Preparing for basel II implementation, U.S. regulators are releasing guidance for internal risk-rating systems by midyear. (Capital Requirements).

U.S. banking regulators hope by the middle of 2003 to provide interagency guidance on which systems and procedures banks must develop to comply with the most advanced approaches put forth in Basel II. In September 1999, the Federal Reserve Board issued SR 99-18 for Large Complex Banking Organizations, outlining examiner expectations for such institutions in light of Basel's expected use of internal risk-rating systems to help establish bank capital standards.

The industry has long awaited additional guidance. The proposal expected at the close of this year will address large corporate and middle-market exposures only. Separate guidance laying out expectations for retail portfolios will be issued in 2004.

Why has it taken so long to develop guidance for internal risk-rating systems? Over the past two years, extensive discussions have taken place with the industry as regulators …