Fed releases NPR for US Basel II implementation

The Federal Reserve has released the notice of proposed rulemaking (NPR) for the delayed implementation of Basel II in the US. In this first draft, the Federal Reserve approved a proposal that bank regulators hope will ensure banks maintain prudent capital cushions, by slowing down and setting more conservative steps for US adoption of the agreement, and specific safeguards that require continual regulatory review. It also details a multi-year transition that includes capital floors to keep cash reserves from declining too quickly or too far.

The revised plans aim to ensure capital levels will not decline as a result of the new rules, as had been indicated by a test of the framework on 26 US banks in late 2004 and early 2005. The NPR has allowed provisions if the Federal Reserve sees a drop of 10% or more in aggregate minimum risk-based capital among all banks, at which point the regulator would intervene.

Regarding concerns about lower capital reserves and the Accord’s impact on smaller banks, the Fed said the rules