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Financial Institution Letter
FIL-75-2011
December 16, 2011
Key Aspects of the Proposed Rule on Risk-based Capital
Standards: Market Risk; Alternatives to Credit Ratings for Debt
and Securitization Positions
Introduction
The attached interagency Notice of Proposed Rulemaking (Proposed Rule)
explains how the banking agencies (the Agencies) plan to adopt certain
revisions to the current market risk capital rule, without relying on credit
ratings, as required by Section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act). The Proposed
Rule would adopt the revisions to the market risk capital standards detailed
in Revisions to the Basel II Market Risk published by the Basel
Committee on Banking Supervision (Basel Committee) in July 2009. The
Proposed Rule would be required for banks with worldwide consolidated
trading activity equal to at least 10 percent of total assets or $1 billion.
Overview
The Proposed Rule modifies the standardized specific risk section of the
rule the Agencies proposed in January 20111 to provide risk-based capital
requirements for banks with significant exposures to market risk to support
the risks arising from such exposures. The Proposed Rule would remove all
reliance on credit ratings from the market risk capital requirements, in
accordance with Section 939A of the Dodd-Frank Act, and in a manner
comparable to the standards agreed to by the Basel Committee.
Specific Treatments in the Proposed
Rule
Sovereign Exposures
The agencies are proposing to apply specific risk capital requirements to
sovereign debt positions based on Country Risk Classifications (CRCs)
published by the Organization for Economic Cooperation and Development.
Public Sector Entities (PSEs)
The agencies are proposing that the specific risk capital requirements for
PSE exposures be based on the PSE's home country sovereign CRC, as well as
the particular instrument's maturity. This approach would apply to general
obligation claims and revenue obligations.
Exposures to Depository Institutions, Foreign Banks, and Credit
Unions
The Proposed Rule would apply standardized specific risk capital
requirements to exposures to depository institutions, foreign banks, or
credit unions based on the applicable CRC of the entity's sovereign of
incorporation.
Non-Financial Corporate Exposures
The Proposed Rule would allow banking organizations to use market-based data
and obligor specific historical financial data to differentiate the credit
risk associated with publicly traded, non-financial corporate debt
positions. The methodology uses a measure of leverage, stock price
volatility, and cash flow to measure credit risk.
Financial Corporate Exposures
All financial corporate exposures would be assigned an 8 percent specific
risk weighting factor under the proposed rule.
Securitizations
The Proposed Rule contains a simplified version of the Basel II advanced
approaches supervisory formula approach (SFA) to assign specific risk
capital charges to securitizations and re-securitizations. This treatment is
referred to in the Proposed Rule as the simplified supervisory formula
approach (SSFA). If a bank cannot, or chooses not to, use the SSFA, the
securitization position would be subject to a full deduction from capital,
which is roughly the equivalent of a dollar-for-dollar capital requirement.
To calculate the SSFA, a bank would determine: (1) the dollar-weighted
average risk weight assigned to the underlying exposures backing the
securitization position if those exposures were held directly by the bank
under the general risk-based capital rules; (2) the position of the tranche
in the deal structure; (3) the calibration parameter, which is 0.5 for
securitization positions and 1.5 for re-securitization positions; and (4)
the cumulative amount of losses experienced in the underlying exposures.
The SSFA applies a 100 percent specific risk-weighting factor to the most
junior portion of a securitization structure up to the dollar-weighted
average risk weight assigned to the underlying exposures backing the
securitization position if those exposures were held directly by the bank
under the general risk-based capital rules. For the remaining securitization
tranches, the SSFA would apply a formula to assign a marginal capital
requirement per dollar amount of exposure. The SSFA formula would be subject
to a supervisory minimum specific risk-weighting floor of 1.6 percent, which
would rise based on the cumulative amount of losses experienced in the
underlying exposures.
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Sandra L.
Thompson
Director
Division of Risk Management Supervision
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1 http://www.fdic.gov/regulations/laws/federal/2011/11proposedjan11.pdf.