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What
is Basel II?
A full explanation of Basel II can be found here.
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How much do
Second Pillar’s Basel II services cost?
A full explanation of Second Pillar's pricing can be found here.
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When can my
bank start complying with Basel II?
Banks had the option of applying for Advanced Basel II treatment as of
April 1, 2008, though only the largest dozen or so are currently
working towards compliance. The Standardized version
of Basel II should be finalized by the end of 2009 or first quarter of
2010,
at which time non-core banks (those with less than $250b total assets
and $10b foreign assets) can apply for treatment.
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Is my bank
required to comply with Basel II?
No, unless you have $250B of total assets or $10B of foreign
assets. Basel II compliance is optional for all others,
though
examiners can require compliance on a case-by-case basis.
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Are the
Second Pillar capital savings estimates guaranteed?
No. Our public data model produces a very good estimate of
potential capital savings, and precision is further enhanced with
private data supplied by clients. But the ultimate level of
capital savings might vary from our estimates for a number of reasons,
including balance sheet changes in the period between our estimates and
compliance and examiner overrides of calculated capital savings.
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How often
must my Basel II submissions be updated?
Your bank will continue filing regulatory call reports on a quarterly
basis using your existing process. The ICAAP is the primary
new
filing required for Basel II compliance, and this must be updated on an
annual or biennial basis, per the request of your examiners.
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Will I need
to change my business or operations to comply with Basel II?
Not to a significant degree. With few exceptions, calculating
the
capital requirements for the Standardized approach is no more difficult
than under the current rules. For example, banks must have
ready
access to updated loan-to-value ratios to take full advantage of the
low-risk mortgage capital benefit. Some banks might require
remedial systems and data work to pull this information together in a
reliable, timely fashion. Basel II also requires a degree of
risk
management awareness, Board involvement, and capital planning savvy
that most, but not all, banks have already embraced. But
unlike
the Advanced approach, which requires deep institutional commitment and
massive risk architecture investments, the Standardized approach is far
less invasive.
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Will I need
to invest in new systems and reporting structure?
Probably not. Your existing regulatory reporting processes
should
be easily modified to accommodate Basel II filings.
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What is an
ICAAP?
The Internal Capital Adequacy Assessment Process is a document that
demonstrates the adequacy of an institution’s capital position,
trajectory, and management. The ICAAP must give examiners
comfort
that the minimum capital requirements calculated under pillar one are
sufficient to protect the institution against a variety of risks.
Economic capital modeling, stress testing, peer benchmarking,
and
scenario analysis are among the evidence that examiners will consider.
But the ICAAP is not just a static document; it must
demonstrate
the dynamic process the institution follows to ensure that capital is
well-managed and sufficient in the face of evolving risks.
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What are
the “three pillars” of Basel II?
Pillar one mechanically calculates minimum capital requirements using
risk-weights assigned to assets and operational risk. Pillar
two
empowers regulators to modify the pillar one minimum by considering the
ICAAP and other evidence of capital and risk management abilities.
Pillar three mandates the public disclosure of capital
calculations so the market can more effectively judge risk and capital
need.
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What is the
difference between Standardized and Advanced Basel II?
The pillar one calculation of minimum regulatory capital varies
dramatically across the two versions of Basel II. The
Standardized version applies simple universal risk-weights to broad
asset classes, while under the Advanced approach each bank applies
complex formulae and internal data and analysis to relatively small
asset subgroups.
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How many
banks are complying with Basel II?
The dozen largest banks must all be in compliance by the first quarter
of 2010. Smaller banks cannot start
opting in to Standardized compliance until the rule becomes effective,
likely by the end of 2009 or first quarter of 2010.
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What are
the required regulatory capital ratios?
Under
the Prompt Corrective Action guidelines, regulated depository
institutions face three distinct regulatory capital requirements in
order to be considered “well-capitalized”:
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Tier 1 Leverage, or the
ratio of tier 1 capital to total reported assets, must exceed 5% |
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Tier 1 risk-based capital, or the ratio of tier
1 capital to risk-weighted assets, must exceed 6% |
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Total risk-based capital, or the ratio of tier
1 plus tier 2 capital to risk-weighted assets, must exceed 10% |
Basel
II calculations impact the denominator of the tier 1 and total
risk-based capital ratios, but leave the tier 1 leverage ratio largely
unchanged. When risk-weighted assets fall, these ratios rise,
giving the institution additional excess capital relative to the
statutory minima.
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What are
the advantages of Basel II compliance?
In addition to potential capital savings, Basel II ensures more
comprehensive capital and risk management. Basel II
compliance
might also improve relations with regulators, rating agencies, and
investors.
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Why is this
regulation called “Basel II”?
The Bank of International Settlements (www.bis.org),
located in Basel (or Basle) Switzerland, authored the internal accord.
The BIS is a collection of central bankers from the US, Japan, and
Europe. Their initial 1988 accord is now called “Basel I” while the
update finalized in 2006 is called “Basel II”
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How is
“Basel” pronounced?
Most practitioners say “Bah-zuhl”, with a first syllable mimicking
Scrooge, though “Baa-zuhl”, with a sheep-like first syllable, is also
acceptable. Avoid “Bay-zuhl”, which should be reserved for
the
flavoring. And while the French-speaking citizens of the
Swiss
city pronounce it “Bahl”, few bank capital practitioners recognize that
form. Don’t worry – however you pronounce it, we can help you
comply with it.
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Do I need
outside consultants to comply with Basel II?
No more than you currently need to generate your capital call
reports. Many larger institutions have the internal staff
required
to develop and maintain the ICAAP and associated economic capital
modeling, stress testing, and scenario analysis.
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Who else
other than Second Pillar Consulting is helping banks with Basel II
compliance?
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The big consulting
firms.
Deloitte, PWC, IBM, and Oliver Wyman are among the firms that
sell multi-million dollar Basel II engagements to banks pursuing
Advanced compliance. |
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Smaller financial services consulting
firms.
Companies active in this space, including Promontory, FMCG,
eRisk, Moody’s-KMV, and S&P risk solutions, also tend to focus
on
larger engagements but do have some services for smaller banks. |
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Solutions providers.
Firms including Algorithmics, I-flex, Fermat, and QRM sell
large
IT systems that can also generate Basel II capital estimates, but they
provide little in the way of ICAAP support. |
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Regulatory reporting providers.
FRS, Jack Henry, Fidelity Information Services, and Finarc
specialize in regulatory reporting but leave the calculation and
analysis to the client. |
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Do I need dedicated staff to comply with Basel II?
No more than you previously needed to generate your capital call
reports. We can help your institution create, implement, and
update all required Basel II documentation and processes.
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How much
capital will I save under Basel II?
The median bank/thrift in the US will see their regulatory capital
ratios rise approximately 4.5 percent under Basel II, though there is
wide disparity across institutions. Please contact us for a
detailed estimate of savings for your institution.
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How long
does it take to obtain full compliance once the project starts?
The entire certification process should take approximately six months
from beginning to end, though this will vary by portfolio complexity,
the existing state of capital and risk management, and the availability
of key data.
What is SR 09-4?
A full explanation of SR 09-4 can be found here.
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How much do
Second Pillar’s
Basel II services cost?
A full explanation of Second Pillar's pricing can be found here.
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When did SR 09-4 come into effect?
SR 09-4 was initially issued by the Federal Reserve Board of
Governors in February 2009 and revised in March 2009.
From this point
forward, Bank Holding
Companies that pay dividends are subject to the guidance provided in SR
09-4.
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What does the acronym “SR 09-4” mean?
SR 09-4 is the fourth “Supervisory and Regulation Letter”
issued by the Federal Reserve in 2009.
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Where can I find a copy of SR 09-4?
Click
here.
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Why are SR letters issued?
Like all SR letters, SR 09-4 address significant policy and
procedural matters related to the Federal Reserve System’s supervisory
responsibilities. The primary function of SR
letters is to guide
Federal Reserve field staff on how to conduct examinations. The Federal Reserve
publicly discloses most
of these letters in order to prepare banks for the questions that their
examination staff will likely ask.
More
information on SR letters can be found here:
http://www.federalreserve.gov/boarddocs/srletters/
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How is SR 09-4 enforced?
Field examiners across the various agencies and regions are
provided with a comprehensive set of directives and guidance from which
they
build their examinations. Different
examiners
might emphasize different aspects of this massive “rule book” on any
given
exam. There is no
guarantee that your
examiner will raise SR 09-4 issues during your next safety and
soundness exam,
but this timely guidance on a timely issue – capital adequacy – will
likely be
among the first arrows pulled from the examination quiver.
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What are the penalties for non-compliance?
SR 09-4 helps guide the overall examination process.
A finding of
non-compliance can be addressed
with the full arsenal of examination penalties – from findings to
notices to
memorandum of understanding or even enforcement action.
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Do examiners provide formal notification of SR
09-4?
No. All bank
holding
companies are subject to SR 09-4, effective February 2009. Banks must comply with the
provisions of this
guidance even in the absence of formal notification or examinations.
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Which banks will most likely receive SR 09-4
scrutiny?
For starters, SR 09-4 applies only to banks that currently
or intend to pay dividends, and banks that repurchase shares or redeem
capital
instruments such as TARP. Within
this
group, banks with the following characteristics will draw the most
attention
from their examiners:
- High
dividend payout ratios, particularly those that
exceed 100% in any period
- Low
capital ratios, net of proposed buybacks or
redemptions
- High
or rising credit losses
- Low
or volatile earnings
- Heavy
reliance on trust preferred securities or
subordinated debt.
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What is required for SR 09-4 compliance?
In general, the SR 09-4 guidance requires a capital planning
and management process that is commensurate with the risks,
complexities, and
capital position of the bank. Board
ownership of the capital management process is a critical requirement
of the
guidance. The
guidance does not
necessarily require a high degree of sophisticated analysis, but banks
must
demonstrate a commitment to capital management that ensures dividends
and
buybacks/redemptions pose no threat to safety and soundness.
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How does Second Pillar Consulting support SR 09-4
compliance?
Our
SR 09-4 support proceeds in two phases.
In the first phase, we
triage bank readiness
and develop a gap analysis and draft remediation plan.
This work, for which
we charge a flat fee of
$10,000, takes no more than a week to complete.
Banks that choose to
retain us for phase two will receive our
remediation “rescue kit”, a low-cost package of services that close all
compliance gaps. Phase
two is also
priced on a flat fee that depends upon results of the phase one gap
analysis. Our pricing page provides
additional information.
What is SR 99-18?
A full explanation of SR 99-18 can be found here.
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Where can I find a copy of SR 99-18?
Click
here.
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How does Second Pillar Consulting support SR 99-18
compliance?
Our
SR 99-18 support proceeds in two phases.
In the first phase, we
triage bank readiness
and develop a gap analysis and draft remediation plan.
This work, for which
we charge a flat fee of
$10,000, with results in about a week.
Banks that choose to
retain us for phase two will receive our
remediation “rescue kit”, a low-cost package of services that close all
compliance gaps. Phase
two is also
priced on a flat fee that depends upon results of the phase one gap
analysis.
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