BankNotes ...

Press Conference Follows Two Weeks of Meetings and Discussions With Banking and Government Leaders in China

BEIJING, CHINA -- FDIC Chairman Sheila C. Bair held a press conference to discuss a memorandum of understanding (MOU) signed today by the FDIC and the People's Bank of China (PBC). The MOU is designed to forge a formal international working relationship between the two entities, with the purpose of developing expanded methods of interaction on economic and financial issues. The Chairman also discussed her experiences in China after meeting with Chinese financial and political leaders over the past two weeks, including stops in Beijing, Shanghai and the Hunan and Shanxi provinces.
Chairman Bair said: "I'm very pleased and honored to support the work of the PBC and the China Bank Regulatory Commission (CBRC), which have taken the lead in establishing a deposit insurance system in China. The MOU is a very positive and important step toward making a deposit insurance system in China a reality. The FDIC has a proud history of protecting the savings of Americans, while serving an important regulatory function involving more than 5,200 banks. The work of the Chinese to create a deposit insurer is critical for China's continued progress in building the financial infrastructure necessary to sustain economic growth, particularly in rural areas where community-based lending and banking relationships are so critically important.
"The PBC and the FDIC also share many other related areas of common interest, including those of economic inclusion, small-dollar financing and financial literacy. On many fronts, these important issues can be successfully addressed through an established banking sector that includes a deposit insurance system.
"I would also like to note our important discussions with the CBRC, which has made great strides in the supervision of China's banking industry. Our meetings with the Ministry of Finance also provided useful perspectives on China's developing banking sector and the role of deposit insurance.
"Touching on safety and soundness issues, consumer protection, international financial stress and other regulatory issues, our meetings were a productive exchange of common interests and experiences. Given the pace of globalization and the continuing integration of our respective financial systems, we also discussed the importance of preparing for the eventuality of one or more troubled institutions operating in both jurisdictions simultaneously.
"I would like to thank our Chinese hosts, particularly the officials at the People's Bank of China, for accommodating the delegation from the FDIC.
"In addition to the generous hospitality, I deeply appreciate the honest and open dialogue that has been possible throughout our meetings here in China. It is clear that we have much to learn from each other in a number of economic and financial areas. For example, in a discussion on savings, it became clear to me that one of the reasons for the high savings rate among the Chinese is the cultural upbringing of taking responsibility for the education and improved lives of their children. As many American strive to save more and borrow less, we should also be motivated by the betterment and security of our future generations.
"In addition to the MOU, I would like to continue discussions in the area of rural finance in China. I believe there are opportunities that can greatly benefit both countries.
"I look forward to continuing these exchanges and fostering the healthy relationship we have forged between the U.S. and Chinese financial policy officials."

WASHINGTON, D.C. -- FDIC Chairman Sheila C. Bair today commented on an agreement in principle that has been reached between The Federal Reserve, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation regarding the implementation of Basel II in the United States. The agreement resolves major outstanding issues and will now lead to finalization of a rule implementing the advanced approaches for computing large banks' risk-based capital requirements.

The agencies have agreed that rules implementing the advanced approach should be finalized expeditiously, and should be technically consistent in most respects with international approaches. The agreement retains the Notice of Proposed Rulemaking's (NPR) transitional floor periods. After the parallel run in 2008, those transitional floors provide for maximum cumulative reductions of 5 percent during the first year of implementation, 10 percent in the second year, and 15 percent in the third year.

After the end of the second transition year period, the agencies will publish a study that evaluates the new framework to determine if there are any material deficiencies. If the study finds there are such material deficiencies that cannot be addressed by existing tools, banks will not be permitted to exit the third transitional period unless the deficiencies are first addressed by changes to the regulation. However, if a primary supervisor disagrees with a finding of material deficiency, it may authorize banks it supervises to exit the third transitional period, but only if it first provides a public report explaining its reasoning.

The agencies also have agreed to eliminate language in the NPR concerning a 10 percent limitation on aggregate reductions in risk-based capital requirements.

The agencies believe the annual review process by which they will assess the performance of the new rules is consistent with recommendations of the U.S. Government Accountability Office and provides a structured and prudent framework for managing the implementation of Basel II in the United States.

The agencies also agreed to proceed promptly to issue a proposed rule that would provide all non-core banks with the option to adopt a standardized approach under the Basel II Accord. This would replace the earlier proposed rule to adopt the "Basel IA" option. The agencies intend that the proposed standardized option would be finalized before the core banks begin the first transition period year under the advanced approaches of Basel II.

The agencies also re-affirmed their commitment to strive to achieve consensus throughout implementation.

FDIC Chairman Bair said, "This is an important consensus agreement that provides a framework for U.S. banks to move forward expeditiously with the Basel II advanced approach. At the same time, it will ensure that adequate capital is maintained by our banks during the necessary period of transition and review appropriate for rules that will have such a significant impact on the capital standards of our banks. Today, our banks are strong and profitable. This agreement assures that safeguards are in place to ensure the future health and stability of our financial system. We all want the advanced approaches to work in producing a more risk sensitive framework which maintains strong levels of capital to protect the safety net. But many questions remain about the framework, and this agreement will help assure that we will be able to fix any problems before capital levels are allowed to drop precipitously.

"Clearly, this is a process that required significant thought and deliberation among the regulators. I want to thank Chairman Bernanke for his personal involvement and thoughtful insight and leadership that enabled the agencies to coalesce around this agreement. I also wish to thank Treasury Secretary Paulson for encouraging the process and providing support for this compromise. The result of this announcement is a balanced approach to the many dimensions of this complex issue."