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COMMENT DOCUMENT
October 31, 2003
Synovus Financial Corp.
Comments on the Advance Notice of Proposed
Rule-Making in Relation to the Implementation of
the New Basel Capital Accord ("Basel II")
The following are the most significant issues and concerns of Synovus
Financial Corp. regarding the Advance Notice of Proposed Rule-Making ("ANPR")
in relation to the implementation of Basel II.
OVERALL COMMENTS
1. BIFURCATED BANKING SYSTEM. We believe that the bifurcated
regulatory framework, namely a certain set of regulations for Basel II banks and
another set for Basel I banks, will create a bifurcated banking system
in the U.S. This creates five issues for us:
• COMPETITIVE EQUALITY. The assets of U.S. banks that will be
required to adhere to Basel II's most advanced approaches constitute
two-thirds of the total domestic assets. The risk measurement practices
and consequent capital allocation adjustments will have a significant
impact on the competitive environment and on Basel I banks' abilities to
compete fairly with Basel II banks.
• BANK RATINGS. There is some concern that even if the methodology
allows banks to reduce their levels of capital, ratings agencies will
look unfavorably on this benefit of Basel II compliance. For those not
complying with Basel II, there is concern that a Basel I bank will be
viewed as a separate (and lower) class of financial institution.
• COST AND AVAILABILITY OF FUNDS. Should Basel I banks be viewed as a
lower class of institution by the ratings agencies, cost and
availability of funds will be adversely and significantly affected.
• VIEWS OF THE MARKET. If Basel I banks are viewed as a lower class
of institution by the shareholder, we believe that the market
capitalization of publicly held banks will be adversely affected.
• REGULATORY ENVIRONMENT. Due to resource constraints, we are
concerned that U.S. regulatory agencies will not be able to adequately
supervise both Basel II and Basel I banks in the future, thus resulting
in regulators eventually pursuing one set of rules.
2. BOARD AND MANAGEMENT OVERSIGHT. Regulations should not mandate the
exact manner in which the Board of a bank is involved in determining risk
management policy, organization or implementation. Senior executive
management, in consultation with the Board, should be charged with
reviewing and approving the risk management framework to ensure that (a)
its scope and approach is appropriate, (b) it is well implemented, and
(c) it is properly audited.
3. CHANGE IN REGULATORY STATUS. There is concern that a bank's
regulatory status will change because of Basel II rather than because of a change in
the bank's risk profile.
4. CONSISTENT IMPLEMENTATION. . Regulators may have difficulty with
the intricacies and complexity of Basel II, particularly in their ability to ensure
consistent implementation of Basel requirements across states,
districts, and countries.
5. COSTS. The costs of developing and implementing Basel II approved
risk assessment and data collection systems may outstrip banks'
abilities to comply.
6. FLEXIBILITY AND ADAPTABILITY. Basel II requires banks to use
specific processes for internal management in many areas, regardless of whether they are
relevant for business practices. By prescribing specific processes for
internal management, Basel II may unintentionally slow the progress and
introduction of better private sector risk management techniques.
7. THIRD PARTY UNDERSTANDING. We are concerned that third parties
(e.g., investors) will not be able to understand the disclosures outlined in Basel II.
We agree that regulators need full disclosure, but we request a limited
universe of disclosures given to the public.
8. TIMEFRAME. It is believed that the current timetable -
particularly the mid-2004 release date of the final Accord and the full
implementation of Basel II in 2006- is unrealistic. Banks will not have
enough lead time to implement any mid-2004 changes in data collection
retroactively effective January 1, 2004 resulting in an inability to
gather appropriate data for the three years leading to the final
implementation date.
9. TRANSITION PERIODS. We request a flexible transition period
reflective of the scope of mergers and acquisitions between Basel I and
Basel II banks.
PILLAR 1: MINIMUM CAPITAL REQUIREMENTS
Credit Risk Management: Identification, Assessment, Monitoring, and
Mitigation/Control
1. COMMERCIAL REAL ESTATE (CRE) LENDING MARKETS. CRE lending
constitutes an important component of our loan portfolio and those of other regional
banks in the U.S. If economic capital is based on special criteria
rather than actual loan loss experience, Basel II may have a significant
impact on regional banks' competitive position compared to other banks
and non-bank lenders. This impact has the potential to disrupt CRE
lending markets.
2. CONCENTRATION LIMITS IN RATINGS GRADES. Concentration limits are
not realistic for some (particularly high quality) portfolios. The more objective
the criteria used for determining ratings, the less there is a need for
limits.
3. CREDIT RISK CHARGES FOR COMMERCIAL REAL ESTATE LENDING. Credit
risk charges are still too high in view of loan loss experience, even after taking
into consideration CP3's Advanced IRB formula for High-Volatility
Commercial Real Estate (HVCRE). All CRE loans should be treated
comparably like other corporate exposures.
4. DEFINITION OF CLASSIFIED ASSETS. There is concern that shifting
focus primarily to borrower credit rating could increase the level of classified assets
for businesses with high PDs/ low LGDs.
5. DEFINITION OF DEFAULT. Basel II's definition of default (the 90
days past due standard) is not necessarily appropriate for all types of
exposures and business lines, and it conflicts with historical loss
data. We suggest replacing the default definition with more flexible
guidelines to truly reflect internal ratings-based methodology.
6. DEFINITION OF LOSS GIVEN DEFAULT (LGD). Basel II's shift from a
cycle-neutral LGD to a recession-based LGD may result in overly conservative
capital calculations for all types of assets. We suggest a
cycle-adjusted definition instead.
7. EXPECTED LOSSES (EL). Since expected losses are covered by loan
loss reserves and are factored by banks into pricing transactions, there
is concern that economic capital requirements will count expected loss twice. We welcome the
regulators' recent agreement to reconsider the treatment of expected
loss.
8. MATURITY (M). We do not believe that the stated maturity of a loan
should be a factor in the capital calculation, particularly in instances
where maturities can be managed to meet the targeted risk hurdle rate
and not in the best interest of the borrower.
9. PRESCRIPTIVE NATURE OF CREDIT RISK MANAGEMENT. We are concerned
that Basel II's credit risk methodology, has become too prescriptive. We request
assurance that there will be enough flexibility in the Basel methodology
to allow for advances in risk management as they occur.
10. QUALIFYING REVOLVING RETAIL EXPOSURES (CREDIT CARDS). The credit
risk capital charges for credit cards are too high under the IRB approaches
(especially for highquality cards) and may negatively affect the
competitive equality of U.S. banks' abilities to compete in other
countries whose banks will be allowed to use standardized approaches.
11. RESIDENTIAL MORTGAGE LENDING - LGD FLOOR. The 10% floor on LGD
for residential mortgages should be eliminated, given that historical
data is below 10% for many mortgage portfolios.
12. RETAIL LENDING. A preferable approach to determining credit risk
capital charges for retail lending would be a framework based on
expected loss. Banks should be able to rely on the volatility of
expected loss that they experience in their own portfolios to determine
capital requirements.
Operational Risk Management: Identification, Assessment, Monitoring,
and Mitigation/Control
1. EXPECTED LOSSES (EL). We recommend expected operational losses be
omitted from the operational risk capital allocation. We are concerned
that expected losses are accounted for in operational costs before they
can be excluded from the operational risk capital charge, thus resulting
in counting operational losses twice. Regulators should require only
unexpected operational losses to be covered by regulatory capital.
2. EXTERNAL DATA. The availability and quality of external data on
operational risk is a source of concern. Guidance would be appreciated
on issues relating to the availability and scaling of external data.
3. OPERATIONAL RISK LOSS DATA. Loss data that is considered in credit
risk and market risk capital charges should not also be required to be
captured in operational risk calculations.
4. PILLAR 1 TREATMENT. Despite the discussions that have been
on-going, we believe that Operational Risk methodology should remain in
Pillar 1 of Basel II.
5. RISK MITIGATION/INSURANCE. Any offset for insurance should be
related to a reasoned assessment of its quality. The 20% ceiling and the
standards that banks and insurance companies have to meet for the banks
to qualify for this offset will inhibit the development of this
important risk mitigation tool. We suggest modifying the criteria so as
to address the issues of the extent of coverage, the certainty of
coverage, and insurer solvency. Additionally, regulations should provide
flexibility, allowing for recognition of other risk mitigation products
that emerge in the future.
PILLAR 2: SUPERVISORY REVIEW PROCESS
1. CONSISTENT APPLICATION. More guidance is needed on Pillar 2 review
standards to reduce the risk of inconsistent application, domestically
as well as internationally. Examiners should be provided guidance,
direction and training to ensure that assessments are objective and
consistent. Parameters for determining when additional capital is to be
required should be formalized by supervisors internationally.
2. CORPORATE GOVERNANCE. Since we recommend that Board oversight of
banks' approaches to capital allocation be limited to a strictly
oversight/ supervisory position, we believe that the adequacy of
Corporate Governance should be evaluated under Pillar 2.
3. MINIMUM CAPITAL REQUIREMENTS. Pillar 2 reviews should not become a
vehicle for imposing de facto higher across-the-board minimum capital
requirements. Only in cases of identified significant risk management
deficiencies should Pillar 2 require capital increases above
institutions' own economic capital assessments.
4. RISK MANAGEMENT CULTURE. A bank's earnings volatility or stability
should be given greater weight when supervisors evaluate the strengths
of the institution's risk management practices, rather than mandating
changes to existing risk management processes as part of eligibility
standards under Pillar 1 advanced approaches. Care should be taken not to disrupt successful risk management cultures
that have been developed through years of training and experience.
PILLAR 3: MARKET DISCIPLINE
Though we fully support transparency in disclosures about our risk
profile and risk management process, a distinction should be made
between the information needs of supervisors and those disclosures that
are meaningful for the markets and the general public.
We also ask that the regulatory agencies ensure that risk management
practices are able to mature beyond the concepts now embedded in Basel
II. Basel II methodologies already lag market best practices.
Consequently, it is expected that Pillar 1 calculations will no longer
be considered good measures of risk for all products. Therefore, banks
must be given the flexibility to alter disclosures to represent emerging
best practices without waiting for formal changes in Basel II.
Please direct any questions/comments to:
Tara H. Skinner
Vice President
Synovus Financial Corp. P.O. Box 120
Columbus, GA 31902-0120 U.S.A.
706-641-3771 taraskinner@synovus.com
Document sent (via email) to:
Office of the Comptroller of the Currency
Attention: Docket No. 03-14
regs.comments@occ.treas.Zov
Ms. Jennifer J. Johnson, Secretary
Board of Governors of the Federal Reserve System
res.comments@federalreserve.gov
Mr. Robert E. Feldman, Executive Secretary
Federal Deposit Insurance
Corporation
Comments@FDIC.gov
Chief Counsel's Office
Office of Thrift Supervision
Attention: No. 2003-27
regs.comments@ots.treas.gov
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