[Federal Register: August 2, 1995 (Volume 60, Number 148)]
[Proposed Rules]
[Page 39495-39572]
From the Federal Register Online via GPO Access
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[[Page 39495]]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 95-17]
FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Docket No. R-0802]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
Joint Agency Policy Statement: Supervisory Policy Statement
Concerning a Supervisory Framework for Measuring and Assessing Banks'
Interest Rate Risk Exposure
AGENCIES: Office of the Comptroller of the Currency (OCC), Treasury;
Board of Governors of the Federal Reserve System (Board); and Federal
Deposit Insurance Corporation (FDIC).
ACTION: Policy statement; request for comment.
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SUMMARY: The OCC, the Board, and the FDIC (collectively, "the
agencies") seek comment on a proposed interagency Supervisory Policy
to establish a uniform supervisory framework for measuring banks'
interest rate risk (IRR) exposures. The proposed policy establishes a
framework that the agencies would use to measure and monitor the level
of IRR at individual banks. The measurement process proposed and
described in this policy statement is intended to facilitate the
agencies' assessment of a bank's IRR exposure and its capital adequacy.
The results of the supervisory and internal models would be one factor
used by the agencies in their assessments' of a bank's capital adequacy
for IRR. Other factors that the agencies will consider include the
quality of the bank's IRR risk management process, the overall
financial condition of the bank, and the level of other risks at the
bank for which capital is needed. Pursuant to the final rule banks may
be required to hold additional capital.
The proposed supervisory framework provides measures of the change
in a bank's economic value for a given change in interest rates using a
supervisory model. The framework also considers the results of a bank's
internal model results when that model provides a measure of the change
in a bank's economic value. Banks not specifically exempted from
detailed IRR reporting would submit new IRR Call Report schedules
indicating the maturity, repricing, or price sensitivity of their
various on- and off-balance sheet instruments. A bank also would have
the option of reporting its internal model estimates of the price
sensitivity of its major portfolios and its economic value.
Concurrent with the publication of this proposed Supervisory Policy
statement, the agencies have issued a final rule that amends their
capital guidelines for IRR. Those amendments indicate that the agencies
will consider in their evaluation of a bank's capital adequacy, the
exposure of a bank's capital and economic value to changes in interest
rates. The amendments are in response to section 305 of the FDIC
Improvement Act of 1991 (FDICIA) which requires the agencies to amend
their risk-based capital standards to take adequate account of interest
rate risk.
As noted in the discussion of the final rule on IRR, the agencies
intend, at a subsequent date, to incorporate explicit minimum
requirements for IRR into their risk-based capital standards. The
agencies anticipate that the measurement framework described in this
proposed policy, will be the basis for such a capital requirement.
Toward that end, the agencies intend to work with the industry to
evaluate the reliability and accuracy of the results from the
supervisory model and bank internal models. Any explicit minimum
capital charge would be implemented through the agencies' rulemaking
process and would provide the opportunity for public comment before a
final rule is adopted.
DATES: Comments must be received by October 2, 1995.
ADDRESSES: Interested parties are invited to submit written comments to
any or all of the agencies. All comments will be shared among the
agencies.
OCC: Written comments should be submitted to Docket No. 95-17,
Communications Division, Ninth Floor, Office of the Comptroller of the
Currency, 250 E Street, S.W., Washington, D.C. 20219, Attention: Karen
Carter. Comments will be available for inspection and photocopying at
that address.
Board of Governors: Comments, which should refer to Docket No. R-
0802, may be mailed to Mr. William Wiles, Secretary, Board of Governors
of the Federal Reserve System, 20th and Constitution Avenue, N.W.,
Washington, D.C. 20551. Comments addressed to Mr. Wiles may also be
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and
to the security control room outside of those hours. Both the mail room
and control room are accessible from the courtyard entrance on 20th
Street between Constitution Avenue and C Street, N.W. Comments may be
inspected in Room B-1122 between 9:00 a.m. and 5:00 p.m., except as
provided in 261.8 of the Board's "Rules Regarding Availability of
Information," 12 CFR 261.8.
FDIC: Written comments should be sent to, Jerry L. Langley,
Executive Secretary, Attention: Room F-402, Federal Deposit Insurance
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments
may be hand-delivered to Room F-402, 1776 F Street N.W., Washington,
D.C. 20429, on business days between 8:30 a.m. and 5:00 p.m. [FAX
number (202) 898-3838; Internet address: comments @ fdic.gov]. Comments
will be available for inspection and photocopying in Room 7118, 550
17th Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30
p.m. on business days.
FOR FURTHER INFORMATION CONTACT:
OCC: Christina Benson, Capital Markets Specialist, or Lisa
Lintecum, National Bank Examiner (202/874-5070), Office of the Chief
National Bank Examiner; Michael Carhill, Financial Economist, Risk
Analysis Division (202/874-5700); and Ronald Shimabukuro, Senior
Attorney, Bank Operations and Assets Division (202/874-4460), Office of
the Comptroller of the Currency, 250 E Street, S.W., Washington, D.C.
20219.
Board of Governors: James Houpt, Assistant Director (202/452-3358),
William F. Treacy, Supervisory Financial Analyst (202/452-3859),
Division of Banking Supervision and Regulation; Gregory Baer, Managing
Senior Counsel (202/452-3236), Legal Division, Board of Governors of
the Federal Reserve System. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544), Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., Washington, D.C. 20551.
FDIC: William A. Stark, Assistant Director (202/898-6972) or
Phillip J. Bond, Senior Capital Markets Specialist (202/898-3519),
Division of Supervision, Federal Deposit Insurance Corporation, 550
17th Street, N.W., Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Introduction
Interest rate risk is the risk that changes in market interest
rates will have an adverse effect on a bank's
[[Page 39496]]
earnings and its underlying economic value. Changes in interest rates
affect a bank's reported earnings by changing its net interest income
and the level of other interest-sensitive income and operating
expenses. The underlying economic value of the bank's assets,
liabilities, and off-balance sheet instruments also is affected by
changes in interest rates. These changes occur because the present
value of future cash flows and in some cases, the cash flows
themselves, are affected when interest rates change. The combined
effects of the changes in these present values reflect the change in
the bank's underlying economic value.
Interest rate risk is inherent in the role of banks as financial
intermediaries. However, a bank that has an excessive level of interest
rate risk can face diminished future earnings, impaired liquidity and
capital positions, and, ultimately, may jeopardize its solvency.
The agencies believe that safety and soundness requires effective
management and measurement of interest rate risk, and each agency has
provided supervisory guidance to banks and examiners on this subject.
In addition, the agencies believe that a bank's capital adequacy should
be assessed in the context of the risks it faces, including interest
rate risk. Section 305 of FDICIA Pub. L. 102-242 (12 U.S.C. 1828 note),
on which a final rule is being issued at the same time as this
statement, specifically requires the agencies to take account of
interest rate risk in assessing capital adequacy. Both of these aspects
of interest rate risk depend on, among other things, a meaningful
measurement of the bank's risk exposure.
The agencies believe that a bank should have an IRR measurement
system that is commensurate with the nature and scope of its IRR
exposures. Among the difficulties in performing a supervisory
evaluation of interest rate risk, however, is that measurement systems
and management philosophies can differ significantly from one bank to
another. As a result, although two banks may each be well-managed,
their measured exposure may not be directly comparable. This difficulty
has been magnified by the rapid pace of change in financial markets and
instruments themselves.
In implementing Section 305 of FDICIA, and in light of the rapid
evolution in financial instruments and practices, the agencies believe
there is a need for a more formal supervisory assessment of banks'
interest rate risk exposures. To support that effort, the agencies
propose a measurement framework that includes a supervisory measurement
system ("supervisory model") that will, on a standardized basis,
measure the risk of all banks not exempted from reporting additional
information on their IRR exposures. In addition, banks will be
encouraged to report, through a voluntary and confidential supplemental
Call Report schedule, the results of their internal IRR measurement
systems. These measured results would then serve as an additional
source of information for an examiner's assessment of the bank's risk
management and capital adequacy. The results also would provide
information on industry trends and patterns that will better inform
both present and future supervisory efforts related to interest rate
risk.
The measurement framework described in this policy statement
focuses on the exposure to a bank's underlying economic value from
movements in market interest rates. The exposure to a bank's economic
value, as used in this policy statement, is defined as the change in
the present value of its assets, minus the change in the present value
of its liabilities, plus the change in the present value of its off-
balance sheet interest-rate positions. The agencies haven chosen this
focus because they believe that changes in a bank's economic value best
reflect the potential impact of embedded options and the potential
exposure that the bank's current business activities pose to the bank's
future earnings stream, and hence, its ability to sustain adequate
capital levels. Changes in economic value measure the effect that a
change in interest rates will have on the value of all of the future
cash flows generated by a bank's current financial positions, not just
those cash flows which affect earnings over the few months or quarters.
Thus, changes in economic value provide a more comprehensive measure of
risk than measures which focus solely on the exposure to a bank's near-
term earnings. It is for this reason that the agencies have amended
their capital standards to identify explicitly a bank's exposure to
declines in economic value from changes in interest rates as an
important factor to consider in evaluating a bank's capital adequacy.
II. Summary of Approach
In assessing the sensitivity of a bank's economic value to changes
in interest rates, the agencies are proposing to use the results of a
supervisory model and, for those electing to provide such analysis, the
results of banks' own internal models. These assessments will rely on
data reported in regulatory Call Reports. Recognizing that the burden
for reporting IRR exposures would fall most heavily on smaller
organizations with limited resources, the policy statement makes
provisions for smaller, well-managed institutions that are less likely
to be significantly exposed to IRR to be exempt from additional
reporting. As described in further detail in the policy statement, the
agencies propose that banks with (i) assets under $300 million, (ii)
composite supervisory CAMEL ratings of 1 or 2 and, (iii) moderate or
low holdings of assets with intermediate and long term maturity or
repricing characteristics, be exempted from expanded reporting
requirements for IRR.
Banks that are not specifically exempted by the proposed policy
statement will submit additional Call Report information on the
repricing and maturity of their portfolios. The proposed supervisory
model applies a series of IRR risk-weights to a bank's reported
repricing and maturity balances. These weights estimate the price
sensitivity of a bank's reported balances to a 200 basis point increase
and decrease in interest rates. The summation of these balances, along
with certain price sensitivity information that a bank may be required
to self-report, results in a net risk-weighted exposure for the bank.
That exposure represents the estimated change in the bank's economic
value to the specified rate change.
The proposed supervisory model represents a refinement of the model
presented in the September 1993 notice of proposed rulemaking
(September NPR) [58 FR 48206, September 14, 1993]. The September NPR
solicited comments on a framework for measuring banks' exposure to IRR
for capital purposes pursuant to Section 305 of FDICIA. The final rule
for Section 305 does not incorporate an explicit measurement framework
for IRR into the agencies' risk-based capital standards. The agencies
have concluded that it is appropriate to first collect industry data
and evaluate the performance of the measurement framework before
explicitly incorporating the results of that framework into their risk-
based capital standards. The data collected by the agencies will assist
current supervisory efforts and will facilitate the development of a
measurement framework that could be explicitly incorporated into
capital standards in the future. This proposed policy statement would
implement that supervisory measurement framework. The proposed
framework is broadly consistent with the one discussed in the September
NPR. The agencies, however, have made several refinements to the
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supervisory model to improve its accuracy while still endeavoring to
limit the burden of the expanded reporting and maintain model
transparency. The refinements to the September NPR model include:
(1) Separate risk-weights and reporting for residential
adjustable-rate mortgages;
(2) Separate risk-weights and reporting for residential fixed-
rate mortgages and all other amortizing assets;
(3) Self-reporting by banks of price sensitivities of
instruments with complex and/or non-standardized cash flow
characteristics such as structured notes, collateralized mortgage
obligations (CMOs), and mortgage servicing rights;
(4) Supplemental reporting for banks with concentrations in
adjustable- and fixed-rate mortgage loans.
(5) Greater flexibility in reporting deposits without stated
maturity or repricing dates;
(6) Separate reporting and treatment in the baseline schedule
for residential mortgage loans which are held by the bank for sale
and delivery to a secondary market participant under terms of a
binding commitment.
A summary of the public comments and agency analysis that led to
these refinements are included in section IV of this document and the
refinements themselves are described in detail in the policy statement
and accompanying reporting instructions.
For a bank choosing also to report the results of its internal IRR
model, the agencies are proposing to collect the dollar change in value
of the bank's major portfolios and the net change in the bank's
economic value using the same rate scenario incorporated in the
supervisory model. To the extent specific details concerning a bank's
financial instruments are incorporated in an internal model with
adequate integrity and reasonable assumptions, those results should
provide the agencies with an improved understanding of a bank's IRR
profile. For a bank reporting internal model results, an examiner would
have the benefit of weighing the results of both measures in assessing
a bank's overall IRR exposure for capital adequacy purposes. Moreover,
comparisons between the results of the supervisory model and internal
models are expected to aid the agencies in determining what, if any,
refinements should be made to the proposed measurement framework before
incorporating it into a minimum capital charge for IRR.
III. CDFI Section 335 Considerations
On September 23, 1994 the Reigle Community Development and
Regulatory Improvement Act of 1994 ("CDFI") (Pub. L. 103-325) was
enacted. Section 335 of CDFI amended section 305 of FDICIA by
instructing the agencies to be sure that steps taken to implement
Section 305 "take into account the size and activities of the
institutions and do not cause undue reporting burdens." The agencies
believe that the Congressional mandate to avoid undue reporting burdens
is also applicable and desirable for purposes of implementing the
proposed policy statement. Consequently, as already noted, the agencies
have formulated a reporting exemption test that takes into account the
size and activities of an institution. In addition, the reporting
requirements for the supervisory model also considers the nature and
scope of a bank's activities. Banks holding certain types of financial
instruments that often have complex or nonstandardized cash flow
characteristics will be expected to have the ability to calculate on
their own, or obtain from reliable sources, estimates of those
instruments' market value sensitivity. Banks with holdings of fixed-
and adjustable-rate residential mortgage loans and securities that
exceed certain levels would be required to report additional
information on those portfolios to better assess the embedded option
risks associated with those products.
IV. September 1993 Notice of Proposed Rulemaking
A. Description of September NPR
In September 1993, the Banking Agencies issued a notice of proposed
rulemaking (September NPR) [58 FR 48206, September 14, 1993] that
solicited comments on a framework for measuring a bank's IRR exposure
and determining the amount of capital the bank needed for IRR.
The framework outlined in the September NPR incorporated the use of
a three-level measurement process to evaluate banks' IRR exposures. The
first measure was a quantitative screen, based on existing Call Report
information, that exempted potential low risk banks from additional
reporting requirements. The exemption screen used two criteria: (1) The
amount of a bank's off-balance-sheet interest rate contracts in
relation to its total assets; and (2) the relation between a bank's
fixed- and floating-rate loans and securities that mature or reprice
beyond five years and its total capital.
Banks not meeting the proposed exemption test were required to
calculate their economic exposure by either: (1) A supervisory model
that measured the change in the economic value of bank for a specified
change in interest rates; or (2) the bank's own IRR model, provided
that the model was deemed adequate by examiners for the nature and
scope of the bank's activities and that it measured the bank's economic
exposure using the interest rate scenarios specified by the agencies.
B. Comments on the September NPR Measurement Framework
The agencies collectively received a total of 133 comments on the
September NPR. The majority of commenters were banks. Thrift, trade
associations, bank consultants, and other government-sponsored agencies
and regulators also commented. The majority of commenters responded
favorably to modifications that the agencies made from an earlier,
advanced notice of proposed rulemaking (ANPR) [57 FR 35507, August 10,
1992]. In particular, most commenters expressed strong support for
using the results of a bank's own IRR model to determine its level of
exposure and corresponding need for capital. Commenters noted the
potential inaccuracies of standardized regulatory models as one reason
for allowing the use of internal models. Internal models, they
believed, would better capture the unique characteristics of individual
bank portfolios. Many commenters also stated that permitting the use of
internal models would provide banks with incentives to improve their
internal risk measurement systems.
Many commenters raised concerns about various elements of the
measurement framework outlined in the September NPR. Most commenters
believed that the proposed treatment of non-maturity deposits
understated their effective maturity. Others questioned the accuracy of
the proposed supervisory model and the appropriateness of the proposed
exemption test criteria.
C. Agencies' Responses to Comments
The agencies have carefully considered the concerns raised by
commenters regarding the structure and elements of the proposed
measurement framework and the accuracy of the proposed supervisory
model. Although the agencies have decided to retain many of the
principles and structures outlined in the September NPR framework, the
agencies are also proposing several modifications and refinements to
that framework. These modifications include changes to the proposed
exemption criteria, the structure of the supervisory model, and the
treatment of certain types of assets and non-maturity deposits. These
modifications are discussed in greater detail in the sections that
follow.
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1. Exemption Criteria
The September NPR included criteria that would exempt a bank from
additional measurement and reporting requirements. The proposal set
forth the following two criteria that a bank would have to meet to
qualify for an exemption:
(1) The total notional principal amount of all of the bank's off-
balance-sheet interest rate contracts must not exceed 10 percent of its
assets; and
(2) 15 percent of the sum of the bank's fixed- and floating-rate
loans and securities that mature or reprice beyond 5 years must be less
than 30 percent of its total capital.
There was general support among commenters for some type of
exemption. The majority of commenters addressing this issue, however,
voiced concerns with the proposed test. Many commenters believed that a
10 percent threshold for off-balance sheet contracts would discourage
the use of such instruments in managing and reducing IRR exposures.
Commenters also expressed concerns that the maturity test, incorporated
in the second criterion, used contractual maturities rather than
expected average lives and would overstate the risk associated with
amortizing loans and securities, such as mortgage-related products.
Several commenters suggested modifying the criterion to use bank
management's estimates of average lives, rather than contractual
maturities.
Several commenters questioned whether the proposed exemption
criteria provided sufficient safeguards against exempting banks that
may pose significant risks to the Bank Insurance Fund due to their
potential IRR exposures. A few commenters noted the potential for
material intermediate-term maturity (e.g., 1- to 5-years) mismatches. A
minority of commenters question the need for, or efficacy of, any
exemption test.
The agencies continue to believe that an exemption is desirable and
that section 335 of CDFI Bill reinforces the need to consider ways of
minimizing burdens associated with this policy statement. The agencies
also believe that there is a need to ensure sufficient safeguards
against exempting banks that may pose significant systemic risks or
costs to the Bank Insurance Fund. Consequently, the agencies propose to
modify the exemption test to focus on three considerations: the size of
the bank; the quality of its overall condition and management, as
measured by its composite CAMEL rating; and the level of its potential
repricing exposure as measured by its intermediate and longer-term
assets. Specifically, to be exempted, a bank would have to meet the all
of the following three conditions:
(1) The bank must have total assets of less than $300 million; and
(2) Have a "1" or "2" composite CAMEL 1 rating from its
primary supervisor; and
\1\ CAMEL refers to the Uniform Financial Institution's Rating
System that the agencies have adopted. Each bank is assigned a
uniform composite rating based on an evaluation of pertinent
financial and operational standards, criteria and principles. This
overall rating is expressed through use of a numerical scale of
"1" through "5" with "1" indicating the highest rating and
"5" the lowest. The composite rating assess five key performance
dimensions that are commonly identified by the acronym "CAMEL":
Capital adequacy, Asset quality, Management, Earnings and Liquidity.
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(3) The sum of:
(a) 30 percent of its loans and securities with contractual
maturity or repricing dates between one and five years, and
(b) 100 percent of its loans and securities with contractual
maturity or repricing dates beyond five years must be less than 30
percent of the bank's total assets.
Banks that meet this proposed exemption test could elect to submit the
proposed IRR Call Report schedules on a voluntary basis. The agencies
encourage such voluntary reporting.
The exemption test does not alleviate the need for an exempted bank
to employ sound IRR measurement and management practices and to have
sufficient capital for its risk exposure. Exempted banks will continue
to be subject to safety and soundness IRR examinations that the
agencies may conduct. As a result of such examinations, a bank that is
exempt from this policy statement may be directed by their primary
supervisor to improve its IRR measurement and management practices, or
to hold additional capital for IRR. In addition, the agencies would
retain the right to require any bank to comply with the provisions of
this policy statement and any subsequent rulemakings regarding IRR.
2. Interest Rate Scenarios
The September NPR outlined a number of factors that should be
considered in selecting an appropriate interest scenario for measuring
banks' IRR exposures and evaluating capital adequacy. These factors
included:
(1) The time horizon over which banks and supervisors could
reasonably be expected to identify risk and implement mitigating
responses;
(2) The likelihood of occurrence, as reflected by historical rate
volatility; and
(3) The appropriate historical sample period used to determine the
likelihood of a given rate movement.
The agencies sought comment on several alternative methodologies
for developing appropriate interest rate scenarios, including both
parallel and non-parallel changes in interest rates. Among the non-
parallel methods, the interest rate scenario could be based upon
observed nominal changes in interest rates, or upon observed
proportional changes in interest rates. As an alternative, the agencies
also sought comment on using a simple parallel shift in interest rates
across the entire maturity spectrum ("parallel rate shocks").
The agencies received a range of comments on the selection and
determination of the appropriate interest rate scenarios. Commenters
were divided on whether a short or long historical sample was most
appropriate for determining the potential range of interest rate
movements. Those favoring a shorter sample period believed such a
period best reflected current and likely probabilities of rate changes.
Others favored a longer sample period, primarily to minimize the impact
of any one rate cycle. Opinions were also divided on whether a monthly,
quarterly, or annual time horizon was most appropriate for analyzing
potential rate scenarios. The majority of commenters favored either a
monthly or quarterly horizon, on the grounds that such time frames
represented the time bank management would need to implement risk
mitigating actions in response to an adverse movement in interest
rates. Others, however, disagreed and favored the use of an annual time
horizon.
Commenters also expressed diverse views on whether the proposed
rate scenarios should be based on nominal or proportional changes in
historical rates, or on the basis of a simple parallel rate shock. A
majority of commenters argued against the use of parallel rate shocks,
on the grounds that such scenarios were not realistic of probable
future interest rate changes. Of these commenters, most favored
scenarios that would be based on proportional rate changes, such that
the size of the rate change used to measure exposures would depend
upon, and vary with, the current level of market interest rates. Other
commenters, however, favored the use of parallel rate shocks, primarily
on the grounds of simplicity and ease of understanding.
The agencies propose to use a simple 200 basis point, instantaneous
parallel upward and downward shift in interest rates for measuring and
evaluating
[[Page 39499]]
banks' exposures for purposes of assessing capital adequacy. The
agencies believe that such rate movements are realistically
conservative given the movements in interest rates experienced in 1994.
They also believe that such rate scenarios are sufficiently transparent
and easy to understand that they can be easily incorporated into either
a bank's own IRR model or the supervisory model. The scenarios are
incorporated into the proposed supervisory model via the proposed risk-
weights that are applied to a bank's reported maturity and repricing
balances.
The agencies stress that their adoption of these rate scenarios
does not replace the need for a bank to evaluate its IRR exposure over
a wider range of possible rate changes for its own risk management
purposes. Such rate changes may include non-parallel yield curve shifts
and gradual, as well as immediate, rate changes. To ensure greater
consistency, however, in the agencies' assessments of banks' exposures
and their need for capital, banks are encouraged to include the
proposed instantaneous and parallel 200 basis point rate scenarios into
their internal IRR measurement processes.
3. Structure of Supervisory Model
The supervisory model in the September NPR grouped assets,
liabilities, and off-balance-sheet positions by various categories,
based on their general cash flow and product characteristics. Each
category and time band was assigned risk-weights corresponding to a
rising rate scenario and a declining-rate scenario. The risk-weights
were constructed by the agencies, using hypothetical market instruments
that were representative of the category being measured. For amortizing
instruments, the risk-weights incorporated assumptions about
prepayments.
A number of commenters expressed concerns regarding the accuracy of
the model proposed in the September NPR. Frequently cited concerns
included: the use of hypothetical, rather than bank-specific,
instruments to derive risk weights; the level of data aggregation; the
use of standardized prepayment assumptions; and the treatment of
interest rate protection agreements (caps and floors). A number of
commenters voiced concerns about the treatment of residential mortgage-
related products. In general, these commenters believed that additional
detail on mortgage holdings, such as coupon information on fixed- rate
mortgages, and more explicit information on periodic and lifetime
interest caps for adjustable-rate products, would improve the model's
accuracy.
The agencies sought comment in the September NPR on whether
commercial banks with portfolios that are similar to thrift should be
required to use the Net Portfolio Value model used by the Office of
Thrift Supervision (OTS) for federally-supervised thrift institutions.
Most commenters believed that such a requirement would impose
substantially greater reporting burdens without necessarily improving
the accuracy of the measure and might create incentives for banks to
substitute such a model for the judgment of bank management. A minority
of commenters disagreed and stated that the approach and data used by
the OTS were superior and more accurate than what the banking agencies
had proposed.
The agencies have carefully considered commenters' concerns about
the proposed supervisory model's accuracy. The agencies believe it is
critical to have a supervisory model that can identify banks with
significant IRR exposures. They also are attentive to the risk that
model measurement errors could lead to undesirable incentives or
incorrect assessments regarding the risk and complexity of products,
activities, or banks. At the same time, the agencies recognize the need
to balance the desire for increased accuracy against the potential
costs of greater reporting detail and model complexity. The agencies
are particularly concerned that the supervisory model retain sufficient
transparency so that bankers can understand its methodology and
anticipate and compute their bank's measured exposure and that it not
replace the role or need for sound internal interest rate risk
management systems.
The agencies intend to make five modifications to the structure of
the supervisory model to improve its accuracy and which are described
below. The first four changes modify the basic supervisory model
outlined in the September NPR. This revised basic model will be the
baseline model for non-exempted banks. The last modification creates
supplemental modules for banks that have concentrations in residential
mortgage-related instruments. The agencies are mindful that the
supplemental schedules will impose additional reporting requirements
for some banks. Nonetheless, the agencies are concerned that the
baseline model may not be sufficiently accurate to capture the risk at
banks with significant holdings of mortgage loans or mortgage pass-
through securities, and therefore propose to require additional
reporting for those banks. A detailed description of the model, the
risk weights, and information requirements are discussed in the policy
statement. Schedule 1, provided in the attached policy statement,
illustrates the type of information that will be used in the baseline
supervisory model, while Schedules 2-4 illustrate the information used
for the supplemental modules.
a. Adjustable-rate residential mortgages. The first modification
that the agencies have made is to treat adjustable-rate residential
mortgage loans and securities (ARMs) separately from fixed-rate
residential mortgage assets. As modified, information on ARMs will be
reported by a bank on the basis of the reset frequency of the ARM's
pricing index, rather than by the ARM's next date to repricing. In
addition, a bank will report ARMs that are currently within 200 basis
points of their lifetime cap separately from those ARMs that are
further away from their lifetime caps. The agencies believe that this
stratification of ARM products will provide a better reflection of
their potential price sensitivity to changes in market interest rates
than the treatment described in the September NPR.
b. Fixed-rate residential mortgages and other amortizing assets.
The second modification the agencies made is to treat fixed-rate
residential mortgage assets separately from other amortizing assets. In
the September NPR, these assets had been combined into a single
category. As a result of this combination, the same prepayment
assumptions were applied to all amortizing assets. By separating these
two categories, the agencies propose to apply different prepayment
assumptions to the two categories.
c. Self-reporting of market value sensitivities. The third
modification will require a bank that holds certain types of financial
instruments to provide in its Call Report submissions, estimates of
changes in market value sensitivities of those instruments for the
specified 200 basis point interest rate scenarios. These estimates may
be obtained from the bank's own internal risk measurement systems or
from reliable third-party sources, provided that the bank knows,
understands, and documents the assumptions underlying those estimates.
All estimates and supporting documentation will be subject to examiner
review. The September NPR used this approach for certain mortgage
derivatives securities. The agencies propose to extend this treatment
to other products. The products for which banks would be required to
self-report market value sensitivities generally have complex options
or cash flow
[[Page 39500]]
characteristics. These characteristics make it difficult to adequately
measure these products in a standardized model without collecting
detailed transaction-oriented data.
Self-reporting of market value sensitivities generally would be
required for the following products or portfolios:
(1) All mortgage-backed derivative securities that meet the
FFIEC's definition of "high-risk." 2
\2\ Effective February 10, 1992, the agencies and the Office of
Thrift Supervision adopted revised supervisory policies on
securities activities that were developed under the auspices of the
FFIEC. The revised policies established a framework for identifying
"high-risk mortgage derivative products."
---------------------------------------------------------------------------
(2) All structured notes, as defined in the Call Report
instructions;
(3) Non-high-risk mortgage derivative securities when those
holdings represent 10 percent or more of a bank's assets.
(4) Mortgage servicing rights that are capitalized and reported
on the bank's balance sheet;
(5) Off-balance-sheet interest rate options, caps, and floors,
including interest rate swaps with embedded option characteristics.
The agencies believe that given the potential price sensitivity of
these products or portfolios to interest rate changes, it is reasonable
to expect banks to be able to calculate or obtain reliable estimates of
their market value sensitivities. Industry comments on the availability
of such information are especially welcomed.
d. Trading account portfolios. The agencies also propose to change
the manner in which trading account positions are treated in the
supervisory model. These changes are in response to commenters concerns
regarding the burden associated with distributing trading positions
into the maturity ladder and applying a 200 basis point rate shock to
those positions.
As modified, banks will be asked to self report the change in the
economic value of all of their trading account positions for a 100
basis point parallel increase or decrease in interest rates. This rate
change, smaller than the 200 basis point change used for the rest of
the bank's holdings, reflects the shorter holding period typical for
trading account positions. It also is similar to the 100 basis point
scenario used by the Basle Committee on Banking Supervision (Basle
Committee) in its April 1995 proposal on capital requirements for the
market risks of traded debt securities.\3\
\3\ The Basle Committee on Banking Supervision is a committee of
banking supervisory authorities which was established by the
central-bank Governors of the Group of Ten countries in 1975.
---------------------------------------------------------------------------
The agencies believe the self-reporting treatment for trading
accounts is consistent with supervisory guidance issued by each of the
agencies that directs banks with significant trading activities to have
internal risk measurement and limit systems commensurate with the size
and complexity of their activities.
As previously noted, the Basle Committee has recently released for
comment a proposal to incorporate the market risks of trading
activities into the Basle Accord risk-based capital standards.\4\ The
agencies published in the Federal Register on July 25, 1995 (60 FR
38082) a notice of proposed rulemaking on the Basle market risk
proposal. If the agencies adopt a final rule to implement the Basle
market risk proposal for banks with a large concentration of trading
activities, the agencies anticipate that modifications to this policy
statement will be required to ensure that IRR exposures arising from
those activities are not "double-counted." One approach that the
agencies are considering is to exclude trading activities from this
proposed policy statement and IRR measure for those banks that are
subject to the market risk proposal. If such an approach is adopted,
those banks would be exempted from having to report the changes in the
market value of their trading portfolios for the IRR measure. If,
however, a bank's trading portfolio offsets the exposure from other
components of the bank's balance sheet, this treatment would overstate
the bank's total IRR exposure.
\4\ The Committee's proposal is described in a consultative
paper, entitled "Planned Supplement to the Capital Accord to
Incorporate Market Risks," issued in Basle, Switzerland on April
12, 1995. Copies of that paper may be obtained by contacting: The
OCC's Communications Division, Ninth Floor, Office of the
Comptroller of the Currency, 250 E Street, S.W., Washington, D.C.
20219. A copy of the paper also is available at the FDIC Reading
Room, 550 North 17th Street, NW, Washington, D.C.
---------------------------------------------------------------------------
e. Supplemental modules. The final modification made by the
agencies to the supervisory model structure is the development of
supplemental modules for fixed-rate and adjustable-rate residential
mortgage loans and pass-through securities. A bank whose holdings of
these products exceeds certain threshold levels will be required to
report additional information on those holdings in their Call Report
submissions. The agencies will apply expanded tables of risk-weights to
those portfolios. The supplemental module for fixed-rate residential
mortgages requires a bank to stratify its balances into eight coupon
ranges. The agencies have developed separate risk-weights for each
coupon range which reflect the differences in expected prepayment
speeds that are associated with the underlying coupon rates. To develop
these risk-weights, the agencies have used the September 30, 1994
pricing tables generated by the Office of Thrift Supervision's Net
Portfolio Value Model.\5\ The agencies will apply this supplemental
module and associated risk-weights when a bank's holdings of fixed-rate
residential mortgage loans and pass-through securities represent 20
percent or more of its total assets. Schedule 2 in the attached policy
statement illustrates the information that will be used in the
supplemental module for fixed-rate residential mortgages. This expanded
module will be optional for a bank whose holdings of these instruments
are less than 20 percent of its assets.
\5\ Appendix 4 of the policy statement provides a description of
the derivation of the risk-weights for the baseline supervisory
model and supplemental modules.
---------------------------------------------------------------------------
Two levels of supplemental modules have been developed by the
agencies for adjustable-rate residential mortgages. The first level,
illustrated by Schedule 3 in the attached policy statement, requires
information on ARMs to be stratified by reset frequency (as in the
baseline model), periodic caps, and the ARMs' distances from lifetime
caps. This module will be used by the agencies when a bank's ARM
holdings are greater than 10 but less than 25 percent of its assets.
The second level, illustrated by Schedule 4 in the attached policy
statement, requires that ARM balances be further stratified by the
underlying rate index of the ARM. This module will apply to banks whose
holdings equal or exceed 25 percent of their total assets. The agencies
have developed risk-weights that correspond with each various reset
frequency, lifetime cap, periodic cap, and, index combination, again
using pricing tables generated from the OTS Net Portfolio Value Model.
The agencies are mindful that many commenters to the September NPR
raised concerns about tradeoffs between attempts to improve the
supervisory model accuracy and associated reporting burdens, especially
with regards to the use of the OTS model. Nonetheless, the agencies
believe the distribution of coupons for fixed-rate mortgage portfolios
and the interaction of the parameters illustrated in Schedules 3 and 4
significantly affect the price sensitivity of mortgage loans and
securities. The agencies believe that by explicitly considering these
parameters, the supplemental modules will enhance the accuracy of the
supervisory model. The agencies believe that this increased accuracy is
[[Page 39501]]
warranted due to the increased holdings of mortgage products among
commercial and savings banks. They also note the flexibility that many
banks exercise in their ability to tailor the various pricing
combinations of their ARM products. As banks expand their activities in
these products, the agencies are particularly concerned that banks not
ignore the potential impact and interaction of these pricing
parameters.
Draft instructions for completing the supplemental modules and a
technical description of the risk-weights used in the modules are
provided in the appendices 2 and 4 to the proposed policy statement.
4. Non-maturity deposit assumptions. The September NPR established
limits on the maximum maturities that a bank could attribute to its
non-maturity deposits when measuring its IRR exposures for capital
adequacy. Non-maturity deposits were defined to be those instruments
without a specific maturity or repricing date and included demand
deposits (DDA), negotiable order of withdrawal (NOW), savings, and
money market deposit (MMDA) accounts. In the September NPR, banks were
subject to the following constraints in distributing these deposits
across time bands:
(1) A bank could distribute its DDA and MMDA accounts across any
of the first three time bands, with a maximum of 40 percent of those
balances in the 1 to 3 year time band;
(2) A bank could distribute its savings and NOW account balances
across any of the first four time bands, with a maximum of 40
percent of the total of those balances in the 3 to 5 year time band.
The treatment of non-maturity deposits was one of the most
commented upon aspects of the September NPR. Most commenters stated
that the proposed treatment could, in many cases, understate the
effective maturity of these deposits and urged the agencies to adopt a
more flexible approach or extend the permissible maturities. Commenters
expressed concern that the adoption of the proposed rules could lead to
incorrect assessments of risk exposures or inappropriate incentives to
shorten asset maturities.
The agencies recognize that the treatment of non-maturity deposits
will be, for many banks, the single most important assumption in
measuring their IRR exposures. The agencies also agree that many banks
historically have been able to exercise considerable flexibility in the
timing and magnitude of pricing changes for these accounts. It is for
this reason that the agencies had proposed to allow banks some
flexibility in the treatment of these deposits. Nonetheless, the
agencies believe that there are risks associated with assuming that a
bank has sufficient flexibility in its management of these deposits so
as to offset any IRR position it may have. While these deposits can, in
many circumstances, help to mitigate a bank's IRR exposure, historical
experience suggests that an institution can incur significant levels of
IRR though it may have sizeable holdings of non-maturity deposits. The
agencies also are concerned that increased competitive pressures and
changing customer demographics may, over time, make these deposits more
rate sensitive or prone to migration into other investment vehicles.
Given these considerations, the agencies believe it is appropriate
to extend, but not eliminate, the maximum permissible maturities for
non-maturity deposits. Within these maturity ranges, a bank would have
the flexibility to distribute its balances based on its own assumptions
and experience. The agencies will expect that bank management will be
able to document to examiners the rationale for the treatment they have
chosen.
In addition to extending permissible maturities, the agencies
believe that demand deposit balances held by businesses should be
treated differently than demand balances held by other entities. In
particular, the agencies believe that a shorter maturity is appropriate
for commercial demand deposit accounts since many of these accounts are
in the form of compensating balances.\6\ The implicit earnings from
these compensating balances are often used to offset service charges
incurred by the customer, and the level of these implicit earnings
attributed to the deposits is generally dependent upon the level of
current market rates. As such, these balances behave very much like
interest-sensitive balances. As market rates increase, the level of
balances drops due to a higher earnings credit, while as rates decline,
the level of balances will generally increase.
\6\ For purposes of this policy statement, the term
"commercial" is used to mean "nonpersonal" as that term is
defined under the Board of Governor of the Federal Reserve System's
Regulation D dealing with reserve requirements.
---------------------------------------------------------------------------
The agencies propose to extend the range of permissible maturities
for non-maturity deposits by revising the distribution rules for those
deposits. As proposed, a bank may distribute its deposits across time
bands according to its individual assumptions and experience, subject
to the following constraints:
(1) Commercial Demand Deposits: A bank would report 50 percent
of it's commercial demand deposits in the 0-3 month time band. The
remaining balances may be distributed across the first four time
bands, with a maximum of 20 percent of total balances in the 3-5
year time band.
(2) Retail DDA, Savings, and NOW Accounts: A bank may distribute
the balances in these accounts across any of the first five time
bands, with a maximum of 20 percent in the 5-10 year time band and
no more than 40 percent combined in the 3-5 and 5-10 year bands.
(3) MMDA Accounts: A bank may distribute the balances in these
accounts across any of the first three time bands, with a maximum of
50 percent in the 1-3 year band.
Table A summarizes the distribution that would result if a bank
reported its balances so as to maximize its allowable maturities.
Table A.--Maturity Distribution Limits for Non-Maturity Deposits
----------------------------------------------------------------------------------------------------------------
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years
(percent) (percent) (percent) (percent) (percent)
----------------------------------------------------------------------------------------------------------------
Commercial DDA................................. 50 0 30 20 ...........
Retail DDA..................................... 0 0 60 20 20
MMDA........................................... 0 50 50 ........... ...........
Savings........................................ 0 0 60 20 20
NOW............................................ 0 0 60 20 20
----------------------------------------------------------------------------------------------------------------
[[Page 39502]]
The agencies believe that these maturity limits provide appropriate
guidelines for the purpose of standardized IRR measurement across the
banking industry. These limits are not intended to replace the need for
banks to evaluate and consider the sensitivity of their individual
deposit bases when managing their IRR exposures. Examiners will
consider a bank's assessment of its deposit base and how those
assessments may differ from those used in the standardized supervisory
model during the examination process when evaluating a bank's capital
adequacy for IRR. The agencies do not propose to require banks to
incorporate these assumptions into their internal IRR models when
submitting internal model results to the agencies. Rather, through the
examination process, examiners will consider whether the treatment used
in the bank's model is appropriate, based on the analysis the bank
provides.
5. Use of a Bank's Internal IRR Model
The September NPR permitted a bank to use the results of its
internal IRR model, as an alternative to the supervisory model, when
assessing its need for capital for IRR, provided that its model was
deemed adequate by the appropriate supervisor. Most commenters
expressed strong support for using the results of a bank's internal
model and believed that such a model would provide a more accurate
assessment of risk than the proposed supervisory model.
The proposed policy statement provides for the consideration of a
bank's internal model results in the assessment of that bank's level of
IRR exposure and its need for capital. The results and quality of a
bank's IRR measurement process will be one factor that examiners will
consider in assessing a bank's need for capital. Among the factors that
an examiner will consider when evaluating the quality of a bank's
internal model is whether the risk profile it generates is an adequate
measure of the bank's risk position, taking account of the types of
instruments held or offered by the bank, the integrity and completeness
of the data used in the model, and whether the assumptions and
relationships underlying the model are reasonable. When assessing the
exposure of a bank's economic value to changes in interest rates,
examiners generally will place greater reliance on the results of a
bank's internal model, rather than the supervisory model, provided that
the bank's own model:
(1) Measures IRR from an economic perspective, as defined in this
proposal;
(2) Uses the proposed supervisory scenario of an instantaneous and
parallel 200 basis point movement in interest rates; and
(3) Is deemed by the examiner to provide a more accurate assessment
of the bank's IRR risk profile than the supervisory model and meets the
criteria discussed in Section VII of the proposed policy statement.
Reacting to the September NPR, some commenters requested the
agencies to provide more explicit guidelines on the criteria that
examiners will use to evaluate the adequacy of a bank's model. Other
commenters cautioned the agencies against creating checklists of
acceptable assumptions or measurement techniques. Such lists, they
believed, would be incomplete given the diverse nature of banks and
would stifle innovation in both risk measurement and product
development. Some commenters also expressed concern that the
assumptions and results of the supervisory model would be used as an
explicit benchmark against which internal models would be judged and
compared. These commenters were concerned that examiners would require
the bank to conduct detailed and ongoing reconciliations between the
bank's internal model and the supervisory model results. Such
requirements, they believed, imposed unnecessary burdens and lessened
the incentives for banks to use their own IRR models. Commenters
raising these concerns generally urged the agencies to refrain from
imposing supervisory model assumptions on bank models and from
requiring banks that have their own internal model to report the
information required for the supervisory model.
A key issue for the agencies, and one reason for delaying the
implementation of explicit minimum capital standards for IRR, is the
degree of specification the agencies need to establish when internal
models are used for assessing regulatory capital adequacy. The agencies
are aware that there are a variety of measurement systems and
assumptions in use by the industry to measure exposures. While such
variation may be appropriate given the diverse nature of commercial
banks, it may lead to different assessments of risk and hence, capital
requirements, for institutions that have similar risk profiles. More
explicit guidance from the agencies on acceptable techniques and
assumptions could help to lessen this variation and the risk that
different amounts of capital may be required for banks with similar
portfolios. Such guidance also would help reduce inconsistencies among
examiners and agencies in evaluating internal models. Efforts to devise
more explicit guidance could, however, result in standards which are
inappropriate for some institutions and may impede the industry's
continued innovation of more sophisticated risk measurement techniques.
The agencies welcome industry comments and suggestions on criteria and
standards that they should establish for accepting internal model
results.
With regard to reporting, the agencies propose that internal model
results be reported on voluntary basis in a supplemental Call Report
schedule like that portrayed in Schedule A. In response to the concerns
of many commenters, the agencies propose that such reporting be on a
confidential basis. Although many commenters to the September NPR
requested that banks submitting internal model results not be required
to also report the data required for the supervisory model, the
agencies propose the data for the supervisory model be collected from
all non-exempt banks. While recognizing the reporting burden that this
imposes, the agencies believe that collecting data for both internal
and the proposed supervisory model results will be important for
effective supervision. Moreover, such data also will help the agencies
evaluate the use of both the supervisory model and internal models as
the basis for ultimately establishing minimum capital charges for IRR.
By monitoring the maturity and repricing data collected for the
supervisory model, the agencies will be able to assess whether
supervisory and internal models results capture major shifts in
portfolio compositions. Such monitoring may help identify key model
assumptions that should be highlighted for examiner review and common
strengths or weaknesses of internal measures when compared to the
supervisory model. This information will help the agencies to provide
better guidance to examiners and bankers on acceptable risk measurement
techniques. It will also assist the agencies in determining what, if
any, improvements could be made to the proposed supervisory model
before explicit minimum capital charges are implemented.
V. Reporting Requirements
The implementation of this policy statement relies on changes to
the Call Report. The examples of Call Report schedules shown in this
proposal and the accompanying draft reporting instructions for those
schedules are provided to assist the reader in analyzing the full
implications of the proposal. Once comments are received on the
measurement framework and any
[[Page 39503]]
modifications that the agencies believe are appropriate are made, the
proposed Call Report schedules would also be amended to reflect those
changes. At that time, the Call Report schedules would be submitted to
FFIEC's Reports Task Force for inclusion in the comment document for
March 1996 Call Report changes. The FFIEC will submit any Call Report
changes to OMB for review as required under the Paperwork Reduction Act
44 U.S.C. 3501. Opportunity for public comment is always provided in
relation to such a submission. Nevertheless, the agencies invite
comments regarding the paperwork implications of this proposed policy
statement, and will carefully consider any comments received in the
development of the policy, as well as in recommending to the FFIEC
proposed revisions to the Call Report.
VI. Implementation Schedule
The agencies propose to require any additional reporting by non-
exempt banks beginning with the March 1996 Call Reports. Full
implementation of this policy statement for assessing the adequacy of
bank capital would be effective December 31, 1996.
VII. Requests for Comments
Comments are requested on all aspects of the proposed policy
statement, including the suggested implementation schedule. The
agencies particularly request comments on the following issues:
1. Exemption for Small Banks
The agencies propose to exempt certain small banks from the
proposed policy statement and associated reporting requirements in
order to lessen regulatory burdens on small, well-managed banks. The
criteria for exemption considers the size of the bank, its overall
CAMEL rating and the proportion of assets in intermediate and longer-
term maturities.
a. Are the three criteria used for the exemption appropriate and
reasonable?
b. Does the use of a bank's confidential CAMEL rating as one of the
exemption criteria raise concerns that it may allow public users of
Call Reports to discern a bank's CAMEL rating?
c. Does the proposed exemption criteria provide adequate safeguards
against exempting banks that pose significant risks to the deposit
insurance fund due to IRR?
2. Baseline Supervisory Model
The agencies are proposing that all non-exempted banks provide
information for a baseline supervisory model, the results of which,
would be one factor that an examiner would use to assess a bank's level
of IRR exposure and its need for capital. The baseline model uses seven
time bands and applies a series of risk-weights to a bank's reported
repricing and maturities balances in each of those time bands. For
certain types of instruments or activities, a bank would be required to
provide their own estimate of the change in value (self-report) of the
instruments or activities for the specified interest rate scenario.
a. Does the proposed baseline supervisory model provide a
reasonable basis for measuring a bank's IRR exposure? If not, what
changes should be made to the model?
b. Are the amount and type of data proposed to be collected for the
model appropriate and reasonable? If not, what changes could be made
either to improve the usefulness of the data collected and/or reduce
the burden of the proposal?
c. Do banks have the ability to calculate or obtain reasonable
estimates of changes in market values for the items where self-
reporting would be required? If not, how should such items be
incorporated into the model? What factors should examiners consider in
reviewing and assessing the reliability of bank's self-reported
estimates?
d. Are the risk-weights proposed for the baseline model appropriate
for an immediate and parallel 200 basis change in interest rates?
e. What portion, if any, of the proposed Call Report interest rate
risk data and output from the proposed supervisory measurement system
should be made available to the public through Call Report disclosures
and the Uniform Bank Performance Report?
3. Treatment of Non-Maturity Deposits
The agencies propose limits on how a bank could distribute deposits
without specified maturities (DDA, NOW, MMDA and savings) among the
time bands for the supervisory model. In setting these limits, the
agencies propose to treat commercial DDA balances separately from other
DDA balances. As proposed, these limits only apply to the standardized
supervisory model. The proposal would give an examiner the latitude to
use a bank's own non-maturity deposit assumptions when evaluating the
bank's capital adequacy for IRR provided that the bank can demonstrate
and support those assumptions.
a. Is it appropriate to treat commercial DDA balances separately
from other DDA balances?
b. Are the proposed maturity limits reasonable for a standardized
reporting and measurement framework?
c. Is it appropriate to give examiners latitude to use a bank's own
non-maturity deposit assumptions? If so, should the agencies specify
minimum standards of analysis that will be acceptable for banks that
wish to use their own assumptions? What types of analyses or factors
should be incorporated into such standards?
4. Supplemental Modules for Mortgage Holdings
The agencies have proposed supplemental reporting and expanded
risk-weight tables that would apply to banks that have concentrations
in either fixed- or adjustable-rate residential mortgage products.
These supplemental modules are designed to improve the supervisory
model's accuracy by incorporating more fully, the parameters which may
affect a mortgage's price sensitivity. The agencies propose to derive
the risk-weights for the supplemental modules from pricing tables
generated by the OTS's Net Portfolio Value Model (OTS model).
a. Is the information that would be collected for the supplemental
modules appropriate and meaningful? If not, what changes should be
made?
b. Are the thresholds proposed for requiring a bank to use the
supplemental modules appropriate? If not, what threshold would be
appropriate?
c. Do the supplemental modules and risk-weights sufficiently
address concerns about the supervisory model's accuracy for banks with
significant holdings of residential mortgage products? Will their use
lessen the possibility of different regulatory treatment for
institutions subject to the OTS model and those subject to this policy
statement?
d. Will the use of the supplemental modules and the associated
risk-weights used in those modules provide appropriate incentives for
bank decision-making? Will their use discourage the development of a
bank's own measurement capabilities?
e. Is the OTS model a reasonable source for developing the risk-
weights used in this module? If not, are there other sources that would
be more better?
f. The agencies believe the supplemental schedules related to
mortgages are necessary because the price sensitivity of these products
may vary substantially depending upon their coupon and cap
characteristics. Are the proposed supplemental schedules appropriate
and is the level of precision sought by the agencies reasonable?
[[Page 39504]]
5. Frequency of Updating Risk-Weights
In the interest of minimizing regulatory burden and providing
greater transparency and certainty for the supervisory model, the
agencies propose to update the risk weights for the baseline and
supplemental schedules only in the event of a significant movement in
market rates or other market factors that materially change the
accuracy of the derived price sensitivities and associated risk
weights. The OTS, in contrast, recalculates the price sensitivities for
its model each quarter in order to achieve the precision it believes
necessary to distinguish among different coupon rates of mortgage and
other products.
a. Does the agencies' intention to limit the updating of risk-
weights represent an appropriate balance among the objectives of
minimizing regulatory burden, providing transparency and certainty, and
providing sufficient measurement accuracy? If not, what other
approaches would be appropriate?
b. Does this limitation on updating risk weights materially reduce
the benefits and accuracy that the supplemental schedules for mortgages
are designed to provide?
c. The supplemental reporting schedule for fixed-rate mortgages
proposes to collect balance information by set coupon ranges. An
alternative that the agencies have considered is to collect balances on
the basis of their distance from prevailing current market coupons.
Such a treatment would allow the risk weight applied to any given
mortgage coupon to vary as its spread to current mortgage rates varies.
Would such a treatment be an improvement over the approach currently
proposed by the agencies? What, if any, difficulties would be
encountered in reporting balances on the basis of their spread to
current mortgage coupons?
6. Use of Carrying Values
In the interest of simplicity, the agencies propose to apply the
risk weights, including those derived from the OTS price sensitivities,
to the carrying value of a bank's instruments. To the extent that the
carrying and market values differ, this introduces an error in the
estimated price sensitivity of an instrument. The price sensitivity of
instruments whose market values exceed their carrying values will be
understated whereas the price sensitivity of instruments whose market
values are below carrying values will be overstated.
a. Is the use of carrying values an appropriate simplification and
does the use of carrying values for both assets and liabilities
sufficiently mitigate the materiality of such errors? If not, what
other approach(es) would be appropriate?
7. Use of Internal Models
a. Does the proposed policy statement provide appropriate
incentives for the use of banks' internal models and for banks to
enhance their internal risk measurement systems?
b. Are the criteria described for assessing a bank's internal model
appropriate? What other factors or criteria should examiners consider
in assessing and reviewing a bank's internal model results?
c. Should the agencies provide additional guidelines on acceptable
parameters, assumptions, and methodologies for internal models? What
types of guidance would be most useful?
d. Is the proposed voluntary schedule for reporting internal model
results appropriate? Are there sufficient incentives for banks to
provide this information on a voluntary basis?
8. Treatment of Trading Account
The agencies propose that banks "self-report" the change in value
of their trading account activities for a 100 basis point change in
interest rates. The agencies also are considering whether trading
account activities should be excluded from this policy statement and
IRR measure if a bank is subject to the market risk capital
requirements as proposed by the Basle Committee.
a. Is the 100 basis point interest rate scenario that the agencies
propose to use when measuring the IRR exposure in a bank's trading
portfolio appropriate? If not, what scenario would be appropriate?
b. What modifications, if any, should be made to this proposal for
banks that may be subject to the Basle Committee's proposed capital
standards for market risk in trading activities? What, if any,
operational problems would be created if such banks were simply
exempted from including and reporting their trading activities for
purposes of this policy statement? What, if any, competitive issues
would such a treatment present?
The text of the proposed policy statement follows. The first two
appendices to the proposed policy statement provide proposed reporting
schedules and accompanying instructions for those schedules that are
under consideration by the agencies as part of this proposed policy
statement. The third appendix provides the risk weights that would be
used in the proposed supervisory model. The fourth appendix provides
technical descriptions of the derivation of the model's risk weights
and the supplemental modules for residential mortgage-related products.
Proposed Policy Statement
I. Purpose
This supervisory policy statement is adopted by 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." The statement
establishes a supervisory framework that the agencies will use to
assess and measure the interest rate risk (IRR) exposures of insured
commercial and FDIC supervised savings banks. The results of this
measurement framework will be used by the agencies in their evaluation
of a bank's IRR exposure and whether it needs capital for IRR. Each
agency has additional guidance and policies on the measurement and
management of IRR. Those policies and guidelines set forth each
agency's expectations regarding safe and sound banking practices for
IRR management. This policy statement does not replace or supersede
those issuances. The adoption of this policy statement by the agencies
does not replace the agencies' expectations that all insured depository
institutions have internal IRR measurement and management processes
that are commensurate with the nature and level of their IRR exposures.
II. Background
Interest rate risk is the adverse effect that changes in market
interest rates have on a bank's earnings and its underlying economic
value. Changes in interest rates affect a bank's earnings by changing
its net interest income and the level of other interest-sensitive
income and operating expenses. The underlying economic value of the
bank's assets, liabilities, and off-balance sheet instruments also are
affected by changes in interest rates. These changes occur because the
present value of future cash flows and in some cases, the cash flows
themselves, change when interest rates change. The combined effects of
the changes in these present values reflect the change in the bank's
underlying economic value.
Interest rate risk is inherent in the role of banks as financial
intermediaries. Interest rate risk, however, introduces volatility to
bank earnings and to the economic value of the bank. A bank that has an
excessive level of IRR can diminish its future earnings, impair its
[[Page 39505]]
liquidity and capital positions, and, ultimately, jeopardize its
solvency.
The agencies believe that safety and soundness requires effective
management and measurement of IRR, and each agency has provided
supervisory guidance to banks and examiners on this subject. In
addition, the agencies believe that a bank's capital adequacy should be
assessed in the context of the risks it faces, including interest rate
risk. Both of these aspects of IRR depend, among other things, on a
meaningful measurement of the bank's risk exposure.
The agencies believe that a bank should have an IRR measurement
system that is commensurate with the nature and scope of its IRR
exposures. Among the difficulties in performing a supervisory
evaluation of interest rate risk, however, is that measurement systems
and management philosophies can differ significantly from one bank to
another. As a result, although two banks may each be well-managed,
their measured exposure may not be directly comparable. This difficulty
has been magnified by the rapid pace of change in financial markets and
instruments themselves. In light of the rapid evolution in financial
instruments and practices, the agencies believe there is a need for the
more formal assessment of banks' IRR exposures that this policy
statement establishes.
The measurement framework described in this policy statement
focuses on the exposure to a bank's underlying economic value from
movements in market interest rates. The exposure to a bank's economic
value, as used in this policy statement, is defined as the change in
the present value of its assets, minus the change in the present value
of its liabilities, plus the change in the present value of its
interest-rate related off-balance sheet positions. The agencies have
chosen this focus because they believe that changes in a bank's
economic value best reflect the potential effect of embedded options
and the potential exposure that the bank's current business activities
pose to the bank's future earnings stream, and hence, its ability to
sustain adequate capital levels. Changes in economic value measure the
effect that a change in interest rates will have on the value of all of
the future cash flows generated by a bank's current financial
positions, not just those cash flows which affect earnings over the few
months or quarters. Thus, changes in economic value provide a more
comprehensive measure of risk than measures which focus solely on the
exposure to a bank's near-term earnings.
III. Definitions and Applicability
A. Definitions
For the purpose of this policy statement, the following definitions
apply:
(1) Interest Rate Risk Exposure means the estimated dollar decline
in the economic value of the bank in response to a potential change in
market interest rates under the specified interest rate scenarios, as
measured by either the supervisory measure or, where applicable, a
bank's internal model.
(2) Economic value of the bank means the net present value of its
assets, minus the net present value of its liabilities, plus the net
present value of its off-balance-sheet instruments.
(3) Interest rate scenarios means the specified changes in market
interest rates used in calculating a bank's IRR exposure.
(4) Mortgage derivative products means interest-only and principal-
only stripped mortgage-backed securities (IOs and POs), tranches of
collateralized mortgage obligations (CMOs) and real estate mortgage
investment conduits (REMICS), CMO and REMIC residual securities, and
other instruments having the same characteristics as these securities.
(5) Net risk-weighted position means the sum of all risk-weighted
positions of a bank's assets, liabilities and off-balance sheet items,
plus the estimated change in market values for any self-reported items.
For the purposes of the supervisory measure, this number represents the
amount by which the economic value of the bank is estimated to change
in response to a potential change in market interest rates under the
specified interest rate scenarios.
(6) Non-maturity deposits mean demand deposit accounts (DDAs),
money market deposit accounts (MMDAs), savings accounts, and negotiable
order of withdrawal accounts (NOWs).
(7) Notional principal amount means the total dollar amount upon
which payments on a contract are based.
(8) Structured notes mean those instruments identified as
structured notes for Call Report purposes.
(9) Commercial demand deposits mean "nonpersonal" demand deposits
as that term is defined under the Board of Governors of the Federal
Reserve System's Regulation D.
B. Applicability and Exemption for Small Banks With Low Risk
All banks will be subject to the provisions of this policy
statement and will be expected to provide information for the
supervisory model, unless:
(1) The total assets of the bank are less than $300 million, and;
(2) The bank's primary supervisor has assigned it a composite CAMEL
rating of either "1" or "2"; and
(3) The sum of:
(a) 30% of the bank's fixed- and floating-rate loans and securities
that have contractual maturity or repricing dates between 1 and 5
years, and
(b) 100% of the bank's fixed- and floating-rate loans and
securities that have contractual maturity or repricing dates beyond 5
years,
is less than or equal to 30% of the bank's total assets.
Notwithstanding this exemption, the appropriate bank supervisor may
apply any or all provisions of this policy statement to a bank if the
supervisor deems such application is necessary to ensure the capital
adequacy of the bank. This means that a bank which otherwise meets the
exemption criteria may be required by the agencies to provide maturity
and repricing data needed for the supervisory model. The agencies would
intend to invoke this requirement only in circumstances where a bank
appears to have excessive IRR levels and lacks sufficient internal risk
measures such that a determination of its need for capital cannot be
adequately assessed by the agencies. Banks that are exempted from the
provisions of this policy statement would continue to be subject to
safety and soundness IRR examinations and, as a result of such exams,
could be directed by their supervisor to improve or strengthen their
risk management practices, or hold additional capital for IRR.
If a previously exempted bank fails to meet the exemption criteria
as of the June reporting date, it would be required to report the
necessary data in the Reports of Condition and Income beginning in
March of the next year regardless of its exemption status for the
remainder of the current year. The one exception to this requirement is
a bank that is involved in business combinations (pooling of interest,
purchase acquisitions, or reorganizations) that would result in a
change in their exemption status. In those instances, the bank will be
subject to any new reporting requirements beginning with the first
quarterly report date following the effective date of the business
combination involving the bank and one or more depository institutions.
C. Specified Interest Rate Scenarios
For the purpose of measuring a bank's level of IRR exposure for
capital adequacy, under either the supervisory model or a bank's
internal model, the
[[Page 39506]]
agencies will consider both a rising and falling interest rate scenario
based on an instantaneous uniform 200 basis point parallel change in
market interest rates at all maturities. The agencies may, from time to
time, modify the specified interest rate scenarios as appropriate,
considering historical and current interest rate levels, interest rate
volatilities and other relevant market and supervisory considerations.
IV. Description of the Supervisory Model
A. Overview
The intent of the supervisory model is to provide the agencies with
a measure that estimates the sensitivity of a bank's economic value to
a specified change in interest rates with sufficient accuracy so as to
allow the agencies to identify banks that have high IRR exposures. The
model applies a series of IRR risk weights to a bank's reported
repricing and maturity balances. These weights estimate price
sensitivity of a bank's reported balances to a 200 basis point change
in interest rates. The summation of these weighted balances, along with
certain price sensitivity information that a bank may be required to
self-report, results in a net risk-weighted exposure for the bank. This
net risk-weighted exposure is an estimate of the sensitivity of the
bank's economic value to the specified change in interest rates.
The maturity and repricing information contained in the Call Report
that all non-exempted banks are required to file, along with the IRR
risk weights that are applied to that information, form the baseline
supervisory model. Banks with concentrations in fixed- or adjustable-
rate residential mortgage products are required to submit additional
information on those holdings through supplemental Call Report
schedules. Supplemental IRR risk weights are applied to this
information. These supplemental reporting schedules and IRR risk
weights are referred to as supplemental modules to the baseline
supervisory model.
B. Supervisory Model Calculations
The structure and format of the supervisory model is designed to
allow a bank manager to be able to calculate the IRR exposure of his or
her bank so as to not be dependent upon the agencies for obtaining
model results. The calculation of a bank's IRR exposure using the
supervisory model generally requires the following steps
(1) The bank's assets, liabilities, and off-balance sheet
contracts must be assigned to the appropriate balance sheet
categories based on the instrument's cash flow characteristics.
(2) Within each balance sheet category, each asset, liability or
off-balance sheet contract must be assigned to the appropriate time
band generally based on each instrument's remaining maturity or next
repricing date.
(3) Balances within each time band must be multiplied by the
appropriate risk weight to produce a risk-weighted position for each
interest rate scenario.
(4) All risk-weighted positions must be summed to produce a net
risk-weighted position for each interest rate scenario which is the
basis for determining the bank's measured exposure to interest rate
risk.
A bank performs the first two steps in its compilation and
submission of the IRR Call Report schedules. Those schedules and
accompanying instructions are contained in the Appendices 1 and 2 to
this policy statement. The risk-weights required for step three are
contained in the tables in Appendix 3 to this policy statement.
C. Information Requirements of the Supervisory Model
Use of the supervisory model requires information on the maturity
and repricing characteristics of a bank's assets, liabilities and off-
balance-sheet positions. This information is collected by the agencies
through the quarterly Call Report submissions filed by non- exempted
banks and illustrated by Schedule 1.7 This reporting schedule
requires a bank to report its assets, liabilities and off-balance-sheet
items across seven maturity ranges (time bands) based on the
instrument's time remaining to maturity or next repricing date. The
time bands used:
7 The agencies have not yet recommended to the Federal
Financial Examination Council (FFIEC), Call Report changes for IRR.
The schedules and associated reporting requirements and instructions
that are discussed in this proposed policy statement and appendix
are under consideration by the agencies. These items are included in
this policy statement to provide commenters with a fuller
understanding of the proposal and to give them opportunities to
comment on items under consideration by the agencies. The agencies
plan to forward to the FFIEC recommended Call Report changes for
IRR. Once final recommendations are made by the agencies, the FFIEC
will publish the proposed changes for public comment.
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(1) Less than or equal to 3 months;
(2) Greater than 3 months and less than or equal to 12 months;
(3) Greater than 1 year and less than or equal to 3 years;
(4) Greater than 3 years and less than or equal to 5 years;
(5) Greater than 5 years and less than or equal to 10 years;
(6) Greater than 10 years and less than or equal to 20 years;
(7) Greater than 20 years.
BILLING CODE 6714-01-P
[[Page 39507]]
BILLING CODE 6714-01-C
[[Page 39508]]
In the interest of minimizing reporting burdens, no coupon or yield
data are collected for the baseline supervisory model. Rather, the
model applies general assumptions regarding coupon rates and other
characteristics of the underlying assets, liabilities, and off-
balance-sheet instruments in developing the interest rate sensitivity
weights. Banks with concentrations in fixed-rate or adjustable-rate
residential mortgages are required to provide additional information on
those holdings. For fixed-rate mortgages, this information includes
data on the underlying coupons of the mortgage assets. For adjustable-
rate mortgages, the information includes data on lifetime and periodic
caps. These supplemental modules for fixed- and adjustable-rate
mortgages are discussed in Section E of this policy statement.
A brief description of how various types of assets, liabilities,
and interest-rate related off-balance sheet instruments are reported is
provided below. Instructions for completing the schedules required for
the supervisory model are provided in the Call Report package issued by
the FFIEC.\8\
\8\ Draft reporting instructions for the schedules under
consideration by the agencies are provided in Appendix 2 of this
policy statement. As previously noted, the schedules and associated
reporting requirements and instructions discussed in this proposed
policy statement have not been finalized and submitted to the FFIEC.
---------------------------------------------------------------------------
a. Reporting for assets. The price sensitivity of a financial
instrument is determined by the instrument's cash flow characteristics.
Accordingly, maturity and repricing data on most assets are collected
in one of five categories that reflect different types of cash flows:
(1) Adjustable-rate 1-4 family mortgage instruments, including
adjustable-rate mortgage loans and adjustable-rate, pass-through
mortgage securities. This category would not include home-equity loans;
those loans would be reported with other amortizing loans based on
their remaining maturity or next repricing date;
(2) Fixed-rate 1-4 family mortgages, including both fixed-rate
mortgage loans and pass-through, fixed-rate mortgage-backed securities,
again excluding home-equity loans;
(3) Other amortizing loans and securities, including asset-backed
securities, consumer loans and other easily identifiable instruments
that involve scheduled periodic amortization of principal more
frequently than once a year;
(4) Zero- or low-coupon securities, including securities with
coupons of less than 3 percent that do not involve scheduled periodic
payments of principal; and
(5) All other loans and securities, including loans and securities
that involve only periodic payments of interest, with payment of
principal at maturity.
Banks holding certain types of assets are required to self-report
the current market value and estimates of the change in market value of
these instruments for the specified interest rate scenarios. Banks can
use either their internal estimates or estimates obtained from a
reliable third-party source, provided that the bank knows, understands,
and documents the assumptions and methodologies used to calculate the
estimated market value sensitivities. Assumptions, pricing
methodologies and all other documentation must be reasonable and
available for examiner review. Self-reporting is used for the following
assets:
(1) All mortgage-backed derivative securities that meet the FFIEC's
definition of "high-risk." \9\
\9\ Effective February 10, 1992 agencies and the Office of
Thrift Supervision adopted revised supervisory policies on
securities activities that were developed under the auspices of the
FFIEC. The revised policies established a framework for identifying
"high-risk mortgage derivative products."
---------------------------------------------------------------------------
(2) All structured notes, as defined in the Call Report
instructions;
(3) Non-high risk mortgage derivative securities when those
holdings represent 10 percent or more of a bank's assets. Banks whose
holdings are less than 10 percent of assets have the option of either
self-reporting or reporting those instruments as non-amortizing
securities based on bank management's estimate of the instrument's
current average life.
(4) Trading account portfolios. A bank should report the change in
the economic value of all of their trading account positions for a 100
basis point parallel increase and decrease in interest rates.\10\
\10\ The agencies expect banks to have prudential internal risk
limits and effective risk measurement systems for their trading
activities. For banks with significant trading operations, the
adequacy and results of those systems will be closely reviewed by
examiners and would be incorporated into their assessment of the
bank's overall risk position. The Basle Committee on Bank
Supervision is also considering methods of evaluating IRR in trading
accounts and determining appropriate capital requirements. This
process could lead to an international agreement which would affect
the treatment of trading activities for U.S. banks.
---------------------------------------------------------------------------
(5) Mortgage servicing rights that are capitalized and reported on
the bank's balance sheet.
b. Reporting for Liabilities. The majority of bank liabilities
repay principal only at maturity. Hence, the supervisory model applies
the same set of risk-weights to all of a bank's interest-sensitive
liabilities. Bank liabilities differ, however, in the certainty of
their maturity. In particular, many bank liabilities have uncertain or
indeterminate contractual maturities. Given these differences,
liabilities with contractual maturities are reported separately from
those with indeterminate contractual maturities.
The agencies have adopted uniform rules for distributing non-
maturity deposits accounts across the time bands. These rules specify
the longest time band that can be used for each type of deposit and the
maximum percentage amount that can be reported into that time band. In
its reporting of these deposits, a bank may distribute such deposits
across the time bands according to the bank's own assumptions and
experience, subject to the following constraints:
(1) Commercial Demand Deposits: A bank should report 50 percent of
its commercial demand deposits in the 0-3 month time band. The
remaining balances may be distributed across the first four time bands,
with a maximum of 20 percent of total balances in the 3-5 year time
band.
(2) Retail DDA, Savings, and NOW Accounts: A bank may distribute
the balances in these accounts across any of the first five time bands,
with a maximum of 20 percent in the 5-10 year time band and no more
than 40 percent combined in the 3-5 and 5-10 year bands.
(3) MMDA Accounts: A bank may distribute these balances across any
of the first three time bands, with a maximum of 50 percent in the 1-3
year band.
Within these deposit reporting parameters, a bank is permitted to
use different distributions of these deposits for the rising and
falling rate scenarios. This flexibility is designed to reflect the
embedded optionality associated with these products.
c. Reporting for Off-Balance-Sheet Positions. Off-balance-sheet
contracts that represent a firm obligation for both parties are
reported within the maturity ladder framework using a two-entry
approach to reflect how the contract alters the timing of cash flows.
For interest rate swaps, the first entry would be reported in the time
band corresponding to the next repricing date of the contract, and the
second entry would be reported in the time band corresponding to the
maturity of the instrument. For futures, forwards, and FRAs, the first
entry would be reported in the time band corresponding to
[[Page 39509]]
settlement date of the contract, and the second entry would be reported
in the time band corresponding to the settlement date plus the maturity
of the instrument underlying the contract.
Contracts that are based on non-amortizing instruments are reported
separately from those based on amortizing principal amounts or on
underlying instruments that amortize. Examples of "non-amortizing"
contracts include futures, forward-rate agreements, swaps on which the
notional principal amount of the contract does not amortize,
securitization of credit card receivables under a spread account
approach, and firm commitments to buy or sell non-mortgage loans or
securities. Examples of "amortizing" contracts are commitments to buy
and sell mortgages and commitments to originate mortgage loans.
Self Reporting for Options
Option-related contracts are not distributed and reported within
the time bands of the maturity ladder schedule. A bank that holds such
contracts is required to "self-report" the market value sensitivities
of those positions.11
11 This differs from earlier proposals where the agencies
proposed that options-related contracts be reported on the basis of
their delta-equivalent values. The agencies have made this change in
the treatment of option-related contracts due to their concerns that
delta-equivalent values may be difficult to compute for longer-dated
caps and floors, and the limitations of using delta as a proxy for
market value sensitivities when evaluating effect of large rate
movements.
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D. IRR Risk Weights
Under the supervisory model, a bank's IRR exposure is calculated by
multiplying its reported repricing and maturity positions by IRR risk
weights. These risk weighted positions, when summed and added to the
sensitivities of any self-reported items, form the bank's net risk-
weighted position.
Each risk weight is constructed to approximate the percentage
change in value of the reported position that would result from a 200
basis point, instantaneous and uniform movement in market interest
rates. Separate risk weights are used for the rising and falling
interest rate scenarios to account for the asymmetrical price behavior
of various bank assets, liabilities and off-balance-sheet instruments.
The set of risk weights used in the baseline supervisory model for
each scenario consists of:
(1) Four "ARM" risk weights for adjustable-rate residential
mortgage loans and securities. There is one risk weight for each of the
three reset frequency categories, plus one risk-weight for those ARMs
that are within 200 basis points of their lifetime cap;
(2) Seven "Fixed-Rate Residential Mortgage" risk weights (i.e.,
one for each time band) for fixed-rate residential mortgage loans and
pass-through mortgage securities;
(3) Seven "Other Amortizing" risk weights for asset-backed
securities, consumer loans and amortizing off-balance-sheet
instruments;
(4) Seven "Zero or Low Coupon" asset risk weights for instruments
with a coupon of 3 percent or less;
(5) Seven "All Other" asset risk weights for non-amortizing
instruments; and,
(6) Seven liability risk weights for all liability instruments.
The risk weights used in the baseline supervisory model are
provided in Table 1 and also in Appendix 3 of the policy statement. The
agencies propose to limit the frequency of revisions to the risk-
weights such that revisions would not be made until such time as market
rates have moved sufficiently as to prompt a revision of all the risk
weights. Such changes may occur only once every several years.
BILLING CODE 6714-01-P
[[Page 39510]]
[[Page 39511]]
BILLING CODE 6714-01-C
[[Page 39512]]
The agencies constructed the risk weights shown in Table 1 by using
hypothetical market instruments that are representative of the category
being measured. The risk weights are based on the percentage change in
the present value of the benchmark instruments for the specified
interest rate scenario. Risk weights for adjustable- and fixed-rate
residential mortgage loans and securities were derived from data
provided by the OTS (Office of Thrift Supervision) Net Portfolio Value
Model as of September 30, 1994 for use in the OTS Asset and Liability
Pricing Tables published by the OTS. The mortgage risk weights directly
incorporate convexity for the rate scenario and prepayment assumptions
for mortgage loans and securities.12 A complete description of the
instruments and methodologies used by the agencies to construct the
risk weights for each category is contained in Appendix 4 of this
policy statement.
\12\ Convexity refers to the non-linear price/yield relationship
of fixed-rate financial instruments. Instruments without option
features, such as Treasury notes, have positive convexity, meaning
that as the price of the instrument falls, its yield will increase
by a proportionately greater amount. Other instruments, such as
certain mortgage-backed securities, have negative convexity.
---------------------------------------------------------------------------
E. Description of Supplemental Modules
Residential mortgage products have option features that make the
value of the instrument more sensitive to interest rate changes than
many other types of financial instruments. To more accurately measure
the sensitivity of these products, a bank that has holdings of these
instruments in excess of specified levels is required to provide
additional information on those holdings in its Call Report
submissions. The agencies will apply expanded tables of risk weights to
those portfolios when estimating the bank's IRR exposure. Both one-to-
four family residential mortgage loans and pass-through securities are
considered mortgage holdings for these supplemental modules. Mortgage
loans that a bank has funded but holds for sale do not need to be
reported in the supplemental modules or included in the calculation of
a bank's holdings of mortgage products provided that the bank has a
firm and binding commitment from a third party to purchase the loan.
Loans with such binding commitments are reported separately in Schedule
1 and receive a risk-weight commensurate with short-term (three months
or less) non-amortizing instruments. A bank, however, may elect to
report these loans in the supplemental reporting schedules.
1. Fixed-Rate Residential Mortgages: A bank with fixed-rate
residential mortgage holdings that exceeds 20% of its total assets will
report as part of its quarterly Call Report submissions, additional
information on those holdings based upon their time remaining to
maturity and coupon rate (Schedule 2). The term "coupon rate" for
fixed-rate mortgage loans refers to the loan's stated coupon rate,
while for pass-through securities, it refers to the weighted average
coupon (WAC) of the underlying mortgages. For each maturity and coupon
range, the agencies have developed and will apply risk weights which
reflect the differences in expected price sensitivities that are
associated with each coupon range.
BILLING CODE 6714-01-P
[[Page 39513]]
BILLING CODE 6714-01-C
[[Page 39514]]
2. Adjustable-Rate Residential Mortgages: Adjustable-rate mortgage
loans and securities have price sensitivities that are substantially
different than fixed-rate mortgage assets primarily due to their coupon
reset features. The coupon adjustments are generally limited by caps
and floors both for the life of the mortgage and also at their rest
period. These caps are known as lifetime and period caps. In general,
there are three factors that most influence the price sensitivity of an
ARM: the reset frequency, the periodic cap, and the lifetime cap. The
relationship between the periodic and lifetime caps and the effect of
that relationship on ARM prices is complex and varies based upon the
likelihood that either cap will become binding. Consequently,
information on both the periodic cap and the lifetime cap will be
collected from banks with significant ARM holdings.
A bank with ARM holdings greater than 10% but less than 25% of its
total assets will through its Call Report submissions, provide
additional information on those holdings (Schedule 3). The bank will
report its ARM balances by the ARM's reset frequency, the nature of its
periodic cap, and the distance to its lifetime cap. ARM balances will
be reported for the three reset frequencies (6 months or less, over 6
months but less than or equal to 1 year, and over 1 year). The three
reset frequencies are divided by whether or not the ARM carries a
periodic cap, and in the over 6 months to 1 year column, by the size of
the periodic cap. The distance to the lifetime cap is stratified into
four groups:
(1) ARMs that are within 200 basis points of their lifetime caps;
(2) ARMs that are 201 to 400 basis points from their lifetime caps;
(3) ARMs that are 401 to 600 basis points from their lifetime caps;
(4) ARMs that are more than 600 basis points from their lifetime
caps.
A bank whose ARM holdings exceed 25% of its total assets will
provide further information on its ARM balances, including information
on the ARM's index type and weighted average coupon, as illustrated by
Schedule 4.
BILLING CODE 6714-01-P
[[Page 39515]]
[[Page 39516]]
BILLING CODE 6714-01-C
[[Page 39517]]
V. Calculation of IRR Exposure
A bank's IRR exposure is calculated for both the rising and
declining interest rate scenarios. The exposures derived for each
scenario may differ in magnitude due to asymmetries in the price
sensitivity of financial instruments as interest rates change (e.g.,
convexity). For each scenario, the first step in computing a bank's IRR
exposure is to multiply each reported repricing or maturity position
(as reported in Schedules 1, 2, 3 or 4) by the appropriate risk weight.
This product, referred to as the "risk weighted position," represents
the estimated dollar change in the present value of that position for
the 200 basis point rate scenario. The next step is to sum all of the
risk weighted positions and add to these positions the sensitivities of
any self-reported items. This result, referred to as the "net risk
weighted position," represents the estimated change in the economic
value of the bank and is the bank's IRR exposure for the that rate
scenario.
Appendix 1 provides example worksheets and IRR calculations for
hypothetical banks subject to the baseline and supplemental modules.
VI. Use of a Bank's Internal IRR Model Results
The supervisory model set forth in this policy statement is one
tool that examiners will use to assess a bank's level of IRR exposure
and its need for capital. Examiners also will consider the IRR
exposures that are indicated by the bank's internal IRR model. The
agencies recognize that many banks have sophisticated internal models
for measuring IRR that take account of complexities that are not
captured by the supervisory model and that are tailored to the
products, activities, and circumstances of each bank. In cases where
the bank's internal model provides a more accurate assessment of the
bank's IRR exposure, the results of that model will be the primary
basis for an examiner's conclusion about the bank's level of IRR
exposure.
Factors that examiners will consider in determining whether a
bank's internal model provides a more accurate assessment of the bank's
IRR profile than the supervisory model include:
(1) Whether the bank's internal model is appropriate to the nature,
scope, and complexities of the bank and its activities;
(2) Whether the model includes all material IRR positions of the
bank;
(3) Whether the model provides a more precise measurement of the
changes in the economic value to the bank than the supervisory model;
(4) Whether the model considers all relevant repricing data,
including information on contractual maturities and repricing dates,
contractual interest rate floors and/or ceilings;
(5) Whether the model measures the bank's IRR exposure over a
probable range of potential interest rate changes, including but not
limited to, the rate scenarios established in this policy statement;
(6) Whether the assumptions and structure of the model are
reasonable, documented and periodically reviewed and validated by an
appropriate level of senior management that has sufficient independence
from units that take or create IRR exposures;
(7) Whether the results of the model are communicated to and
reviewed by senior management and the institution's Board of Directors
on at least a quarterly basis.
VII. Use of Measurement Process Results
The results of the measurement process established by this policy
statement will be one factor that an examiner will use when evaluating
a bank's capital adequacy with regards to IRR. In reviewing a bank's
capital adequacy, an examiner will consider the exposure of the bank's
capital and economic value to changes in interest rates, as measured by
the supervisory model and, where applicable, the bank's internal model.
Other factors that an examiner will consider include the quality of a
bank's IRR management, internal controls, and the overall financial
condition of the bank, including its earnings capacity, capital base,
and the level of other risks which may impair future earnings or
capital. When assessing the adequacy of the bank's IRR management
process, an examiner will consider:
(1) The adequacy and effectiveness of senior management and Board
oversight;
(2) The adequacy of and compliance with the bank's policies,
procedures and internal controls;
(3) The existence of and adherence to specific risk limits relating
to loss of capital;
(4) Management's knowledge and ability to identify and manage
sources of IRR effectively; and
(5) The adequacy of internal risk measurement and monitoring
systems.
At the completion of each safety and soundness examination,
examiners will form and document conclusions as to the adequacy of a
bank's capital and risk management process with regard to interest rate
risk. An examiner's conclusions about both the level of risk and the
adequacy of the risk management process will play an integral role in
determining a bank's need for capital for IRR. Banks with high levels
of measured exposure or weak management systems generally will need to
hold capital for IRR. The specific amount of capital that may be needed
will be determined on a case-by-case basis by the examiner and the
appropriate supervisory agency. This determination and the examiner's
overall conclusions regarding IRR will be discussed with bank
management at the close of each examination.
During the intervals between examinations, the agencies will use
the supervisory model to help monitor changes in a bank's IRR exposure.
Significant changes in reported exposures or in a bank's overall
financial condition will be analyzed by the bank's primary supervisor
to determine whether additional supervisory actions are warranted. Such
actions may include additional discussions with bank management,
requests for additional information, on-site reviews of the bank, and
reevaluation of the bank's capital adequacy.
Appendix 1--Proposed Call Report Schedules and Supervisory Model
Worksheets
This appendix contains sample call report schedules and worksheets
that would be used for the proposed supervisory model. As noted in the
proposed policy statement, the schedules shown in this appendix are
under consideration by the agencies but have not yet been submitted to
the FFIEC for approval. These schedules and worksheets are included in
this document to provide readers and commenters a better understanding
of the proposed supervisory risk measurement system.
I. Sample Call Report Schedules
Schedule 1 illustrates the information that would be collected from
all banks that do not meet the reporting exemption criteria. This
information would be used for the baseline supervisory model. Schedules
2-4 illustrate the information that would be collected from non- exempt
banks that have concentrations in fixed- or adjustable-rate residential
mortgage loans or pass-through securities. This information would be
used in lieu of the items for these portfolios on Schedule 1. The
balances reported in the supplemental schedules would be subjected to
the expanded set of risk weights shown in Appendix 3. Draft reporting
instructions for Schedules 1-4 are provided in Appendix 2.
[[Page 39518]]
Schedule 5 illustrates the information on a bank's internal IRR
model results that the agencies propose to collect on a voluntary and
confidential basis. A bank that has an internal IRR model that measures
the bank's economic exposure for a 200 basis point parallel rate shock
would provide summary information on the estimated change in value for
various asset, liability, and off-balance-sheet categories.
BILLING CODE 6714-01-P
[[Page 39519]]
[[Page 39520]]
[[Page 39521]]
[[Page 39522]]
[[Page 39523]]
BILLING CODE 6714-01-C
[[Page 39524]]
II. Baseline Supervisory Model Worksheet
To illustrate how a bank's IRR exposure would be calculated under
the baseline supervisory model, the following worksheets are provided
for a hypothetical bank (Bank A) that is not exempted from reporting
(see policy statement) and has filed the proposed Schedule 1. Since
Bank A's fixed-rate residential mortgage loan and security holdings are
less than 20% of its total assets and its adjustable-rate holdings are
less than 10% of total assets, it is not subject to any the
supplemental reporting schedules. Schedule 1A shows the completed
Schedule 1 for Bank A. Tables 1A and 2A are the baseline model
worksheets for the rising and falling rate scenarios, respectively for
Bank A.
Column A in Tables 1A and 2A combine and transcribe the balance
information that Bank A reported. For example, Bank A reported $4.126
million of fixed-rate mortgage securities and $5.432 million of fixed-
rate mortgage loans that had maturities of 10- to 20-years. These
balances have been combined and reported in Item 1(f) in Tables 1A and
2A.
Column B in Tables 1A and 2A shows the supervisory model risk
weights for each instrument type and maturity category. The risk
weights represent the estimated percentage change in the value of the
reported balances for a 200 basis point rise (Table 1A) and decline
(Table 2A) in interest rates. For example, the value of a 3- to 5-year
non-amortizing loan or security, as shown in Item 6(d) is estimated to
decline by 6.60% if interest rates increase by 200 basis points and
increase in value by 7.10% if rates decline by 200 basis points. The
risk weights shown in Column B are established by the agencies and
published in Appendix 3 to this policy statement. Because liabilities
represent future obligations of the bank, the risk-weights used for
liabilities are shown as positive numbers for the rising rate scenario
(representing a benefit to the bank) and negative numbers for the
declining rate scenario.
Column C in Tables 1A and 2A represents the estimated dollar change
in the present value of each reported balance. These values are
obtained by multiplying the reported balance in Column A by the
corresponding risk weight in Column B. For example, Bank A has $3.458
million in ARMs that are near their lifetime caps (line 2(d) in Tables
1A and 2A). The agencies have estimated that the value of such ARMs
will decline by approximately 7.00% if rates increase by 200 basis
points. Thus, the estimated decline in value for Bank A's reported ARM
balances near lifetime caps is approximately $242 thousand ($3.458
million times-7.00%). Note that for self-reported items, no
multiplication is needed. Rather, the estimated dollar change in value
reported by the bank in Schedule 1A is incorporated directly into the
exposure estimate.
Bank A's net IRR exposure is calculated by summing the individual
risk-weighted positions and self-reported change amounts shown in
Column C. The sum of the risk-weighted asset positions plus self-
reported items for Bank A indicates a decline in value for these
portfolios of approximately $17.560 million under the rising rate
scenario. This decline is partially offset by $11.093 million and
$0.266 million increases in value for liabilities and other off-balance
sheet items, respectively. Bank A's net risk-weighted position is the
sum of these items and indicates that the economic value of Bank A is
expected to decline by $6.201 million under the rising rate scenario.
Conversely, under the declining rate scenario, the economic value of
Bank A is expected to increase by $10.103 million.
BILLING CODE 6714-01-P
[[Page 39525]]
[[Page 39526]]
[[Page 39527]]
BILLING CODE 6714-01-C
[[Page 39528]]
III. Supplemental Module Worksheets
The calculation of net IRR exposure for a bank using the
supplemental schedules is similar to the process described for the
baseline model. The primary difference is that the risk-weighted
positions for the applicable residential mortgage portfolios are
derived from the supplemental schedules and expanded risk-weight tables
rather than from baseline schedules.
To illustrate the calculation, worksheets are provided for a
hypothetical bank (Bank B) that has filed supplemental Schedule 2
(fixed-rate mortgages) and Schedule 4 (adjustable-rate mortgages). Bank
B uses these schedules because both its fixed-rate and adjustable-rate
residential mortgage loans and pass-through securities holdings exceed
25% of its total assets. Schedules 1B, 2B and 4B (corresponding to the
proposed Schedules 1, 2 and 4) show the data that Bank B has reported.
Table 1B is the worksheet used to calculate Bank B's IRR exposure for
the rising rate scenario. This worksheet is similar to the worksheets
used for the baseline model. Column A combines and transcribes the
balance information that Bank B reported in Schedules 1B, 2B and 4B.
Column B shows the applicable risk-weights for each instrument and
maturity category. Column C reflects the estimated dollar change in
value for each portfolio. The only difference in this worksheet and the
one used for the baseline model is that risk-weighted positions in
Column C for the fixed- and adjustable-rate mortgages are obtained by
applying the expanded set of risk-weights (provided in Appendix 3) to
the balances reported in Schedules 2B and 4B.
BILLING CODE 6714-01-P
[[Page 39529]]
[[Page 39530]]
BILLING CODE 6714-01-C
[[Page 39531]]
Table 2B illustrates how the change in value for Bank B's fixed-
rate mortgage portfolio is calculated. The first block of information
in Table 2B is the balances that Bank B reported in Schedule 2B. Note
that the total balance shown in the right-hand corner of Table 2B,
$144.245 million, corresponds to the total balance shown in Column A
for line 1 in Table 1B. The second block of information reproduces the
risk-weights shown in Appendix 3 for Schedule 2. The last block of
information shows the net risk-weighted position for each coupon and
maturity category and is derived by multiplying the balances shown in
the first block by the corresponding risk-weight in the second block.
For example, Bank B has $1.008 million of fixed-rate balances with a
maturity of 5-10 years and coupons between 6.76 and 7.25 percent. The
agencies have estimated the present value of such balances will decline
by 7.80% if interest rates increase by 200 basis points. Thus, the
estimated decline in the value of these balances is $79 thousand, the
product of $1.008 million times-7.80%. The change in value for each
maturity and coupon category are summed to produce a net change in Bank
B's fixed-rate mortgage portfolio of -$13.796 million. This amount is
transcribed to Column C in line 1 for the worksheet shown in Table 1B.
Schedule 2B.--Bank B--Fixed-Rate Mortgages
[Supplemental Reporting Schedule]
[To be completed by banks with FRM holdings > 20% of total assets]
------------------------------------------------------------------------
Remaining time to maturity
---------------------------------------------------
(Column B) (Column C)
Balance with coupons (Column A) over 5 over 10 (Column D)
of: 5 years or years years over 20
less through 10 through 20 years
years years
------------------------------------------------------------------------
2. <=6.75%.......... $149 $246 $1,284 $9,362
3. 6.76%-7.25%...... 793 1,0008 2,451 10,041
4. 7.26%-7.75%...... 726 1,095 2,068 13,498
5. 7.76%-8.25%...... 833 1,163 1,984 15.984
6. 8.26%-8.75%...... 623 1,994 2,201 16,498
7. 8.76%-9.25%...... 511 2,541 2,468 27,375
8. 9.26%-9.75%...... 336 2,006 1,604 19,230
9. >=9.75%.......... 597 736 948 1,892
------------------------------------------------------------------------
Table 2B.--Bank B--Fixed-Rate Mortgages
[Supplemental Reporting Worksheet]
Balance from Schedule 2B
----------------------------------------------------------------------------------------------------------------
Remaining time to maturity
----------------------------------------------------
(Column B) (Column C)
Balance with coupons of: (Column A) over 5 over 10 (Column D) Total
5 years or years years over 20
less through 10 through 20 years
years years
----------------------------------------------------------------------------------------------------------------
2.<=6.75%...................................... $149 $246 $1,284 $9,362 $11,041
3. 6.76%-7.25%................................. 793 1,008 2,451 10,041 14,293
4. 7.26%-7.75%................................. 726 1,095 2,068 13,498 17,387
5. 7.76%-8.25%................................. 833 1,163 1,984 15,984 19,964
6. 8.26%-8.75%................................. 623 1,994 2,201 16,498 21,316
7. 8.76%-9.25%................................. 511 2,541 2,468 27,375 32,895
8. 9.26%-9.75%................................. 336 2,006 1,604 19,230 23,176
9. >9.75%...................................... 597 736 948 1,892 4,173
----------------------------------------------------------------
Total.................................... 4,568 10,789 15,008 113,880 144,245
----------------------------------------------------------------------------------------------------------------
Risk Weights--Rising Rates
------------------------------------------------------------------------
Remaining time to maturity
---------------------------------------------------
(Column B) (Column C)
Balance with coupons (Column A) over 5 over 10 (Column D)
of: 5 years or years years over 20
less through 10 through 20 years
(percent) years years (percent)
(percent) (percent)
------------------------------------------------------------------------
<=6.75%............. -6.00 -7.90 -8.90 -12.30
6.76%-7.25%......... -5.90 -7.80 -8.80 -11.90
7.26%-7.75%......... -5.70 -7.60 -8.50 -11.50
7.76%-8.25%......... -5.50 -7.20 -8.20 -11.00
[[Page 39532]]
8.26%-8.75%......... -5.20 -6.80 -7.70 -10.30
8.76%-9.25%......... -4.70 -6.10 -7.10 -9.50
9.26%-9.75%......... -4.10 -5.40 -6.40 -8.50
>=9.75%............. -3.00 -3.90 -4.90 -6.30
------------------------------------------------------------------------
Net Position (Balance x Risk Weight) ($)
----------------------------------------------------------------------------------------------------------------
Remaining time to maturity
----------------------------------------------------
(Column B) (Column C)
Balance with coupons of: (Column A) over 5 over 10 (Column D) Total
5 years or years years over 20
less through 10 through 20 years
years years
----------------------------------------------------------------------------------------------------------------
<=6.75%........................................ ($9) ($19) ($114) ($1,152) ($1,294)
6.76%-7.25..................................... (47) (79) (216) (1,195) (1,536)
7.26%-7.75%.................................... (41) (83) (176) (1,552) 1,853)
7.76%-8.25%.................................... (46) (84) (163) (1,758) (2,050)
8.26%-8.75%.................................... (32) (136) (169) (1,699) (2,037)
8.76%-9.25%.................................... (24) (155) (175) (2,601) (2,955)
9.26%-9.75%.................................... (14) (108) (103) (1,635) (1,859)
>=9.75%........................................ (18) (29) 46) (119) (212)
----------------------------------------------------------------
Total.................................... (231) (693) (1,162) (11,711) (13,796)
----------------------------------------------------------------------------------------------------------------
BILLING CODE 6714-01-P
[[Page 39533]]
BILLING CODE 6714-01-C
[[Page 39534]]
Tables 3B-6B illustrate how the change in value for Bank B's ARM
holdings is calculated. Table 3B shows the calculation for the Bank B's
ARMs that are priced off of the current market index and have the set
frequencies or 6 months or less. Table 4B shows the similar calculation
for the current market-indexed ARMs with reset frequencies of 6 months
to 1 year while Table 5B is for the current market-indexed ARMs with
reset frequencies over 1 year. Table 6B is for Bank B's lagging market-
indexed ARMs. The steps for calculating the change in value for each of
these sub-portfolios is identical so only Table 3B is described.
The first block of information on Table 3B is the balance and
coupon data that Bank B reported for this category of ARMs on Schedule
4B. The second block of information reproduces the applicable risk
weights for this product in the rising rate scenario from Appendix 3.
The highlighted risk weights represent the risk weights applied to the
balances and coupon data reported by Bank B in Schedule 4B. The third
block of information is the net position for each category of ARMs,
representing the estimated decline in value for a 200 basis increase in
interest rates. The net position is derived by multiplying the balance
shown in the first block by the corresponding risk-weight in the second
block. For example, Bank B has $3.023 million of current market-indexed
ARMs that have a reset frequency of 6 months or less that are currently
within 200 basis points of their lifetime cap and that also have a
periodic cap. These balances have a weighted average coupon of 5.60%.
The applicable risk-weight for these mortgages is the one shown for
ARMs with these characteristics and a weighted average coupon between
4.76 and 6.25 percent, or --8.70%. The decline in value for these
mortgage loan balances is $263 thousand, the product of the balance
($3.023 million) times the applicable risk weight (-8.70%). Similar
calculations are used to for the remaining balances reported in Tables
3B-6B. The total amounts are then summed ($2.372 million) and reported
in Column C of the worksheet in Table 1B.
BILLING CODE 6714-01-P
[[Page 39535]]
[[Page 39536]]
[[Page 39537]]
[[Page 39538]]
BILLING CODE 6714-01-C
[[Page 39539]]
Tables 7B-12B show the calculations for Bank B's IRR exposure for
the declining rate scenario.
BILLING CODE 6714-01-P
[[Page 39540]]
6714-01-C
[[Page 39541]]
Table 8B.--Bank B--Fixed-Rate Mortgages
[Supplemental Reporting Worksheet]
Balance from Schedule 2B
----------------------------------------------------------------------------------------------------------------
Remaining time to maturity
----------------------------------------------------
(Column B) (Column C)
Balance with coupons of: (Column A) over 5 over 10 (Column D) Total
5 years or years years over 20
less through 10 through 20 years
years years
----------------------------------------------------------------------------------------------------------------
2. <=6.75%..................................... $149 $246 $1,284 $9,362 $11,041
3. 6.76%-7.25%................................. 793 1,008 2,451 10,041 14,293
4. 7.26%-7.75%................................. 726 1,095 2,068 13,498 17,387
5. 7.76%-8.25%................................. 833 1,163 1,984 15,984 19,964
6. 8.26%-8.75%................................. 623 1,994 2,201 16,498 21,316
7. 8.76%-9.25%................................. 511 2,541 2,468 27,375 32,895
8. 9.26%-9.75%................................. 336 2,006 1,604 19,230 23,176
9. >9.75%...................................... 597 736 948 1,892 4,173
----------------------------------------------------------------
Total.................................... 4,568 10,789 15,008 113,880 144,245
----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------
Remaining time to maturity
---------------------------------------------------
(Column B) (Column C)
Balance with coupons (Column A) over 5 over 10 (Column D)
of: 5 years or years years over 20
less through 10 through 20 years
(percent) years years (percent)
(percent) (percent)
------------------------------------------------------------------------
<=6.75%............. 5.80 7.80 9.30 13.40
6.76%-7.25%......... 5.20 6.90 8.50 12.10
7.26%-7.75%......... 4.50 5.80 7.50 10.60
7.76%-8.25%......... 3.70 4.80 6.50 9.10
8.26%-8.75%......... 3.10 3.80 5.50 7.60
8.76%-9.25%......... 2.60 3.10 4.50 6.20
9.26%-9.75%......... 2.30 2.70 3.80 5.10
>=9.75%............. 2.10 2.40 2.90 3.50
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
Remaining time to maturity
----------------------------------------------------
(Column B) (Column C)
(Column A) over 5 over 10 (Column D)
Balance with coupons of: 5 years or years years over 20 Total
less through 10 through 20 years
(percent) years years (percent)
(percent) (percent)
----------------------------------------------------------------------------------------------------------------
<=6.75%........................................ $9 $19 $119 $1,255 $1.402
6.76%-7.25%.................................... 41 70 208 1,215 1,534
7.26%-7.75%.................................... 33 64 155 1,431 1,682
7.76%-8.25%.................................... 31 56 129 1,455 1,670
8.26%-8.75%.................................... 19 76 121 1,254 1,470
8.76%-9.25%.................................... 13 79 111 1,697 1,900
9.26%-9.75%.................................... 8 54 61 981 1,104
>=9.75%........................................ 13 18 27 66 124
----------------------------------------------------------------
Total.................................... 166 434 932 9,353 10,886
----------------------------------------------------------------------------------------------------------------
BILLING CODE 6714-01-P
[[Page 39542]]
[[Page 39543]]
[[Page 39544]]
[[Page 39545]]
BILLING CODE 6714-01-C
[[Page 39546]]
Appendix 2--Draft Reporting Instructions
General Instructions
I. Interest Rate Risk Reporting Requirements
A. Schedule 1
Schedule 1 must be completed by those commercial banks and FDIC-
supervised savings banks which do not meet all of the following
exemption criteria:
(1) The institution's total assets are less than $300 million, and
(2) The bank's primary federal supervisor has assigned the
institution a composite CAMEL rating of either "1" or "2"; and
(3) The sum of:
a. 30% of the institution's fixed- and floating-rate loans and
securities with contractual maturity or repricing dates between 1 and 5
years, and
b. 100% of the institution's fixed- and floating-rate loans and
securities with contractual maturity or repricing dates beyond 5 years,
is less than 30% of the institution's total assets as of the report
date.
Exempted institutions may file Schedule 1 on a voluntary basis.
Institutions that file Schedule 1 should report "N/A" in Schedule RC-
B, Memorandum Item 2; Schedule RC-C, Part I, Memorandum Item 2 on FFIEC
034; Schedule RC-C, Part I, Memorandum Item 3 on FFIEC 031, 032, and
033; and Schedule RC-E, Memorandum Items 5 and 6. FDIC-supervised
savings banks which file Schedule 1 should report "N/A" in Schedule
RC-J.
All shifts in reporting status, with one exception, are to begin
with the March Reports for Condition and Income. Such a shift will take
place only if the reporting bank's condition fails to meet the
exemption criteria, as previously noted, as of the June reporting date.
Banks involved with business combinations (pooling of interests,
purchase acquisitions, or reorganizations) will be subject to new
reporting requirements, if any, beginning with the first quarterly
report date following the effective date of a business combination
involving a bank and one or more depository institutions.
II. Criteria for Required Completion of Supplemental Schedules 2-4
These schedules are applicable only to banks that answered "yes"
to the reporting requirement for Schedule 1. This section identifies
which of the supplemental interest rate risk reporting schedules, if
any, must be completed based on the reporting bank's level of mortgage
holdings as a percent of total assets as of the report date.
A. Schedule 2
If "total adjusted fixed-rate mortgage holdings" divided by total
assets (on an unrounded basis) is greater than 20 percent of total
assets, then the bank should place an "X" in the box marked "Yes".
Otherwise, indicate "No" in Item 1. If the box marked "Yes" is
checked, then the bank must complete Schedule 2. Banks completing
Schedule 2 should only report the total amount of fixed-rate mortgage
holdings on Schedule 1, Items 1(b) and 2(b), in Column A; the
distribution of these instruments across Columns B through H is not
required.
For purposes of this item, "total adjusted fixed-rate mortgage
holdings" equals the sum of the bank's permanent loans secured by
first liens on 1-4 family residential mortgages, which have fixed
interest rates; and the bank's mortgage-backed pass-through securities
not held for trading, which have fixed interest rates less any of those
loans held for sale and delivery to secondary market participants such
as FNMA or FHLMC under terms of a binding commitment.
B. Schedule 3
If "total adjusted adjustable-rate mortgage holdings" divided by
total assets (on an unrounded basis) is equal to or greater than 10
percent but less than 25 percent of total assets, then the bank should
place an "X" in the box marked "Yes" in Item No. 1. Otherwise,
indicate "No" in Item No. 1. If the box marked "Yes" is checked,
then the bank must complete Schedule 3. Banks completing Schedule 3 are
exempt from completing Schedule 4 and the memoranda section of Schedule
1.
C. Schedule 4
If "total adjusted adjustable-rate mortgage holdings" divided by
total assets (on an unrounded basis) is greater than or equal to 25
percent of total assets, then the bank should place an "X" in the box
marked "Yes" in Item No. 1. Otherwise, indicate "No" in Item No. 1.
If the box marked "Yes" is checked, then the bank must complete
Schedule 4. Banks completing Schedule 4 are exempt from completing
Schedule 3 and the memoranda section of Schedule 1.
For purposes of Schedules 3 and 4, "total adjusted adjustable-rate
mortgage holdings" equals the sum of the bank's permanent loans
secured by first liens on 1-4 family residential mortgages which have
adjustable interest rates and the bank's mortgage pass-through
securities not held for trading which have adjustable interest rates
less any of those loans held for sale and delivery to secondary market
participants such as FNMA or FHLMC under terms of a binding commitment.
Institutions that are not required to complete the supplemental
schedules may elect to do so on a voluntary basis.
III. Reporting Instructions--Schedule 1
The information required in Schedule 1 primarily represents the
distribution across Columns B through H of maturity and repricing data
for selected assets, liabilities and off- balance sheet items that are
outstanding as of the report date. These distributed dollar amounts
must equal the total dollar amounts reported in Column A. Assets in
nonaccrual status are excluded from this schedule. Additionally, a
self-reporting section is to be completed by those banks holding
particular types and/or concentrations of interest rate sensitive
assets and off-balance sheet contracts. This section requests
information concerning the carrying value of these items as well as
estimates of market value changes for the 200 basis point rising and
falling interest rate scenarios. The carrying value of the bank's
trading account holdings is requested separately in the self-reported
section, along with market value changes given 100 basis point rising
and falling interest rate scenarios. Estimates for self-reported items
may be obtained from a reliable third party source or from the
institution's internal risk measurement system. Schedule 1 also
contains a memoranda section for the reporting of adjustable-rate
mortgage holdings by reset frequency for those banks with less than 10%
of total assets in adjustable-rate mortgages.
Definitions
A fixed interest rate is a rate that is specified at the
origination of the transaction, is fixed and invariable during the term
of the asset or liability, and is known to both the borrower and the
lender. Also treated as a fixed interest rate is any rate that changes
during the term of the asset or liability on a predetermined basis,
with the exact rate of interest over the life of the instrument known
with certainty to both the borrower and the lender at origination or
when the instrument is acquired.
The remaining maturity is the amount of time remaining from the
report date until the final contractual maturity of an asset or
liability.
A floating or adjustable rate is a rate that varies, or can vary,
in relation to an index, to some other interest rate such as the rate
on certain U.S. Government
[[Page 39547]]
securities or the bank's "prime rate," or to some other variable
criterion the exact value of which cannot be known in advance.
The reset or repricing frequency is how often the contract permits
the interest rate on an instrument to be changed (e.g., daily, monthly,
quarterly, semiannually, annually) without regard to the length of time
between the report date and the date the rate can next change.
The next repricing date is the amount of time remaining from the
report date until the instrument's contract permits the rate of
interest to change.
Distribution of Securities, Loans and Leases, and Other Interest-
Bearing Assets
Banks must distribute the carrying value of selected securities,
loans and leases and other interest-bearing assets in the specified
balance sheet categories of this schedule in accordance with the
procedures set forth in the item instructions below.
All permanent loans secured by first liens on 1-4 family
residential mortgages and 1-4 family residential mortgage pass-through
securities should be reported on the following basis:
(1) The entire carrying value of each asset with a fixed rate of
interest should be reported on the basis of the asset's remaining
contractual maturity, and
(2) The entire carrying value of each asset with a floating or
adjustable rate of interest should be reported on the basis of its
reset frequency.
The bank's own estimates of expected cash flows associated with
these mortgage products should not be used in this schedule. Loans held
for sale and delivery to secondary market participants under terms of
binding commitments are reported separately in Item No. 2(c) without
regard to maturity or repricing.
The carrying value of other debt securities, all other loans and
leases, and all other interest-bearing assets should be reported on the
following basis:
(1) Assets which carry a fixed rate of interest should be spread
among the Columns according to their remaining maturity (as defined
below), and
(2) Assets which carry a floating or adjustable rate of interest
should be reported on the basis of the time remaining until the next
repricing date.
Distribution of Time Deposits, Non-Maturity Deposits, and All Other
Interest-Bearing Liabilities
All time deposits and other interest-bearing nondeposit liabilities
should be distributed across Columns B through H according to remaining
contractual maturity for fixed-rate liabilities and according to next
repricing date for adjustable-rate liabilities. The maturity and
repricing for all non-maturity deposits (DDAs, MMDAs, NOW accounts, and
other savings deposits) is determined by bank management based on its
own assumptions and experience and must be reported in both rising and
falling interest rate scenarios in accordance with the parameters
described in the item instructions below.
Distribution of Off-Balance Sheet Positions
Institutions are required to distribute selected off-balance sheet
contracts that are not held for trading among the time bands (Columns)
of Schedule 1. The off-balance sheet items include interest rate
forward contracts, interest rate futures contracts, interest rate swaps
without embedded options, and commitments to originate, buy, and sell
loans and securities. Such commitments should exclude unused lines of
credit and commitments to sell 1-4 family mortgage loans that the bank
holds for sale and delivery to secondary market participants.
Off-balance sheet contracts should be reported as either amortizing
or non-amortizing contracts depending on whether the notional value of
the contract amortizes over time.
The selected off-balance sheet items must be reported using two
entries to reflect the timing of the cash flows. The notional amounts
of the contracts are offsetting: one entry is positive and the other is
an offsetting negative entry. This reporting method reflects the way in
which the off-balance sheet instruments affect the institution's
balance sheet. In general, if the outstanding contract serves to
lengthen an asset's maturity (i.e., long futures) then the first entry
is negative and the second entry is positive. If the outstanding
contract serves to shorten an asset's maturity (i.e., pay-fixed swap)
then the first entry is positive and the second entry is negative.
Reporting instructions for particular types of off-balance sheet
contracts are provided in sections that follow.
Excluded from this section are: (1) Interest rate option contracts,
including caps, floors, collars, corridors, and swaptions, and (2)
interest rate swaps with embedded options, such as index amortizing
swaps. These items are included in the self-reported section below.
Self-Reported Items
This self-reported section requests information regarding certain
assets and off- balance sheet contracts. Institutions are required to
provide estimates of changes in market values for each instrument given
both a 200 basis point rise and decline in interest rates. These
estimates may be obtained from reliable third party sources or from the
institution's internal risk measurement system.
Item Instructions
The total amount reported in Column A must equal the sum of Columns
B through H.
Item 1, Debt Securities (exclude self reported items): The sum of
Items 1(a) and 1(b), Column A for this item plus the amount of
nonaccrual pass-through securities included in Schedule RC-N, Column C,
must equal the sum of Schedule RC-B, Items 4(a)(1) through 4(a)(3),
Columns A and D.
Fixed-rate debt securities should be reported without regard to
their call date unless the security has actually been called. When
fixed-rate debt securities have been called, they should be reported on
the basis of the time remaining until the call date. Adjustable-rate
debt securities should be reported on the basis of their reset
frequency without regard to their call date even if the security has
actually been called.
Fixed-rate debt securities that the reporting bank has the option
to redeem prior to maturity ("put bonds") should be reported on the
basis of the time remaining until the earliest "put" date.
Adjustable-rate "put bonds" should be reported on the basis of reset
frequency without regard to "put" dates.
The information requested in Items 1(c), 1(d), and 1(e) applies to
both fixed-rate and adjustable-rate instruments.
Item 1(a), ARM Securities (use Memoranda section below): Report the
total carrying value \13\ of all adjustable-rate mortgage-backed pass-
through certificates, such as those guaranteed by the Government
National Mortgage Association (GNMA) and those issued by the Federal
National Mortgage Association (FNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), and others (e.g., other depository institutions or
insurance companies)
[[Page 39548]]
which are included in Schedule RC-B, Items 4(a)(1) through 4(a)(3).
\13\ For purposes of this schedule, available-for-sale debt
securities are to be reported on the basis of their fair value,
while held-to-maturity debt securities are to be reported on the
basis of their amortized cost. Therefore, throughout the
instructions to this schedule, references to the carrying value
should be read as such.
---------------------------------------------------------------------------
The reporting of these adjustable-rate pass-through securities by
reset frequency depends upon the institution's asset concentration
level and is requested in the Memoranda Section of this schedule as
well as in Schedules 3 and 4.
Item 1(b), Fixed-Rate Mortgage Securities: Report the carrying
value of all fixed-rate mortgage-backed pass-through certificates, such
as those guaranteed by the Government National Mortgage Association
(GNMA) and those issued by the Federal National Mortgage Association
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and others
(e.g., other depository institutions or insurance companies) which are
included in Schedule RC-B, Items 4(a)(1) through 4(a)(3).
Item 1(c), All Other Amortizing Securities: Report the carrying
value of all other debt securities (not reported in Items 1(a) and 1(b)
above) which have regularly scheduled principal amortization more
frequently than on an annual basis, exclude amortizing securities which
require a balloon payment of 25 percent or more of the original
principal at maturity. This may include:
(1) U.S. Government agency and corporation obligations reported in
Schedule RC-B, Item 2(a) and 2(b).
(2) Securities issued by states and political subdivisions in the
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
(3) Other debt securities reported in Schedule RC-B, Item 5,
including home equity loan-backed securities (and the appropriate
subitems on the FFIEC 031, 032, and 033 report forms).
Exclude from all other amortizing securities:
(1) All equity securities reported in Schedule RC-B, Items 6(a)
through 6(c).
(2) Zero- or low-coupon (3 percent or less) securities (report in
Item 1(e) below).
(3) All debt securities which are on nonaccrual status.
(4) All structured notes (include in Item 8 of the self-reported
items below).
(5) All "high-risk" mortgage securities (include in Item 6 of the
self-reported items below.)
(6) CMO and REMIC holdings. If CMO and REMIC holdings exceed 10% of
total assets, they must be included in Items 6 or 7 of the self-
reporting section below. For holdings of 10% or less of assets, an
institution may elect to report these balances in the non-amortizing
section based on bank management's estimate of the instrument's current
average life.
Item 1(d), Non-Amortizing Securities: Report all debt securities
with coupons greater than 3 percent that have either: (1) regularly
scheduled principal payments less frequently than on an annual basis,
or (2) full repayment of principal at maturity. Also reported in this
item are amortizing securities which require a balloon payment of 75
percent or more of the original principal at maturity. Non-amortizing
securities may include:
(1) U.S. Treasury securities reported in Schedule RC-B, Item 1.
(2) U.S. Government agency and corporation obligations reported in
Schedule RC-B, Items 2(a) and 2(b).
(3) Securities issued by states and political subdivisions in the
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
(4) CMOs and REMICs reported in Schedule RC-B, Items 4(b)(1)
through 4(b)(3) if the institution is not required or does not elect to
self-report the estimated changes in the market values of these
instruments for a 200 basis point increase and decrease in interest
rates. Institutions should not report CMO and REMIC holdings in this
item if these exceed 10% of total assets. If CMOs and REMIC holdings
exceed 10% of total assets, they must be included in the self-reporting
section below.
(5) Other debt securities reported in Schedule RC-B, Item 5 (and
the appropriate subitems on the FFIEC 031, 032, and 033 report forms).
Exclude from non-amortizing securities:
(1) All equity securities reported in Schedule RC-B, Items 6(a)
through 6(c).
(2) Zero- or low-coupon (3 percent or less) securities (report in
Item 1(e) below).
(3) All debt securities which are on nonaccrual status.
(4) All structured notes (include in Item 8 of the self-reported
items below).
(5) All "high-risk" mortgage securities (include in Item 6 of the
self-reported items below).
(6) Non-high-risk mortgage securities that are included in the
self-reported items below.
Item 1(e), Zero- or Low-Coupon Securities Report: On the basis of
final maturity, all holdings of debt securities with coupon rates of 3
percent or less. Such holdings may include:
(1) U.S. Treasury securities reported in Schedule RC-B, Item 1,
including all U.S. Treasury bills issued on a discount basis.
(2) U.S. Government agency and corporation obligations reported in
Schedule RC-B, Items 2(a) and 2(b).
(3) Securities issued by states and political subdivisions in the
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
(4) Other debt securities reported in Schedule RC-B, Item 5 (and
the appropriate subitems on the FFIEC 031, 032, and 033 report forms).
Exclude from zero- or low-coupon securities:
(1) All equity securities reported in Schedule RC-B, Items 6(a)
through 6(c).
(2) All debt securities which are on nonaccrual status.
(3) All structured notes (include in Item 8 of the self-reported
items below).
(4) All "high-risk" mortgage securities (include in Item 6 of the
self-reported items below).
Item 2, Loans and Leases: Loan amounts should be reported net of
unearned income to the extent that they have been reported net of
unearned income in Schedule RC-C.
The sum of Items 2(a), 2(b) and 2(c), Column A of this schedule,
plus the amount of permanent loans secured by first liens on 1-4 family
residential mortgages in nonaccrual status reported in Schedule RC-N,
Column C, Memorandum Item 4(c)(2) on FFIEC 033 and 034, and Memorandum
Item 3(c)(2) on FFIEC 031 and 032 must equal RC-C, Item 1(c)(2)(a).
Included in Items 2(c), 2(d) and 2(e) is information regarding both
fixed- and adjustable-rate instruments.
Item 2(a), ARM Loans (use Memorandum section below): Report the
total amount of permanent loans secured by first liens on 1-4 family
residential mortgages that are included in RC-C, Item 1(c)(2)(a), which
are subject to a floating or adjustable interest rate. Exclude from
this item any loans in nonaccrual. Also exclude loans held for sale
with firm commitments (report in Item 2(c) below).
The reporting of these items according to reset frequency depends
on the institution's asset concentration level and is requested in the
Memoranda section of this schedule as well as Schedules 3 and 4.
Item 2(b), Fixed-Rate Mortgage Loans: Report all permanent loans
secured by first liens on 1-4 family residential mortgages included in
RC-C, Item 1(c)(2)(a) that are subject to a fixed or predetermined
interest rate on the basis of time remaining until their final
contractual maturity. Exclude any loans in nonaccrual status. Also
exclude loans held for sale with firm commitments (report in Item 2(c)
below).
Item 2(c), Mortgage Loans Held for Sale with Firm Commitments:
Report in this item the total amount of all outstanding loans secured
by first liens
[[Page 39549]]
on 1-4 family residential mortgages which are held by the bank for sale
and delivery to a secondary market participant under the terms of a
binding commitment.
Item 2(d), Other Amortizing Loans: Report all other loans and
leases with regularly scheduled principal amortization (more frequently
than annually), which are not included above in Items 2(a), 2(b) and
2(c).
Include in this item all revolving lines of credit and credit card
receivables. The reporting of adjustable-rate revolving credit should
be according to the next repricing date, while fixed-rate revolving
credit should be reported based on management determination of the
likely repayment horizon. Relevant considerations in assigning a
repayment period should include, at a minimum: (1) Required minimum
monthly payments, (2) the effect of "payment holidays," (3)
historical repayment patterns, (4) the effect of credit card accounts
used strictly for transactions purposes, and (5) the effect of pricing
incentives such as tiered rates linked to the amount outstanding.
Exclude amortizing loans which require a balloon payment of 75
percent or more of the original principal at maturity. For this
schedule, such loans are considered to be non-amortizing and are
included in Item 2(d), "All other loans", below. Also exclude any
loans in nonaccrual status.
Item 2(e), All Other Loans: Report all other loans and leases with
no scheduled principal amortization or with principal amortization
scheduled annually or less frequently that are not included above in
Items 2(a) through 2(c). Also include loans which require a balloon
payment of 25 percent or more of the original principal at maturity.
Exclude any loans in nonaccrual status.
Item 3, All Other Interest-Bearing Assets: Report all interest-
earning assets, other than loans and securities. The sum of the amount
reported in Column A for this item must equal the sum of Schedule RC,
Item 1(b), "Interest-bearing balances due from depository
institutions," Item 3(a), "Federal funds sold," and Item 3(b)
"Securities purchased under agreements to resell," less any amount
reported in nonaccrual status.
Item 4, Liabilities: For purposes of this schedule, report all
fixed-rate time deposits and interest-bearing nondeposit liabilities on
the basis of their remaining maturity, and adjustable-rate time
deposits and nondeposit interest-bearing liabilities on the basis of
their next repricing date. Non-maturity deposits include: (1)
Commercial demand deposit accounts; (2) money market deposit accounts
(MMDAs); and (3) NOW accounts, all other savings deposits, and all
other retail demand deposit accounts. The distribution of these non-
maturity deposits across the time bands will be based on management
determination within defined constraints.
The term "commercial" for purposes of this schedule refers to all
demand deposit accounts in which the beneficial interest is held by a
depositor that is not an individual or sole proprietorship. Such
accounts include, but are not limited to, demand deposits held by:
corporations, partnerships, and other associations; the U.S. and
foreign governments; states and political subdivision in the U.S.; U.S.
and foreign banks. Only those commercial accounts which are
noninterest-bearing demand deposit accounts are differentiated for
reporting purposes; all other commercial deposits (i.e., NOW accounts,
MMDAs and other savings deposits) are not differentiated for purposes
of this schedule.
The term "retail" for purposes of this report refers to all
demand deposit accounts in which the beneficial interest is held by a
depositor that is an individual or sole proprietorship.
Institutions must report all non-maturity deposits across the time
bands each quarter according to management's own assumptions and
experience in both a rising rate and a declining rate scenario in
accordance with the following parameters:
(1) Commercial Demand Deposit Accounts: A minimum of 50 percent of
an institution's commercial demand deposit accounts is required to be
reported in Column B, "Up to 3 months." The remaining balances can be
distributed across Columns B through E ("Up to 3 months," "Greater
than 3 months-1 year," "1-3 years," and "3-5 years") with a
maximum of 20 percent of the total balance in Column E, "3-5 years."
(2) MMDA Accounts: These deposit accounts may be distributed across
Columns B through D ("Up to 3 months," "Greater than 3 months-1
year," and "1-3 years") with a maximum of 50 percent reported in the
Column D, "1-3 years."
(3) NOW Accounts, Other Savings Deposits and Retail Demand Deposit
Accounts: These deposit accounts may be distributed across Columns B
through F ("Up to 3 months," "Greater than 3 months-1 year," "1-3
years," "3-5 years," and "5-10 years") under the following
constraints: a maximum of 20 percent in Column F, "5-10 years," and a
maximum of 20 percent combined in Columns E and F, "3-5 years" and
"5-10 years."
Item 4(a), Time Deposits: Report the total amount of all time
deposits, regardless of amount. This item includes both time
certificates of deposit and open-account time deposits. The amount in
Column A must equal the sum of Schedule RC-E, Memorandum Items 2(b),
2(c), and 2(d). For purposes of this schedule, time deposits with
"step up" features should be reported on the basis of remaining
maturity.
Item 4(b), All Other Interest-Bearing Nondeposit Liabilities: The
amount reported in this item must equal the sum of the following items
from Schedule RC: Item 14(a), "Federal funds purchased;" Item 14(b),
Securities sold under agreements to repurchase;" Item 15(a), "Demand
notes issued to the U.S. Treasury;" Item 16(a), "Other borrowed money
with original maturity of one year or less;" Item 16(b), "Other
borrowed money with original maturity of more than one year;" Item 17,
"Mortgage indebtedness and obligations under capitalized leases;"
Item 19, "Subordinated notes and debentures;" and Item 22, "Limited-
life preferred stock and related surplus."
Item 4(c), Commercial Demand Deposits--Rising Rates: Report the
total amount of all demand deposit accounts (included in Schedule RC-E,
Columns A and B) representing funds in which any beneficial interest is
held by a depositor which is not an individual or sole proprietorship.
Item 4(d), MMDAs--Rising Rates: Report the total amount of all
MMDAs as reported on Schedule RC-E, Memorandum Item 2(a)(1).
Item 4(e), NOW Accounts, Other Savings Deposits, and Other Demand
Deposits--Rising Rates: Report the total amount of all NOW accounts
that are included in Schedule RC-E, Memorandum Item 3, all other
savings deposits as reported on Schedule RC-E, Memorandum Item 2(a)(2),
and all demand deposits representing funds in which any beneficial
interest is held by an individual or sole proprietorship included in
Schedule RC-E, Item 1, Columns A and B.
Item 4(f), Commercial Demand Deposits--Declining Rates: Report the
total amount of all demand deposit accounts (included in Schedule RC-E,
Columns A and B) representing funds in which any beneficial interest is
held by a depositor which is not an individual or sole proprietorship.
Item 4(g), MMDAs--Declining Rates: Report the total amount of all
MMDAs as reported on Schedule RC-E, Memorandum Item 2(a)(1).
[[Page 39550]]
Item 4(h), NOW Accounts, Other Savings Deposits, and Other Demand
Deposits--Declining Rates: Report in this item the total amount of all
NOW accounts that are included in Schedule RC-E, Memorandum Item 3, all
other savings deposits as reported on Schedule RC-E, Memorandum Item
2(a)(2), and all demand deposits representing funds in which any
beneficial interest is held by an individual or sole proprietorship
included in Schedule RC-E, Item 1, Columns A and B.
Item 5, Off-Balance Sheet Positions: In this section, respondents
must report selected off-balance sheet contracts using two entries.
Each contract has two offsetting entries (one is positive, one is
negative) which reflect the timing of the cash flows. This reporting
method reflects the way in which the off-balance sheet instruments
affect the institution's economic value.
Item 5(a), Non-Amortizing Contracts: Report the notional amounts of
the following contracts that are not held for trading: (1) Futures
contracts whose predominant risk characteristic is interest rate risk
as reported in Schedule RC-L, Item 14(a), "Futures contracts, Column
A, "Interest Rate Contracts;" (2) forward contracts whose predominant
risk characteristic is interest rate risk reported in Schedule RC-L,
Item 14(b), "Forward contracts," Column A, "Interest Rate
Contracts;" and (3) interest rate swaps, excluding basis swaps,
reported in Schedule RC-L, Item 14(e), "Swaps," Column A, "Interest
Rate Contracts." Also included in this item are commitments to
originate, buy, and sell non-amortizing loans and securities. Exclude
all unused lines of credit.
Exclude from this item all exchange-traded option contracts and
over-the-counter option contracts and any swaps with embedded options.
Swaptions, i.e., options to enter into a swap contract, and contracts
known as caps, floors, collars and corridors should be reported as
options and are included in Item 11 of the self-reported section below.
Also exclude all contracts held for trading (report in Item 12 of the
self-reporting section below.)
Futures contracts and interest rate forwards must be reported in
Columns B through H on the following basis: The first entry corresponds
to the settlement date of the contract, and the offsetting entry
corresponds to the settlement date plus the maturity of the instrument
underlying the contract.
Long positions in futures contracts and forward rate agreements
represent commitments to purchase specified financial instruments at a
specified future date at a specified price or yield. For outstanding
long positions, the first entry corresponding to the contract
settlement date must be negative. The offsetting positive entry must be
reported according to the settlement date plus the maturity of the
instrument underlying the contract.
Short positions in futures contracts and forward rate agreements
represent commitments to sell specified financial instruments at a
specified future date at a specified price or yield. For an outstanding
short position, the first entry corresponding to the contract
settlement date must be positive. The offsetting negative entry must be
reported according to the settlement date plus the maturity of the
instrument underlying the contract.
Interest rate swaps must be reported in Columns B through H on the
following basis: The first entry corresponds to the next repricing date
of the adjustable-rate coupon, and the offsetting entry corresponds to
the maturity of the swap.
For swaps in which the reporting bank pays an adjustable rate and
receives a fixed rate, the first entry corresponding to the next
repricing date of the floating rate coupon must be negative. The
offsetting positive entry must be reported according to the maturity of
the swap.
For swaps in which the reporting bank pays a fixed rate and
receives an adjustable rate, the first entry corresponding to the next
repricing date of the floating rate coupon must be positive. The
offsetting negative entry must be reported according to the maturity of
the swap.
Securitized credit cards where the credit card holders pay a fixed
rate and the security has an adjustable-rate coupon are treated
similarly to interest rate swaps. Like swaps, the first entry
corresponds to the repricing date of the adjustable-rate coupon that is
paid to the holder of the security. However, the offsetting entry in
these transactions corresponds to the expected maturity of the
security. Exclude securitized credit cards where the cards and the
security are both fixed rate or both variable rate.
Firm commitments to originate, buy or sell non-amortizing loans or
securities must be reported in Columns B through H on the following
basis: The first entry corresponds to the settlement date of the
commitment contract. The offsetting entry corresponds to the settlement
date plus the maturity of the underlying instrument if the underlying
instrument carries a fixed rate, or to the settlement date plus the
time until the next repricing date of the underlying instrument if the
underlying instrument carries an adjustable rate.
For commitments to originate or buy non-amortizing loans or
securities, the first entry corresponding to the contract settlement
date must be negative. The offsetting positive entry must be reported
according to the settlement date plus the maturity of the underlying
instrument if the underlying instrument carries a fixed rate, or to the
settlement date plus the time until the next repricing date if the
underlying instrument carries an adjustable rate.
For commitments to sell non-amortizing loans or securities, the
first entry corresponding to the contract settlement date must be
positive. The offsetting negative entry must be reported according to
the settlement date plus the maturity of the underlying instrument if
the underlying instrument carries a fixed rate, or to the settlement
date plus the time until the next repricing date of the underlying
instrument if the underlying instrument carries an adjustable rate.
Item 5(b) Amortizing Contracts: Report all outstanding commitments
to originate, buy and sell mortgages and other amortizing loans and
securities. Include only those commitments for which interest rates
have already been locked in, either on a fixed-rate or adjustable-rate
basis. Also include all other interest rate contracts whose notional
value amortizes over time.
Commitments to originate, buy or sell mortgages and other
amortizing loans or securities must be reported in Columns B through H
on the following basis: The first entry corresponds to the settlement
date of the commitment contract. The offsetting entry corresponds to
the settlement date plus the maturity of the underlying instrument if
the underlying instrument carries a fixed rate, or to the settlement
date plus the time until the next repricing date of the underlying
instrument if the underlying instrument carries an adjustable rate. All
commitments should be reported on a gross basis, using a zero percent
fallout factor.
For commitments to originate or buy mortgages and other amortizing
loans or securities, the first entry corresponding to the contract
settlement date must be negative. The offsetting positive entry must be
reported according to the settlement date plus the maturity of the
underlying instrument if the underlying instrument carries a fixed
rate, or to the settlement date plus the time until the next repricing
date of the underlying instrument if the underlying instrument carries
an adjustable rate.
For commitments to sell mortgages and other amortizing loans or
securities,
[[Page 39551]]
the first entry corresponding to the contract settlement date must be
positive. The offsetting negative entry must be reported according to
the settlement date plus the maturity if the underlying instruments
carry a fixed rate, or to the settlement date plus the time until the
next repricing date if the underlying instruments carry an adjustable
rate.
Self-Reported Items
Maturity and repricing information is not requested in this
section. However, banks must report the carrying value of on-balance
sheet instruments in Column A and the market value of all instruments
in Column B. In addition banks must report in Columns C and D,
respectively, each instrument's estimated change in market value given
a 200 basis point instantaneous and parallel rise and decline in
interest rates. These estimates may be obtained from a reliable third
party source or from the institution's internal risk measurement
system. Item 7 in this section requests estimated market value changes
of the institution's trading account holdings given 100 basis point
instantaneous and parallel rise and decline in interest rates.
Item 6, High-Risk Mortgage Securities: Report all high-risk
mortgage securities included in Schedule RC-B, Memorandum Item 8. This
item includes all mortgage derivative products (stripped mortgage-
backed securities, CMOs, REMICs, and CMO and REMIC residuals) that meet
the definition of a high-risk mortgage security under the FFIEC's
Supervisory Policy Statement on Securities Activities.
Item 7, Nonhigh-Risk Mortgage Securities: Non-high risk mortgage
securities are those mortgage derivative products which did not meet
the definition of a high-risk mortgage security under the FFIEC's
Supervisory Policy Statement on Securities Activities as of their most
recent testing date. Institutions with greater than 10% of total assets
in nonhigh-risk mortgage derivative securities as of the report date
must report information about such instruments in this item.
Institutions that are not required to complete this item may elect to
do so on a voluntary basis.
Item 8, Structured Notes: Report all structured notes included in
Schedule RC-B, Memorandum Item 9. Structured notes are debt securities
whose cash flow characteristics are dependent upon one or more indices
and/or have embedded forwards or options. Included below is a list of
common structures. For further information concerning these products,
refer to the instructions for Schedule RC-B, Memorandum Item 9.
(1) Step-up Bonds
(2) Index Amortizing Notes (IANs)
(3) Dual Index Notes
(4) De-leveraged Bonds
(5) Range Bonds
(6) Inverse Floaters
Item 9, Mortgage Servicing Rights: Report the unamortized portion
of excess residential mortgage servicing fees receivable included in
Schedule RC-F, Item 3. Also report the unamortized amount (carrying
value) of mortgage servicing rights included in Schedule RC-M, Item
7(a) on FFIEC 034; Item 5(a) on FFIEC 033; and Item 6(a) on FFIEC 031
and 032.
Item 10, Interest Rate Swaps with Embedded Options: Report all
interest rate swaps with embedded options. Exclude all interest rate
swaps held for trading.
Item 11, Interest Rate Options: Report interest rate option
contracts not held in trading accounts, including options to purchase/
sell interest-bearing financial instruments and whose predominant risk
characteristic is interest rate risk as well as contracts known as
caps, floors, collars, corridors and swaptions. Include all exchange-
traded and over-the-counter interest rate contracts as reported on
Schedule RC-L, Items 14(c), Column A, and Item 14(d), Column A.
Item 12, Trading Account: Report in this item the carrying value of
all trading account assets, liabilities and off-balance sheet
contracts. Also report the market value changes of these holdings given
both a 100 basis point instantaneous and parallel rise and decline in
interest rates. The carrying value of these items are included in
Schedule RC, Items 5 and 15(b), and Schedule RC-L, Item 15, Column A on
FFIEC 033 and 034; and Schedule RC-D, Items 12 and 15, and Schedule RC-
L, Item 15, Column A on FFIEC 031 and 032.
Memoranda Section
This memoranda section is to be completed only by those banks whose
ARM holdings are less than 10% of total assets as of the report date
and have checked an "X" in the "No" boxes on Item 1 of both
Schedules 3 and 4.
Memoranda Items 1-4 divide total ARM securities and loans included
in Schedule 1, Items 1(a) and 2(a) above into two categories, those
adjustable-rate instruments whose rates are greater than or equal to
200 basis points (bp) away from their lifetime interest rate cap, and
those whose rates are less than 200 bp from their lifetime interest
rate cap. The lifetime interest rate cap is the upper limit on the
mortgage rate that can be charged over the life of a loan. Report in
Memorandum Items 1 and 2 the entire amount of those instruments whose
rates are greater than or equal to 200 bp away from their lifetime
interest rate cap according to the frequency with which the interest
rate on the mortgage may contractually reset. Report in Memorandum
Items 3 and 4 the total amount of adjustable ARM securities and loans
whose rates are less than 200 bp from their lifetime interest rate cap.
With respect to the relationship of this memoranda section to the
main body of this schedule, the sum of Memorandum Items 1, Columns A
through C, and Memorandum Item 3 must equal Schedule 1, Item 1(a).
The sum of Memoranda Item 2, Columns A through C, and Memorandum
Item 4 must equal Schedule 1, Item 2(a).
Memoranda
Item 1, ARM Securities: Report the carrying value of all
adjustable-rate, mortgage-backed pass-through securities on the basis
of their reset frequency. Exclude any securities in nonaccrual status.
Also exclude those pass-through securities whose rates are less than
200 bp of their lifetime interest rate cap. For this memoranda section,
such securities are to be reported in Memorandum Item 3.
Column A, 0 to 6 Months: Report the dollar amount of the bank's
adjustable-rate pass-through securities whose rates may reset
semiannually or more frequently (e.g., semiannually, quarterly,
monthly, weekly, daily).
Column B, 6 Months to 1 Year: Report the dollar amount of the
bank's adjustable-rate, pass-through securities whose rates reset
annually or more frequently, but less frequently than semiannually.
Column C, Greater than 1 Year: Report the dollar amount of the
bank's adjustable-rate, pass-through securities whose rates reset less
frequently than annually.
Item 2, ARM Loans: Report all adjustable-rate, permanent loans
secured by first liens on 1-4 family residential mortgages on the basis
of the reset frequency. Exclude all loans in nonaccrual status. Also
exclude those loans whose rates are less than 200 bp from their
lifetime interest rate cap. For this memoranda section, such loans are
to be reported in Memorandum Item 4.
Column A, 0 to 6 Months: Report the dollar amount of the bank's
adjustable-rate, permanent loans secured by first liens on 1-4 family
residential mortgages whose rates reset
[[Page 39552]]
semiannually or more frequently (e.g. semiannually, quarterly, monthly,
weekly, daily.)
Column B, 6 Months to 1 Year: Report the dollar amount of the
bank's adjustable-rate, permanent loans secured by first liens on 1-4
family residential mortgages whose rates reset annually or more
frequently, but less frequently than semiannually.
Column C, Greater than 1 Year: Report the dollar amount of the
bank's adjustable-rate, permanent loans secured by 1-4 family
residential mortgages whose rates reset less frequently than annually.
Near Lifetime Cap
Item 3, ARM Securities: Report the total amount of the bank's
adjustable-rate, pass-through securities whose rates are less than 200
bp from their lifetime interest rate cap.
Item 4, ARM Loans: Report the total amount of the bank's
adjustable-rate, permanent loans secured by 1-4 family residential
mortgages whose rates are less than 200 bp from their lifetime interest
rate cap.
IV. Reporting Instructions--Schedule 2
General Instructions
Institutions which complete Schedule 2 should only report the total
amount of fixed-rate mortgage holdings on Schedule 1, Items 1(b) and
2(b), Column A. The distribution of these instruments across Columns B
through H is not required.
The information required in this supplemental schedule represents
the distribution of individual fixed-rate mortgages holding balances by
maturity and coupon rate. In the distribution of Schedule 2 items, the
entire carrying value of all fixed-rate mortgage holdings should be
reported on the basis of final maturities. The bank's own estimate of
expected cash flows is not reported on this schedule.
Items 2 through 9 of Schedule 2 list eight coupon rate ranges,
beginning with a rate of less than or equal to 6.75% proceeding in 50
bp increments, to a rate of greater than 9.75%. Columns A through D
list four time ranges, which represent the time remaining from the
report date until the final maturity of the instrument: 5 years or
less, over 5 years through 10 years, over 10 years through 20 years,
and greater than 20 years. Respondents must report selected assets by
the coupon rate 14 in each of the relevant time bands.
\14\ The term "coupon rate" is used in this schedule as a
generic term, but for loans and pass-through securities it has two
distinct definitions. Whereas loans are to be reported according to
each individual loan's coupon or stated interest rate, pass-through
securities are to be reported according to the weighted average
coupon (WAC) of the underlying collateral. If this rate is not
known, it should be estimated by adding 50 bp to the rate the bank
receives on each pass-through certificate. The 50 bp represents the
deduction of servicing fees and any applicable guarantee fees. As a
consequence of these fees, the pass-through rate is lower than the
WAC of the underlying of mortgages. Therefore, to estimate the WAC
of the mortgage pool, the fees should be added back to the pass-
through rate.
---------------------------------------------------------------------------
Examples
An 8%, fixed-rate, residential mortgage loan which matures in 15
years would be reported in Item 5, Column C.
An 8.5%, fixed-rate, mortgage pass-through security which matures
in three years would be reported in Item 7, Column A. Note that 50 bp
added to the 8.5% rate results in a 9% estimated weighted average
coupon rate of the underlying collateral.
For purposes of this supplemental schedule the following
definitions apply:
A fixed interest rate is a rate that is specified at the
origination of the transaction, is fixed and invariable during the term
of the loan or security, and is known to both the borrower and the
lender. Also treated as a fixed interest rate is a predetermined
interest rate which is a rate that changes during the term of the loan
or security on a predetermined basis, with the exact rate of interest
over the life of the instrument known with certainty to both the
borrower and the lender at loan origination or when the debt security
is acquired.
Remaining maturity is the amount of time remaining from the report
date until the final contractual maturity of a loan or debt security.
The carrying value of a held-to-maturity pass-through security is
its amortized cost, while the carrying value of an available-for-sale
pass-through security is its fair value.
All loans are to be reported net of unearned income to the extent
that the loans have been reported net of unearned income in Schedule
RC-C, Item 1(c)(2)(a).
Include as fixed interest rate residential mortgage holdings the
following instruments:
(1) All permanent loans secured by first liens on 1-4 family
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a), that
have fixed interest rates regardless of whether they are current or are
reported as "past due and still accruing" in Schedule RC-N, Columns A
and B.
(2) The carrying value of all pass-through securities which have
fixed interest rates and are included in Schedule RC-B, Items 4(a)(1)
through 4(a)(3), Columns A and D.
Exclude from this schedule
(1) Fixed-rate residential mortgage loans held for sale and
delivery to secondary market participants, such as FNMA and FHLMC,
under terms of a binding commitment.
(2) Fixed-rate residential mortgage holdings that are on nonaccrual
status.
(3) All collateralized mortgage obligations (CMOs), real estate
mortgage investment conduits (REMICs), and stripped mortgage-backed
securities.
(4) All pass-through securities held for trading.
Column Instructions
Distribute the carrying value of selected assets in accordance with
the procedures described for Columns A through D below.
Report in Column A the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of 5 years
or less.
Report in Column B the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 5
years through 10 years.
Report in Column C the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 10
years through 20 years.
Report in Column D the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 20
years.
Item Instructions
Item 1: Test for determining whether Schedule 2 should be
completed. Either repeat the instruction on page 1 of the General
Instructions or cross-reference it. In Items 2 through 9, distribute,
in accordance with Column instructions, the carrying value of the
bank's fixed-rate residential mortgage holdings.
Item 2: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of less than or equal to 6.75%.
Item 3: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 6.76% through 7.25%.
Item 4: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 7.26% through 7.75%.
Item 5: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 7.76% through 8.25%.
Item 6: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 8.26% through 8.75%.
Item 7: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 8.76% through 9.25%.
[[Page 39553]]
Item 8: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of 9.26% through 9.75%.
Item 9: Report the bank's fixed-rate residential mortgage holdings
with a coupon rate of greater than or equal to 9.76%.
V. Reporting Instructions--Schedule 3
General Instructions
This supplemental schedule primarily requests information related
to the interest rate sensitivity of adjustable-rate mortgage (ARM)
holdings. The information required in this supplemental schedule
represents the categorization of the reporting bank's ARM holdings
according to the distinct characteristics of each loan or security. The
defining ARM characteristics requested for this schedule include:
(1) Reset frequency. The reset frequency is how often the contract
permits the interest rate on a loan to be changed (e.g., daily,
monthly, quarterly, semiannually, annually) without regard to the
length of time between the report date and the date the rate can next
change.
(2) Lifetime interest rate cap. The lifetime cap is the upper limit
on the mortgage rate that can be charged over the life of a loan. This
lifetime loan cap is expressed in terms of the initial rate. For
example, if the initial mortgage rate is 7% and the lifetime cap is 5%,
the maximum interest rate that the bank can charge over the life of the
loan is 12%.
(3) Periodic cap. A periodic cap limits the amount that the
interest rate may increase at the reset (repricing) date. The periodic
cap is expressed in basis points (bp). For example, the bank owns a 7%
adjustable-rate mortgage loan. If the periodic cap is 100 bp, then the
maximum rate the bank can charge at the next reset date is 8%. If the
indexing rate rose by 150 bp, making the fully indexed mortgage rate
8.5%, the bank could only charge 8% at the next reset date.
Schedule 3, Columns A through G, list three reset frequency Columns
which are divided by the presence of a periodic cap, and, in the over
"6 months through 1 year" Column only, by the size of the periodic
cap. Items 2 through 5 list four basis point ranges for how far the
ARM's current rate is from the instrument's lifetime interest rate cap.
In terms of ARM pass-through securities, the information required
pertains to the relationship between the current interest rates and
caps of the underlying mortgages. If the loans in the mortgage pool are
not uniform in terms of periodic caps and lifetime caps, the weighted
cap information is required.
In the distribution of Schedule 3 items, the entire carrying value
of all ARM holdings should be reported on the basis of the reset
frequency.
Examples
An adjustable-rate permanent loan secured by a first lien on a 1-4
family residence whose current rate is 7.5% and that has a lifetime cap
of 12% and a periodic cap of 200 bp which reprices annually would be
reported to Item 4, Column E.
An adjustable-rate pass-through security whose current coupon is 8%
and has a lifetime cap of 10.5% and a periodic cap of 100 bp which
reprices semiannually would be reported to Item 3, Column B.
For purposes of this supplemental schedule the following
definitions apply:
A floating or adjustable rate is a rate that varies, or can vary,
in relation to an index, to some other interest rate such as the rate
on certain U.S. Government securities or the bank's "prime rate," or
to some other variable criterion the exact value of which cannot be
known in advance. Therefore, the exact rate the loan or security
carries at any subsequent time cannot be known at the time of
origination or acquisition.
All loans are to be reported net of unearned income to the extent
that the loans have been reported net of unearned income on RC-C, Item
1(c)(2)(a).
Include as adjustable-rate residential mortgage holdings the
following instruments:
(1) All permanent loans secured by first liens on 1-4 family
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a), that
have adjustable interest rates, regardless of whether they are current
or are reported as "past due and still accruing" in Schedule RC-N
Columns A and B.
(2) The carrying values 15 of all pass-through securities
which have adjustable interest rates and are included in RC-B, Items
4(a)(1) through 4(a)(3), Columns A and D.
\15\ For purposes of this schedule, available-for-sale debt
securities are to be reported on the basis of their fair value,
while held-to-maturity debt securities are to be reported on the
basis of their amortized cost. Therefore, throughout the
instructions to this schedule, references to the carrying value
should be read as such.
---------------------------------------------------------------------------
Exclude from this schedule
(1) Adjustable-rate residential mortgage loans held for sale and
delivery to secondary market participants such as FNMA and FHLMC under
terms of a binding commitment.
(2) All adjustable-rate mortgage holdings that are on nonaccrual
status.
(3) All collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs), and stripped mortgage-backed
securities.
(4) All pass-through securities held for trading.
Column Instructions
Distribute the carrying value of selected assets in accordance with
the procedures described for Columns A though G below.
Report in Column A the carrying value of the bank's ARM holdings
which reprice in 6 months or less and have no periodic cap.
Report in Column B the carrying value of the bank's ARM holdings
which reprice in 6 months or less and have a periodic cap.
Report in Column C the carrying value of the bank's ARM holdings
which reprice over 6 months through 1 year and have no periodic cap.
Report in Column D the carrying value of the bank's ARM holdings
which reprice over 6 months through 1 year and have a periodic cap
equal to or less than 150 bp.
Report in Column E the carrying value of the bank's ARM holdings
which reprice over 6 months through 1 year and have a periodic cap
greater than 150 bp.
Report in Column F the carrying value of the bank's ARM holdings
which reprice over 1 year and have no periodic cap.
Report in Column G the carrying value of the bank's ARM holdings
which reprice over 1 year and have a periodic cap.
Item Instructions
In Items 2 through 5, distribute, in accordance with column
instructions, the carrying value of the bank's ARM holdings.
Item 1: Test for determining whether Schedule 3 should be
completed. Either repeat the instruction on page 1 of the General
Instructions or cross-reference it.
Item 2: Report the bank's ARM holdings that are within 200 bp of
their lifetime cap.
Item 3: Report the bank's ARM holdings that are 201-400 bp from
their lifetime cap.
Item 4: Report the bank's ARM holdings that are 401-600 bp from
their lifetime cap.
Item 5: Report the bank's ARM holdings that are greater than 600 bp
from their lifetime cap.
[[Page 39554]]
VIII. Reporting Instructions--Schedule 4
General Instructions
This supplemental schedule primarily requests information related
to the interest rate sensitivity of adjustable-rate mortgage (ARM)
holdings. The information required in this supplemental schedule
represents the categorization of the reporting bank's ARMs according to
the distinct characteristics of each loan or security. The
characteristics of an ARM include:
(1) Underlying Index. The underlying index of an ARM represents the
base or reference point for calculating the mortgage rate of an ARM
loan. There are two main categories of indices: (1) those based on a
current market index, and (2) those derived from a lagging market
index. A current market index is one that adjusts quickly to changes in
market interest rates. Examples include rates on Treasury securities,
and the London Interbank Offered Rate (LIBOR). A lagging market index
is one that adjusts to changes in market interest rates more slowly
than the current market indexes such as rates on Treasury securities,
the London Interbank Offered Rate (LIBOR), etc. Examples of lagging
market indexes are the various published FHLB cost-of-funds indexes and
the National Average Contract Rate for the Purchase of Previously
Occupied Homes.
(2) Lifetime Interest Rate Cap. The lifetime cap is the upper limit
on the mortgage rate that can be charged over the life of a loan. This
lifetime loan cap is expressed in terms of the initial rate. For
example, if the initial mortgage rate is 7% and the lifetime cap is 5%,
the maximum interest rate that the bank can charge over the life of the
loan is 12%.
(3) Periodic Cap. A periodic cap limits the amount that the
interest rate may increase or decrease at the reset (repricing) date.
The periodic cap is expressed in basis points (bp). For example, the
bank owns a 7% adjustable-rate mortgage loan. If the periodic cap is
100 bp, then the maximum rate the bank can charge at the next reset
date is 8%. Even if the indexing rate rose by 150 bp, making the fully
indexed mortgage rate 8.5%, the bank could only charge 8% at the next
reset date.
(4) Reset Frequency. The reset or repricing frequency is how often
the contract permits the interest rate on a loan to be changed (e.g.,
daily, monthly, quarterly, semiannually, annually) without regard to
the length of time between the report date and the date the rate can
next change.
Columns A through I on Schedule 4 list the two major indices,
current and lagging, each of which is divided by reset frequencies. The
current market index columns are further divided by the presence of a
periodic cap, and, in the Over 6 months through 1 year columns only,
by the size of the periodic cap. Items 2 through 9 cover four distance
groups, in terms of basis point ranges, of current ARM rates in
relation to the instruments lifetime interest rate cap. For each
distance group, both the ARM balances and the associated weighted
average coupon (WAC) rates must be reported. The weighted average
coupon rate for this schedule is determined by multiplying the balance
of each ARM loan by the applicable annual interest rate (i.e., the
annualized rate in effect for the asset as of the report date) and by
dividing the sum of all such calculated amounts by the total carrying
value of the category. The WAC required for ARM securities in this
schedule is that of the underlying mortgages, which should be estimated
by adding 75 bp to the bank's pass-through rate. The 75 bp represents
the deduction of servicing fees and any applicable guarantee fees. As a
consequence of these fees, the coupon rate of the pass-through is lower
than that of the WAC of the underlying mortgages. Therefore, to
estimate the WAC of the mortgage pool, the fees should be added back to
the coupon rate.
Examples
An adjustable-rate permanent loan secured by a first lien on a 1-4
family residence repricing quarterly whose current rate is 7.25% and
has a lifetime cap of 10%, no periodic cap, and based on the COFI index
would be reported in Items 4 and 5, Column I.
An ARM pass-through security, repricing annually whose current
coupon is 7.75% and has a lifetime cap of 14.25%, periodic cap of 200
bp, and based on the Treasury index would be reported in Items 6a and
7, Column E. Note the WAC of the underlying mortgages in this case is
estimated to be 8.5%, which is the pass-through rate of 7.75% plus 75
bp.
For purposes of this supplemental schedule the following
definitions apply:
A floating or adjustable rate is a rate that varies, or can vary,
in relation to an index, to some other interest rate such as the rate
on certain U.S. Government securities or the bank's "prime rate," or
to some other variable criterion the exact value of which cannot be
known in advance. Therefore, the exact rate the loan or security
carries at any subsequent time cannot be known at the time of
origination or acquisition.
All loans are to be reported net of unearned income to the extent
that the loans have been reported net of unearned income on RC-C, Item
1(c)(2)(a).
Adjustable-rate residential mortgage loans that are held by the
bank for sale and delivery to a secondary market participant under the
terms of a binding contract should be reported according to their
repricing frequency regardless of the delivery date specified in the
commitment.
Include as adjustable-rate residential mortgage holdings the
following instruments:
(1) All permanent loans secured by first liens on 1-4 family
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a) that
have adjustable interest rates, regardless of whether they are current
or are reported as "past due and still accruing" in Schedule RC-N,
Columns A and B.
(2) The carrying values \16\ of all pass-through securities which
have adjustable interest rates and are included in RC-B, Items 4(a)(1)
through 4(a)(3), Columns A and D.
\16\ For purposes of this schedule, available-for-sale debt
securities are to be reported on the basis of their fair value,
while held-to-maturity debt securities are to be reported on the
basis of their amortized cost. Therefore, throughout the
instructions to this schedule, references to the carrying value
should be read as such.
---------------------------------------------------------------------------
Exclude from this schedule:
(1) All adjustable-rate mortgage holdings that are on nonaccrual
status.
(2) All collateralized mortgage obligations (CMOs) and real estate
mortgage investment conduits.
Column Instructions
Distribute the balance of selected assets in accordance with the
procedures described for Columns A through I below.
Report in Column A the balance of the bank's ARM holdings which are
based on the current market index, reprice 6 months or less, and have
no periodic cap.
Report in Column B the balance of the bank's ARM holdings which are
based on the current market index, reprice 6 months or less, and have a
periodic cap.
Report in Column C the balance of the bank's ARM holdings which are
based on the current market index, reprice, over 6 months through 1
year, and have no periodic cap.
Report in Column D the balance of the bank's ARM holdings which are
based on the current market index, reprice over 6 months through 1
year,, and have a periodic cap equal to or less than 150 bp.
Report in Column E the balance of the bank's ARM holdings which are
based
[[Page 39555]]
on the current market index, reprice over 6 months through 1 year, and
have a periodic cap greater than 150 bp.
Report in Column F the balance of the bank's ARM holdings which are
based on the current market index, reprice over 1 year, and have no
periodic cap.
Report in Column G the balance of the bank's ARM holdings which are
based on the current market index, reprice over 1 year, and have a
periodic cap.
Report in Column H the balance of the bank's ARM holdings which are
based on the lagging market index and reprice1 month or less.
Report in Column I the balance of the bank's ARM holdings which are
based on the lagging market index and reprice over 1 month.
Item Instructions
In Items 2 through 9, distribute, in accordance with column
instructions, the carrying value as well as the weighted average coupon
rate of the bank's ARM holdings.
Items 2 and 3: Report the bank's ARM holdings which are within 200
bp of their lifetime cap.
Items 4 and 5: Report the bank's ARM holdings which are 201-400 bp
from their lifetime cap.
Items 6 and 7: Report the bank's ARM holdings which are 401-600 bp
from their lifetime cap.
Items 8 and 9: Report the bank's ARM holdings which are greater
than 600 bp from their lifetime cap.
Appendix 3--Risk Weight Tables
This appendix contains the risk weights that would be used in the
proposed supervisory model. Table 1 provides the risk weights used for
the baseline module and reporting Schedule 1. Table 2 provides the risk
weights used for the fixed-rate mortgage supplemental module and
Schedule 2 while Table 3 provides the risk weights used for adjustable-
rate mortgages reported in Schedule 3. Table 4 provides the risk
weights used for adjustable-rate mortgages reported in Schedule 4.
[[Page 39556]]
[[Page 39557]]
[[Page 39558]]
BILLING CODE 6714-01-C
[[Page 39559]]
[[Page 39560]]
[[Page 39561]]
[[Page 39562]]
[[Page 39563]]
[[Page 39564]]
[[Page 39565]]
BILLING CODE 6714-01-C
[[Page 39566]]
Appendix 4--Technical Description of Supplemental Modules and Risk
Weights
This appendix is intended to provide detailed information on the
methods used to derive the risk weights used in the supervisory
measurement system. Descriptions of the derivation of non-mortgage risk
weights are provided, followed by the descriptions for fixed and
adjustable-rate mortgage risk weights. Titles and locations of
reference documents are also provided.
I. Non-Mortgage Risk Weights
The non-mortgage risk weights were derived using hypothetical
market instruments that are representative of the asset or liability
category that is measured. Each weight approximates the percentage
change in the price of the benchmark instruments given a 200 basis
point, instantaneous and uniform shift in market interest rates.
Separate risk weights are constructed for the rising and falling
interest rate scenarios for the following categories:
(1) Other amortizing assets;
(2) Zero or low coupon assets;
(3) All other assets;
(4) Liabilities; and
(5) Off-balance sheet.
A. Benchmark Instruments for Non-Mortgage Risk Weights
The benchmark instruments for each category of assets and
liabilities, corresponding maturities, coupons and bond-equivalent
yields are listed below.
(1) Other Amortizing Assets: For other (non-mortgage) amortizing
assets, a benchmark monthly amortizing instrument with an original
maturity equal to the end point of the specific time band; a remaining
maturity equal to the midpoint of the time band; and a coupon and bond-
equivalent yield equal to 7.50% was used.\17\ No prepayments are
assumed for this category of instruments.
\17\ For the third quarter of 1994, the average effective yield
on earning assets at all commercial banks was approximately 7.50% on
an annualized basis.
---------------------------------------------------------------------------
(2) Zero- or Low-Coupon Assets: The risk weights for zero- or low-
coupon instruments were calculated using the percentage change in the
price of a zero-coupon instrument with an assumed maturity equal to the
mid-point of each time band and a bond-equivalent yield of 7.50%.
(3) All Other Assets: The risk weights for the "All Other"
category were calculated assuming semi-annual interest payments, a
maturity equal to the mid-point of each time band, and an assumed
coupon and yield equal to 7.50%.
(4) Liabilities: The only set of risk weights used for liabilities
is represented by the percentage price change for a semi-annual
interest-bearing instrument with an assumed coupon and yield equal to
3.75%.\18\
\18\ The 3.75% coupon approximates the effective cost of
interest-bearing liabilities at all commercial banks for the third
quarter of 1994 on an annualized basis.
---------------------------------------------------------------------------
(5) Off-Balance Sheet Positions: The risk weights for interest rate
futures, forwards and swaps are the same as those applied to the "All
Other" category. Off-balance sheet positions with amortizing features
are assigned the same risk weights as the "Other Amortizing"
category.
B. Derivation of Non-Mortgage Risk Weights
The prices and risk weights for each rate scenario were calculated
in the following manner:
(1) The benchmark instruments were priced at par in the base case,
or current interest rate environment. Using the coupon and maturity of
the instruments and static discounted cash flow analysis, the bond-
equivalent yields were calculated.
(2) Prices for the benchmark instruments were then calculated for
the rising and declining rate scenarios by shifting the bond-equivalent
yields up and down by 200 basis points. The present values of the
expected cash flows in each scenario were then determined to arrive at
the new price for each instrument.
(3) The percentage change in the price from the base case price of
par represents the risk weight for the benchmark instrument in the
corresponding rate scenarios. If the risk weight was determined to be
less than 1 percentage point, it was expanded to the nearest 5 basis
points interval. If the risk weight was greater than 1 percentage
point, it was rounded to the nearest 10 basis points interval.
II. Treatment of Fixed-rate Mortgages and Derivation of Risk Weights
Office of Thrift Supervision Pricing Information
Representative benchmark mortgage instruments used in the
calculation of risk weights for Schedules 1 through 4 were based on
instruments available in the Office of Thrift Supervision (OTS) Asset
and Liability Price Tables as of September 30, 1994. Publicly available
data on certain coupon ranges and weighted average remaining maturities
(WARM) not specifically presented in the OTS Asset and Liability Price
Tables were obtained from the OTS as part of a separate data request by
the agencies.
Representative benchmark fixed-rate mortgage instruments for
Schedule 1 were drawn from a combination of hypothetical mortgage pass-
through instruments and mortgage pool securities listed in the OTS
Asset and Liability Price Tables. The mortgage pool security price
information contained in the OTS Asset and Liability Price Tables were
calculated using the OTS Net Portfolio Value Model. A brief overview of
the pricing methodology in The OTS Net Portfolio Value Model Manual,
published in November 1994, states that "the model uses the options-
based approach to determine the market value of 1 to 4 family
mortgages. Cash flows consist of scheduled principal payments,
interest, and prepaid principal. Prepayments are modeled using a
prepayment equation that relates the prepayment rate for a particular
period to, among other factors, the difference between the mortgage
coupon rate and the current market interest rate. Scheduled principal
and interest cash flows are estimated by amortizing the remaining
balance in each period over its remaining term. To calculate market
values in each of the alternate interest rate scenarios, cash flows for
that scenario are discounted by the simulated Treasury rates for that
scenario plus the option-adjusted spread." For additional detail and
model specifications, refer to The OTS Net Portfolio Value Model,
published by the OTS, Risk Management Division, Washington, District of
Columbia. Copies of the aforementioned publication are available for
review in the FDIC Reading Room, 550 North 17th Street, N.W.,
Washington, District of Columbia, and the in the OCC Library at 250 E
Street SW., Washington, District of Columbia.
The OTS model projects prices for numerous fixed-rate and
adjustable-rate mortgage securities with various weighted average
coupons (WAC) and WARM given different interest rate scenarios. Price
tables are provided for different types of mortgage pool securities.
Each table contains mortgage pool security prices as a percentage of
the underlying mortgage balance in the base case (current interest
rates) as well as price projections for interest rate movements up and
down 400 basis points in 100 basis point increments.
Fixed-rate residential mortgage assets have embedded options that
make the value of the instrument more sensitive to interest rate
changes than fixed maturity instruments. In order to more effectively
analyze the impact of
[[Page 39567]]
embedded options on the value of this asset class, additional reporting
schedules are required depending on the amount of an institution's
mortgage holdings in relation to its total assets. Both one-to-four
family residential mortgage loans and pass-through securities are
considered mortgage holdings for the purposes of these schedules. CMOs
and other mortgage derivative securities are accorded separate
treatment as described in the body of the Policy Statement.
A. Benchmark Instruments
Risk weights have been derived from a group of benchmark fixed-rate
mortgages with attributes most representative of the mortgage market as
of September 30, 1994. Balances reported by banks would be assigned
risk weights corresponding to these benchmark instruments. It is
believed that the benchmark risk weights will provide reasonable
approximations of the price sensitivity of an institution's actual
holdings.
1. Benchmark Instruments for Schedule 1
For Schedule 1, outstanding balances would be reported according to
their remaining maturity in one of seven time bands represented by
Columns B through H of Schedule 1 as shown in Table 1. The balances in
each time band would be assigned risk weights equal to the price
sensitivity of the benchmark instruments chosen for that specific time
band. The benchmark instrument for the first three time bands (Columns
B, C, and D) on Schedule 1 are monthly amortizing instruments with
original maturities equal to the end point of the specific time band;
remaining maturities equal to the midpoint of each time band; and a
coupon and bond-equivalent yield equal to 7.50%. No prepayments are
assumed for those time bands.
Table 1.--Fixed-Rate Mortgages Risk Weight Derivations For Schedule 1
--------------------------------------------------------------------------------------------------------------------------------------------------------
B D E F G H
-------------------- C 3 Months to 1 ----------------------------------------------------------------------------------------------
Column 3 year
months 1 to 3 years 3 to 5 years 5 to 10 years 10 to 20 years > 20 years
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source............ Discounted Cash Discounted Cash Discounted Cash OTS Data......... OTS Data......... OTS Data......... OTS Data.
Flow. Flow. Flow.
--------------------------------------------------------------------------------------------------------------------------------------------------------
The benchmark mortgage instruments for the remaining four time
bands are as follows:
(1) Column E (3 to 5 years): 7-year fixed-rate balloon mortgage
pool security with a 48-month WARM and a 7.50% WAC;
(2) Column F (over 5 to 10 years): 7-year fixed-rate balloon
mortgage pool security with a 72-month WARM and a 7.50% WAC;
(3) Column G (over 10 to 20 years): 15-year fixed-rate mortgage
pool security with a 160-month WARM and a 7.50% WAC;
(4) Column H (over 20 years): FHLMC/FNMA 30-year fixed-rate
mortgage pool security with a 330-month WARM and a 7.50% WAC.
The coupon rate of 7.50 percent was chosen for consistency with the
average effective annualized yield on earning assets at all commercial
banks as of September 30, 1994. Consideration was also given to the
average dollar amount of outstanding 30 year Federal National Mortgage
Association (FNMA) mortgage pass-through securities in September 1994.
2. Benchmark Instruments for Schedule 2
The benchmark instruments used to derive the risk weights for
Schedule 2 include the following:
(1) Column A (0-5 years): 7-year fixed-rate balloon mortgage pool
security with a 48 month WARM;
(2) Column B (Over 5 to 10 years): 7-year fixed-rate balloon
mortgage pool security with a 72 month WARM;
(3) Column C (Over 10 to 20 years): 15-year fixed-rate mortgage
pool security with a 160 month WARM;
(4) Column D ( Over 20 years): FHLMC/FNMA 30-year fixed-rate
mortgage pool security with a 330 month WARM.
The weighted average coupon rates of the benchmark instruments were
the midpoints of the coupon ranges with the exception of those coupons
equal to or less than 6.75 percent and equal to or greater than 9.76
percent. For those coupon ranges, the WACs used were 6.50 percent and
10.50 percent respectively.
B. Derivation of Fixed-rate Mortgage Risk Weights
The following examples have been taken directly from the
information contained in the OTS Asset and Liability Price Tables as of
9/30/94 as well as data obtained from the OTS in a separate request by
the agencies. As previously noted, the OTS price tables present prices
of mortgage pool securities based on bond-equivalent yields, given an
increase and decrease in interest rates from 100 to 400 basis points in
100 basis point increments. The supervisory measurement system risk
weights are derived using the 200 basis point increase and decrease
scenarios.
Table 2 includes prices for the representative mortgage instrument
chosen for the first column of Schedule 2, which is a 7-year fixed-rate
balloon with a 48-month WARM. All mortgage holding balances reported in
the 0-5 year column would receive a risk weight equal to the percentage
change in price for this instrument given 200 basis point
rate shifts. Price changes for each benchmark vary depending on the
particular WAC as depicted in the table. The midpoint of each WAC range
was selected to determine which benchmark instrument to use from the
OTS price table.
Table 2.--7-Year Fixed-Rate Balloon With a 48-Month WARM Prices as a Percent of the Underlying Mortgage Balance
As of September 30, 1994
----------------------------------------------------------------------------------------------------------------
0-5 Year time band benchmark
-----------------------------------------------------------------------------------------------------------------
Interest rate scenario
-----------------------------------------------------------------------------------------------------------------
Coupon -200 bp 0 bp +200 bp
----------------------------------------------------------------------------------------------------------------
6.75%................................................ 101.57 96.01 90.26
[[Page 39568]]
6.76%-7.25%.......................................... 102.54 97.50 91.77
7.26%-7.75%.......................................... 103.17 98.76 93.10
7.76%-8.25%.......................................... 103.74 100.01 94.49
8.26%-8.75%.......................................... 104.33 101.23 96.00
8.76%-9.25%.......................................... 104.89 102.26 97.47
9.26%-9.75%.......................................... 105.34 102.99 98.74
>9.75%.......................................................... 106.30 104.12 100.98
----------------------------------------------------------------------------------------------------------------
Example of a Risk Weight Calculation:
The risk weights for the 7.26%-7.75% coupon range are calculated as
follows: Using 7.50 percent as the midpoint of the coupon range, the
base case price as of September 30, 1994, for a 7.50 percent, 7-year
fixed-rate balloon mortgage, with a 48 month WARM is 98.76. In the +200
bp scenario, the base price of 98.76 is subtracted from +200 bp price
of 93.10: (93.10-98.76= -5.66). The absolute change is -5.66
representing a percentage decrease in price of -5.7% (-5.66/
98.76=-0.057 or -5.7%.) Negative 5.7% serves as the risk weight for the
benchmark mortgage in the +200 bp scenario. As a result, all balances
reported on Schedule 2, in the 0-5 year remaining maturity column, and
the 7.26%-7.75% coupon row would receive a risk weight of -5.7 in the
rising rate analysis.
In the -200 bp scenario, the base price of 98.76 is subtracted from
the -200 bp price of 103.17: (103.17-98.76=4.41). The absolute change
is 4.41 representing a percentage increase in price of 4.5% (4.41/
98.76=0.0446 or 4.5%). The risk weight for this benchmark mortgage
becomes 4.5% in the -200 bp scenario. Consequently, all balances in
this item receive the 4.5% risk weight in the declining rate analysis.
The aforementioned method for calculating the risk weights is used to
determine the risk weights for the other mortgage instruments. Tables
3, 4, and 5 are the price tables for the other three fixed-rate
benchmark instruments used in the supervisory measurement system.
Table 3.--7-Year Fixed-Rate Balloon With a 72-Month WARM Prices as a Percent of the Underlying Mortgage Balance
As of September 30, 1994
----------------------------------------------------------------------------------------------------------------
Coupon
-----------------------------------------------
>5-10 year time band benchmark Interest rate scenario
-----------------------------------------------
-200 bp 0 bp +200 bp
----------------------------------------------------------------------------------------------------------------
6.75%................................................ 101.24 93.90 86.47
6.76%-7.25%.......................................... 102.48 95.89 88.44
7.26%-7.75%.......................................... 103.25 97.57 90.19
7.76%-8.25%.......................................... 103.94 99.211 92.02
8.26%-8.75%.......................................... 104.63 100.79 93.98
8.76%-9.25%.......................................... 105.30 102.14 95.89
9.26%-9.75%.......................................... 105.87 103.10 97.55
9.75%................................................ 107.09 104.57 100.53
----------------------------------------------------------------------------------------------------------------
Table 4.--15-Year Fixed-Rate Pool With a 160-Month WARM Prices as a Percent of the Underlying Mortgage Balance
As of September 30, 1994
----------------------------------------------------------------------------------------------------------------
>10-20 year time band benchmark
-----------------------------------------------------------------------------------------------------------------
Interest rate scenario
Coupon -----------------------------------------------
-200 bp 0 bp +200 bp
----------------------------------------------------------------------------------------------------------------
6.75%................................................ 99.74 91.29 83.12
6.76%-7.25%.......................................... 101.39 93.48 85.28
7.26%-7.75%.......................................... 102.74 95.55 87.40
7.76%-8.25%.......................................... 103.93 97.59 89.59
8.26%-8.75%.......................................... 105.09 99.64 91.93
8.76%-9.25%.......................................... 106.31 101.70 94.45
9.26%-9.75%.......................................... 107.53 103.63 96.99
9.75%................................................ 109.79 106.72 101.53
----------------------------------------------------------------------------------------------------------------
[[Page 39569]]
Table 5 30-Year Fixed-Rate Pool with a 330-Month WARM Prices as a Percent of the Underlying Mortgage Balance As
of September 30, 1994
----------------------------------------------------------------------------------------------------------------
20 year time band benchmark
-----------------------------------------------------------------------------------------------------------------
Interest rate scenario
Coupon -----------------------------------------------
-200 bp 0 bp +200 bp
----------------------------------------------------------------------------------------------------------------
6.75%................................................ 97.78 86.20 75.61
6.76%-7.25%.......................................... 100.13 89.33 78.66
7.26%-7.75%.......................................... 101.87 92.07 81.46
7.76%-8.25%.......................................... 103.36 94.73 84.33
8.26%-8.75%.......................................... 104.77 97.36 87.33
8.76%-9.25%.......................................... 106.20 99.97 90.52
9.26%-9.75%.......................................... 107.67 102.49 93.80
9.75%................................................ 110.67 106.91 100.15
----------------------------------------------------------------------------------------------------------------
III. Treatment of Adjustable-Rate Mortgages and Derivation of Risk
Weights
Adjustable-rate mortgage loans and securities (ARMS) have price
sensitivities that are substantially different than fixed-rate mortgage
assets primarily due to their coupon reset features. The coupon
adjustments are generally limited by caps and floors both for the life
of the mortgage and also at their reset period. These caps are known as
lifetime caps and periodic caps. In general, there are three factors
that most influence the price sensitivity of an ARM: the reset
frequency, the periodic cap, and the lifetime cap.
A review of ARM price behavior reveals that the relationship
between the periodic and lifetime caps and the effect of that
relationship on ARM prices is complex and varies based upon the
likelihood that either cap will become binding. Consequently,
information on both the periodic cap and the lifetime cap would be
reported by institutions with significant ARM holdings. Benchmark
mortgages representative of the ARM market have been identified and are
used to assign risk weights. Supplemental reporting schedules were also
developed to capture the effect of these characteristics on the price
of ARMs.
A. Benchmark ARM Instruments
The coupon ranges provided in Schedule 4 were chosen to be
representative of the ARM securities outstanding. In an effort to
maintain consistency with the risk weights applied to the non-mortgage
products and FRM holdings in Schedule 1, a 7.5% WAC was selected for
all of the benchmark ARM instruments in Schedule 1 as well as for
Schedule 3.
1. Benchmark Instruments for Schedule 1
The benchmark instruments for Schedules 1, 3, and 4 represent the
characteristics of the ARM mortgages most prevalent in the market place
according to reported index, margin, periodic cap, and distance to
lifetime cap. Schedules 1 and 3 are based on instruments with 7.5% WACs
and share other common characteristics, hence, all of the benchmark
instruments and risk weights used for Schedule 1 may be found in
Schedule 3. However, the benchmark WACs in Schedule 4 do not
necessarily fall precisely on a 7.5 percent WAC. To obtain the 7.5
percent WAC sensitivity for Schedules 1 and 3 an additional
interpolation was used. The interpolation used was the following:
(1) for the 6-month and 1-year ARMs: P7.5=1/3[P8.5-
P7.0]+P7.0;
(2) for the 3-year ARMs: P7.5=1/3[P9.5-
P7.5]+P6.5.
Where as Px=PriceWAC(X)
The benchmark instruments for Schedule 1 are as follows:
(1) Reset Frequency--0 to 6 Months: Six month Constant Maturity
Treasury (CMT) index, 275 basis point margin, four month reset period,
100 basis point periodic cap and 500 basis points to the lifetime cap;
(2) Reset Frequency--6 Months to 1 Year: One year CMT, 275 basis
point margin, six month reset period, 200 basis point periodic cap and
500 basis points to the lifetime cap;
(3) Reset Frequency--Greater than 1 Year: Three year CMT, 275 basis
point margin, 18 month reset period, 200 basis point periodic cap and
500 basis points to the lifetime cap;
(4) Reset Frequency--Near Lifetime Cap: One year CMT, 275 basis
point margin, six month reset period, no periodic cap and 200 basis
points from the lifetime cap.
2. Benchmark Instruments for Schedule 3
The benchmark instruments for Schedule 3 represent the
characteristics of the ARM mortgages most prevalent in the market place
according to reported index, margin, periodic cap, and distance to
lifetime cap. Banks are required to report their ARM holdings by reset
frequency, periodic interest rate cap levels, and distance from the
lifetime cap in Schedule 3. The benchmark instruments for each reset
frequency and lifetime cap are summarized in Table 6.
[[Page 39570]]
Table 6.--Benchmark Instruments for Schedule 3
--------------------------------------------------------------------------------------------------------------------------------------------------------
RESET frequency
---------------------------------------------------------------------------------------------------------------------------------------------------------
6 Months or less: 6 Month treasury 275 Over 6 months to 1 year: 1 Year treasury 275 margin 330 month Over 1 year: 3 Year treasury 275 margin
margin 330 month WARM 7.50% WAC WARM 7.50% WAC 330 month WARM 7.50% WAC
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cap <150bp: 100 bp Cap > 150bp: 200 bp
No Cap: No periodic Cap: 100 bp periodic No Cap: No periodic periodic cap and periodic cap and No Cap: No periodic Cap: 200 bp periodic
cap cap and floor cap floor floor cap cap
--------------------------------------------------------------------------------------------------------------------------------------------------------
DISTANCE FROM LIFETIME CAP
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instruments 200 basis points or less from lifetime cap: 200 basis points
Instruments 201 to 400 basis points from lifetime cap: 300 basis points.
Instruments 401 to 600 basis points from lifetime cap: 500 basis points.
Instruments more than 600 basis points from lifetime cap: 700 basis points.
--------------------------------------------------------------------------------------------------------------------------------------------------------
3. Benchmark Instruments for Schedule 4
Schedule 4 collects information on an ARM's rate index, reset
frequency, periodic and lifetime caps as shown in Table 7.
Table 7.--Adjustable-Rate Mortgage Information for Schedule 4
--------------------------------------------------------------------------------------------------------------------------------------------------------
Current market index by reset frequency Lagging market index by reset
----------------------------------------------------------------------------------------------------------------------- frequency
6 Months or less Over 6 months to 1 year Over 1 year ---------------------------------
-----------------------------------------------------------------------------------------------------------------------
Cap of 150 bp Cap of more 1 Month or less Over 1 month
No cap Cap No Cap or less than 150 No Cap Cap
--------------------------------------------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------------------------------------------
Treasury ARM securities were used as the benchmark for the class of
mortgages labeled Current Market Index. COFI ARM securities were used
as the benchmark for the class of mortgages labeled as Lagging Market
Index. Within each reset frequency and cap range for the Current Market
Index and Lagging Market Index mortgage classes, benchmark instruments
were used. The WAC and cap benchmarks for the instruments used for
Schedule 4 are as follows:
a. Current Market Index By Reset Frequency
(1) 6 Months or Less, No Cap: 6-month Treasury ARM securities, as
published in the OTS price tables as of September 30, 1994, subject to
the aforementioned linear interpolation were used for this category.
OTS price tables provide price data on 7.00 percent WAC and 8.50
percent WAC 6-Month Treasury ARM securities. The benchmark weighted
average coupons for each WAC range are provided in Table 8.
Table 8.--Benchmark WACs for 6 Month Treasury ARMs
------------------------------------------------------------------------
Benchmark
Weighted average coupon WAC
(percent)
------------------------------------------------------------------------
4.75% and under.............................................. 4.00
4.76% to 6.25%............................................... 5.50
6.26% to 7.75%............................................... 7.00
Over 7.75%................................................... 8.50
------------------------------------------------------------------------
(2) 6 Months or Less, Cap: The same benchmark WAC's as those listed
in Table 7 were used for the benchmark instruments in this category,
subject to a 100 basis point periodic cap and floor.
(3) Over 6 Months to 1 year, No Cap: 12-Month Treasury ARM
securities, as published in the OTS price tables as of September 30,
1994, were used for this category. Because the WAC ranges provided in
the OTS price tables vary based on the underlying index, the WAC ranges
developed for the supervisory measurement system also vary with the
underlying index. OTS price tables provide price information on 7.00
percent WAC and 8.50 WAC 12-Month Treasury ARM securities. The
benchmark weighted average coupon used for the WAC ranges are provided
in Table 9.
Table 9.--Benchmark WACs for 12-Month Treasury ARMs
------------------------------------------------------------------------
Benchmark
Weighted average coupon WAC
(percent)
------------------------------------------------------------------------
4.75% and under.............................................. 4.00
4.76% to 6.25%............................................... 5.50
6.26% to 7.75%............................................... 7.00
Over 7.75%................................................... 8.50
------------------------------------------------------------------------
(4) Over 6 Months to 1 Year, Cap of 150 Basis Points of Less: The
same benchmark WAC's as those listed in Table 10 were used for the
benchmark instruments in this category, subject to a 100 basis point
periodic cap and floor.
(5) Over 6 Months to 1 Year, Cap of More Than 150 Basis Points: The
same benchmark WAC's as those listed in Table 10 were used for the
benchmark instruments in this category, subject to a 200 basis point
periodic cap and floor.
(6) Over 1 Year, No Cap: 36-Month Treasury ARM securities, as
published in the OTS price tables as of September 30, 1994, were used
for this category. Because the WAC ranges provided in the OTS price
tables vary based on the underlying index, the WAC ranges developed for
the supervisory measurement system also vary with the underlying index.
OTS price tables
[[Page 39571]]
provide price information on 6.50 percent WAC and 9.50 WAC 36-Month
Treasury ARM securities. The benchmark weighted average coupons used
for the WAC ranges are provided in Table 10.
Table 10.--Benchmark WACs for 36 Month Treasury ARMs
------------------------------------------------------------------------
Benchmark
Weighted average coupon WAC
(percent)
------------------------------------------------------------------------
5.50% and under.............................................. 4.50
5.51% to 8.00%............................................... 6.50
8.01% to 10.50%.............................................. 9.50
Over 10.50%.................................................. 11.50
------------------------------------------------------------------------
(7) Over 1 Year, Cap: The same benchmark WAC's as those listed in
Table 11 were used for the benchmark instruments in this category,
subject to a 200 basis point periodic cap and floor.
b. Lagging Market Index By Reset Frequency
(1) 1 Month or Less: 1 Month COFI ARM securities, as published in
the OTS price tables as of September 30, 1994, were used for this
category. Because the WAC ranges provided in the OTS price tables vary
based on the underlying index, the WAC ranges developed for the
supervisory measurement system also vary with the underlying index. OTS
price tables provide price information on 6.00 percent WAC and 7.00 WAC
1 Month COFI ARM securities. No periodic cap or floor were used for the
benchmark instrument in this category. Table 11 provides the benchmark
weighted average coupons used for each WAC range.
Table 11.--Benchmark WACs for 1 Month COFI ARMs
------------------------------------------------------------------------
Benchmark
Weighted average coupon WAC
(percent)
------------------------------------------------------------------------
5.00% and under.............................................. 4.00
5.01% to 6.50%............................................... 6.00
6.51% to 8.00%............................................... 7.00
Over 8.00%................................................... 9.00
------------------------------------------------------------------------
(2) Over 1 Month: The same benchmark WAC's as those listed in Table
12 were used for the benchmark instruments in this category, subject to
a 200 basis point periodic cap and floor.
B. Derivation of Benchmark Instrument Prices and Risk Weights
Benchmark ARM instruments used in the calculation of risk weights
for Schedules 1,3, and 4 were based on ARM securities available in the
OTS Asset and Liability Price Tables as of September 30, 1994 and
industry data. The OTS price tables do not contain prices for the
benchmark instruments used in the supervisory measurement system.
Using the OTS price tables, a series of linear interpolations was
performed to generate prices for the benchmark instruments, using bond-
equivalent yields, selected for the supervisory measurement system.
Prices were calculated for each WAC underlying a benchmark instrument
(e.g., for benchmark instruments tied to the 6-month CMT-based ARM,
WACs of 4.00 percent, 5.50 percent, 7.00 percent, 7.50 percent and 8.50
percent were calculated). Prices for the benchmark instruments for each
of the selected WACs were interpolated for selected loan
characteristics (i.e., margin, lifetime cap, and reset frequency) in
each of the three interest rate scenarios used in the supervisory
measurement system (i.e., +200 basis points, base case, and -200 basis
points). Table 12 presents the OTS price table for a 6 month CMT-based
ARM with a 7.0 percent WAC.
Table 12.--6-Month Treasury ARM Security Prices As of September 30, 1994 (WAC 7.00 Percent)
----------------------------------------------------------------------------------------------------------------
ARM parameters Interest rate scenario
----------------------------------------------------------------------------------------------------
Lifetime +200 Price
Margin cap Months to -200 Price 0 Base
(percent) reset
----------------------------------------------------------------------------------------------------------------
200 basis points............................... 11.0 2 100.85 99.64 95.13
200 basis points............................... 11.0 6 101.34 99.42 94.03
200 basis points............................... 15.0 2 100.86 100.07 97.58
200 basis points............................... 15.0 6 101.35 99.85 96.32
350 basis points............................... 11.0 2 104.30 101.68 95.29
350 basis points............................... 11.0 6 104.52 100.73 94.18
350 basis points............................... 15.0 2 104.39 103.02 99.02
350 basis points............................... 15.0 6 104.61 102.02 97.60
----------------------------------------------------------------------------------------------------------------
In addition to the criteria established in the OTS price table
presented above, the ARM securities have the following characteristics:
(1) WARM of 330 months;
(2) Lifetime floor 1200 basis points below the lifetime cap; and
(3) Periodic cap and floor of 100 basis points.
The OTS price table provides the data for the linear interpolation
process. As stated above, an interpolated price for each property of
the benchmark instrument is derived through this process.
For each value of a selected variable, a linear interpolation was
performed to generate a particular price of the benchmark instrument.
With each layer of interpolation, a new set of prices was produced. At
the completion of the requisite number of interpolations needed to
generate a price estimate given the set of criterion for the variables
underlying a benchmark instrument, the resulting price table was used
to calculate the risk weights for that particular instrument. Once the
interpolated price table was developed, the risk weights were
calculated in the same manner as those for fixed-rate mortgages.
Office of the Comptroller of the Currency
Dated: June 29, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.
By Order of the Board of Governors of the Federal Reserve
System.
Dated: July 7, 1995.
William Wiles,
Secretary of the Board.
By order of the Board of Directors.
Dated at Washington, DC this 27th day of June, 1995.
[[Page 39572]]
Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-18099 Filed 8-1-95; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P