View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Opening Statement
Martin J. Gruenberg
Acting Chairman, FDIC;
FDIC Board Meeting
June 12, 2012

I am pleased we are in a position today to consider four important capital rulemakings:
the Market Risk Final Rule; two notices of proposed rulemaking implementing Basel III
reforms; and a notice of proposed rulemaking for the so-called Standardized Approach.
Before commenting on the specifics of the cases, I would like to note that we divided
these proposals into three separate NPRs to reflect the distinct objectives of each
proposal, to allow interested parties to better understand the various aspects of the
overall capital framework, and to help them focus their comments on areas of particular
interest.
Market Risk Final Rule
The Market Risk Final Rule will address important weaknesses of the current Market
Risk Rule to reflect lessons learned in the financial crisis. Leading up to the crisis, low
capital requirements under the current Market Risk Rule encouraged institutions to
place illiquid, high-risk assets in their trading books. Large mark-to-market losses on
these assets played an important role in the early stages of the crisis. The final rule will
require an appropriate increase in the stringency of the Market Risk rule that will better
address such risks.
The final rule applies to about 25 institutions with significant trading activities. It is based
on reforms that were agreed internationally with the Basel Committee's 2009 paper
Revisions to the Basel II market risk framework. These revisions are part of what is
generally referred to as the Basel II.5 reforms.
There has been concern expressed that the Market Risk Rule, while improved, is still
too reliant on internal models. The idea of establishing a simple, non-modeled backstop
for all trading book capital requirements is worthy of further study, and is in fact being
considered as part of a fundamental review of trading book capital requirements being
conducted by the Basel Committee.
Basel III NPRs
As previously noted, we are also considering two NPRs aimed at implementing the
Basel III international capital agreement -- one that would apply to all banks and a
separate NPR for the large, internationally-active banks that use the advanced
approaches. Fundamentally, Basel III aims to improve the quality of regulatory capital
and increase the level of capital requirements.

General Basel III NPR
The General Basel III NPR would strengthen the definition of capital by requiring Tier I
capital to be composed principally of tangible common equity. For example, the
proposal establishes a minimum common equity tier 1 risk-based capital requirement of
4.5 percent. To avoid restrictions on capital distributions, banks would need to maintain
their risk-based capital ratios at least 2.5 percent above these minimums. Together, this
would establish an expectation that banks maintain loss-absorbing capital of at least 7%
of risk-weighted assets. The NPR also would amend the Prompt Corrective Action
thresholds to reflect these proposed new requirements. In short, the proposals will
significantly strengthen minimum requirements for loss-absorbing equity capital in our
banking system.
This NPR also contains proposals that only would apply to banking organizations that
use the advanced approaches rule. One such requirement is that advanced approach
banks must maintain a three percent Basel III leverage ratio as a supplement to the
existing U.S. leverage ratio. This would meaningfully incorporate the new international
leverage ratio into the U.S. regulatory capital regulations. In this regard, I would note
that the NPR maintains the existing leverage requirements for all banks, updated to
reflect the new definition of capital.
Our analysis suggests that most banks have ample capital to meet the proposed
requirements. For example, we estimate that approximately 96 percent of all depository
institutions currently hold capital that meets or exceeds the proposed requirements.
Basel III NPR for Advanced Approaches Banks
The Basel III NPR for Advanced Approaches contains a number of enhancements to
the calculation of risk-weighted assets for advanced approaches banks. The proposal is
consistent with the Basel III international capital agreement, but also contains
alternatives to credit ratings consistent with Section 939A of the Dodd Frank Act. The
proposals in this NPR would strengthen the existing advanced approaches capital rules,
particularly related to capital requirements for derivatives.
The FDIC has had a longstanding concern about the reliance in the advanced
approaches rule on a bank's own models and risk estimates. Section 171 of the Dodd
Frank Act, the so-called Collins amendment, addresses this concern by placing a floor
under advanced approaches capital requirements that serves to both prevent the level
of capital requirements from declining below the levels prevailing when the law was
enacted, and to ensure that advanced approaches capital requirements are not less
than the requirements applying to other banks.
Standardized Approach NPR
The Standardized Approach NPR proposes a number of enhancements to the
calculation of risk-weighted assets in the agencies' general risk-based capital rules,

including alternatives to credit ratings consistent with Section 939A of the Dodd Frank
Act. The capital requirements proposed in this NPR are separate and distinct from the
internationally agreed Basel III framework. Staff will describe this NPR at greater length.
Conclusion
The rules under consideration by the Board today are an important step in the direction
of strengthening the capital requirements for banks in the United States. While two of
the rules apply only to large, internationally active institutions, the General Basel III NPR
and the Standardized Approach NPR would be generally applicable to all institutions.
For that reason, each of those NPRs includes an addendum. The goal of these
addenda is to aid smaller banks in identifying and understanding the aspects of the
proposals that would apply to them. We are planning additional outreach as well,
including a national call-in and a series of informational sessions in our six FDIC
regions. We anticipate working cooperatively with the OCC and the Federal Reserve on
these outreach efforts.
I would like to conclude by thanking the staff of the FDIC, as well as the OCC and
Federal Reserve, for their extraordinary efforts on these rulemakings. It has been a
major challenge to prepare these rules for today's Board meeting, and the staff
deserves great credit for the work that has been done.

Last Updated 6/12/2012