Modifications to the Risk-Based Capital Regulations Advance Notice
of Proposed Rulemaking
The Board of Directors of the
Federal Deposit Insurance Corporation (FDIC) approved the publication of an
Advance Notice of Proposed Rulemaking (ANPR) on October 6, 2005, that
considers a range of approaches for enhancing the risk sensitivity of the
current risk-based capital framework. The ANPR is being issued on an
interagency basis by the FDIC, the Board of Governors of the Federal Reserve
System, the Office of the Comptroller of the Currency, and the Office of
Thrift Supervision (the agencies) for a 90-day comment period. Comments are
due by January 18, 2005.
The proposals under
consideration could affect virtually all FDIC-supervised institutions.
Institutions should closely review the attached document, which includes
various alternatives to the current rules, and provide specific comments
that will enable the agencies to advance fully developed proposals in a
future rulemaking.
The agencies have developed
high-level principles that define the objectives of the domestic capital
rulemaking. These principles are:
-
Address potential
competitive inequities between the existing risk-based capital framework
and the proposed domestic implementation of the risk-based capital
framework described in "International Convergence of Capital Measurement
and Capital Standards: A Revised Framework (Basel II);1
-
Modernize the risk-based
capital rules to recognize advances made within the banking industry in
the areas of credit risk measurement and mitigation; and
-
Ensure that the revised
framework is well suited for the approximately 9,000 banking
organizations of varying asset sizes and capital levels without creating
undue burden.
Addressing Potential
Competitive Inequities. The FDIC recognizes the concerns raised by
several institutions and trade groups regarding the potential competitive
inequities that could arise between banks that adopt a Basel II framework
and those that remain on the existing risk-based capital framework.
Institutions are urged to analyze and compare the proposals set forth in the
ANPR with the Basel II approaches currently under consideration for
implementation in the United States , which are the advanced internal
ratings-based approach for credit risk and the advanced measurement approach
for operational risk.
To facilitate comment on the
competitive aspects of these two capital frameworks, the FDIC has included
in this letter selected results of the fourth quantitative impact study of
Basel II (QIS-4) conducted by 26 large U.S. banking organizations. The QIS-4
results provide some perspective on the possible competitive issues that
could arise between Basel II banks and those banks that will remain subject
to the existing risk-based capital rules (see Chart 1). The QIS-4 results
suggest that risk-based capital requirements for all major lending
categories, except credit cards, would be substantially less than current
requirements and possibly the requirements discussed in this ANPR.
The ANPR proposes
modifications to the existing risk-based capital rules where quantitative
factors used to measure the risk associated with a given product or exposure
can be readily articulated. However, in certain areas the ANPR may not
adequately address potential competitive inequities, especially where
risk-measurement factors are not well defined or universally applied, such
as with unrated commercial loans and certain retail loans. The FDIC
encourages comments in those areas.
Modernizing the Risk-Based
Capital Rules. The agencies seek to advance the goal of promoting
greater risk sensitivity without imposing undue burden and have identified
the following areas for potential modification :
-
Increasing the number of
risk-weight categories to which credit exposures may be assigned;
-
Expanding the use of
external credit ratings as an indicator of credit risk for externally
rated exposures;
-
Expanding the range of
collateral and guarantors that may qualify an exposure for a lower risk
weight;
-
Using loan-to-value
ratios and other broad measures of credit risk for assigning risk
weights to residential mortgages;
-
Modifying the credit
conversion factor for various commitments, including those with an
original maturity of under one year;
-
Requiring that certain
loans 90 days or more past due or in a non-accrual status be assigned to
a higher risk-weight category;
-
Modifying the risk-based
capital requirements for certain commercial real estate exposures;
-
Increasing the risk
sensitivity of capital requirements for other types of retail,
multifamily, small business, and commercial exposures; and
-
Assessing a risk-based
capital charge to reflect the risks in securitizations backed by
revolving retail exposures with early amortization provisions.
Ensuring the Revised
Risk-Based Capital Framework Is Well Suited for All Applicable Banks
. The FDIC recognizes that the proposals under consideration might not
be suitable to the entire universe of institutions that will most likely not
adopt the Basel II approaches. Institutions vary considerably in size and
capital levels. Some institutions may be more inclined to remain on the
existing risk-based capital framework rather than adopt a more
risk-sensitive framework.
The FDIC encourages all
commenters to carefully consider the implications of the proposals included
in the ANPR. In addition to comments on the specific proposals set forth in
the ANPR, the FDIC welcomes any alternatives or suggestions that would
facilitate the development of fuller and more comprehensive proposals
applicable to a range of activities and exposures. Finally, as required
under section 2222 of the Economic Growth and Regulatory Paperwork Reduction
Act of 1996 (EGRPRA), the ANPR solicits comments on any outdated,
unnecessary, or unduly burdensome requirements in the regulatory capital
rules.
1 The complete text for Basel II is
available on the Bank for International Settlements Web site at http://www.bis.org. For the proposed
domestic implementation of Basel II, see the Basel II ANPR, 68 FR 45900
(August 4, 2003).
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Christopher J. Spoth
Acting Director
Division of Supervision and Consumer Protection
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