[Federal Register: December 30, 1997 (Volume 62, Number 249)]
[Rules and Regulations]
[Page 68063-68069]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30de97-31]
[[Page 68063]]
_______________________________________________________________________
Part V
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Federal Reserve System
12 CFR Parts 208 and 225
Federal Deposit Insurance Corporation
12 CFR Part 325
_______________________________________________________________________
Risk-Based Capital Standards: Market Risk; Interim Rule
[[Page 68064]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 97-25]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0996]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC14
Risk-Based Capital Standards: Market Risk
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; and Federal Deposit Insurance
Corporation.
ACTION: Joint interim rule with request for comment.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the Agencies) are
amending their respective risk-based capital standards for market risk
applicable to certain banks and bank holding companies with significant
trading activities. The amendment eliminates the requirement that when
an institution measures specific risk using its internal model, the
total capital charge for specific risk must equal at least 50 percent
of the standard specific risk capital charge. The amendment implements
a revision to the Basle Accord that permits such treatment for an
institution whose internal model adequately measures specific risk. The
rule will reduce regulatory burden for institutions with qualifying
internal models because they will no longer be required to calculate a
standard specific risk capital charge.
DATES: This interim rule is effective December 31, 1997. Comments must
be received by March 2, 1998.
ADDRESSES: Comments should be directed to:
OCC: Comments may be submitted to Docket No. 97-25, Communications
Division, Third Floor, Office of the Comptroller of the Currency, 250 E
Street, S.W., Washington DC 20219. Comments will be available for
inspection and photocopying at that address. In addition, comments may
be sent by facsimile transmission to FAX number (202) 874-5274, or by
electronic mail to regs.comment@occ.treas.gov.
Board: Comments directed to the Board should refer to Docket No. R-
0996 and may be mailed to Mr. William W. Wiles, Secretary, Board of
Governors of the Federal Reserve System, 20th Street and Constitution
Avenue, N.W., Washington DC 20551. Comments addressed to the attention
of Mr. Wiles may also be delivered to Room B-2222 of the Eccles
Building between 8:45 a.m. and 5:15 p.m. weekdays, or the security
control room in the Eccles Building courtyard on 20th Street, N.W.
(between Constitution Avenue and C Street) at any time. Comments may be
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's
Rules Regarding Availability of Information.
FDIC: Send written comments to Robert E. Feldman, Executive
Secretary, Attention: Comments/OES, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, DC 20429. Comments may
be hand-delivered to the guard station at the rear of the 17th Street
Building (located on F Street), on business days between 7:00 a.m. and
5:00 p.m. (FAX number (202) 898-3838; Internet address:
comments@fdic.gov). Comments may be inspected and photocopied in the
FDIC Public Information Center, Room 100, 801 17th Street, N.W.,
Washington, DC 20429, between 9:00 a.m. and 4:30 p.m. on business days.
FOR FURTHER INFORMATION CONTACT:
OCC: Roger Tufts, Senior Economic Advisor (202/874-5070), Capital
Policy Division; Margot Schwadron, Financial Analyst (202/874-5670),
Treasury and Market Risk; or Ronald Shimabukuro, Senior Attorney (202/
874-5090), Legislative and Regulatory Activities Division.
Board: Roger Cole, Associate Director (202/452-2618), James Houpt,
Deputy Associate Director (202/452-3358), Barbara Bouchard, Senior
Supervisory Financial Analyst (202/452-3072), Division of Banking
Supervision; or Stephanie Martin, Senior Attorney (202/452-3198), Legal
Division. For the hearing impaired only, Telecommunication Device for
the Deaf (TDD), Diane Jenkins (202/452-3544).
FDIC: William A. Stark, Assistant Director (202/898-6972), Miguel
Browne, Manager (202/898-6789), John J. Feid, Chief (202/898-8649),
Division of Supervision; Jamey Basham, Counsel (202/898-7265), Legal
Division, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,
Washington DC 20429.
SUPPLEMENTARY INFORMATION:
Background
The Agencies' risk-based capital standards are based upon
principles contained in the July 1988 agreement entitled
``International Convergence of Capital Measurement and Capital
Standards'' (Accord). The Accord, developed by the Basle Committee on
Banking Supervision (Committee) and endorsed by the central bank
governors of the Group of Ten (G-10) countries (G-10 Governors),
provides a framework for assessing an institution's capital adequacy by
weighting its assets and off-balance-sheet exposures on the basis of
counterparty credit risk.\1\ In December 1995, the G-10 Governors
endorsed the Committee's amendment to the Accord (effective by year-end
1997) to incorporate a measure for exposure to market risk into the
capital adequacy assessment. On September 6, 1996, the Agencies issued
revisions to their risk-based capital standards implementing the
Committee's market risk amendment (61 FR 47358).
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\1\ The G-10 countries are Belgium, Canada, France, Germany,
Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States. The Committee is comprised of representatives
of the central banks and supervisory authorities from the G-10
countries and Luxembourg.
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Under the Agencies' market risk rules, banks and bank holding
companies (institutions) with significant trading activities must
measure and hold capital for exposure to general market risk arising
from fluctuations in interest rates, equity prices, foreign exchange
rates, and commodity prices and exposure to specific risk associated
with debt and equity positions in the trading portfolio. General market
risk refers to changes in the market value of on-balance-sheet assets
and off-balance-sheet items resulting from broad market movements.
Specific risk refers to changes in the market value of individual
positions due to factors other than broad market movements and includes
such risks as the credit risk of an instrument's issuer.
Under the Agencies' current rules, an institution must measure its
general market risk using its internal risk measurement model, subject
to certain qualitative and quantitative criteria, to calculate a value-
at-risk (VAR) based capital charge.\2\ An institution may
[[Page 68065]]
measure its specific risk through a valid internal model or by the so-
called standardized approach. The standardized approach uses a risk-
weighting process developed by the Committee that is applied to
individual instruments and through which debt and equity positions in
the institution's trading account are assessed a category-based fixed
capital charge. However, the Agencies' current rules provide that an
institution using an internal model to measure specific risk must hold
capital for specific risk at least equal to 50 percent of the specific
risk charge calculated using the standardized approach (referred to as
the minimum specific risk charge). If the portion of the institution's
VAR which is attributable to specific risk does not equal the minimum
specific risk charge, the institution's VAR-based capital charge is
subject to an add-on charge for the difference. The sum of these
capital charges is factored into an institution's risk-based capital
ratio.
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\2\ The VAR-based capital charge is the higher of (i) the
previous day's VAR measure, or (ii) the average of the daily VAR
measures for each of the preceding 60 business days multiplied by a
factor of three. Beginning no later than one year after adopting the
market risk rules, an institution is required to backtest its
internal model. An institution may be required to apply a higher
multiplication factor, up to a factor of four, based on backtesting
results.
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When the Agencies included the minimum specific risk charge as part
of the market risk rules, the Agencies recognized that dual
calculations of specific risk--that is, calculating specific risk in
the internal model as well as using the standardized approach to
establish the minimum specific risk charge--would be burdensome.
However, the Agencies' decision to include the minimum specific risk
charge was consistent with the Committee's conviction, at the time the
Committee adopted its market risk amendment, that a floor was necessary
to ensure that modeling techniques for specific risk adequately
measured that risk.
Since the Committee adopted the market risk amendment, many
institutions have significantly improved their modeling techniques and,
in particular, their modeling of specific risk. In September 1997 the
Committee determined that sufficient progress had been made to
eliminate the use of the minimum specific risk charge and the burden of
a separate calculation. Accordingly, the Committee revised the market
risk amendment to the Accord so that an institution using a valid
internal model to measure specific risk may use the VAR measures
generated by the model without being required to compare the model-
generated results to the minimum specific risk charge as calculated
under the standardized approach.\3\ The revisions specify that the
specific risk elements of internal models will be assessed consistently
with the assessment of the general market risk elements of such models
through review by the relevant supervisor and backtesting.
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\3\ The revisions are described in the Committee's document
entitled ``Explanatory Note: Modification of the Basle Capital
Accord of July 1988, as Amended January 1996'' and is available
through the Board's and the OCC's Freedom of Information Office and
the FDIC's Public Information Center.
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To implement this revision to the market risk amendment, the
Agencies are issuing an interim rule with a request for comment. As
discussed in the section entitled ``Interim Effectiveness of the
Rule,'' the Agencies have found that good cause necessitates making the
amendments herein effective immediately, without opportunity for public
comment or a delayed effective date. Effectiveness of the amendments
herein is on an interim basis, until the Agencies issue a final rule,
following public comment on this interim rule, in accordance with the
procedures specified in section 553 of the Administrative Procedure
Act, 5 U.S.C. 553. The interim rule applies only to the calculation of
specific risk under the market risk rules. All other aspects of the
market risk rules remain unchanged.
Description of the Interim Rule
An institution whose internal model does not adequately measure
specific risk must continue to calculate the standard specific risk
capital charge and add that charge to its VAR-based capital charge to
produce its total regulatory capital requirement for market risk. An
institution whose internal model adequately captures specific risk may
base its specific risk capital charge on the model's estimates.
The Agencies will review an institution's internal model to ensure
that the model adequately measures specific risk. In order to clarify
the risks that must be assessed in this regard, the rule contains a new
definition that states that specific risk means the changes in market
value of specific positions due to factors other than broad market
movements, including such risks as idiosyncratic variation as well as
event and default risk. In order to adequately capture specific risk,
an institution's internal model must explain the historical price
variation in the portfolio and be sensitive to changes in portfolio
concentrations (both magnitude and changes in composition), requiring
additional capital for greater concentrations. The Agencies will also
take into account whether an internal model is robust to an adverse
environment. The model's ability to capture specific risk must be
validated through backtesting aimed at assessing whether specific risk
is adequately captured. In addition, the institution must be able to
demonstrate that its methodologies adequately capture event and default
risk. An institution that has been able to demonstrate to its
supervisor that its internal model adequately captures specific risk
consistent with the preceding discussion may use its VAR-based capital
charge as its measure for market risk. Such an institution will have no
specific risk add-on.
An institution whose model addresses idiosyncratic risk but does
not adequately capture event and default risk will continue to have a
specific risk add-on. The specific risk add-on for such an institution
may be calculated using either one of two approaches, both of which
have the effect of subjecting the modeled specific risk elements of the
institution's internal risk model to a multiplier of four.\4\
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\4\ The multiplier applicable to the modeled general market risk
elements will not be affected. Thus, the multiplier for general
market risk will continue to be three, unless a higher multiplier is
indicated by virtue of the institution's backtesting results for
general market risk, or unless no multiplier is applied because the
previous day's VAR for general market risk is higher than the 60-day
average times the multiplier.
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Under the first approach, an institution's internal model must be
able to separate its VAR measure into general market risk and specific
risk components. The institution's measure for market risk would equal
the sum of the total VAR-based capital charge (typically three times
the internal model's general and specific risk measure), plus an add-on
consisting of the isolated specific risk component of the VAR measure.
Alternatively, an institution whose internal model does not separately
identify the specific and general market risk of its VAR measure, may
use as its measure for market risk the sum of the total VAR-based
capital charge, plus an add-on consisting of the VAR measure(s) of the
subportfolios of debt and equity positions that contain specific risk.
An institution using this approach normally would identify its sub-
portfolio structures prior to calculating market risk capital charges
and may not alter those sub-portfolio structures without supervisory
consultation.
An institution using its internal model for specific risk capital
purposes must backtest its internal model to assess whether observed
price variation arising from both general market risk and specific risk
are accurately
[[Page 68066]]
explained by the model. To assist in model validation, the institution
should perform backtests on subportfolios containing specific risk,
i.e., traded debt and equity positions. The institution should conduct
these backtests with the understanding that subportfolio backtesting is
a productive mechanism for assuring that instruments with higher levels
of specific risk, especially event or default risk, are being
accurately modeled. If backtests of subportfolios reflect an
unacceptable internal model, especially for unexplained price variation
that may be arising from specific risk, the institution should take
immediate action to improve the internal model and ensure that it has
sufficient capital to protect against associated risks.
The Agencies, based on information available to them, presently
feel that the industry is making significant progress in developing
methodologies for modeling specific risk, although progress relating to
measurement of event and default risk lags somewhat. The Agencies'
consultation over the past two years with other national supervisors on
the Committee has supported this view. The Agencies expect institutions
to continue improving their internal models and particularly to make
substantial progress in measuring event and default risk for traded
debt and equity instruments. The Agencies intend to work with the
industry in these efforts and believe that, over time, market standards
for measuring event and default risk will emerge. As individual
modeling methodologies are improved and become accepted within the
industry as effective measurement techniques for event and default
risk, the Agencies will consider permitting all internal models based
on that methodology to be applied without any add-on charge. The Basle
Supervisors Committee may issue general guidance for capturing event
and default risk for trading book instruments. Until such time as
standards for measuring event and default risk are established within
the industry, the Agencies intend to cooperate with each other and
communicate extensively with other international supervisors to ensure
that the market risk capital requirements are implemented in an
appropriate and consistent manner.
The Agencies request comment on all aspects of these amendments to
their market risk rules.
Interim Effectiveness of the Rule
The Agencies' amendments to their market risk rules are effective
on December 31, 1997, but only on an interim basis during the Agencies'
full notice and comment rulemaking process. Section 553 of the
Administrative Procedure Act permits the Agencies to issue a rule
without public notice and comment when the agency, for good cause,
finds (and incorporates the finding and a brief statement of reasons
therefore in the rules issued) that notice and public procedure thereon
are impracticable, unnecessary, or contrary to the public interest. 5
U.S.C. 553(b)(B). Section 553 also permits the Agencies to issue a rule
without delaying its effectiveness for thirty days from the publication
if the agency finds good cause and publishes it with the rule. 5 U.S.C.
553(d)(3). In addition, section 302 of the Riegle Community Development
and Regulatory Improvement Act of 1994, 12 U.S.C. 4802(b), permits the
Agencies to issue a regulation which takes effect before the first day
of a calendar quarter beginning on or after the date on which the
regulations are published in final form when the agency determines for
good cause published with the regulation that the regulation should
become effective before such time. The Agencies have found that good
cause exists, for several reasons.
First, the amendments are extremely limited in scope. The number of
institutions subject to the Agencies' market risk rules, and
consequently to the amendments, is very small, in both absolute and
relative terms. The amendments will serve only to reduce regulatory
burden, by eliminating the need for institutions that model specific
risk to make dual calculations under the standardized approach in order
to determine their minimum specific risk charge. Such calculations,
while not necessarily difficult from an analytical standpoint, are a
voluminous and detailed operation to execute.
Second, immediate effectiveness of the amendments is necessary. The
market risk rules become mandatory for certain institutions in January
of 1998, and the Agencies will not be able to complete the full
rulemaking process by that time. Institutions covered by the market
risk rule that model specific risk would be needlessly forced to commit
significant internal resources to implement the dual calculation
approach potentially on a temporary basis. Contrary to the public
interest, they could also be placed at a competitive disadvantage vis a
vis their competitors (internationally-active banks in other G-10
countries) who, because of the recent G-10 Governors' endorsement of
the Committee's new approach, will not be subject to any dual
calculation requirement.
Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the Regulatory Flexibility Act, the
Agencies have determined that this interim final rule would not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). The Agencies' comparison of the applicability section of the
rule to which these amendments pertain to Consolidated Reports of
Condition and Income (Call Report) data on all existing institutions
shows that the rule will rarely, if ever, apply to small entities.
Accordingly, a regulatory flexibility analysis is not required.
Paperwork Reduction Act
The Agencies have determined that the interim final rule does not
involve a collection of information pursuant to the provisions of the
Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
OCC Executive Order 12866 Determination
The OCC has determined that the interim final rule does not
constitute a ``significant regulatory action'' for the purpose of
Executive Order 12866.
OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this interim rule eliminates the minimum specific risk charge for
institutions that use internal models that adequately capture specific
risk. The effect of this rule is to reduce regulatory burden by no
longer requiring institutions to make dual calculations under both the
institution's internal model and the standardized specific risk model.
The OCC therefore has determined that the effect of the interim rule on
national banks as a whole will not result in expenditures by State,
local, or tribal governments or by the private sector of $100 million
or more. Accordingly, the OCC has not prepared a budgetary impact
statement or specifically
[[Page 68067]]
addressed the regulatory alternatives considered.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Bank deposit insurance, Banks, banking, Capital adequacy, Reporting
and recordkeeping requirements, Savings associations, State non-member
banks.
Authority and Issuance
Office of the Comptroller of the Currency
12 CFR Chapter I
For the reasons set out in the joint preamble, part 3 of chapter I
of title 12 of the Code of Federal Regulations is amended as set forth
below:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
2. Section 2 of Appendix B to part 3 is amended by revising
paragraph (b)(2) to read as follows:
Appendix B To Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and
includes default and event risk as well as idiosyncratic variations.
* * * * *
3. Section 5 of appendix B to part 3 is amended by revising
paragraphs (a) and (b) to read as follows:
* * * * *
Section 5. Specific Risk
(a) Specific risk surcharge. For purposes of section 3(a)(2)(ii)
of this appendix, a bank shall calculate its specific risk surcharge
as follows:
(1) Internal models that incorporate specific risk. (i) No
specific risk surcharge required for qualifying internal models. A
bank that incorporates specific risk in its internal model has no
specific risk surcharge for purposes of section 3(a)(2)(ii) of this
appendix if the bank demonstrates to the OCC that its internal model
adequately measures all aspects of specific risk, including default
and event risk, of covered debt and equity positions. In evaluating
a bank's internal model the OCC will take into account the extent to
which the internal model:
(A) Explains the historical price variation in the trading
portfolio; and
(B) Captures concentrations.
(ii) Specific risk surcharge for modeled specific risk that
fails to adequately measure default or event risk. A bank that
incorporates specific risk in its internal model but fails to
demonstrate that its internal model adequately measures all aspects
of specific risk, including default and event risk, as provided by
this section 5(a)(1), must calculate its specific risk surcharge in
accordance with one of the following methods:
(A) If the bank's internal model separates the VAR measure into
a specific risk portion and a general market risk portion, then the
specific risk surcharge equals the previous day's specific risk
portion.
(B) If the bank's internal model does not separate the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk surcharge equals the sum of the
previous day's VAR measure for subportfolios of covered debt and
equity positions.
(2) Specific risk surcharge for specific risk not modeled. If a
bank does not model specific risk in accordance with section 5(a)(1)
of this appendix, then the bank shall calculate its specific risk
surcharge using the standard specific risk capital charge in
accordance with section 5(c) of this appendix.
(b) Covered debt and equity positions. If a model includes the
specific risk of covered debt positions but not covered equity
positions (or vice versa), then the bank may reduce its specific
risk charge for the included positions under section 5(a)(1)(ii) of
this appendix. The specific risk charge for the positions not
included equals the standard specific risk capital charge under
paragraph (c) of this section.
* * * * *
Dated: December 19, 1997.
Eugene A. Ludwig,
Comptroller of the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint preamble, parts 208 and 225
of chapter II of title 12 of the Code of Federal Regulations are
amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
Authority: 12 U.S.C. 24, 36, 92(a), 93(a) 248(a), 248(c), 321-
338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),
1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835(a), 1882,
2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,
781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
2. In appendix E to part 208, section 1., paragraph (a), footnote 1
is revised to read as follows:
Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks; Market Risk Measure
Section 1. Purpose, Applicability, Scope, and Effective Date
(a) * * * 1 * * *
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\1\ This appendix is based on a framework developed jointly by
supervisory authorities from the countries represented on the Basle
Committee on Banking Supervision and endorsed by the Group of Ten
Central Bank Governors. The framework is described in a Basle
Committee paper entitled ``Amendment to the Capital Accord to
Incorporate Market Risks,'' January 1996. Also see modifications
issued in September 1997.
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* * * * *
3. In appendix E to part 208, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements. Specific
risk includes such risk as idiosyncratic variation, as well as event
and default risk.
* * * * *
4. In appendix E to part 208, section 5., paragraphs (a), (b), and
(c) introductory text are revised to read as follows:
* * * * *
[[Page 68068]]
Section 5. Specific Risk
(a) Modeled specific risk A bank may use its internal model to
measure specific risk. If the bank has demonstrated to the Federal
Reserve that its internal model measures the specific risk,
including event and default risk as well as idiosyncratic variation,
of covered debt and equity positions and includes the specific risk
measures in the VAR-based capital charge in section 3(a)(2)(i) of
this appendix, then the bank has no specific risk add-on for
purposes of section 3(a)(2)(ii) of this appendix. The model should
explain the historical price variation in the trading portfolio and
capture concentration, both magnitude and changes in composition.
The model should also be robust to an adverse environment and have
been validated through backtesting which assesses whether specific
risk is being accurately captured.
(b) Add-on charge for modeled specific risk. If a bank's model
measures specific risk, but the bank has not been able to
demonstrate to the Federal Reserve that the model adequately
measures event and default risk for covered debt and equity
positions, then the bank's specific risk add-on is determined as
follows:
(1) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(2) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and covered equity positions.
(c) Add-on charge if specific risk is not modeled. If a bank
does not model specific risk in accordance with paragraph (a) or (b)
of this section, then the bank's specific risk add-on charge equals
the components for covered debt and equity positions as appropriate:
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In appendix E to part 225, the appendix heading is revised and
in section 1., paragraph (a), footnote 1 is revised to read as follows:
Appendix E To Part 225--Capital Adequacy Guidelines For Bank Holding
Companies: Market Risk Measure
Section 1. Purpose, Applicability, Scope, and Effective Date
(a) * * * 1 * * *
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\1\ This appendix is based on a framework developed jointly by
supervisory authorities from the countries represented on the Basle
Committee on Banking Supervision and endorsed by the Group of Ten
Central Bank Governors. The framework is described in a Basle
Committee paper entitled ``Amendment to the Capital Accord to
Incorporate Market Risks,'' January 1996. Also see modifications
issued in September 1997.
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* * * * *
3. In appendix E to part 225, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk. means changes in the market value of specific
positions due to factors other than broad market movements. Specific
risk includes such risk as idiosyncratic variation, as well as event
and default risk.
* * * * *
4. In appendix E to part 225, section 5., paragraphs (a), (b), and
(c) introductory text are revised to read as follows:
* * * * *
Section 5. Specific Risk
(a) Modeled specific risk. A bank holding company may use its
internal model to measure specific risk. If the institution has
demonstrated to the Federal Reserve that its internal model measures
the specific risk, including event and default risk as well as
idiosyncratic variation, of covered debt and equity positions and
includes the specific risk measures in the VAR-based capital charge
in section 3(a)(2)(i) of this appendix, then the institution has no
specific risk add-on for purposes of section 3(a)(2)(ii) of this
appendix. The model should explain the historical price variation in
the trading portfolio and capture concentration, both magnitude and
changes in composition. The model should also be robust to an
adverse environment and have been validated through backtesting
which assesses whether specific risk is being accurately captured.
(b) Add-on charge for modeled specific risk. If a bank holding
company's model measures specific risk, but the institution has not
been able to demonstrate to the Federal Reserve that the model
adequately measures event and default risk for covered debt and
equity positions, then the institution's specific risk add-on is
determined as follows:
(1) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(2) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and covered equity positions.
(c) Add-on charge if specific risk is not modeled. If a bank
holding company does not model specific risk in accordance with
paragraph (a) or (b) of this section, then the institution's
specific risk add-on charge equals the components for covered debt
and equity positions as appropriate:
* * * * *
By order of the Board of Governors of the Federal Reserve
System, December 19, 1997.
William W. Wiles,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
For the reasons set forth in the joint preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is amended
as follows:
PART 325--CAPITAL MAINTENANCE
1. The authority citation for part 325 continues to read as
follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, 2386 (12 U.S.C. 1828 note).
2. In appendix C to part 325, section 1(a), footnote 1 is revised
to read as follows:
Appendix C to Part 325--Risk-Based Capital For State Non-Member Banks;
Market Risk
Section 1. Purpose, Applicability, Scope, and Effective Date
(a) * * * 1 * * *
---------------------------------------------------------------------------
\1\ This appendix is based on a framework developed jointly by
supervisory authorities from the countries represented on the Basle
Committee on Banking Supervision and endorsed by the Group of Ten
Central Bank Governors. The framework is described in a Basle
Committee paper entitled ``Amendment to the Capital Accord to
Incorporate Market Risks,'' January 1996. Also see modifications
issued in September 1997.
---------------------------------------------------------------------------
* * * * *
3. In appendix C to part 325, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements. Specific
risk includes such risk as idiosyncratic variation, as well as event
and default risk.
* * * * *
4. In appendix C to part 325, section 5., paragraphs (a), (b), and
(c) introductory text are revised to read as follows:
* * * * *
Section 5. Specific Risk
(a) Modeled specific risk. A bank may use its internal model to
measure specific risk. If
[[Page 68069]]
the bank has demonstrated to the FDIC that its internal model
measures the specific risk, including event and default risk as well
as idiosyncratic variation, of covered debt and equity positions and
includes the specific risk measure in the VAR-based capital charge
in section 3(a)(2)(i) of this appendix, then the bank has no
specific risk add-on for purposes of section 3(a)(2)(ii) of this
appendix. The model should explain the historical price variation in
the trading portfolio and capture concentration, both magnitude and
changes in composition. The model should also be robust to an
adverse environment and have been validated through backtesting
which assesses whether specific risk is being accurately captured.
(b) Add-on charge for modeled specific risk. If a bank's model
measures specific risk, but the bank has not been able to
demonstrate to the FDIC that the model adequately measures event and
default risk for covered debt and equity positions, then the bank's
specific risk add-on for purposes of section 3(a)(2)(ii) of this
appendix is as follows:
(1) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(2) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and covered equity positions.
(c) Add-on charge if specific risk is not modeled. If a bank
does not model specific risk in accordance with paragraph (a) or (b)
of this section, the bank's specific risk add-on charge for purposes
of section 3(a)(2)(ii) of this appendix equals the components for
covered debt and equity positions as appropriate:
* * * * *
Dated at Washington, D.C. this 9th day of December, 1997.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 97-33653 Filed 12-29-97; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P
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