via e-mail
October 30, 2003
Ms. Jennifer J. Johnson
Secretary, Board of Governors
Federal Reserve System
20th Street and Constitution Avenue, NW
Washington, D.C. 20551 Docket No. R-1154
Office of the Comptroller of the Currency
250 E Street, SW
Public Information Room, Mailstop 1-5
Washington, DC 20219
Attention: Docket No. 03-14
Robert E. Feldman
Executive Secretary
Attention: Comments
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Risk Based Capital Guidelines;
Implementation of New Basel Capital Accord
HSBC Bank USA appreciates the opportunity
to comment on the framework set forth in the advance notice of proposed
rulemaking (ANPR) for implementing the new Basel Capital Accord in the
United States. We agree that the ANPR represents a significant
improvement over the current capital standards and fully support the
initiative to create a more risk sensitive framework. We also endorse
the inclusion of operational risk as a component of Pillar I minimum
capital requirements.
We wish to advise that David Palmer, in
his letter of April 22, 2003, indicated that HSBC Bank USA’s
participation in the new capital framework was considered voluntary.
However, all the necessary preparations are being made to “opt-in” to
IRB Advanced and AMA.
Other comments regarding specific
provisions follow.
- Securitization – Asset
securitization is a key risk management tool and liquidity source
for the industry. We are concerned that the proposed treatment for
securitizations is overly complex and conservative and will limit
the benefits of this important activity.
- Credit Card Treatment – We are
concerned that the proposed treatment for undrawn credit card lines
does not account for the uncommitted, cancelable nature of these
exposures and will inflate capital requirements. Separately, we are
pleased that the definition for default for credit cards and other
retail exposures has been revised from that listed in CP3.
- Home/Host Issues – Greater clarity
is needed to define how the requirements of ‘Home’ regulators will
impact banking subsidiaries in ‘Host’ jurisdictions and vice versa,
especially where different approaches are permitted to quantify
credit and operational risk. We would hope that regulatory
agreements could be reached that would eliminate the need to
calculate capital ratios using two different approaches for banks
operating in Host countries.
- Benefits of Diversification –
Business line diversification is, in itself, a significant risk
mitigant for internationally active banks. However, none of the
proposed approaches contain provisions that recognize the benefits
of diversification and its impact on the safety and soundness of the
organization. We think the value of diversification should be
quantified by applying a factor (high, medium, low) at the total
bank level to adjust the capital requirement according to a bank’s
overall business mix.
- Capital Coverage of Expected Losses
- We applaud the recent decision to exclude expected losses from the
capital calculation as it will more closely align regulatory capital
with the industry standards used for economic capital.
- Conservatism – The combined effect
of the conservative treatment for determining many of the risk
parameters - - e.g. high default period LGDs, the 10% LGD floor for
residential mortgages, fixed formula asset value correlations, PD
floors - - is likely to produce minimum capital requirements well in
excess of economic capital calculations.
- CRA Investments – If the 10%
materiality test for equity investments is adopted as proposed,
banks may choose to limit their CRA investment activity to avoid
triggering higher capital charges. We recommend that qualifying CRA
investments be excluded from the materiality test and continue to be
treated as they are currently.
While we are grateful for the willingness
of the Agencies to consider revisions to the proposed regulation, we
also suggest that a comment period, followed by formal amendments, be
made available each year leading up to the implementation date. This
would provide an opportunity to address issues as they come up during
preparation that may not be evident today.
We would be happy to discuss our views on
these or other matters in greater detail. Please address your comments
to John Roesgen, SVP Risk Management (716) 841-4123 or to the
undersigned.
Sincerely,
Robert M. Butcher
Senior Executive Vice President and Chief Risk Officer
HSBC Bank USA, New York, NY
CC: Martin Glynn, CEO HUSI
Jim Gunner, Senior Executive HGHQ
John Roesgen, SVP HUSI
Sarah Dahlgren, SVP Federal Reserve Bank of NY
AJ Badyal, Supervising Bank Examiner, Federal Reserve Bank of NY
Manzar Atabaki, Assistant Deputy Superintendent, State of New York
Banking Dept
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