FDIC Chair Calls Basel III Implementation Top Priority for Federal Banking Agencies

FDIC Chair Martin J. Gruenberg announced that the FDIC, the Federal Reserve Board and the OCC plan to issue a joint proposed rulemaking in the near term to incorporate the finalization of the Basel III capital framework.

In remarks before the Peterson Institute for International Economics, Mr. Gruenberg stated that the implementation of Basel III would address the following areas of risk:

• Credit Risk. Mr. Gruenberg said that Basel III will introduce a standardized approach to credit risk that increases the "granularity and robustness" of the credit risk capital framework, in addition to addressing flaws associated with internal models.
• Market Risk. Mr. Gruenberg stated that a "fundamental review of the trading book" ("FRTB") will be included in Basel III. He added that the FRTB introduces a standardized measurement for market risk to create a "consistent approach" to determine capital requirements. He said the FRTB will employ an "expected shortfall methodology" to address market risk.
• Operational Risk. Mr. Gruenberg said that Basel III moves away from internal models to address operational risk and towards a standardized approach that accounts for banks’ historical loss experience.
• Financial Derivatives Risk. Mr. Gruenberg said that Basel III will account for potential losses caused by credit valuation adjustment, which was determined to be a major source of loss for banks during the 2008 global financial crisis. He explained that Basel III would implement new frameworks that are consistent with the "more robust methodology under the revised market risk framework."

He stated that the FDIC, the FRB and the OCC are considering the scope of the proposed rulemaking, particularly as to banks with assets over $100 billion.

Mr. Gruenberg argued that the implementation of Basel III would strengthen the banking system while making access to credit more efficient during varying economic conditions. He emphasized the importance of ensuring that bank capital continues to be able to provide a "long-term benefit . . . by allowing banks to play a counter-cyclical role during an economic downturn rather than a pro-cyclical one."