The preamble to the proposed rule described the agencies’ intention to avoid a material reduction in overall risk-based capital requirements under the advanced approaches.

The agencies also identified other objectives, such as ensuring that differences in capital requirements appropriately reflect differences in risk and ensuring that the U.S. implementation of the New Accord will not be a significant source of competitive inequity among internationally active banks or among domestic banks operating under different risk-based capital rules.

The final rule modifies and clarifies the approach the agencies will use to achieve these objectives.

The agencies proposed a series of transitional floors to provide a smooth transition to the advanced approaches and to temporarily limit the amount by which a bank's risk-based capital requirements could decline over a period of at least three years.

The transitional floors are described in more detail in section III.A.2. of this preamble.

The floors generally prohibit a bank’s risk-based capital requirement under the advanced approaches from falling below 95 percent, 90 percent, and 85 percent of what it would be under the general risk-based capital rules during the bank’s first, second, and third transitional floor periods, respectively.

The proposal stated that banks would be required to receive the approval of their primary Federal supervisor before entering each transitional floor period.

The preamble to the proposal noted that if there was a material reduction in aggregate minimum regulatory capital upon implementation of the advanced approaches, the agencies would propose regulatory changes or adjustments during the transitional floor periods.

The preamble further noted that in this context, materiality would depend on a number of factors, including the size, source, and nature of any reduction; the risk profiles of banks authorized to use the advanced approaches; and other considerations relevant to the maintenance of a safe and sound banking system.

The agencies also stated that they would view a 10 percent or greater decline in aggregate minimum required risk based capital (without reference to the effects of the transitional floors), compared to minimum required risk-based capital as determined under the general risk-based capital rules, as a material reduction warranting modification to the supervisory risk functions or other aspects of the framework.

Further, the agencies stated that they were "identifying a numerical benchmark for evaluating and responding to capital outcomes during the parallel run and transitional floor periods that do not comport with the overall capital objectives."

The agencies also stated that "[a]t the end of the transitional floor periods, the agencies would reevaluate the consistency of the framework, as (possibly) revised during the transitional floor periods, with the capital goals outlined in the ANPR and with the maintenance of broad competitive parity between banks adopting the framework and other banks, and would be prepared to make further changes to the framework if warranted.”

The agencies sought comment on the appropriateness of using a 10 percent or greater decline in aggregate minimum required risk-based capital as a numerical benchmark for material reductions when determining whether capital objectives were achieved.

Many commenters objected to the proposed transitional floors and the 10 percent benchmark on the grounds that both safeguards deviated materially from the New Accord and the rules implemented by foreign supervisory authorities.

In particular, commenters expressed concerns that the aggregate 10 percent limit added a degree of uncertainty to their capital planning process, since the limit was beyond the control of any individual bank. They maintained that it might take only a few banks that decided to reallocate funds toward lower-risk activities during the transition period to impose a penalty on all U.S. banks using the advanced approaches.

Other commenters stated that the benchmark lacked transparency and would be operationally difficult to apply.

Commenters also criticized the duration, level, and construct of the transitional floors in the proposed rule. Commenters believed it was inappropriate to extend the transitional floors by an additional year (to three years), and raised concerns that the floors were more binding than those proposed in the New Accord.

Commenters strongly urged the agencies to adopt the transition periods and floors in the New Accord to limit any competitive inequities that could arise among internationally active banks.

To better balance commenters’ concerns and the agencies’ capital adequacy objectives, the agencies have decided not to include the 10 percent benchmark language in this preamble.

This will alleviate uncertainty and enable each bank to develop capital plans in accordance with its individual risk profile and business model.

The agencies have taken a number of steps to address their capital adequacy objectives.

Specifically, the agencies are retaining the existing leverage ratio and PCA requirements and are adopting the three transitional floor periods at the proposed numerical levels.

Under the final rule, the agencies will jointly evaluate the effectiveness of the new capital framework.

The agencies will issue a series of annual reports during the transition period that will provide timely and relevant information on the implementation of the advanced approaches.

In addition, after the end of the second transition year, the  agencies will publish a study (interagency study) that will evaluate the advanced approaches to determine if there are any material deficiencies.

For any primary Federal supervisor to authorize any bank to exit the third transitional floor period, the study must determine that there are no such material deficiencies that cannot be addressed by tools, or, if such deficiencies are found, they must be first remedied by changes to regulation.

Notwithstanding the preceding sentence, a primary Federal supervisor that disagrees with the finding of material deficiency may not authorize a bank under its jurisdiction to exit the third transitional floor period unless the supervisor first provides a public report explaining its reasoning.

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