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| Summary: |
The federal bank regulatory agencies
(the agencies) have jointly issued the attached Notice of Proposed Rulemaking
(proposed rule) that would amend the advanced approaches risk-based capital rules
(advanced approaches rules) to incorporate revisions to the Basel capital framework
published by the Basel Committee on Banking Supervision (BCBS), and would remove
references to credit ratings, consistent with section 939A of the Dodd-Frank Act. It
also would propose to apply the market risk capital rules to state savings
associations.
Statement of Applicability to Institutions with Total Assets Under $1 Billion: This Financial Institution Letter is generally not applicable to banks with total assets less than $1 billion. The market risk rules would, however, apply to those institutions with trading assets and liabilities that exceed 10 percent of total assets. |
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Highlights:
The proposed rule:
Distribution:
Suggested Routing:
Note:
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Financial
Institution Letters
FIL-24-2012 June 18, 2012 |
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Asset Value Correlation To recognize the correlation among financial institutions to common risk factors, the agencies are proposing to incorporate the Basel III increase in the correlation factor used to determine the capital requirement for certain "wholesale" exposures—that is, exposures to highly leveraged entities such as hedge funds and financial guarantors as well as exposures to regulated financial institutions with consolidated assets of greater than or equal to $100 billion.Securitizations and Disclosures The BCBS enhancements amended the Basel internal ratings-based approach to require a banking organization to assign higher risk weights to resecuritization exposures than other, similarly rated securitization exposures. Consistent with the BCBS enhancements, the proposed rule would amend the supervisory formula approach in a manner that results in higher risk weights for resecuritization positions. The proposed rule also would revise the definition of eligible financial collateral to exclude certain instruments that performed poorly during the crisis, such as resecuritization exposures. Consistent with Section 939A of the Dodd-Frank Act, the proposed rule would remove the ratings-based and the internal assessment approaches from the securitization hierarchy under the existing advanced approaches rules and substitute in their place a simplified supervisory formula approach (SSFA) (see the standardized approaches proposed rule for a more extensive discussion of the SSFA). The agencies are proposing to remove the internal assessment approaches because it was designed to produce results similar to, and for supervisory purposes would be compared with, the ratings-based approach. Consistent with the BCBS enhancements, the agencies are proposing certain other revisions to the securitization framework under the advanced approaches rules. Specifically, the proposed rule would broaden the definition of securitization to include an exposure that directly or indirectly references a securitization exposure. In addition, consistent with the BCBS amendments, the proposed rule would improve risk-management practices with respect to securitization exposures by requiring banking organizations subject to the advanced approaches rules to conduct more rigorous credit analysis prior to acquiring such exposures. The proposed rule also would require enhanced disclosure requirements related to securitization exposures. Other Revisions to Remove Credit Ratings The agencies are proposing to replace creditworthiness standards in current definitions of the advanced approaches rules that reference credit ratings. (For example, under the current advanced approaches rules the term "eligible double default guarantor" requires the guarantor of an exposure to be of investment grade credit rating status). In general, the ratings-based standards would be replaced with a new "investment grade" standard, which would be defined as a determination by the bank that an entity to which the bank has exposure through a loan or security, or the reference entity with respect to a credit derivative, has adequate financial capacity to satisfy all commitments under the exposure for the projected life of the investment. Such an entity would have an adequate capacity to meet financial commitments if its risk of default is low and full and timely repayment of principal is expected. In addition, the agencies are proposing to revise the collateral haircut approach by removing references to credit ratings from the matrix used to determine the standard supervisory market price volatility haircuts applicable to certain forms of collateral. Under the proposed rule, the market price volatility haircut would be based, in part, on the risk weight applicable to collateral under the Standardized Approaches proposed rule. Market Risk Rule Consistent their new authorities under section 312 of the Dodd-Frank Act, the agencies are proposing to revise the agencies' market risk rules to apply to State and federal savings associations, as well as savings and loan holding companies. The Office of Thrift Supervision (OTS) did not implement the market risk capital rules for such institutions prior to its abolition under section 313 of the Dodd-Frank Act because, as a general matter, such institutions do not engage in trading activity to a substantial degree. However, the agencies believe that any savings association or savings and loan holding company whose trading activity grows to the extent that it meets the thresholds should hold capital commensurate with the risk of the trading activity and should have in place the prudential risk management systems and processes required under the market risk capital rule.
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Additional Related Topics:
- Risk-Based Capital Rules
- 12 CFR Part 325
- Basel III
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Default fund contributions refer to the funds contributed or commitments made by clearing members to a CCP's mutualized loss sharing arrangement. Default funds are also known as clearing deposits or guaranty funds.