subject toBasel II standards.
US authorities‘selection of Basel II approaches
TheUS agencieshaveimplemented theadvancedBasel II
approaches,but not thelessadvanced Basel II approaches.
While jurisdictionsarenot requiredtoimplement thelessadvancedBasel
II approaches, themanner in whichthe US agencieshave implemented
Basel II impliesthat US core banksthat donot comply – or ceaseto
comply– withthe requirementsof theadvanced approachesare subjectto
approachesthat differ from thosecontemplated in the Basel II framework
for banksthat do not qualify for the advancedapproaches.
In theUnited States,theadvanced Basel II approachesapplicabletocore
banksare complemented by three other capital requirements,whichthe
US authoritieshaveasserted result in higher minimum capital
requirements:
(i)Apermanent floor calculatedunder theagencies‘general risk-based
capital rules(whichcurrentlyimplement Basel I);
(ii)Thenon-risk-weightedUSleverageratio; and
(iii)ThePillar 2requirements,includingthoseunder theFederalReserve
Board‘s―capital plan rule‖.
However,a core bank that doesnot satisfytheconditionsfor the
advancedBasel II approachesremainssubject to a Basel I-based
calculationof risk-weightedassets,thusnot beingsubject to Basel II
minimum capital requirements.

36
For example, Basel I doesnot includea charge for operational risk. The
reviewteam intendsto discusswiththe USauthoritiesthe basisfor
their applying a Basel I-based approach for thecalculationof
risk-weightedassetsto core banksthat donot qualify for theadvanced
approachesrather than the optionsprovided by the
simplified, standardisedand foundation approachesunder Basel II.
Notes
TheLevel 2assessment teamof theUnitedStatesisbeingconductedbya
teamof expertsledbyMr Arthur Yuen (Hong KongMonetaryAuthority).
Thefull review team comprises:Mr ThierryBayle (Banque de
France), Mr PierpaoloGrippa (Banca d‘Italia), Mr Sebastijan Hrovatin
(EuropeanCommission), Mr CarlosLuna (National Bankingand
SecuritiesCommission of Mexico) and Mr Naruki Mori (Bank of Japan).
Theteam is supported by Mr Maarten Hendrikx of the Basel Committee
Secretariat.
Thedefinitionof corebanksincludesanydepository institution(ie bank
or savingsassociation) meeting either of the followingtwocriteria:
(i)Consolidatedtotal assetsof $250billion or more; or
(ii)Consolidated total on-balancesheet foreign exposureof $10billion or
more;
or anyUS-charteredbank holding company (BHC) meeting any of the
followingthreecriteria:
(i)Consolidatedtotal assets(excludingassetsheld by an insurance
underwritingsubsidiary) of $250billion or more;
(ii)Consolidatedtotal on-balancesheet foreign exposureof $10billion or
more; or
(iii)Havinga subsidiary depositoryinstitutionthat is a core bank or
opt-in bank.
Finally, anydepositoryinstitution that isa subsidiary of a core or opt-in
bank isalsoa corebank.

37
Under the ―capital plan rule‖, based on the Comprehensive Capital
Analysis and Review (CCAR) frameworkusing stresstests, bank holding
companies withconsolidatedassetsof greater than $50billion must
demonstratetheir ability tomaintain capital above existingminimum
regulatorycapital ratios and above a tier 1common ratioof 5 percent
under both expected and stressed conditionsover a minimum
nine-quarter planninghorizon.
Basel II parallel run
At the timethis interim report wasprepared, none of thecoreUS banks
had receivedpermissiontoexit thetransitional parallel run, whichwould
requirea bank tobaseitscapital requirementson the advancedBasel II
approaches(supplementedby the additional requirementsdiscussed
above).
Theregulatorycapitalratios ofthecoreUS bankscontinuetobebasedon
risk-weightedassetscalculatedaccordingto the general (Basel I)
risk-basedcapital rules,andthere isnorulerequiringbankstohold more
capital asa consequenceof higher risk-weightedassetsascalculated
under the advancedBasel II approaches.
Thereview team will assesstheconsistencyof UStransitional
arrangementswiththecorrespondingBaselII standardsandwhetherthis
may lead to a situationin whichcore banks that are not allowedtoleave
theparallel run over an indeterminateperiod are effectivelysubject to
lowercapital requirementsthan those providedfor by Basel II for banks
that do not qualify for the advanced approaches.
Elimination of referencesto external credit ratings
TheDodd-Frank Wall Street Reform and Consumer ProtectionAct (the
Dodd-FrankAct) mandatesthe US agenciestoremove referencesto and
requirementsofrelianceonexternalcredit ratingsfromregulationsandto
replace them withappropriatealternativesfor evaluatingcreditworthiness.

38
As a first step in this context, in December 2011the USagencies issued a
notice of proposedrulemaking (NPR) that containsalternative
methodologies for calculatingspecific risk capital requirementsfor
debt, securitisationand equitypositionsunder the market risk capital
rules.
Thereview team will engagewith the USagenciesto assess– both in
qualitativeand quantitativeterms– whetherthe proposedrulemaking is
at leastasrobust asthe corresponding Basel requirements.
In additiontothe overarchingissues,the review team hasidentifieda
numberofspecificareasofpotential differencebasedonitsassessment of
thecomponentsof Basel II rulesand the proposed rulesfor Basel 2.5.
Theseareasrequirefurtherreviewand/ oranassessment oftheirpotential
materiality– taking intoaccount that their relevancemay bediminished
onceBasel III is implemented. So far, the main areasidentifiedinclude:
Definition of capital
Thecurrent US capital treatment of insurance subsidiariesof bank
holdingcompaniesdiffersfrom theBasel II full deconsolidation and
deductionapproach.
This could result in a potential overstatement of capital ratios.
TheBasel II treatment ishowever supersededby Basel III, and the issue
may turn out tobe irrelevant if theUnited Statesaltersitstreatment to
align withBasel III.
Pillar 1– Minimum capital requirements
TheBasel criteria for credit riskmitigation– such asrequirementsfor
collateral management, operational procedures,legal certaintyand risk
management processes– appearabsent from the current US
regulations,while thescope of eligible collateral and guarantorsseemsto
belarger than thosespecifiedby the Basel Framework.

39
Differenceshave alsobeen identifiedin thedefinitionsand/ or treatment
of specific asset classes(eg credit card exposuresand leasing).
Further, certain overarchingprinciples,such asthe IRB approaches‘
minimum requirements‘―usetest‖, appear not tobe explicitlyenshrined
in regulation.
Concerning the treatment of securitisation exposures, the main area of
difference relates to the removal of references to external credit ratings
andtheconsistencywith theBasel requirements.
Another area relatesto the treatment of securitisationscontainingearly
amortisation featureswhichappearstodeviatefrom theBasel treatment.
With regard to operational risk, the main area of difference relates to the
possibility as permitted in the USrules of using risk mitigants other than
insurancetohedgeoperational risk.
This contrastswiththeBasel Framework, whichonlyallowsinsuranceas
a risk mitigant.
Concerningmarket risk, theproposed replacement of external credit
ratingswith new creditworthinessmetricsfor specific risk posesan issue
of alignment withthe Basel standards.
It alsoraises the question of whethertheresultingcapital chargeswould
beequallyor comparably robust.
Pillar 2 – Supervisory review process
Regardingsecuritisations,potential significant differenceshave been
identifiedfor thetreatment of provisionof implicit support and of the
recognition of protection against first losscredit enhancementsand
relatedsupervisory actions.
Next steps
Thefirst stage of theassessment – thequalitativereview of the US
self-assessment – hasprogressed accordingto schedule.

40
However, due to the delay in publishing the final Basel 2.5 rule and the
proposed Basel III rule, the review team‘s completion of the US review
withinthe agreedtimelineshasbecome increasinglychallenging.
The on-site component of the review, in which the review team will meet
face-to-face with the US agencies, is currently scheduled for 25 – 29 June
2012.
Response from the US authorities:
TheUS agencieswelcomethe opportunityto respond to the interim
report on theUSbanking agencies‘implementation of the Basel
framework.
We wishto comment on three of the overarchingissuesraised in the
report.
First isthe scope of application, where aquestion israised, doestheUS
applicationof BaselII standardsto―corebanks,‖ astheyarecalledin the
report, cover all banks withsignificant international activities?
TheUS agenciesareconfident that it does.
Thesecond issueisthe selection of Basel II approaches.
Theinterim report notesthat the UnitedStateshasimplementedthe
advancedapproaches,but has not offered any of the lessadvanced
approachesasoptionsfor core banks,asallowedbytheBasel framework.
Thereport goestosuggest that, in thisregard, theUS implementation
may fall short.
Thepossibleimplication is that jurisdictionsthat only adopt the
advancedapproachesought to developtheir own versionsof less
advancedapproachesthat are closeto theBasel II optionsand apply
thesetonon-qualifying internationallyactivebanks.
TheUS agenciesdonot seeany requirement for this in theBasel
frameworkand, indeed, wewouldnote that usingBasel I is specifically
permitted.

41
Thethird issueis related and concernsthe BaselII parallel run process.
Here, the review team saythat theywant to look intowhether―core‖
banksnot allowedto leavethe parallel run ... are effectivelysubject to
lowercapitalrequirements[thantheBaselII lessadvancedapproaches].‖
This is a fair question.
However,asnoted in the report, the US Basel I implementation is
complementedby a leverageratiorequirement and theFederal Reserve
Board‘scapital plan rule, whichcoversall ―core‖ holding companies.
Unsatisfactorycapital plans have severe and specific regulatory
consequences.
Moreover,the Board‘s2012ComprehensiveCapitalAnalysisand Review
framework requiredenough capital to meet the BaselIII transition
schedule.
Taken together, these and other US requirements such as the prompt
corrective action regime are both demanding and effective relative to
Basel standards.
TheUS agenciesfullysupport theeffortsof theBasel Committeeto
monitorprogressin implementing theBaselcapital framework in
different jurisdictionsand look forwardtoworkingwith theUS Level 2
review team in themonthsahead astheycompletetheir work.

42
Level 3
Analysisof risk-weighted assets in the banking book
In December2011, theBaselCommitteeapprovedaworkplantoevaluate
sourcesof material differencesin risk-weightedassets(RWAs) across
banksusing theInternal Ratings-Based(IRB) approach for credit riskin
thebanking book, and assessthe extent to whichRWAcalculationsare
consistent withrelevant Basel standards.
Thework,conductedbyrepresentativesof 30regulatoryagenciesfrom 23
countries,relies on a combination of top-downanalysis of data asreported
bybanks,bottom-upportfolio benchmarking, observationof therange of
practicesacrossbanks and supervisors, and on-sitework at banksas
appropriate.
Theworkdistinguishesbetweenvariationsin RWAs that arerisk-based
(thosedue to differencesin underlying risk at theexposure/portfolio
level) and thosethat are practice-based(eg thosedue to model selection
or calibrationof model parameters,exerciseof judgement, application of
national discretion, etc).
Practice-basedvariationscan be further subdivided intodifferencesthat
are specificallyprovided for under the BaselFramework(eg IRB
rollout, national discretions), and othersthat arisemore from differences
in interpretationof standardsin theframeworkor from specific practices
such asthoserelated to calibration of riskparameters.
Recommendationstonarrow thevariationin RWAs are appropriate
primarilyfor practice-basedRWA variation.
Todate, workhasconsidered and assesseda widerangeof existing
analysesof RWAs acrossbanks and countries.
Most studiesacknowledgethat underlying differencesin risk are likely to
bea key driver in variationsin RWA; theseincludedifferencesin risk
arisingfrom differencesin businessmodel and portfolio mix.

43
However,most studiesalsoconcludethat at leastsomeof thevariationin
RWAscould be attributabletopractice-basedfactors.
For example, several studiesfrom theregulatory communityraisemodel
calibration (particularlyPD and LGD estimation) and thestageof IRB
adoption aspotential driversof RWAvariation.
On the other hand, external analystshavefocused more on differencesin
theapplicationof supervisoryprinciples,with regulatory and accounting
approachesbeingfrequentlycited asreasonsfor differencesin RWA
measurement.
Existingstudies reveal that, whilethere are many potential
candidates,thereis nodefinitiveconsensuson thetrue sourcesof RWA
differencesacrossbanks, or on the extent towhichdifferencesare due to
differencesin risksor differencesin practices.
Thus, additional work is clearlynecessary, and is beingpursued. To
extend existing analysesand determine an appropriatefocusfor
regulatoryeffortsto enhanceconvergence, the group is undertaking
additional high-level analysesof RWAvariationusing supervisorydata
from the BaselCommittee‘sCapital Monitoring Group (CMG).
- TheCMG hascollectedinformation on Basel II RWA, capital
requirements,and riskparameterssemi-annuallysinceend-June
2008.
Thedataareextractedfromnationalreportingframeworksofmember
countries,and submittedtothe BaselCommitteeSecretariat in
standardisedreportingtemplates.
- Theanalytical frameworkthat will be applied tothe CMG data
combinesexistingmethodswithadditional approachesbeing
developed aspart of thisproject.

44
- Thesourcesand materialityof RWAdifferenceswill be assessed
acrossportfolios,acrossbanks, and acrosscountries, with a focuson
particular driversbelieved to playa material rolein RWAdispersion.
- Tosafeguarddata confidentiality, resultswill be presented in
anonymised or aggregated form.
Conclusionsbased on top-downanalysis of aggregated data asdescribed
aboveare necessarilylimited.
Thus,that analysisisbeing supplemented withbottom-up analysisusing
test portfolios, in which theriskparametersbanks assign togroupsof
common exposuresare compared and analysed.
Theportfolio exerciseis currentlyin development.
- Informed by a comprehensivestock-takeof similarexercises
conducted by the industry and by variousregulatory authorities, the
initial focushasbeen narrowedtowholesalecredit.
Similar analysiscan be extendedtoother typesof credit at a later
stagebased on the lessonsand conclusionsof theinitial exercise.
- Adata collectiontemplatehasbeendeveloped, together with
instructionsfor completion of the template.
- Alist of exposuresis being developed tobe provided to participating
banks;bankswillbeaskedtorespondwithPD andLGD estimatesfor
each exposure.
- Thecomposition of thehypothetical portfolio hasnot been
finalised, but is being designed to ensure maximum overlap across
participatingbanks, and includeslargesovereignborrowers,large
financial institutions, and largenon-financial corporateborrowers.
Output from this work will includevariousbenchmark
analyses, includingpair-wiserank-orderinganalysis, analysisof the
distribution of PD and LGD estimatesacrossbanks, and assessment of
howtheimpact

45
of the observed parameter estimateson RWAsdependson different risk
profiles or businessstrategies.
Quantitativeanalysisusing either aggregateddata or hypothetical
portfolio resultscan highlight sourcesof RWAvariation, but will not
necessarilypinpoint the reasonsfor that variation.
Therefore, workis alsounder waytoidentify the specificpracticesthat
might underliedifferencesin RWAs.
- In a first phase, an extensivelist of potential drivers of RWA
differenceshasbeen developed, drawingon existing supervisory
knowledgeand judgement and informed by analysis of existing
studies.
Thelist of drivershasbeen divided intothoserelated to underlying
risk or risk profile, and thoserelated topractices.
- Thepotential significanceof the drivershasbeen assessedbased on
both magnitudeand prevalence; the assessmentsof significance
currentlyare being refined.
- Further analyseswill be conductedtoassessthematerialityand the
nature of a selectednumber of drivers.
Theworkdescribedhere – combiningtop-downdataanalysis,bottom-up
portfolio benchmarking, and supervisoryevaluation of the rangeof
practice in specificareas– will extend thepreliminaryconclusionsfrom
prior analysesby identifying selected industryand supervisorypractices
that appear likely tobe causing differencesin RWA and capital across
institutionsand countriesthat arenot reflectiveof underlying risk.
Specific recommendationsfor narrowingof therangeof practice will be
provided totheBasel Committeefor considerationand possibleactionas
appropriate.
Theanalytical frameworkdevelopedfor analysing RWA differencescan
alsoserve asan approach for ongoingmonitoring of RWAdifferences.

46
Analysisof risk-weighted assets in the trading book
This interim report containstheinitial findingsof thepotential driversof
differencesin market risk-relatedrisk-weightedassets(mRWA) using
data that is publicly disclosed by banksin financial and regulatory
reports.
Thescope of theseinitial findingsisthereforelimited, sincethe analysis
appliesto public data prior tothe implementationof Basel 2.5and is
basedonlyonthosebanksforwhichsufficient datawasavailabletomake
meaningful comparisons.
TheCommittee‘stask force is currentlyworkingon completingthepublic
dataanalysisby, amongothers,evaluatingtheutilityofnon-public
supervisorydata.
In addition, it isperforminga test portfolio exercisein whichthemRWA
calculationsof banksare compared on a common set of positions,with
theresultsto be further investigatedby meansof on-sitevisits.
Anumber of bankshave volunteered to be included in thetest portfolio
exercise, whichis well under wayand thefirst resultsare expectedin the
second half of thisyear.
Thetask forcewill includethefindingsof this complementary workin a
final report that is expected by theend of this year.
Based on public disclosures bya sample of 17large bankswith significant
trading activities, the analysis reveals considerable differences in mRWA
asa ratio tototal tradingassetsreported in financial disclosures.
Such variationcan be justifiedwhenit reflectsthe varying risk profile of
tradingactivities,giventhe differencesin tradingstrategiesand business
modelsamong the banks.
In thisregard, apreliminaryanalysisof thepublic disclosuresona subset
of banksin thesample suggeststhat thosebanks that trade risky assets,

47
such asdistressed loansor lessliquid equities, exhibit a higher ratio of
mRWAtototal tradingasset.
However,theresultsare not conclusive, asthere remainssubstantial
unexplainedvariation, and in manyinstancespublic disclosuresare
insufficient toexplain the observed variation in mRWAratiosacross
banks.
Onepotential policy responseisthereforeto investigatefurther
improvementsin public disclosuresfor market risk, for instance,by
includingmore informationabout mRWAand its componentsand
providingmore direction to banksregarding Pillar 3 disclosure.
Thesepolicy optionswill be investigatedfurther.
Notes: This graphic presentsbanks in increasing order of average market
risk weighted assets(mRWA) calculated as the ratio of mRWA to Trading
Assets, showingthesubstantial variation, from below 5% to about 45%.

48
TradingAssetsis defined asthevalue of all instrumentsin the trading
account, includingsecurities,traded loans,and net derivativeswitha
positivereplacement value.
Toput banks on a comparablebasisthemeasurement of total trading
assetshasbeen adjusted for the effect of different accountingregimes.
In particular, thedatahasbeenadjustedtotakeintoaccount thedifferent
approachestonetting of derivatives.
Source:public informationbased on banks‘financial and public
regulatoryreporting.
For bank Adata isbased on Q4 2010for all other banksdata is from Q2
2011.
Thepreliminaryanalysisshowsa number of potential reasonsfor
variation in mRWA(the list doesnot reflect a rankingin order of
importanceasthe analysisdoesnot allowfor that at this stage):
- Differencesdue to variation in the compositionof tradingassetsas
evident tosome extent in publicdisclosures.
- Differencesin thewaythat banks applyaccounting requirementsto
their businessmodel in allocatingassetsbetweenthe trading and
bankingbooks, for example, the treatment of securitiesfinancing
transactionsand loans.
- Differencesin methodologyand inputsfor market risk modelsused
for regulatory capital calculations.
- Differencesin supervisory approaches,with some jurisdictions
relying more heavily on the internal models approach and integrated
VaR models while otherscontinuetousethe standardisedapproach
selectively for some debt and equitypositions.

49
- Differencesin regulatory add-onsand notablytheuse of VaR
multipliershigher than the minimum of 3 to account for model
uncertainty.
With regard tothe last twopoints, the analysisindicatesthat some of the
variation in mRWAasa percentageof total tradingassetsmay be related
tothe degreeof relianceon internal models based on Value-at-Risk
(VaR).
Banks for whichinternal modelshave a more important role in
determiningmRWAtend to show a lower averageratioof mRWAtototal
tradingassetscomparedtobanks for which models have a lesser
role, with standardised approachesmore important.
This is in linewithexpectationsasthe standardisedapproach provides
for lesshedging and diversificationbenefits and is thereforegenerally
more conservativethantheinternal modelsapproach.
At the same time, however, there remainssubstantial unexplained
variation, asthere is a widerangeof mRWA ratiosfor bankswith similar
relianceon models and alsobanks withsimilar mRWAratiosbut varying
degreesof relianceon internal models.
This variation will be examinedfurther by meansof thetest portfolio
exercisethat is currentlyunder way.
It should benoted that therelationshipbetweenthedegreeof relianceon
internalmodels and the ratio of mRWAaspercentageof total RWA may
changein the future.
Basel 2.5 implementation (from end-2011) is expectedto raisethecapital
chargefor banksusing internal models approachesfor market risk and
thefundamental review of thetradingbook aimstostrengthen the
relationship betweenthe models-basedand standardised approachesby
establishinga closer link between the calibration of thetwoapproaches.
This may reducetheimportanceof the degreeof relianceon internal

50
modelsasanexplanatory factorbehind the observeddifferencesamong
banks.
Notes: The horizontal axis showsmRWAfrom internal models approach
(IMA) aspercentageof total mRWA.
Thevertical axis showstotal mRWA asa percentage of total trading
assets.
Thesizesof the circlesin the figure indicate the size of tradingassets(in
USD) for each bank.
It should be noted that the ratio of IMA aspercentageof total mRWAis
an imperfect proxy for degreeof relianceon internal modelsasfor some
banksa lowratio may still implya high degreeof relianceon internal
models,forinstance,whentheinternalmodelproducesaverylowmRWA
comparedtototal mRWA.
Source:public informationbased on banks‘financial and public
regulatoryreporting. Of the 17banksin the sample, sufficient disclosure
wasonlyavailablefor 14banksin quarter 4, 2010and for only 7 banksin
quarter 2, 2011.

51
Thetask forcehasa workprogramme in placeto further analyse the
driversof differencein mRWAacrossglobal banks.
This includes:
- Completingtheanalysisofpublicdatatotest, refine,andextendthese
initial findings;
- Evaluatingtheutilityof internalsupervisorydatatobetterunderstand
thedrivers of observed differences;
- Identifying keydrivers of IRC (Incremental Risk Charge), VaR and
stressed VaR based on existingdomesticsupervisoryknowledgeof
bank‘smodels (and at a later stageCRM, ComprehensiveRisk
Measure).
Theobjectivesof thisworkare toidentify thekeyaspectsof model
methodologythat drive thedifferencesin internal modelsbased
approachesand toassessthe materialityof thesedriversat a
high-level.
This work will support the test portfolio exerciseand help tofocus
attention tothoseareasof the internal models that most likely
contributeto differences;
Performinga test portfolio exercisetocompare and assessthemRWA
calculationsby a sampleof large, internationally-activebanksfor a set of
hypothetical tradingportfolios.
Theaim of theexercise is tomeasurepotential mRWAvariability due to
theimplementationof VaR, stressed VaR and IRC models. In
addition, banksare beingrequested to completequestionnairesto
specify theworkingsof their internal models;

52
Carrying out selected on-site visits to some participatingbanks toallow
for a deeper investigation of the sourcesof variabilityin thecalculated
mRWA.
It should be stressedthat the on-sitevisits will not be model-validation
exercises,but are meant toprovidefurther information about the
workingsof thebanks‘internalmodelsandtheresultingmRWAnumbers
from thetest portfolioexercise.
This exercisewill help to identify themajor sourcesof mRWAvariability
duetomodellingchoicesin largebanks.
However,asit isa hypothetical portfolioexerciseit will not be able to
explainmRWAvariability due tothedifferingbusinessstrategies of large
tradingbanks.
Further work
The Basel Committee will continue to work to attain the full, timely and
consistent implementation among itsmembers.
The Committee will update G20 in November on its work on all of the
threelevels.
Level 1
The Level 1 reports will continue to be published until all Basel
Committeemembershave fullyimplemented therequirements.
Thenext publicationofthetablesinappendix 1willreflectthepositionas
at end September 2012.
Level 2
Final reports for thethree Level 2 assessmentsof theEuropean
Union, Japan and theUnited Statesare expected to be publishedin
September.

53
Somefollow-upwork may be required after September dependingon the
findingsof the reviews.
Additional work will alsoincludethenew liquidityrequirements,the
leverageratio, and thesurchargesfor systemically important banks, once
theCommitteeconcludesitsreview on any revisionor final adjustments
for theseelementsof the framework.
In linewiththe threecurrent reviews, the review of liquidity
requirements,the leverageratioand systemic surchargeswill take place
aheadof the deadlineand assessdraft regulationswhereappropriate
accordingto the staggeredimplementation dates.
Areview of Singaporewill commence later in 2012,and reviewsof China
andSwitzerlandin 2013.
This schedulewill mean that all countries whichare home of G-SIBs will
havebeen reviewedbeforethemiddleof 2013.
ReviewsofAustralia and Brazil will take place during the second half of
2013.
TheBasel Committeeis collaboratingwiththe IMF and World Bank to
ensure that itsscheduleis complementary and non-duplicativeto the
IM F and World Bank‘sFSAP review process.
Level 3
ThetwoLevel 3 groupsassessingtheconsistencyof risk-weightedassets
in thebankingbook and tradingbook will continuetheir detailed
analyses, includinghypothetical portfolioexercises,questionnaires
horizontallyreviewingpracticesacrossbanksand jurisdictionsand
on-sitevisitstobanks.
Preliminaryconclusionsfrom thedetailed analysesshould be availablein
thefourth quarter of 2012.

54
Interesting…
Statusof Basel II, Basel 2.5 and Basel III adoption:
Number code:
1= draft regulationnot published;
2= draft regulation published;
3= final rule published;
4= final rule in force.
Country Base
l III
Next steps - Implementation plans
Argentina 1 On-going work to draft preliminary documents.
Australia 2 Draft rules for capital requirements issued
on 30 March 2012.
Draft rules to implement liquidity requirements
issued in November 2011 for public
consultation until 17 February 2012.
Belgium (2) (Follow EU process - third compromise
text published)
Brazil 2 Draft regulation published for public
consultation on 17 February 2012.
Canada 2 On 1 February 2011, banks were directed to
meet the 7% CET1 standard as of January
2013.
Regulations for (i) non-viability contingent
capital
and (ii) transitioning for non-qualifying
instruments published August and October
2011 respectively.
Draft regulation for definition of capital and
counterparty credit risk issued to banks in
March
2012.
China 2 Draft regulation combines BII, B2.5 and BIII.
Public consultation ended in 2011. Final rule
expected to

55
come into force in Q3 2012. Will be applied
to all banking institutions.
France (2) (Follow EU process - third compromise
text published)
Germany (2) (Follow EU process - third compromise
text published)
Hong Kong 1, 3 (3) Bill passed by the Legislative Council on 29
February 2012 and published for the purpose
of creating rule-making powers for the
implementation of Basel III.
(1) Industry consultation underway on
policy proposals for inclusion in rules.
Consultation on
draft text of rules scheduled for second half of
2012.
India 2 Draft regulation released for comments
on 30 December 2011.
Indonesia 1 Draft regulation to be released for
consultation with industry in Q2 2012.
Italy (2) (Follow EU process - third compromise
text published)
Japan 3 Draft regulation published on 7 February 2012 -
Final rules published on 30 March 2012 -
Implementation of final rules (end of March
2013 - In Japan, the fiscal year for banks starts
in April and ends in March).
Korea 1 Draft regulation to be published in the first
half of 2012.
Luxembour
g
(2) (Follow EU process - third compromise
text published)
Mexico 1 Final rule expected in Q2 2012.
The
Netherland
s
text published)
Russia 1 Draft regulations under development.

56
Saudi
Arabia
3 Final regulation issued to banks.
Singapore 2 Public consultation on draft ended in February
2012. Final rule is expected to be published in
mid-2012.
South Africa1 Draft amendments to legislation issued on 30
March 2012 for consultation.
Spain (2) (Follow EU process - third compromise
text published)
Sweden (2) (Follow EU process - third compromise
text published)
Switzerland 2 Public consultation on draft regulation on
Basel III has been finished in January 2012.
Decision on final rules text expected until mid-
2012. Final SIFI regulation (level: Banking Act)
adopted by Parliament on 30 September 2011 -
Draft SIFI regulation (level: accompanying
ordinances) was published in December 2011;
decision on final rule text expected before
end-2012.
Turkey 1 Draft regulation expected to be
published in mid-2012.
United
Kingdo
m
text published)
United
States
1 Draft regulation for consultation planned
during Q2 2012. Basel 2.5 and Basel III
rulemakings in the United States must be
coordinated with applicable work on
implementation of the Dodd-Frank regulatory
reform legislation.
Europea
n Union
2 Third compromise text (directive and
regulation) published by the Danish
Presidency on 28 March 2012.

57
Subject: Liquidity
Date: June 8, 2012
Description: Comptroller‘s Handbook Revisionsand
Rescissions
TheOfficeof the Comptrollerof the Currency(OCC) recentlyrevisedthe
―Liquidity‖ booklet of the Comptroller‘sHandbook, whichreplacesa
similarlytitledbooklet issued in February 2001.
This revised booklet providesupdated guidanceto examinersand
bankerson assessingthequantityof liquidityriskexposure and the
qualityof liquidityriskmanagement.
Themajor revisionstothis booklet includethe following:
Narrativemore heavily focused on management of
liquidity, including
o Emphasison the importanceof maintainingappropriate
levelsof highlyliquid assets,and
o Enhanceddiscussion regarding the importanceof a
well-developedplanningprocessfor contingencyfunding.
Additional guidance—particularlyfor thoseexaminersresponsible
for examininglargeand internationallyactivebanks—from the
September 2008―Principlesfor Sound LiquidityRisk Management
andSupervision,‖ issued by the Basel Committeeon Bank
Supervisionand formallyadopted by theOCC and other U.S.
bankingregulatory agencies.
Addition of eight appendixesprovidingspecific guidanceto
examinersand bankerson a varietyof topics and examplesof
fundamental liquiditymanagement reports.

58
In accordancewiththe OCC‘ssupervision-by-risk approach, examiners
will generallyusethe liquiditycore examinationprocedures, whichcan
befound in the 2010―CommunityBank Supervision‖ booklet and the
2010―LargeBank Supervision‖ booklet in the Comptroller‘sHandbook.
Examinerswill supplement the procedureslistedin thesebooklets,as
appropriate, withtheupdatedproceduresdetailed in the ―Liquidity‖
booklet, for additional analysis of liquidityrisk.
With the issuanceof this guidance, the followingOffice of Thrift
Supervisionguidancepertainingto liquidityrisk is herebyrescinded:
ExaminationHandbook:Liquidity
o Section 510, ―FundsManagement‖ (and related program)
o Section 530, ―LiquidityRisk Management‖ (and related
program and appendixes)
o Section 560, ―Deposits/ BorrowedFunds‖ (and related
program and questionnaire)
Chief ExecutiveOfficer Memo#295, ―Monitoring and
Documenting the Useof Fundsfrom Federal Financial Stability
and GuarantyPrograms‖
TheOCC‘s―FundsManagement‖ booklet of the Comptroller‘s
Handbook hasalsobeen rescinded, effectiveimmediately.
OCC Advisory Letter 2001-5,―Brokered and Rate-SensitiveDeposits,‖
hasbeen rescinded, whilethe―Joint AgencyAdvisory on Brokered and
Rate-SensitiveDeposits‖hasbeen incorporatedintothe ―Liquidity‖
booklet asan appendix.

59
Liquidity
Comptroller‘sHandbook
June2012
This booklet providesguidancetoexaminersand bankers on assessing
the quantityof liquidityrisk exposureand the qualityof liquidityrisk
management.
Thesophisticationof a bank‘sliquiditymanagement processdependson
itsbusinessactivitiesand appetitefor risk, aswell asthe overall level of
liquidityrisk.
Awell-managedbank, regardlessof size and complexity, must be able to
identify, measure, monitor, and control itsexposure toliquidityrisk in a
timely and comprehensivemanner.
Liquiditycoreprocedurescan be found in the Community Bank
SupervisionHandbook (January 2010) and in Examiner View (EV).
This handbook providesexaminerswithsupplemental proceduresfor
further analyzing thequantityand qualityof liquidityrisk.
Examinersshould refer to the Bank Supervision ProcessHandbook for
further guidanceon CAMELSRatingSystem.
Additional guidance, particularlyfor thoseexaminersresponsiblefor
examininglargeand internationallyactivebanks, is provided in the
September 2008―Principlesfor Sound Liquidity Risk Management and
Supervision,― issued by the Basel Committeeon Banking Supervision
(BCBS) and formally adopted by theOCC and other U.S. banking
regulatoryagenciesin that same year.
Background
Traditionally, bankshave relied on localretail deposits(transaction and

60
savingsaccounts) tosupport asset growth.
Most retail deposit balancesare federallyinsured, stable, and relatively
inexpensive.Fundingdynamics at community, midsize, and largebanks,
however, have evolved over time.
Technological advancesin thedeliveryof financialproductsandservices,
the removal of interstatebanking restrictions,and thederegulationof
interest ratespaid on deposit accountschanged both depositor and
banker behavior.
Legislativereforms wereintendedtogivedepositoryinstitutionsthetools
to compete withother market participantsfor deposits,but theyalso
increasedcompetition among the banksthemselves.
The combination of these reforms and technological advances also made
it easier for depositors, looking for better returns on their money, to leave
their localmarkets.
Consequently, in some cases,retail bank deposit growth did not keep
pacewithasset growth.
Somebanks became reliant on alternativedeposit, nondeposit, and
offbalance-sheet fundingsourcestocover the shortfall in traditional retail
deposit funding.
Changesin technology, product innovation, andfundingdynamicscreate
new challengesfor liquiditymanagers.
Intensecompetitionand decliningcustomer loyalty increasethe rate
sensitivityof traditional retail deposits.
As banking customersarenow using deposit accountsmore as
transactionvehicles than savingsvehicles, therebymaintaininglower
averageexcessbalances,bankerscan nolonger relyupon historically
inelasticdepositorbehavior.

61
Thus, therelianceon alternativesourcesof funding from the wholesale
andbrokeredmarketsexposesbankstomorerateandliquiditysensitivity
than the relianceon traditional retail depositsdid.
Moreover,many banks have increasedtheir use of productswith
embedded optionalityon both sidesof the balancesheet, which makesit
more challengingtomanagethe correspondingcashflows.
Liquidityrisk management systems and controlsmust keeppace with
thesechangesand added complexities.
Given thesechangesin fundingdynamics, liquiditymanagement ismore
complex and requiresa more robust risk management process.
Toeffectivelyidentify, measure, monitor, and control liquidityrisk
exposure, well-managedbanks supplement traditional liquidityrisk
measureslike static-balance-sheet ratioswith more prospectiveanalyses.
Bankers and examinersshould have, at a minimum, a sound
understandingof a bank‘s
projectedfundingsourcesand needsunder a varietyof market
conditions.
net cash flow and liquid asset positionsgiven planned and unplanned
balancesheetchanges.
projectedborrowingcapacityunder stableconditionsand under
adversescenariosof varying severityand duration.
highly liquid asset and collateral position, includingtheeligibility and
marketabilityof such assetsunder a varietyof market environments.
vulnerability torollover risk.
fundingrequirementsfor unfunded commitmentsover varioustime
horizons.
projectedfundingcosts, aswell asearningsand capital positions
under varying rate scenariosand market conditions.

62
Definition
Liquidityisa financial institution‘scapacitytoreadily meet itscash and
collateral obligationsat a reasonablecost.
Maintainingan adequatelevel of liquiditydependson the institution‘s
abilityto efficientlymeet both expected and unexpected cash flowsand
collateral needswithout adverselyaffectingeither daily operationsor the
financial condition of the institution.
Abank‘sliquidityexistsin itsassetsreadily convertibletocash, net
operatingcashflows, and itsabilitytoacquire funding through
deposits,borrowings,and capital injections.
By definition, liquidityrisk is therisk that an institution‘sfinancial
condition or overall safetyand soundnessis adversely affected by an
inability (or perceived inability) to meet itsobligations.
An institution‘s obligations, and the funding sources used to meet
them, depend significantly on its business mix, its balance sheet
structure, and the cash flow profiles of its on- and off-balance sheet
obligations.
In managingitscash flows, an institutionconfrontsvarioussituations
that can giveriseto increased liquidityrisk.
Theseincludefundingmismatches,market constraintson theabilityto
convert assetsintocash or in accessingsourcesof funds(i.e., market
liquidity), and contingent liquidityevents.
Changesin economicconditionsor exposure to
credit, market, operational, legal, and reputation risksalsocan affect
an institution‘sliquidityrisk profile and should be considered in the
assessment of liquidityand asset or liability management.
In assessinga bank‘sliquidityposition, examinersshould consider a
bank‘saccesstofundsaswell asits costof funding.

63
Depending on the current interestrateand competitive
environments,undue relianceon wholesaleor market based funding
may increasea bank‘scost structure.
Thecost of acquiringor renewingsuch fundingis purelymarket
driven, asopposed toratespaid on retail deposits,which may be set at
management‘sdiscretionwithin theparametersof localand national
marketconditions.Risingorhighfundingcosts,especiallyincomparison
topeer and market rates,is a sign of potential liquidityproblems.
Importance of Liquidity Management
Liquidityisthe lifebloodof anyinstitution, but it isparticularlycrucial to
highly leveragedentitiessuch asbanks.
Morebroadly, the financial crisisbeginningin 2008demonstrated how
liquidityproblemsand riskscan be transmittedthroughout the entire
financial system.
For all banks, theimmediateand dire repercussionsof insufficient
liquiditymakesliquidityrisk management a key element in a bank‘s
overall risk management structure.
TheOCC expectsall banks tomanage liquidityrisk with sophistication
equal tothe risksundertakenand complexityof exposures.
Critical elementsof a sound liquidityrisk management process
established by theboard include
appropriatecorporate governance and activeinvolvement by
management.
appropriatestrategies, policies,procedures,andlimitsusedtomanage
and control liquidityrisk, even in stressed conditions.

64
appropriateliquidityrisk measurement and monitoring systems.
activemanagement of intradayliquidityand collateral.
maintainingan appropriately diversemix of existing and potential
futurefunding sources.
adequatelevelsof highly liquid marketablesecurities, withno legal,
regulatory, or operational impediments,that can be used tomeet
liquidityneedsin stressful situations.
comprehensivecontingencyfunding plans (CFP) sufficient toaddress
potential adverse liquidityeventsand emergencycash flow needs.
adequateinternalcontrolssurroundingall aspectsof liquidityrisk
management.
Sourcesof Liquidity
Structural changesin banks‘deposit baseshave prompted bankstotake
advantageof improved accesstowholesaleand market-basedfunding
sources.
Examplesof alternativefundingsourcesincludefederal fundslines,
repurchaseagreements(repos), correspondent bank lines,Federal Home
Loan Bank (FHLB) advances,Internet deposits,deposit-sharing
arrangements,and brokered deposits.
Accesstothesefundsproviders enablesbanksto meet funding
requirementswhile still maintainingadequatefundingdiversification.
Fundsfrom the wholesalemarketscan be accessed at a variety of tenors
that providebankerswithgreater flexibilityto managetheir cashflows
and liquidityneeds.

65
On the other hand, toomuch relianceon wholesaleand market-based
fundingsourceselevatesa bank‘sliquidityrisk profile.
Bankerswhoareunfamiliar withwholesalefundingmarketsmay become
overlycomplacent during stableeconomic times.
Fundingthrough alternativesourcesexposesbanksto theheightened
interest-rateand credit sensitivityof these fundsproviders.
Providersof wholesalefunding often require a bank‘smore liquid
assetsascollateral, whichmay impair the overall liquidityof a bank‘s
asset base.
Further, if that collateralbecomeslessliquid, or itsvalue becomes
uncertain, wholesalefundsproviders may be unwillingto extend or roll
over fundingat maturity.
Abank‘sfinancial conditionaswell asmarket or systemic events
unrelatedto the institutionmay adverselyaffect the cost to a bank to
acquire fundsor itsabilityto accessthe wholesalemarkets.
Asabank‘srelianceonwholesaleandmarket-basedfundingincreases, so
should thequalityof liquidityrisk-management processes.
Theseprocessesshould includeperiodic assessmentsof a bank‘s
exposure to changesin market conditions,and a bank should develop
correspondingrisk control systemsto accompany theseassessments.
Asset salesandsecuritizationarealsoimportant sourcesofbank liquidity.
Banks of all sizeshave increasedtheuseof asset salesand securitization
to accessalternativefunding sources,manage concentrations, improve
financial performanceratios,and more efficientlymeet customer needs.
Someof thesetransactions,however,carry explicit recourseprovisions
withincontractual documents, aswell asthepotential implied recourse

66
associated witha bank‘sdesireto maintain accesstofuture funding by
repurchasingor otherwisesupportingsecuritizationsthat exhibit
performanceproblems.
Asaresult, examinersshouldbeawareofsituationsin whichbanksmight
overestimatethe risk transfer of salesand securitization or may
underestimatethe commitment and resourcesrequired to managethis
processeffectively.
Such mistakes may lead to highly visible problems during the life of a
transaction that could impair future accessto the secondary markets. A
bank‘s role and level of involvement in asset sales and securitization
activitiesdeterminethe degreeof risk towhichit is exposed.
Off-balance-sheet positionscan serve asboth a source of liquidityand a
potential, sometimesunexpected, drain on liquidity.
Banks witha substantial amount of unfunded loancommitmentsmay be
requiredto fund such obligationsunexpectedlyand on short notice.
Other off-balance-sheetcommitments, such aslegallybindingand
nonlegallybindingsupport for securitizations,asset-backed commercial
paper conduits, and other market basedfunding vehicles, can affect a
bank‘sliquidityposition.
In addition, collateral required for coveringadversemark-to-market
changesin derivativehedgingand tradingactivitiesmay reducethestock
of liquid assets.
Often, the fulfillment of nonlegallybindingoff-balance-sheet
commitmentsis necessarytopreservethereputationof the institution, as
well asto allowa bank continued accessto that segment of the financial
markets.
On the other hand, off-balance-sheet activitiesmay provideadditional
sourcesfor liquidity.

Basel 3 July 2012

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Basel 3 July 2012