Risk-Based Capital Standards: Advanced Capital Adequacy

499 Pages·2006·1.23 MB·English

by  Inter Agency

DEPARTMENT OF THE TREASURY pub 9/25/06
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 06-09]
RIN 1557-AC91

FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1261

FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC73

DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 566
RIN 1550-AB56

Risk-Based Capital Standards: Advanced Capital Adequacy Framework
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors
of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of
Thrift Supervision, Treasury.
ACTION: Joint notice of proposed rulemaking.
SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board of
Governors of the Federal Reserve System (Board), the Federal Deposit Insurance
Corporation (FDIC), and the Office of Thrift Supervision (OTS) (collectively, the
agencies) are proposing a new risk-based capital adequacy framework that would require
some and permit other qualifying banks1 to use an internal ratings-based approach to
calculate regulatory credit risk capital requirements and advanced measurement
approaches to calculate regulatory operational risk capital requirements. The proposed

1 For simplicity, and unless otherwise indicated, this notice of proposed rulemaking (NPR) uses the term
“bank” to include banks, savings associations, and bank holding companies (BHCs). The terms “bank
holding company” and “BHC” refer only to bank holding companies regulated by the Board and do not
include savings and loan holding companies regulated by the OTS.
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rule describes the qualifying criteria for banks required or seeking to operate under the
proposed framework and the applicable risk-based capital requirements for banks that
operate under the framework.
DATES: Comments must be received on or before [INSERT DATE 120 DAYS AFTER
PUBLICATION IN THE FEDERAL REGISTER].
ADDRESSES: Comments should be directed to:
OCC: You should include OCC and Docket Number 06-09 in your comment.
You may submit comments by any of the following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
• OCC Web Site: http://www.occ.treas.gov. Click on "Contact the OCC," scroll
down and click on "Comments on Proposed Regulations."
• E-mail address: [email protected].
• Fax: [phone].
• Mail: Office of the Comptroller of the Currency, 250 E Street, SW, Mail Stop 1-
5, Washington, DC 20219.
• Hand Delivery/Courier: 250 E Street, SW, Attn: Public Information Room,
Mail Stop 1-5, Washington, DC 20219.
Instructions: All submissions received must include the agency name (OCC) and
docket number or Regulatory Information Number (RIN) for this notice of proposed
rulemaking. In general, OCC will enter all comments received into the docket without
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change, including any business or personal information that you provide. You may
review comments and other related materials by any of the following methods:
• Viewing Comments Personally: You may personally inspect and photocopy
comments at the OCC's Public Information Room, 250 E Street, SW, Washington, DC.
You can make an appointment to inspect comments by calling [phone].
Board: You may submit comments, identified by Docket No. R-1261, by any of
the following methods:
• Agency Web Site: http://www.federalreserve.gov. Follow the instructions for
submitting comments at
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions
for submitting comments.
• E-mail: [email protected]. Include docket number in the
subject line of the message.
• FAX: [phone] or 202/452-3102.
• Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, NW, Washington, DC 20551.
All public comments are available from the Board’s web site at
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless
modified for technical reasons. Accordingly, your comments will not be edited to
remove any identifying or contact information. Public comments may also be viewed
electronically or in paper in Room MP-500 of the Board’s Martin Building (20th and C
Streets, NW) between 9:00 a.m. and 5:00 p.m. on weekdays.
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FDIC: You may submit comments, identified by RIN number, by any of the
following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions
for submitting comments.
• Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html.
• Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, D.C. 20429.
• Hand Delivery/Courier: Guard station at rear of the 550 17th Street Building
(located on F Street) on business days between 7:00 a.m. and 5:00 p.m.
• E-mail: [email protected].
• Public Inspection: Comments may be inspected at the FDIC Public Information
Center, Room E-1002, 3502 Fiarfax Drive, Arlington, VA, 22226, between 9 a.m. and
5:00 p.m. on business days.
Instructions: Submissions received must include the agency name and RIN for
this rulemaking. Comments received will be posted without change to
http://www.fdic.gov/regulations/laws/federal/propose.html including any personal
information provided.
OTS: You may submit comments, identified by No. 2006-33, by any of the
following methods:
• Federal eRulemaking Portal: http://www.regulations.gov. Follow the
instructions for submitting comments.
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• E-mail address: [email protected]. Please include No. 2006-33 in
the subject line of the message and include your name and telephone number in the
message.
• Fax: [phone].
• Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW, Washington, DC 20552, Attention: No. 2006-33.
• Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street,
NW, from 9:00 a.m. to 4:00 p.m. on business days, Attention: Regulation Comments,
Chief Counsel’s Office, Attention: No. 2006-33.
Instructions: All submissions received must include the agency name and docket
number or Regulatory Information Number (RIN) for this rulemaking. All comments
received will be posted without change to the OTS Internet Site at
http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any personal
information provided.
Docket: For access to the docket to read background documents or comments
received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1.
In addition, you may inspect comments at the Public Reading Room, 1700 G Street, NW,
by appointment. To make an appointment for access, call [phone], send an e-mail
to [email protected], or send a facsimile transmission to [phone]. (Prior
notice identifying the materials you will be requesting will assist us in serving you.) We
schedule appointments on business days between 10:00 a.m. and 4:00 p.m. In most
cases, appointments will be available the next business day following the date we receive
a request.
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FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic Advisor, Capital Policy (202-874-4925) or
Ron Shimabukuro, Special Counsel, Legislative and Regulatory Activities Division (202-
874-5090). Office of the Comptroller of the Currency, 250 E Street, SW, Washington,
DC 20219.
Board: Barbara Bouchard, Deputy Associate Director (202-452-3072 or
[email protected]) or Anna Lee Hewko, Senior Supervisory Financial Analyst
(202-530-6260 or [email protected]), Division of Banking Supervision and
Regulation; or Mark E. Van Der Weide, Senior Counsel (202-452-2263 or
[email protected]), Legal Division. For users of Telecommunications Device
for the Deaf (“TDD”) only, contact 202-263-4869.
FDIC: Jason C. Cave, Associate Director, Capital Markets Branch, (202) 898-
3548, Bobby R. Bean, Senior Quantitative Risk Analyst, Capital Markets Branch, (202)
898-3575, Kenton Fox, Senior Capital Markets Specialist, Capital Markets Branch, (202)
898-7119, Division of Supervision and Consumer Protection; or Michael B. Phillips,
Counsel, [phone], Supervision and Legislation Branch, Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429.
OTS: Michael D. Solomon, Director, Capital Policy, Supervision Policy (202)
906-5654; David W. Riley, Senior Analyst, Capital Policy [phone]; or Karen
Osterloh, Special Counsel, Regulations and Legislation Division [phone], Office
of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
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I. Introduction

A. Background

B. Conceptual Overview
1. The IRB framework for credit risk
2. The AMA for operational risk

C. Overview of Proposed Rule

D. Structure of Proposed Rule

E. Quantitative Impact Study 4 and Overall Capital Objectives
1. Quantitative Impact Study 4
2. Overall capital objectives

F. Competitive Considerations

II. Scope

A. Core and Opt-In Banks
B. U.S. Depository Institution Subsidiaries of Foreign Banks
C. Reservation of Authority

III. Qualification

A. The Qualification Process
1. In general
2. Parallel run and transitional floor periods

B. Qualification Requirements
1. Process and systems requirements
2. Risk rating and segmentation systems for wholesale and retail exposures
Wholesale exposures
Retail exposures
Definition of default
Rating philosophy
Rating and segmentation reviews and updates
3. Quantification of risk parameters for wholesale and retail exposures
Probability of default (PD)
Loss given default (LGD) and expected loss given default (ELGD)
Exposure at default (EAD)
General quantification principles
4. Optional approaches that require prior supervisory approval
5. Operational risk
Operational risk data and assessment system
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Operational risk quantification system `
6. Data management and maintenance
7. Control and oversight mechanisms
Validation
Internal audit
Stress testing
8. Documentation

C. Ongoing Qualification

IV. Calculation of Tier 1 Capital and Total Qualifying Capital

V. Calculation of Risk-Weighted Assets

A. Categorization of Exposures
1. Wholesale exposures
2. Retail exposures
3. Securitization exposures
4. Equity exposures
5. Boundary between operational risk and other risks
6. Boundary between the proposed rule and the market risk amendment

B. Risk-Weighted Assets for General Credit Risk (Wholesale Exposures, Retail
Exposures, On-Balance Sheet Assets that are not Defined by Exposure Category,
and Immaterial Credit Exposures)
1. Phase 1 – Categorization of exposures
2. Phase 2 – Assignment of wholesale obligors and exposures to rating grades
and retail exposures to segments
Purchased wholesale receivables
Wholesale lease residuals
3. Phase 3 – Assignment of risk parameters to wholesale obligors and exposures
and retail segments
4. Phase 4 – Calculation of risk-weighted assets
5. Statutory provisions on the regulatory capital treatment of certain mortgage
loans

C. Credit Risk Mitigation Techniques
1. Collateral
2. EAD for counterparty credit risk
EAD for repo-style transactions and eligible margin loans
Collateral haircut approach
Standard supervisory haircuts
Own estimates of haircuts
Simple VaR methodology
3. EAD for OTC derivative contracts
Current exposure methodology
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4. Internal models methodology
Maturity under the internal models methodology
Collateral agreements under the internal models methodology
Internal estimate of alpha
Alternative models
5. Guarantees and credit derivatives that cover wholesale exposures
Eligible guarantees and eligible credit derivatives
PD substitution approach
LGD adjustment approach
Maturity mismatch haircut
Restructuring haircut
Currency mismatch haircut
Example
Multiple credit risk mitigants
Double default treatment
6. Guarantees and credit derivatives that cover retail exposures

D. Unsettled Securities, Foreign Exchange, and Commodity Transactions

E. Securitization Exposures
1. Hierarchy of approaches
Exceptions to the general hierarchy of approaches
Servicer cash advances
Amount of a securitization exposure
Implicit support
Operational requirements for traditional securitizations
Clean-up calls
2. Ratings-based approach (RBA)
3. Internal assessment approach (IAA)
4. Supervisory formula approach (SFA)
General requirements
Inputs to the SFA formula
5. Eligible disruption liquidity facilities
6. Credit risk mitigation for securitization exposures
7. Synthetic securitizations
Background
Operational requirements for synthetic securitizations
First-loss tranches
Mezzanine tranches
Super-senior tranches
8. Nth-to-default credit derivatives
9. Early amortization provisions
Background
Controlled early amortization
Noncontrolled early amortization

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F. Equity Exposures
1. Introduction and exposure measurement
Hedge transactions
Measures of hedge effectiveness
2. Simple risk-weight approach (SRWA)
Non-significant equity exposures
3. Internal models approach (IMA)
IMA qualification
Risk-weighted assets under the IMA
4. Equity exposures to investment funds
Full look-through approach
Simple modified look-through approach
Alternative modified look-through approach

VI. Operational Risk

VII. Disclosure
1. Overview
Comments on ANPR
2. General requirements
Frequency/timeliness
Location of disclosures and audit/certification requirements
Proprietary and confidential information
3. Summary of specific public disclosure requirements
4. Regulatory reporting

I. Introduction
A. Background
On August 4, 2003, the agencies issued an advance notice of proposed rulemaking
(ANPR) (68 FR 45900) that sought public comment on a new risk-based regulatory
capital framework based on the Basel Committee on Banking Supervision (BCBS)2 April
2003 consultative paper entitled “The New Basel Capital Accord” (Proposed New
Accord). The Proposed New Accord set forth a “three pillar” framework encompassing
risk-based capital requirements for credit risk, market risk, and operational risk (Pillar 1);

2 The BCBS is a committee of banking supervisory authorities, which was established by the central bank
governors of the G-10 countries in 1975. It consists of senior representatives of bank supervisory
authorities and central banks from Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the
Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
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