WASHINGTON — The Federal Reserve on Thursday approved Bank of America's model for assessing its risk-based capital requirements under Basel III's so-called "advanced approaches" process, making it the final U.S.-based global systemically important bank to have its own model approved.
The central bank said that Bank of America and its subsidiaries have completed "parallel runs" of its advanced approach and the Fed's model and the regulator found the results to be satisfactory. Banks that have approved advanced approaches models can use their model to calculate their risk-based capital ratios instead of the Fed's model in its quarterly assessments.
Under Basel III, certain large banking companies - those with more than $250 billion in assets or $10 billion in overseas exposures - can use a more complex system than other institutions to calculate their risk-based capital, utilizing the bank's own internal modeling. But regulators must be satisfied that a bank's internal process is sufficient before it can use the advanced framework.
For the bank to gain approval, the regulators' process and the bank's process are compared side-by-side for four consecutive quarters to observe whether there are any major discrepancies. Wells just completed its so-called "parallel run," culminating in the agencies' approval.
Bank of America joins nine other banks that have had their advanced approaches models approved, and is the final G-SIB to gain approval. The other banks are Wells Fargo, Citigroup, Goldman Sachs, JPMorgan Chase, Bank of New York Mellon, Morgan Stanley, Northern Trust, U.S. Bancorp and State Street.
The Fed in July proposed a handful of changes to its CCAR stress test regime, among them delaying the applicability of advanced approaches risk based capital models for the stress test review. The banks themselves said that it would be challenging to run both the Fed's model and their own models, and so the Fed is considering allowing banks to just run the standardized model for the time being until it has more time to examine whether it is appropriate to allow banks to rely on their individualized models.