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FIL-18-95 Attachment

[Federal Register: February 15, 1995 (Volume 60, Number 31)]

[Proposed Rules]

[Page 8582-8583]

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



 

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[[Page 8582]]


 

FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 325


 

RIN 3064-AB54


 

 

Capital Maintenance


 

AGENCY: Federal Deposit Insurance Corporation (FDIC).


 

ACTION: Proposed Rule.


 

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SUMMARY: The FDIC is proposing to amend its risk-based capital

guidelines to modify the definition of the OECD-based group of

countries. Claims on the governments and banks of this group generally

receive lower risk weights than corresponding claims on the governments

and banks of non-OECD-based countries. The FDIC is proposing this

amendment on the basis of an announcement, made on July 15, 1994, by

the Basle Committee on Banking Supervision (Basle Committee) that,

subject to national consultation, the Basle Committee plans to

introduce a change to the Basle Accord in 1995. The effect of the

proposed modification would be to exclude from the OECD-based group of

countries which are eligible for the lower risk weights any country

that has rescheduled its external sovereign debt within the previous

five years.


 

DATES: Comments on the proposal must be received by March 17, 1995.


 

ADDRESSES: All comments should be submitted to Robert E. Feldman,

Acting Executive Secretary, Attention: Room F-402, Federal Deposit

Insurance Corporation, 550 17 Street NW., Washington, D.C. 20429.

Comments may be hand delivered to Room F-402, 1776 F Street NW.,

Washington, DC, on business days between 8:30 a.m. and 5:00 p.m. [Fax

number: (202)898-3838.] Comments will be available for inspection at

the FDIC's Reading Room, Room 7118, 550 17th Street NW., Washington,

D.C. between 9:00 a.m. and 4:30 p.m. on business days.


 

FOR FURTHER INFORMATION CONTACT: For supervisory purposes, Stephen G.

Pfeifer, Examination Specialist, Accounting Section, Division of

Supervision (202/898-8904); for legal purposes, Dirck A. Hargraves,

Attorney, Legal Division (202/898-7049).


 

SUPPLEMENTARY INFORMATION:


 

I. Background


 

In 1988 the central bank governors of the G-10 countries endorsed

international capital standards (the Basle Accord)<SUP>1 establishing a

risk-based framework for measuring the capital adequacy of

internationally-active banks. Under the framework, risk-weighted assets

are calculated by assigning assets and off-balance-sheet items to broad

categories based primarily on their credit risk; that is, the risk that

a banking organization will incur a loss due to an obligor or

counterparty default on a transaction. Risk weights range from zero

percent, for assets with minimal credit risk (such as U.S. Treasury

securities), to 100 percent, which is the risk weight that applies to

most private sector claims, including commercial loans.


 

\1\The Basle Accord was issued in 1988 by the Basle Committee,

which is comprised of representatives of the central banks and

supervisory authorities from the G-10 countries (Belgium, Canada,

France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland,

the United Kingdom, and the United States) and Luxembourg. In 1989

the FDIC adopted a Statement of Policy on Risk-Based Capital

(Appendix A to Part 325) to implement the Basle Accord. This risk-

based capital policy statement applies to the state nonmember banks

for which the FDIC is the appropriate federal banking agency.

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While the Basle Accord primarily focuses on credit risk, it also

incorporates country transfer risk considerations.<SUP>2 In addressing

transfer risk, the Basle Committee members examined several methods for

assigning obligations of foreign countries to the various risk

categories. Ultimately, the Basle Committee decided to use a defined

group of countries considered to be of high credit standing as the

basis for differentiating claims on foreign governments and banks. For

this purpose, the Basle Committee determined this group as the full

members of the Organization for Economic Cooperation and Development

(OECD), as well as countries that have concluded special lending

arrangements with the International Monetary Fund (IMF) associated with

the IMF's General Arrangements to Borrow.<SUP>3 These countries are

referred to as the OECD-based group of countries and encompass most of

the major industrial countries, including all members of the G-10 and

the European Union.


 

\2\ Transfer risk generally refers to the possibility that an

asset cannot be serviced in the currency of payment because of a

lack of, or restraints on, the availability of needed foreign

exchange in the country of the obligor.

\3\The OECD is an international organization of countries which

are committed to market-oriented economic policies, including the

promotion of private enterprise and free market prices; liberal

trade policies; and the absence of exchange controls. Full members

of the OECD at the time the Basle Accord was endorsed included

Australia, Austria, Belgium, Canada, Denmark, Finland, France,

Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the

Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, Turkey, the United Kingdom, and the United States. In

May 1994, Mexico was accepted as a full member of the OECD. In

addition, Saudi Arabia has concluded special lending arrangements

associated with the International Monetary Fund's General

Arrangements to Borrow.

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Under both the Basle Accord and the FDIC's risk-based capital

guidelines, claims on the governments and banks of the OECD-based group

of countries generally receive lower risk weights than corresponding

claims on the governments and banks of non-OECD countries.

Specifically, the FDIC's risk-based capital policy statement provides

for the following treatment:

<bullet> Direct claims on, and the portions of claims that are

directly and unconditionally guaranteed by, OECD-based central

governments (including central banks) are assigned to the zero percent

risk weight category. Claims on central governments outside the OECD-

based group are assigned to the zero percent risk weight category only

if such claims are denominated in the national currency (i.e., local

currency claims) and funded by liabilities in the same currency.

<bullet> Claims conditionally guaranteed by OECD-based central

governments and claims collateralized by securities issued or

guaranteed by OECD-based central governments generally are assigned to

the 20 percent risk weight category. The same types of claims on non-

OECD countries are assigned to the 100 percent risk category.

<bullet> Long-term claims on OECD banks are assigned to the 20

percent risk-weight category. Long-term claims on non-OECD banks are

assigned to the 100 percent risk category. (Short-term claims on all

banks, whether they are members of the OECD-based group of countries or

not, are assigned a 20 percent risk weight.)

<bullet> General obligation bonds that are obligations of states or

other political subdivisions of the OECD-based group of countries are

assigned to the 20 percent risk category. Revenue bonds of such

political subdivisions are assigned to the 50 percent risk category.

Both general obligation and revenue bonds of political

subdivisions of non-OECD countries are assigned to the 100

percent risk category.

Recently, the OECD has taken steps to expand its membership. In

light of these steps, the Basle Committee was urged to clarify an

ambiguity in the Basle Accord as to whether the OECD members eligible

for the lower risk weights include only those members that were in the

OECD when the Basle Accord was endorsed in 1988 or all members,

regardless of entry date into the OECD. The Basle Committee also

reviewed the overall appropriateness of the criteria the Basle Accord

uses to determine whether claims on a foreign government

[[Page 8583]] or bank qualify for placement in a lower risk category.

As part of this review, the Basle Committee reassessed whether

membership in the OECD (or the conclusion of special lending

arrangements with the IMF) would, by itself, be sufficient to ensure

that only countries with relatively low transfer risk would continue to

be eligible for lower risk weight treatment.

On July 15, 1994, the Basle Committee made an announcement to

clarify that the reference in the Basle Accord to OECD members applies

to all current members of the organization. The announcement also

stated that it is the Basle Committee's intention, subject to national

consultation, to record a change to the Basle Accord in 1995 that would

modify the definition of the OECD-based group of countries for risk-

based capital purposes. The change, if adopted, would exclude from

lower risk weight treatment any country within the OECD-based group of

countries that has rescheduled its external sovereign debt within the

previous five years. The Basle Committee announcement was endorsed by

the G-10 Governors.


 

II. Proposed Rule


 

In view of the Basle Committee's announcement, the FDIC is

proposing to amend its risk-based capital guidelines to modify the

definition of the OECD-based group of countries. Under the proposal,

the OECD-based group of countries would continue to include countries

that are currently full members of the OECD, regardless of entry date,

as well as countries that have concluded special lending arrangements

with the IMF associated with the Fund's General Arrangements to Borrow,

but would exclude any country within this group that has rescheduled

its external sovereign debt within the previous five years. The effect

of the proposed modification would be to clarify that membership in the

OECD-based group of countries must coincide with relatively low

transfer risk in order for a country to be eligible for differentiated

capital treatment.

For purposes of this proposal, an event of rescheduling of external

sovereign debt generally would include renegotiations of terms arising

from the country's inability or unwillingness to meet its external debt

service obligations. Renegotiations of debt in the normal course of

business generally do not indicate transfer risk of the kind that would

preclude an OECD-based country from qualifying for lower risk weight

treatment. One example of such a routine renegotiation would be a

renegotiation to allow the borrower to take advantage of a change in

market conditions, such as a decline in interest rates.

The FDIC invites comment on all aspects of this proposal.


 

III. Regulatory Flexibility Act


 

The Board of Directors of the FDIC hereby certifies that adoption

of this proposed amendment to part 325 will not have a significant

economic impact on a substantial number of small business entities (in

this case, small banking organizations) within the meaning of the

Regulatory Flexibility Act requirements (5 U.S.C. 601 et seq.). This

amendment will not necessitate the development of sophisticated

recordkeeping or reporting systems by small institutions nor will small

institutions need to seek out the expertise of specialized accountants,

lawyers, or managers to comply with this regulation. In light of this

certification, the Regulatory Flexibility Act requirements (at 5 U.S.C.

603, 604) to prepare initial and final regulatory flexibility analyses

do not apply.


 

IV. Paperwork Reduction Act


 

The FDIC has determined that the proposed amendment, if adopted,

would not increase the regulatory paperwork burden of state nonmember

banks pursuant to the provisions of the Paperwork Reduction Act (44

U.S.C. 3501 et seq.). Consequently, no information has been submitted

to the Office of Management and Budget for review.


 

List of Subjects in 12 CFR Part 325


 

Bank deposit insurance, Banks, Banking, Capital adequacy, Reporting

and recordkeeping requirements, Savings Associations, State nonmember

banks.


 

For the reasons set forth in the preamble, the Board of Directors

of the Federal Deposit Insurance Corporation proposes to amend part 325

of title 12 of the Code of Federal Regulations 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, 3907, 3909; 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. Appendix A to part 325 is amended by revising footnote 12 in

section II.B.2. to read as follows:


 

Appendix A to Part 325--Statement of Policy on Risk-Based Capital


 

* * * * *

II. * * *

B. * * *

2. * * *\12\ * * *


 

\12\The OECD-based group of countries comprises all full members

of the Organization for Economic Cooperation and Development (OECD),

as well as countries that have concluded special lending

arrangements with the International Monetary Fund (IMF) associated

with the IMF's General Arrangements to Borrow, but excludes any

country that has rescheduled its external sovereign debt within the

previous five years. The OECD includes the following countries:

Australia, Austria, Belgium, Canada, Denmark, Finland, France,

Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico,

the Netherlands, New Zealand, Norway, Portugal, Spain, Sweden,

Switzerland, Turkey, the United Kingdom and the United States. Saudi

Arabia has concluded special lending arrangements with the IMF

associated with the IMF's General Arrangements to Borrow.

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* * * * *

By order of the Board of Directors.


 

Dated at Washington, D.C. this 31st day of January, 1995.


 

Federal Deposit Insurance Cprporation

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 95-3692 Filed 2-14-95; 8:45 am]

BILLING CODE 6714-01-P