US banks and regulators both failed on Basel II parallel runs, says Fed official

Failure to exit Basel II parallel runs represents a 'black eye' for US financial sector, says Federal Reserve Bank of Richmond unit head

The failure by US banks to exit their parallel runs to become Basel II compliant reflects badly on both banks and regulators, according to Evan Sekeris, assistant vice-president at the Federal Reserve Bank of Richmond. US banks entered parallel runs while attempting to have their advanced credit and operational risk models approved as compliant with Basel II capital rules.

"We don't have a single US institution out of parallel run," Sekeris told delegates attending Op Risk North America in New York yesterday. "This is really a black eye for the US. Forget differentiation between industry and regulators; it is just a black eye for all of us collectively that we haven't got our act together and done this."

Pre-crisis, Sekeris said, some of the models that the regulator was seeing were of an acceptable standard, and in some cases, exceeded expectations. But the crisis changed this. "We had models and modelling frameworks in place. In some cases, I have to admit as a regulator, we even thought they were fairly decent models. I can even think of cases where we thought they were class-leading models. And then the crisis hit and it blew through the models. It completely obliterated the models."

This was a big issue, Sekeris said, and the fact that the industry had "failed so miserably" was a wake-up call. "It is true that we have made a lot of progress, but we shouldn't rest on our laurels and we should really keep pushing the envelope," he told delegates.

Despite this, Sekeris said he felt the failure had been blown out of proportion to a degree and that looking at institutions that are Basel II compliant in other jurisdictions may help the US financial services industry to gain some perspective. "Let's compare apples to apples," he said. "And maybe there is a good reason nobody has exited here and maybe others should not have jumped the gun the way they did in other jurisdictions."

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