The Basel Committee on Banking Supervision’s proposed interest rate risk capital requirement is fundamentally flawed and could ultimately increase interest rate risk, ABA and another trade group said in a comment letter on Friday. Instead of employing its “Pillar 1” approach — a mandatory global minimum capital requirement and public disclosures — the Basel Committee should employ a pure “Pillar 2” approach that would flexibly allow discretionary practices by national jurisdictions.
The committee’s flawed Pillar 1 approach represents an inaccurate measure of interest rate risk for U.S. institutions, the groups noted. “If adopted, the standard would represent a significant step backwards for interest rate risk management and risk management as a whole.” As an alternative, a well-designed Pillar 2 approach would focus on strong and flexible domestic supervision and the integration of interest rate risk into an overall risk management program without “misleading” disclosure requirements.
The groups emphasized that the committee’s proposed Pillar 2 approach requires modification because it relies on public disclosure of the flawed Pillar 1 calculation. Without these modifications, “the proposed Pillar 2 approach would constrain banks’ internal modeling of [interest rate risk] and likely establish a floor to the capital banks should hold,” the groups added. For more information, contact ABA’s Hugh Carney.