FDIC FINALIZES RULE REQUIRING BANKS TO BETTER PREDICT MARKET RISK
FOR IMMEDIATE RELEASE PR-61-96 (8-13-96)
Media Contact: David Barr (202-898-6992)
The FDIC Board today finalized a new rule requiring banks
with relatively large trading activity to project the maximum
amount of trading gains or losses and to hold capital based on their
market risk exposure.
Affected banks will measure market risk using their own
internal "value-at-risk" (VAR) models. This internal model
approach--which has drawn broad support from the banking
industry--gives banks incentives for addressing and understanding
market risks, without creating undue regulatory burdens. An
institution's internal model must address risk factors for interest
rates, equity prices, foreign exchange rates, and commodity prices.
Banks are required to hold capital on a daily basis sufficient to
effectively cover peak levels of market volatility.
Through a process called "backtesting," banks will compare
past estimates of market risk with actual results. Banks using
models that produce poor backtesting results will be required to
increase their capital for market risk.
Banks whose trading activity equals ten percent or more of
their total assets, or whose trading activity equals $1 billion or
more, are affected by the rule. The FDIC may require an institution
not meeting this criteria to comply with the rule for safety and
soundness purposes. The FDIC may also exclude an institution that
meets the criteria. A small number of FDIC-supervised banks are
affected by the rule.
The final rule implements an amendment to the Basle
Capital Accord that sets forth a supervisory framework for
measuring market risk. The rule will be incorporated into the
FDIC's risk-based capital standards.
The Federal Reserve Board and the Office of the
Comptroller of the Currency have recently approved final rules on
market risk for the banks they regulate.
Banks must comply with the final rule by January 1, 1998,
but may voluntarily begin compliance as early as January 1, 1997.
Congress created the Federal Deposit Insurance Corporation in 1933 to
restore public confidence in the nation's banking system. The FDIC
insures deposits at the nation's 12,000 banks and savings associations
and it promotes the safety and soundness of these institutions by
identifying, monitoring and addressing risks to which they are exposed.
FDIC press releases and other documents are available on the Internet
via the World Wide Web at www.fdic.gov or through Gopher at
gopher.fdic.gov. They may also be obtained through the FDIC's Public
Information Center, 801 17th St., NW, Washington, DC ((703) 562-2200).