FDIC Federal Register Citations

[Federal Register: November 3, 2000 (Volume 65, Number 214)]

[Proposed Rules]

[Page 66193-66197]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr03no00-14]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 00-24]

RIN 1557--AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1084]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC44

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 2000-90]

RIN 1550-AB11

Simplified Capital Framework for Non-Complex Institutions

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: Advance notice of proposed rulemaking.

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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 considering developing a

simplified regulatory capital framework applicable to non-complex banks

and thrifts (non-complex institutions). The Agencies believe that the

size, structure, complexity, and risk profile of many banking and

thrift institutions (banking organizations or institutions) may warrant

the application of a simplified capital framework that could relieve

regulatory burden associated with the existing capital rules.

The Agencies are considering the advantages and disadvantages

associated with developing a regulatory capital framework specifically

for non-complex institutions. The main objective of this advance notice

of proposed rulemaking is to obtain preliminary views from the industry

and the public regarding such a framework. The information gathered as

a result of this advance notice of proposed rulemaking will assist the

Agencies in determining whether to propose a simplified capital

framework and, if so, how the framework should be structured and

implemented.

In considering the development of a less burdensome regulatory

framework, the Agencies would not lower capital standards or encourage

a reduction in existing capital levels. Rather, a simplified, less

burdensome framework may result in higher minimum regulatory capital

requirements for certain institutions than required under current

capital standards. Many non-complex institutions currently maintain

levels of capital in excess of the regulatory minimum requirements, and

the Agencies would therefore expect that most banking organizations

subject to a simplified framework would not have to increase capital

levels.

This advance notice of proposed rulemaking sets forth broad options

for a simplified framework. The options advanced for comment include

adopting a simplified risk-based framework (and maintaining the

leverage ratio requirement) or adopting a leverage-based approach. The

leverage-based approach may include either a traditional leverage

framework or one that is modified to address off-balance sheet risks.

DATES: Comments must be received by no later than February 1, 2001.

ADDRESSES: Comments should be directed to:

OCC: Comments may be submitted to Docket No. 00-24, Communications

Division, Third Floor, Office of the Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219. Comments will be available for

inspection and photocopying at that address. In addition, comments may

be sent by facsimile transmission to (202) 874-5274, or by electronic

mail to regs.comments@occ.treas.gov. You can make an appointment to

inspect the comments by calling (202) 874-5043.

Board: Comments, which should refer to Docket No. R-1084, may be mailed

to Ms. Jennifer J. Johnson, Secretary, the Board of Governors of the

Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551,

or mailed electronically to regs.comments@federalreserve.gov. Comments

addressed to Ms. Johnson may be delivered to the Board's mailroom

between 8:45 a.m. and 5:15 p.m., and to the security control room

outside of those hours. Both the mailroom and the security control room

are accessible from the courtyard entrance on 20th Street between

Constitution Avenue and C Street, NW.. Comments may be inspected in

Room MP-500 between 9 a.m. and 5 p.m. weekdays pursuant to Sec. 261.12,

except as provided in Sec. 261.14 of the Board's Rules Regarding

Availability of Information, 12 CFR 261.12 and 261.14.

FDIC: Send written comments to Robert E. Feldman, Executive Secretary,

Attention: Comments/OES, Federal Deposit Insurance Corporation, 550

17th Street, NW, Washington, DC 20429. Comments may be hand-delivered

to the guard station at the rear of the 550 17th Street Building

(located on F Street), on business days between 7 a.m. and 5 p.m.

(facsimile 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, NW, Washington, DC

20429, between 9 a.m. and 4:30 p.m. on business days.

OTS: Send comments to Manager, Dissemination Branch, Information

Management & Services Division, Office of Thrift Supervision, 1700 G

Street, NW, Washington, DC 20552, Attention Docket No. 2000-90. Hand

deliver comments to Public Reference Room, 1700 G Street, NW, lower

level, from 9 a.m. to 4 p.m. on business days. Send facsimile

transmissions to FAX number (202) 906-7755 or (202) 906-6956 (if the

comment is over 25 pages). Send e-mails to public.info@ots.treas.gov

and include your name and telephone number. Interested persons may

inspect comments at 1700 G Street, NW, from 10 a.m. until 4 p.m. on

Tuesdays and Thursdays, or obtain comments or an index of comments by

facsimile by telephoning the Public Reference Room at (202) 906-5900

from 9 a.m. until 5 p.m. on business days. Comments and the related

index will also be posted on the OTS Internet Site at

``www.ots.treas.gov.''

FOR FURTHER INFORMATION CONTACT:

OCC: Amrit Sekhon, Risk Specialist, Capital Policy Division, (202) 874-

5211; or Ron Shimabukuro, Senior Attorney, Legislative and Regulatory

[[Page 66194]]

Activities Division, (202) 874-5090, Office of the Comptroller of the

Currency, 250 E Street SW, Washington, DC 20219.

Board: Norah Barger, Assistant Director (202/452-2402), Barbara

Bouchard, Manager (202/452-3072), Division of Banking Supervision and

Regulation, or David Adkins, Supervisory Financial Analyst (202/452-

5259). For the hearing impaired only, Telecommunication Device for the

Deaf (TDD), Janice Simms (202/872-4984), Board of Governors of the

Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551.

FDIC: Mark S. Schmidt, Associate Director, (202/898-6918), Division of

Supervision, William A. Stark, Assistant Director, (202/898-6972),

Division of Supervision, or Keith A. Ligon, Chief, Policy Unit, (202/

898-3618), Division of Supervision.

OTS: Michael D. Solomon, Senior Program Manager for Capital Policy

(202/906-5654), or Teresa A. Scott, Counsel (Banking and Finance) (202/

906-6478), Office of Thrift Supervision, 1700 G Street, NW, Washington,

DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

In 1989, the Agencies each adopted regulatory capital standards

based on the Basel Capital Accord (1988 Accord).\1\ The 1988 Accord

sets forth a general framework for measuring the capital adequacy of

internationally active banks under which assets and off-balance-sheet

items are ``risk-weighted'' based on their perceived credit risk using

four broad risk categories.\2\ Institutions subject to the 1988 Accord

are required to maintain a minimum ratio of regulatory capital \3\ to

total risk-weighted assets of 8 percent.\4\

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\1\ The 1998 Accord was developed by the supervisory authorities

represented on the Basel Committee on Banking Supervision and

endorsed by the G-10 Central Bank Governors. The framework is

described in a document entitled ``International Convergence of

Capital Measurement'' issued in July 1998 (with subsequent

amendments). The Basel Committee on Banking Supervision is comprised

of representatives of the central banks and supervisory authorities

from the G-10 countries (Belgium, Canada, France, Germany, Italy,

Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the

United States) and Luxembourg. The Agencies' risk-based capital

standards implementing the 1988 Accord are set forth in 12 CFR part

3 (OCC), 12 CFR parts 208 and 225, Appendices A and E (Board), 12

CFR part 325 (FDIC) and 12 CFR part 567 (OTS).

\2\ The categories are 100 percent (the standard risk weight for

most claims); 50 percent (primarily for residential mortgages); 20

percent for claims on, or guarantees provided by, certain entities

(for example, qualifying depository institutions); and zero percent

for very low risk assets (such as claims on, or guarantees provided

by, qualifying governments).

\3\ Regulatory capital may be comprised of three components. In

general terms, Tier 1 capital includes common stockholder's equity,

qualifying noncumulative perpetual preferred stock (and for bank

holding companies limited amounts of cumulative perpetual preferred

stock), and minority interests in the equity accounts of

consolidated subsidiaries. Tier 2 capital includes limited amounts

of the allowance for loan and lease losses, perpetual preferred

stock, hybrid capital instruments and mandatory convertible debt,

and term subordinated debt. Tier 3 capital (available only for

certain institutions that apply specific rules for market risk)

consists of short-term subordinated debt subject to certain

restrictions on repayment. Items deducted from regulatory capital

include goodwill and certain other intangible assets, investments in

unconsolidated subsidiaries, reciprocal holdings of other banking

institutions' capital instruments and some deferred tax assets. At

least 50 percent of regulatory capital must be Tier 1. See each

agency's capital rules referenced in footnote 1 for a more complete

discussion.

\4\ The 1988 Accord and the implementing United States standards

addressed capital in relation to credit risk. In January 1996, the

1988 Accord was amended to include a measure for market risk. The

amendment was incorporated into FRB, FDIC, and OCC standards in

September 1996.

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In addition to risk-based capital requirements, United States

banking organizations must comply with a minimum leverage ratio

requirement. \5\ Generally, strong banking organizations (e.g.,

institutions assigned a composite rating of 1 under the Uniform

Financial Institutions Ratings System) must maintain a minimum ratio of

Tier 1 capital to average total consolidated on-balance sheet assets of

3 percent. For other banking organizations, the minimum leverage ratio

is 4 percent. The Agencies view the risk-based and leverage capital

requirements as minimums. Institutions should hold capital at a level

that is commensurate with their individual risk profile.

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\5\ Leverage guidlines for each agency are located at 12 CFR

part 3 (OCC); 12 CFR part 208, Appendix B and 12 CFR part 225,

Appendix D (Board); 12 CFR part 325 (FDIC); and 12 CFR part 567

(OTS).

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United States banking organizations are also subject to Prompt

Corrective Action (PCA) regulations. Generally, under these rules an

institution's regulatory capital ratios are used to classify the

institution into a PCA category. Institutions with the highest capital

ratios (i.e., at or above a 10 percent total risk-based capital ratio,

at or above a 6 percent Tier 1 risk-based capital ratio, and at or

above a 5 percent leverage capital ratio) are usually categorized as

``well capitalized.'' Institutions with lower capital ratios are

assigned to lower capital categories. Institutions that are less than

well capitalized have restrictions or conditions on certain activities

and may also be subject to mandatory or discretionary supervisory

action.

Although the 1988 Accord was developed for large and

internationally active banking organizations, when the Agencies adopted

the risk-based capital standards domestically, the standards were

applied to all banking organizations regardless of size, structure,

complexity, and risk profile. The four broad risk-weight categories,

while imperfect, were viewed as a significant improvement over the

previous domestic capital framework that did not take into account

asset credit quality and discouraged banking organizations from holding

low-risk assets. In addition, the capital adequacy framework

incorporated off-balance sheet items into the risk-based capital

formula. The consistent application of an international regulatory

capital regime was also expected to minimize competitive equity

concerns.

The 1988 Accord has had a stabilizing effect on the international

banking system. Since its inception, capital levels have risen and

competitive equity has been enhanced. Over the past decade, however,

the world financial system has become more complex and challenging. The

Basel Committee on Banking Supervision (Basel Committee) recognizes

that the 1988 Accord needs to evolve along with recent financial

innovations and changes in the financial marketplace. Accordingly, the

Basel Committee is working to develop a new capital adequacy framework

that would enhance the 1988 Accord.

As outlined in its June 1999 consultative paper, A New Capital

Adequacy Framework, the Basel Committee is contemplating substantial

revisions to the 1988 Accord. \6\ Among other things, the Basel

Committee is exploring the concept of using sophisticated internal risk

measurement systems in the development of minimum capital standards.

The Basel Committee is also developing a standardized approach that

proposes revisions to the risk-weight framework of the 1988 Accord

which might incorporate external ratings in the assessment of a minimum

capital requirement.

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\6\ The Basel Committee consultative document was issued on June

3, 1999. Comment was requeted through March 2000. The document is

available through the Bank for International Settlements website at

www.bis.org.

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While the approaches contemplated in the proposed revisions to the

1988 Accord may be appropriate for some large, complex, internationally

active banks, many small domestic banking organizations may not have or

need the infrastructure to implement a sophisticated internal ratings-

based approach to regulatory capital.

[[Page 66195]]

Regardless of what revisions are made to the 1988 Accord, however,

given the complexity of existing regulatory capital rules, a simplified

capital framework could reduce regulatory burden for many institutions

without compromising the principles of prudential supervision.

The Agencies wish to explore all options in the development of a

regulatory framework for non-complex institutions. The following

discussion outlines the Agencies' preliminary views on ways to simplify

the regulatory capital framework for such institutions. The Agencies

encourage comments from the industry and the public on all aspects of

this advance notice of proposed rulemaking.

II. Discussion

A. Overview

This advance notice of proposed rulemaking discusses how non-

complex institutions could be defined and presents three possible

alternatives for measuring the regulatory capital of non-complex

institutions. The Agencies believe that three key factors could serve

to define a non-complex institution. These are the nature of the

institution's activities, its asset size, and its risk profile. Broadly

stated, a relatively small institution engaged in non-complex

activities that presents a low-risk profile could be subject to a more

simplified capital framework without compromising the safety and

soundness of the institution or the banking system. The three broad

alternatives for a simplified framework are a simple leverage ratio, a

modified leverage ratio and a risk-based framework.

Question 1: Do institutions view maintenance of the current risk-

based capital standards as posing undue burden for small institutions?

If so, how? Would views change if the current standards were revised to

make them more risk-sensitive, in line with the contemplated revisions

to the 1988 Basel Accord as set forth in the June 1999 consultative

paper?

Question 2: For non-complex institutions, should the Agencies

maintain the current risk-based capital standards or develop a

simplified capital adequacy framework? What are the advantages and

disadvantages of adopting a separate framework?

B. Defining a Non-Complex Institution

The Agencies are considering the nature of a non-complex

institution's activities, its asset size, and its risk profile as

determinants of eligibility for the simplified capital framework. In

general, the Agencies believe that a ``non-complex institution'' would

possess the following characteristics:

--A relatively small asset size (e.g., consolidated assets of less than

$5 billion).

--A relatively simple and low-risk balance sheet (e.g., primarily

traditional, nonvolatile assets and liabilities).

--A moderate level of off-balance sheet activity that is compatible

with core business activities (e.g., commitments, in the case of

residential lenders).

--A minimal use of financial derivatives (i.e., institution uses

financial derivatives solely for risk management purposes.)

--A relatively simple scope of operations and relatively little

involvement in nontraditional activities as a source of income.

In this section, the Agencies describe possible criteria that could

be used to determine whether an institution could be considered a non-

complex institution.

Nature of Activities

Objective criteria could be used to measure the level of complexity

associated with the activities conducted by domestic banking

organizations. The Consolidated Reports of Condition and Income and

Thrift Financial Reports (regulatory reports) provide the Agencies with

information on the structure and operations of an institution. While

subject to certain limitations, these data elements could provide

objective support for defining a set of non-complex institutions.

The Agencies are considering using various data elements as an

initial screen for determining whether a particular institution

exhibits a ``complex'' profile. That is, where an institution reports a

significant amount of certain data elements, the Agencies may consider

the institution to be complex. Items collected within regulatory

reports that could be used include: Trading assets and liabilities;

interest only strips; credit derivatives--guarantor and beneficiary;

foreign exchange spot contracts; other off-balance sheet assets and

liabilities; foreign exchange, equity, commodity, and other

derivatives; purchased mortgage servicing rights; purchased credit card

relationships; structured notes; performance standby letters of credit;

and interest rate derivatives. Data elements such as these could

provide an initial screen for determining whether a particular

institution exhibits a ``complex'' profile.

The Agencies envision using additional data elements that might

become available due to revisions to regulatory reporting requirements.

A concern about such screening criteria is setting an appropriate

threshold level for reported activities. The number of institutions

that may qualify as non-complex depends upon the threshold level set in

establishing the screening criteria.

Question 3: What specific data elements should be considered in

determining whether an institution is non-complex? At what level should

the thresholds be set for such elements to qualify for the non-complex

framework?

Question 4: What information sources other than regulatory reports

are available for measuring the level of complexity of domestic banking

organizations (e.g., examination reports or other supervisory

information or ratings)?

Asset Size

The Agencies believe that a strong relationship exists between the

asset size of an institution and its relative complexity. In general,

banking organizations of larger asset size exhibit greater levels of

complexity. The strength of this correlation changes with the size of

the institution. For example, banking organizations with assets of less

than $5 billion generally engage in less complex activities than larger

banking organizations. This effect is generally more pronounced for

institutions with less than $1 billion in assets. However, some smaller

banking organizations are engaged in activities reflecting a high level

of complexity. The Agencies are considering the extent to which asset

size alone might be sufficient to determine which banking organizations

may be eligible for the non-complex capital framework.

Question 5: What are the advantages and disadvantages of using

asset size to determine ``complexity''? What would be a reasonable and

appropriate asset size limit for banking organizations to qualify for

the non-complex framework?

Question 6: Should banking organizations within a holding company

be subject to an asset size limit based on an aggregate or individual

institution basis?

Question 7: Should the Agencies apply a simplified framework to all

non-complex institutions regardless of size?

Question 8 :Should off-balance sheet assets (e.g., securitized

assets) be considered within the asset size limit? If not, why not?

Risk Profile

The Agencies are considering whether banking organizations of any

size that present a higher risk profile should be

[[Page 66196]]

required to comply with a more sophisticated risk measurement and

capital adequacy framework. A small asset size and lack of complexity

do not necessarily equate to lower risk. There can be instances where a

small and otherwise non-complex banking organization may be exposed to

risks that warrant excluding the institution from the simplified

framework.

Factors considered when assessing an institution's overall risk

profile should include the level of involvement in activities that

present greater degrees of credit, liquidity, market, or other risks,

such as sub-prime lending activities, significant asset securitization

activities, or trading activities. The issues encountered in trying to

define ``high-risk'' are similar to those encountered in trying to

define ``non-complex.'' Approaches could include objective measures

derived from regulatory reporting data (as discussed previously) or

more subjective alternatives that incorporate assessments made by

supervisors in reports of examination, or some combination of objective

measures and subjective assessments.

Question 9: What methods for determining a ``low-risk'' institution

are reasonable and appropriate?

C. Setting a Minimum Capital Threshold for Non-Complex Institutions

While a simplified capital framework for non-complex institutions

might be less burdensome, such a framework might also be less risk

sensitive and flexible. For this reason, the Agencies believe that the

minimum capital standard should be set at a level that more than

adequately addresses the risks that may not precisely or specifically

be measured and identified by the simplified framework. The minimum

capital level in such a framework should be a relatively high threshold

above which supervisory concerns regarding capital adequacy are

minimized. Therefore, a higher minimum capital requirement may ensure

that banking organizations that are exempted from the risk-sensitive

measures continue to hold sufficient capital.

Setting a higher minimum capital threshold for non-complex

institutions raises issues and concerns. To the greatest extent

possible, the simplified framework should avoid creating regulatory

arbitrage incentives vis-a-vis the risk-based capital standards.

However, the minimum capital level for non-complex institutions must

continue to promote safety and soundness. A higher minimum threshold in

exchange for simpler standards, therefore, may be an appropriate trade-

off.

One method to address these concerns is to establish a system that

allows a degree of flexibility in designating an institution non-

complex and subject to the simplified capital framework. For example, a

non-complex institution could be allowed, but not required, to

calculate its capital under the simplified framework. A non-complex

institution could instead elect to use the more sophisticated, risk-

based framework applicable to international or ``complex'' banking

organizations. The trade-off between burden and benefit could be a

determination reached by the individual institution, with appropriate

supervisory oversight.

Question 10: What factors should be considered in the determination

of a minimum threshold capital level for non-complex institutions?

Should additional or different elements be included in the definition

of capital under a non-complex framework?

Question 11: Should the institution have the option to decide

whether to use the simplified framework?

D. Options for Measuring the Capital Adequacy of Non-Complex

Institutions

Each option should promote safety and soundness while minimizing

regulatory burden. In addition, any alternative to the existing

framework would have to be compatible with PCA mandates. The Agencies

have some flexibility in establishing a relevant capital measure for

non-complex institutions for PCA purposes.\7\ The Agencies do not

foresee eliminating the leverage requirements established under the

Prompt Corrective Action standards.

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\7\ Section 38 of the Federal Deposit Insurance Act (12 U.S.C.

1831o) establishes PCA guidelines as they relate to capital

standards. In general, the capital standards prescribed by each

appropriate Federal banking agency shall include a leverage limit

and a risk-based capital requirement. However, the section also

states that an appropriate Federal banking agency may, by

regulation, establish any additional relevant capital measures to

carry out the purpose of this section, or rescind any relevant

capital measure upon determining that the measure is no longer an

appropriate means for carrying out the purpose of this section.

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The alternatives set out in the following paragraphs are: (1) A

risk-based ratio (that maintains a leverage requirement); (2) a

leverage ratio; and (3) a modified leverage ratio that incorporates

certain off-balance sheet exposures. The Agencies also recognize that

the risk-based capital framework remains a viable option for non-

complex institutions. The Agencies are seeking input on these and any

other alternatives to measure regulatory capital commensurate with the

size, structure, complexity, and risk profile of non-complex

institutions. Comment is requested on the benefits and drawbacks and

potential impact on banking organizations of each approach.

A Risk-Based Ratio

One alternative for a non-complex framework is a risk-based capital

standard. Such a risk-based capital standard would be consistent with

the principles underlying the evolving risk-based standards under

discussion by the Basel Committee, but could be tailored to the size,

structure, and risk profile of less complex banking organizations. For

example, the risk-based approach could be based upon a modified risk-

weight system that is consistent with the structure of non-complex

institutions.

Potentially, such a risk-based standard for non-complex

institutions could both reduce burden and set capital requirements in

relation to risk. Implementation of such a system could also prove

advantageous because it would not require a structural overhaul to the

way banking organizations currently compute capital requirements.

A potential weakness of such an approach could be that, while

striving for the dual purposes of greater simplicity and a better match

between capital requirements and risk, the approach might fall short of

attaining either goal. In effect, it may turn out that greater

simplicity in risk-based capital measures means requirements that are

less closely aligned to risk (and closer to a leverage measure).

Alternatively, finer and more accurate measurements of risk that

require greater computational complexity in the determination of

regulatory capital means greater regulatory burden. A key consideration

in the development of a simplified framework is to strike an

appropriate balance between these potentially conflicting goals.

A Leverage Ratio

Another option for a capital adequacy measure for non-complex

institutions is to use only a leverage ratio. Under this alternative,

non-complex institutions would no longer be required to comply with the

risk-based capital framework. The leverage ratio provides a simple,

straightforward measure of capital relative to total assets.

A concern is that the leverage ratio does not adequately account

for off-balance sheet exposures and that a minimum capital requirement

should accommodate this expanding area of banking risk. Even non-

complex institutions can generate significant off-balance sheet

exposures (e.g., by issuing standby letters of credit, selling loans

with recourse, or extending short-term loan commitments). Another

weakness

[[Page 66197]]

of the leverage ratio is that it does not account for the wide spectrum

of credit risk and creates an incentive for the institution to avoid

investing in low-risk assets.

A Modified Leverage Ratio

To address some of the concerns with the leverage ratio discussed

above, it might be appropriate to consider modifying the measure to

account for off-balance sheet exposures. A modified leverage ratio

could incorporate the simplicity of the leverage ratio while seeking to

remedy its main weaknesses. A modified leverage ratio would be a

relatively simple measure--a major objective of the non-complex

framework. A disadvantage of the modified leverage ratio is that,

unlike the risk-based approach, it would provide no capital benefit to

banking organizations that maintain a low-risk profile and might

encourage institutions to invest in higher-risk assets.

The appropriate capital framework for a non-complex institution

depends partly on the screening criteria chosen to assess complexity or

risk. If complex or high-risk banking organizations can be effectively

screened out of the non-complex category, then the benefits of a

leverage-based approach will likely be enhanced. Similarly, if banking

organizations with significant off-balance sheet items are screened out

of the non-complex framework, then use of a modified leverage ratio

(that incorporates off-balance sheet items) might be unnecessary to

assure sufficient levels of regulatory capital.

Question 12: What elements of the current risk-based framework

should be retained within a simplified risk-based framework? What

elements should not be included?

Question 13: Should classes of assets be re-assigned to other and

potentially new risk weights, based on relative comparisons of

historical charge-off data or other empirical sources, including but

not limited to credit ratings?

Question 14: Is a leverage ratio a sufficient method for

determining capital adequacy of non-complex institutions in a range of

economic conditions?

Question 15: If off-balance sheet items are incorporated into a

modified leverage ratio, what items should be incorporated, and how?

Question 16: What degree of burden reduction is foreseeable

regarding any of the alternatives? Do the foreseeable benefits of

burden reduction outweigh any concerns about establishing a non-complex

domestic framework?

E. Implementation Issues

The establishment of a simplified capital framework presents a host

of implementation issues. How would banking organizations be placed

within the simplified framework? Once subjected to the simplified

framework, how would the institution transition to a more complex

framework, if needed? Would there be a transition or adjustment period?

These implementation issues can be foreseen, but not fully addressed,

until a framework is determined.

Moreover, the Agencies must determine the least burdensome and most

efficient manner to collect data necessary to identify the universe of

non-complex institutions and to provide this information to banking

organizations in a timely manner. Options include requiring the

Agencies to determine which banking organizations are subject to the

non-complex framework using current regulatory reports, or requiring a

banking organization to seek entry into the non-complex framework by

filing an application.

On an ongoing basis, a change in size, structure, complexity, or

risk profile of a non-complex institution could impact its continued

eligibility for the simplified framework. Institutions that were no

longer deemed ``non-complex'' could be required to comply with the

standards applicable to complex banking organizations or to take other

remedial steps. For an institution transitioning from the non-complex

framework to the complex regime, an adjustment period might be

necessary to meet reporting and capital requirements.

Establishment of a process for monitoring on-going eligibility for

the simplified framework should also be considered. The process used to

collect and report data should not undermine burden reduction, one of

the primary objectives of a non-complex framework.

Question 17: How could the non-complex capital adequacy framework

be initially implemented and thereafter applied on an ongoing basis?

Question 18: Should banking organizations no longer deemed ``non-

complex'' be required to comply with the otherwise applicable capital

standards? What other alternatives could be made available for these

banking organizations? What types of transition would be most

appropriate?

III. OCC and OTS Executive Order 12866 Determination

The Comptroller of the Currency and the Director of the Office of

Thrift Supervision have determined that this advance notice of proposed

rulemaking does not constitute a significant regulatory action under

Executive Order 12866.

Dated: October 26, 2000.

John D. Hawke, Jr.,

Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve

System, October 23, 2000.

Jennifer J. Johnson,

Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, DC, this 17th day of October, 2000.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: October 19, 2000.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 00-28270 Filed 11-2-00; 8:45 am]

BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P