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FDIC Federal Register Citations
Federal Register: October 20, 2005 (Volume 70, Number 202)]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 05-16]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1238]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Domestic Capital Modifications
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Joint advance notice of proposed rulemaking (ANPR).
SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) (collectively, ``the Agencies'') are considering various revisions to the existing risk-based capital framework that would enhance its risk sensitivity. These changes would apply to banks, bank holding
companies, and savings associations (``banking organizations''). The Agencies are soliciting comment on possible modifications to their risk-based capital standards that would facilitate the development of
fuller and more comprehensive proposals applicable to a range of activities and exposures.
This ANPR discusses various modifications that would increase the number of risk-weight categories, permit greater use of external ratings as an indicator of credit risk for externally-rated exposures,
expand the types of guarantees and collateral that may be recognized, and modify the risk weights associated with residential mortgages. This ANPR also discusses approaches that would change the credit conversion factor for certain types of commitments, assign a risk-based capital
charge to certain securitizations with early-amortization provisions, and assign a higher risk weight to loans that are 90 days or more past due or in nonaccrual status and to certain commercial real estate
exposures. The Agencies are also considering modifying the risk weights on certain other retail and commercial exposures.
DATES: Comments on this joint advance notice of proposed rulemaking
must be received by January 18, 2006.
ADDRESSES: Comments should be directed to:
OCC: You should include OCC and Docket Number 05-16 in your
comment. You may submit comments by any of the following methods:
Follow the instructions for submitting comments.
the OCC,'' scroll down and click on ``Comments on Proposed
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: All submissions received must include the agency name
(OCC) and docket number or Regulatory Information Number (RIN) for this
notice of proposed rulemaking. In general, OCC will enter all comments
received into the docket without change, including any business or
personal information that you provide. You may review comments and
other related materials by any of the following methods:
and photocopy comments at the OCC's Public Information Room, 250 E
Street, SW., Washington, DC. You can make an appointment to inspect
comments by calling (202) 874-5043.
CD-ROM copies of comments that the OCC has received by contacting the
OCC's Public Information Room at email@example.com.
documents and project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1238, by
any of the following methods:
Follow the instructions for submitting comments.
number in the subject line of the message.
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit by any of the following methods:
Follow the instructions for submitting comments.
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
the 550 17th Street Building (located on F Street), on business days
between 7 a.m. and 5 p.m.
photocopied in the FDIC Public Information Center, Room 100, 801 17th
Street, NW., Washington, DC, between 9 a.m. and 4:30 p.m. on business
Instructions: Submissions received must include the Agency name and
title for this notice. Comments received will be posted without change
to http://www.FDIC.gov/regulations/laws/federal/propose.html, including
any personal information provided.
OTS: You may submit comments, identified by No. 2005-40, by any of
the following methods:
Follow the instructions for submitting comments.
include No. 2005-40 in the subject line of the message and include your
name and telephone number in the message.
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2005-40.
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: No. 2005-40.
Instructions: All submissions received must include the Agency name
and docket number or Regulatory Information Number (RIN) for this
rulemaking. All comments received will be posted without change to the
OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1
, including any personal information provided.
Docket: For access to the docket to read background documents or
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1.
In addition, you may inspect comments at the Public Reading Room, 1700 G Street, NW., by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to
firstname.lastname@example.org, or send a facsimile transmission to (202)
906-7755. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
FOR FURTHER INFORMATION CONTACT:
OCC: Nancy Hunt, Risk Expert, Capital Policy Division, (202) 874-
4923, Laura Goldman, Counsel, or Ron Shimabukuro, Special Counsel,
Legislative and Regulatory Activities Division, (202) 874-5090, Office
of the Comptroller of the Currency, 250 E Street, SW., Washington, DC
Board: Thomas R. Boemio, Senior Project Manager, Policy, (202) 452-
2982, Barbara Bouchard, Deputy Associate Director, (202) 452-3072,
Jodie Goff, Senior Financial Analyst, (202) 452-2818, Division of
Banking Supervision and Regulation, or Mark E. Van Der Weide, Senior
Counsel, (202) 452-2263, Legal Division. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Jason C. Cave, Chief, Policy Section, Capital Markets Branch,
(202) 898-3548, Bobby R. Bean, Senior Quantitative Risk Analyst,
Capital Markets Branch, (202) 898-3575, Division of Supervision and
Consumer Protection; or Michael B. Phillips, Counsel, (202) 898-3581,
Supervision and Legislation Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
OTS: Teresa Scott, Senior Project Manager, Supervision Policy (202)
906-6478, or Karen Osterloh, Special Counsel, Regulation and
Legislation Division, Chief Counsel's Office, (202) 906-6639, Office of
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.
In 1989 the Agencies implemented a risk-based capital framework for
U.S. banking organizations1 based on the ``International Convergence
of Capital Measurement and Capital Standards'' (``Basel I'' or ``1988
Accord'') as published by the Basel Committee on Banking Supervision
(``Basel Committee'').2 Basel I addressed certain weaknesses in the
various regulatory capital regimes that were in force in most of the
world's major banking jurisdictions. The Basel I framework established
a uniform regulatory capital system that was more sensitive to banking
organizations' risk profiles than the regulatory capital to total
assets ratio that was previously used in the United States, assessed
regulatory capital against off-balance sheet items, minimized
disincentives for banking organizations to hold low-risk assets, and
encouraged institutions to strengthen their capital positions.
The Agencies' existing risk-based capital framework generally
assigns each credit exposure to one of five broad categories of credit
risk, which allows for only limited distinctions in credit risk for
most exposures. The Agencies and the industry generally agree that the
existing risk-based capital framework should be modified to better
reflect the risks present in many banking organizations without
imposing undue regulatory burden.
Since the implementation of the Basel I framework, the Agencies
have made numerous revisions to their risk-based capital rules in
response to changes in financial market practices and accounting
standards. Over time, these revisions typically have increased the
degree of risk sensitivity of the Agencies' risk-based capital rules.
In recent years, however, the Agencies have limited modifications to
the risk-based capital framework at the domestic level and focused on
the international efforts to revise the Basel I framework. In June
2004, the Basel Committee introduced a new capital adequacy framework
for large, internationally-active banking organizations,
``International Convergence of Capital Measurement and Capital
Standards: A Revised Framework'' (Basel II).3 The Basel Committee's
goal was to develop a more risk sensitive capital adequacy framework
for internationally-active banking organizations that generally rely on
sophisticated risk management and measurement systems. Basel II is
designed to create incentives for these organizations to improve their
risk measurement and management processes and to better align minimum
capital requirements with the risks underlying activities conducted by
these banking organizations.
In August 2003, the Agencies issued an Advance Notice of Proposed
Rulemaking (``Basel II ANPR''), which explained how the Agencies might
implement the Basel II approach in the United States.4 As part of the
Basel II implementation process, the Agencies have been working to
develop a notice of proposed rulemaking (NPR) that provides the
industry with a more definitive proposal for implementing Basel II in
the United States (``Basel II NPR'').
The complexity and cost associated with implementing the Basel II
framework effectively limit its application to those banking
organizations that are able to take advantage of the economies of scale
necessary to absorb these expenses. The implementation of Basel II
would create a bifurcated regulatory capital framework in the United
States, which may result in regulatory capital charges that differ for
similar products offered by both large and small banking organizations.
In comments responding to the Basel II ANPR, Congressional
testimony, and other industry communications, several banking
organizations, trade associations, and others raised concerns about the
competitive effects of a bifurcated regulatory framework on community
and regional banking organizations. Among other broad concerns, these
commenters asserted that implementing the Basel II capital regime in
the United States would result in lower capital requirements for some
banking organizations with respect to certain types of credit
exposures. Community and regional banking organizations claimed that
this would put them at a competitive disadvantage.
As part of the ongoing analysis of regulatory capital requirements,
the Agencies believe that it is important to update their risk-based
capital standards to enhance the risk-sensitivity of the capital
charges, to reflect changes in accounting standards and financial
markets, and to address competitive equity questions that, ultimately,
may be raised by U.S. implementation of the Basel II framework.
Accordingly, the Agencies are considering a number of revisions to
their Basel I-based regulations.
To assist in quantifying the potential effects of Basel II, the
Agencies conducted a quantitative impact study during late 2004 and
early 2005 (QIS 4). QIS 4 was a comprehensive effort completed by 26 of
the largest banking organizations using their own internal estimates of the key risk
parameters driving the capital requirements under the Basel II
framework. The preliminary results of QIS 4, which were released
earlier this spring,5 prompted concerns with respect to the (1)
reduced levels of regulatory capital that would be required at
individual banking organizations operating under the Basel II-based
rules, and (2) dispersion of results among organizations and portfolio
types. Because of these concerns, the issuance of a Basel II NPR was
postponed while the Agencies undertook additional analytical work.6
The Agencies understand the desire of banking organizations to
compare the proposed revisions to the existing Basel I-based capital
regime with the Basel II proposal. However, the ability to definitively
compare this ANPR with a Basel II NPR is limited due to the delay in
the issuance of the Basel II NPR and to the number of options suggested
in this ANPR. The Agencies intend to publish the pending Basel II NPR
and an NPR addressing the Basel I-based rules in similar time frames,
which will ultimately enable commenters to compare the proposals.
The existing risk-based capital requirements focus primarily on
credit risk and generally do not impose explicit capital charges for
operational or interest rate risk, which are covered implicitly by the
framework. The risk-based capital charges suggested in this ANPR
continue to implicitly cover aspects of these risks. Moreover, the
Agencies are not proposing revisions to the existing leverage capital
requirements (i.e., Tier 1 capital to total assets).7
II. Domestic Capital Framework Revisions
In considering revisions to their domestic risk-based capital rules
the Agencies were guided by five broad principles. A revised framework
must: (1) Promote safe and sound banking practices and a prudent level
of regulatory capital, (2) maintain a balance between risk sensitivity
and operational feasibility, (3) avoid undue regulatory burden, (4)
create appropriate incentives for banking organizations, and (5)
mitigate material distortions in the amount of regulatory risk-based
capital requirements for large and small institutions. The changes
under consideration are broadly consistent with the concepts used in
developing Basel II, but are tailored to the structure and activities
of banking organizations operating primarily in the United States.
In this ANPR, the Agencies are considering:
The Agencies welcome comments on all aspects of their risk-based
capital framework that might require further review and possible
modification, as well as suggestions for reducing the burden of these
rules. The Agencies believe that a banking organization should be able
to implement any changes outlined in this ANPR using data that are
currently available as part of the organization's credit approval and
portfolio management processes. As a result, this approach should
minimize potential regulatory burden associated with any revisions to
the existing risk-based capital rules. Commenters are particularly
requested to address whether any of the proposed changes would require
data that are not currently available as part of the organization's
existing credit approval and portfolio management systems.
As required under section 2222 of the Economic Growth and
Regulatory Paperwork Reduction Act of 1996 (EGRPRA), the Agencies are
requesting comments on any outdated, unnecessary, or unduly burdensome
requirements in their regulatory capital rules. The Agencies
specifically request comment on the extent to which any of these
capital rules may adversely affect competition and whether: (1)
Statutory changes are necessary to eliminate specific burdensome
requirements in these capital rules; (2) any of these capital rules
contain requirements that are unnecessary to serve the purposes of the
statute that they implement; (3) the compliance cost associated with
reporting, recordkeeping, and disclosure requirements in these capital
rules is justified; and (4) any of these capital rules are unclear.
A. Increase the Number of Risk-Weight Categories
The Agencies' risk-based capital framework currently has five risk-
weight categories: zero, 20, 50, 100, and 200 percent. This limited
number of risk-weight categories limits differentiation of credit
quality among the individual exposures. Thus, the Agencies are
considering alternatives that would better associate credit risk with
an underlying exposure. One approach would be to increase the number of
risk-weight categories to which on-balance sheet assets and credit
equivalent amounts of off-balance sheet exposures may be assigned.
For illustrative purposes, this ANPR suggests adding four new risk-
weight categories: 35, 75, 150, and 350 percent. Increasing the number
of basic risk-weight categories from five to nine would permit banking
organizations to redistribute exposures into additional categories of
risk-weights. Like the changes in Basel II, the revisions suggested in
this ANPR, such as increasing the number of risk-weight categories,
should improve the risk sensitivity of the Agencies' regulatory capital
rules. However, the increase in risk-weight categories is not expected
to generate the same capital requirement for a given exposure as the
pending Basel II proposal. The proposed categories would remain
relatively broad measures of credit risk, which should minimize
The Agencies seek comment on whether (1) increasing the number of
risk-weight categories would allow supervisors to more closely align
capital requirements with risk; (2) the additional risk-weight
categories suggested above would be appropriate; (3) the risk-based
capital framework should include more risk-weight categories than those
proposed, such as a lower risk weight for the highest quality assets with very low
historical default rates; and (4) an increased number of risk-weight
categories would cause unnecessary burden on banking organizations.
B. Use of External Credit Ratings
In November 2001, the Agencies revised their risk-based capital
standards to permit banking organizations to rely on external credit
ratings that are publicly issued by Nationally Recognized Statistical
Rating Organizations (NRSROs)
recourse obligations, direct credit substitutes, residual interests,
and asset- and mortgage-backed securities.9 For example, subject to
the requirements of the rule, mortgage-backed securities with a long-
term rating of AAA or AA 10 may be assigned to the 20 percent risk-
weight category, and mortgage-backed securities with a long-term rating
of BB may be assigned to the 200 percent risk-weight category. The rule
did not apply this ratings-based approach to corporate debt and other
types of exposures, even if they have an NRSRO rating.
To enhance the risk sensitivity of the risk-based capital
framework, the Agencies are considering a broader use of NRSRO credit
ratings to determine the risk-based capital charge for most NRSRO-rated
exposures. If an exposure has multiple NRSRO ratings and these ratings
differ, the credit exposure could be assigned to the risk weight
applicable to the lowest NRSRO rating.
The Agencies currently are considering assigning risk weights to
the rating categories in a manner similar to that presented in Tables 1
While the Agencies are considering greater use of external ratings
for determining capital requirements for a broad range of exposures,
the Agencies are not planning to revise the risk weights for all rated
exposures. For example, the Agencies are considering retaining the zero
percent risk weight for short- and long-term U.S. government and agency
exposures that are backed by the full faith and credit of the U.S.
government and the 20 percent risk weight for U.S. government-sponsored
The Agencies recognize that for certain exposures, the existing
rules might serve as a better indicator of risk than the ratings-based
approach as presented. The Recourse Final Rule introduced capital
charges on sub-investment quality and unrated exposures that adequately
reflect the risks associated with these exposures, which the Agencies
intend to retain in their present form. Similarly, for exposures such
as federal funds sold and other short-term inter-bank lending
arrangements, the existing capital rules provide for a reasonable
indicator of risk and thus would not be proposed to be changed. The
Agencies also intend to retain the current treatment for municipal
obligations. The Agencies recognize that other examples exist where
the existing capital rules might serve as an appropriate indicator of risk,
and request comment and suggestions on ways to accommodate these situations.
The Agencies would retain the ability to override the use of
certain ratings or the ratings on certain exposures, either on a case-
by-case basis or through broader supervisory policy, if necessary, to
address the risk that a particular exposure poses. Furthermore, while
banking organizations would be permitted to use external ratings to
assign risk weights, this would not release an organization from its
responsibility to comply with safety and soundness standards regarding
prudent underwriting, account management, and collection policies and
The Agencies solicit comment on (1) whether the risk-weight
categories for NRSRO ratings are appropriately risk sensitive, (2) the
amount of any additional burden that this approach might generate,
especially for community banking organizations, in comparison with the
benefit that such organizations would derive, (3) the use of other
methodologies that might be reasonably employed to assign risk weights
for rated exposures, and (4) methodologies that might be used to assign
risk weights to unrated exposures.
C. Expand Recognized Financial Collateral and Guarantors
i. Recognized Financial Collateral
The Agencies' risk-based capital framework permits lower risk
weights for exposures protected by certain types of eligible financial
collateral. Generally, the only forms of collateral that the Agencies'
existing rules recognize are cash on deposit at the banking
organization; securities issued or guaranteed by central governments of
the OECD countries, U.S. government agencies, and U.S. government-
sponsored enterprises; and securities issued by multilateral lending
institutions or regional development banks.12 If an exposure is
partially secured, the portion of the exposure that is covered by
collateral generally may receive the risk weight associated with the
collateral, and the portion of the exposure that is not covered by the
collateral is assigned to the risk-weight category applicable to the
obligor or the guarantor.
The banking industry has commented that the Agencies should
recognize the risk mitigation provided by a broader array of collateral
types for purposes of determining a banking organization's risk-based
capital requirements. The Agencies believe that recognizing additional
risk mitigation techniques would increase the risk sensitivity of their
risk-based capital standards in a manner generally consistent with
market practice and would provide greater incentives for better credit
risk management practices.
The Agencies are considering expanding the list of recognized
collateral to include short- or long-term debt securities (for example,
corporate and asset- and mortgage-backed securities) that are
externally-rated at least investment grade by an NRSRO, or issued or
guaranteed by a sovereign central government that is externally-rated
at least investment grade by an NRSRO. The NRSRO-rated debt securities
would be assigned to the risk-weight category appropriate to the
external credit rating as discussed in section II.B of this ANPR. For
example, the portion of an exposure collateralized by a AAA- or AA-
rated corporate security could be assigned to the 20 percent risk-
weight category. Similarly, portions of exposures collateralized by
financial collateral would be assigned to risk-weight categories based
on the external rating of that collateral.
To use this expanded list of collateral, banking organizations
would be required to have collateral management systems that can track
collateral and readily determine the value of the collateral that the
banking organization would be able to realize. The Agencies are seeking
comments on whether this approach for expanding the scope of eligible
collateral improves risk sensitivity without being overly burdensome.
ii. Eligible Guarantors
Under the Agencies' risk-based capital framework there is only
limited recognition of guarantees provided by independent third
parties. Specifically, the risk-based capital standards assign lower
risk weights to exposures that are guaranteed by the central government
of an OECD country, U.S. government agencies, U.S. government-sponsored
enterprises, municipalities, public sector entities in OECD countries,
multilateral lending institutions and regional development banks,
depository institutions incorporated in OECD countries, qualifying
securities firms, short-term exposures of depository institutions
incorporated in non-OECD countries, and local currency exposures of
central governments of non-OECD countries.
The Agencies seek comment on expanding the scope of recognized
guarantors to include any entity whose long-term senior debt has been
assigned an external credit rating of at least investment grade by an
NRSRO. The applicable risk weight for the guaranteed exposure could be
based on the risk weights in Tables 1 and 2. This approach would
eliminate the distinction between OECD and non-OECD countries. The
Agencies are also seeking comments on using a ratings-based approach
for determining the risk weight applicable to a recognized guarantor
and, more specifically, limiting the external rating for a recognized
guarantor to investment grade or above.
D. One-to-Four Family Mortgages: First and Second Liens
Under the existing rules, most one-to-four family mortgages that
are first liens are generally eligible for a 50 percent risk weight.
Industry participants have, for some time, asserted that this 50
percent risk weight imposes an excessive risk-based capital requirement
for many of these exposures. The Agencies observe that this ``one size
fits all'' approach to risk-based capital may not assess suitable
levels of capital for either low-or high-risk mortgage loans.
Therefore, to align risk-based capital requirements more closely with
risk, the Agencies are considering possible options for changing their
risk-based capital requirements for first lien one-to-four family
Several industry participants have suggested that capital
requirements for first lien one-to-four family mortgages could be based
on collateral through the use of the loan-to-value ratio (LTV). The
following table illustrates one approach for using LTV ratios to
determine risk-based capital requirements:
Basing risk weights on LTVs in a manner similar to that illustrated
above is intended to improve the risk sensitivity of the existing risk-
based capital framework. The Agencies believe that the use of LTV
ratios to measure risk sensitivity would not increase regulatory burden
for banking organizations since this data is readily available and is
often utilized in the loan approval process and in managing mortgage
Banking organizations would determine the LTV of a mortgage loan
after consideration of loan-level private mortgage insurance (PMI)
provided by an insurer with an NRSRO-issued long-term debt rating of
single A or higher. However, the Agencies currently do not recognize
portfolio or pool-level PMI for purposes of determining the LTV of an
individual mortgage. Furthermore, the Agencies note that reliance on
even a highly-rated PMI insurance provider has some measure of
counterparty credit risk and that PMI contract provisions vary, which
provides banking organizations with a range of alternatives for
mitigating credit risk. Arrangements that require a banking
organization to absorb any amount of loss before the PMI provider would
not be recognized under this approach. In addition, the Agencies are
concerned that a blanket acceptance of PMI might overstate its ability
to effectively mitigate risk especially on higher risk loans and novel
products. Accordingly, to address concerns about PMI, the Agencies
could place risk-weight floors on mortgages that are subject to PMI.
The Agencies seek comment on (1) the use of LTV to determine risk
weights for first lien one-to-four family residential mortgages, (2)
whether LTVs should be updated periodically, (3) whether loan-level or
portfolio PMI should be used to reduce LTV ratios for the purposes of
determining capital requirements, (4) alternative approaches that are
sensitive to the counterparty credit risk associated with PMI, and (5)
risk-weight floors for certain mortgages subject to PMI, especially
higher-risk loans and novel products.
The Agencies are also considering alternative methods for assessing
capital based on the evaluation of credit risk for borrowers of first
lien one-to-four family mortgages. For example, credit assessments,
such as credit scores, might be combined with LTV ratios to determine
risk-based capital requirements. Under this scenario, different ranges
of LTV ratios could be paired with specified ranges of credit
assessments. Based on the resulting risk assessments, the Agencies
could assign mortgage loans to specific risk-weight categories. Table 4
illustrates one approach for pairing LTV ratios with a borrower's
credit assessment. As the table indicates, risk decreases as the LTV
decreases and the borrower's credit assessment increases, which results
in a decrease in capital requirements. Mortgages with low LTVs that are
written to borrowers with higher creditworthiness might receive lower
risk weights than reflected in Table 3; conversely, mortgages with high
LTVs written to borrowers with lower creditworthiness might receive
higher risk weights.
Table 4: Conceptual Approach for Determining Risk Weights:
Residential Mortgages Based on LTV Ratios and Credit Assessments
Another parameter that could be combined with LTV ratios to
determine capital requirements might be a capacity measure such as a
debt-to-income ratio. The Agencies seek comment on (1) the use of an
assessment mechanism basedon LTV ratios in combination with credit assessments,
debt-to-income ratios, or other relevant measures of credit quality, (2) the impact of
the use of credit scores on the availability of credit or prices for
lower income borrowers, and (3) whether LTVs and other measures of
creditworthiness should be updated annually or quarterly and how these
parameters might be updated to accurately reflect the changing risk of
a mortgage loan as it matures and as property values and borrower's
credit assessments fluctuate.
The Agencies are interested in any specific comments and available
data on non-traditional mortgage products (e.g., interest-only
mortgages). In particular, the Agencies are reviewing the recent rapid
growth in mortgages that permit negative amortization, do not amortize
at all, or have an LTV greater than 100 percent. The Agencies seek
comment on whether these products should be treated in the same matrix
as traditional mortgages or whether such products pose unique and
perhaps greater risks that warrant a higher risk-based capital
If a banking organization holds both a first and a second lien,
including a home equity line of credit (HELOC), and no other party
holds an intervening lien, the Agencies' existing capital rules permit
these loans to be combined to determine the LTV and the appropriate
risk weight as if it were a first lien mortgage. The Agencies intend to
continue to permit this approach for determining LTVs.
For stand-alone second lien mortgages and HELOCs, where the
institution holds a second lien mortgage but does not hold the first
lien mortgage and the LTV at origination (original LTV) for the
combined loans does not exceed 90 percent, the Agencies are considering
retaining the current 100 percent risk weight. For second liens, where
the original LTV of the combined liens exceeds 90 percent, the Agencies
believe that a risk weight higher than 100 percent would be appropriate
in recognition of the credit risk associated with these exposures. The
Agencies seek comment regarding this approach.
E. Multifamily Residential Mortgages
Under the Agencies' existing rules, multifamily (i.e., properties
with more than four units) residential mortgages are generally risk-
weighted at 100 percent. Certain seasoned multifamily residential loans
may, however, qualify for a risk weight of 50 percent.13 The Agencies
seek comment and request any available data that might demonstrate that
all multifamily loans or specific types of multifamily loans that meet
certain criteria, for example, small size, history of performance, or
low loan-to-value ratio, should be eligible for a lower risk weight
than is currently permitted in the Agencies' rules.
F. Other Retail Exposures
Banking organizations also hold many other types of retail
exposures, such as consumer loans, credit cards, and automobile loans.
The Agencies are considering modifying the risk-based capital rules for
these other retail exposures and are seeking information on
alternatives for structuring a risk-sensitive approach based on well-
known and relevant risk drivers as the basis for the capital
requirement. One approach that would increase the credit risk
sensitivity of the risk-based capital requirements for other retail
exposures would be to use a credit assessment, such as the borrower's
credit score or ability to service debt.
The Agencies request comment on any methods that would accomplish
their goal of increasing risk sensitivity without creating undue
burden, and, more specifically, on what risk drivers (for example, LTV,
credit assessments, and/or collateral) and risk weights would be
appropriate for these types of loans. The Agencies further request
comment on the impact of the use of any recommended risk drivers on the
availability of credit or prices for lower-income borrowers.
G. Short-Term Commitments
Under the Agencies' risk-based capital standards, short-term
commitments (with the exception of short-term liquidity facilities
providing liquidity support to asset-backed commercial paper (ABCP)
programs) 14 are converted to an on-balance sheet credit equivalent
amount using the zero percent credit conversion factor (CCF). As a
result, banking organizations that extend short-term commitments do not
hold any risk-based capital against the credit risk inherent in these
exposures. By contrast, commitments with an original maturity of
greater than one year are generally converted to an on-balance sheet
credit equivalent amount using the 50 percent CCF.
The Agencies are considering amending their risk-based capital
requirements for commitments with an original maturity of one year or
less (i.e., short-term commitments). Even though commitments with an
original maturity of one year or less expose banking organizations to a
lower degree of credit risk than longer-term commitments, some credit
risk exists. The Agencies are considering whether this credit risk
should be reflected in the risk-based capital requirement. Thus, the
Agencies are considering applying a 10 percent CCF on certain short-
term commitments. The resulting credit equivalent amount would then be
risk-weighted according to the underlying assets or the obligor, after
considering any collateral, guarantees, or external credit ratings.
Commitments that are unconditionally cancelable at any time, in
accordance with applicable law, by a banking organization without prior
notice, or that effectively provide for automatic cancellation due to
deterioration in a borrower's credit assessment would continue to be
eligible for a zero percent CCF.15
The Agencies solicit comment on the approach for short-term
commitments as discussed above. Further, the Agencies seek comment on
an alternative approach that would apply a single CCF (for example, 20
percent) to all commitments, both short-term and long-term.
H. Loans 90 Days or More Past Due or in Nonaccrual
Under the existing risk-based capital rules, loans generally are
risk-weighted at 100 percent unless the credit risk is mitigated by an
acceptable guarantee or collateral. When exposures (for example, loans,
leases, debt securities, and other assets) reach 90 days or more past
due or are in nonaccrual status, there is a high probability that the
financial institution will incur a loss. To address this potentially
higher risk of loss, the Agencies are considering assigning exposures
that are 90 days or more past due and those in nonaccrual status to a
higher risk-weight category. However, the amount of the exposure to be
assigned to the higher risk-weight category may be reduced by any
reserves directly allocated to cover potential losses on that exposure.
The Agencies seek comments on all aspects of this potential change in treatment.
I. Commercial Real Estate (CRE) Exposures
The Agencies may revise the capital requirements for certain
commercial real estate exposures such as acquisition, development and
construction (ADC) loans based on longstanding supervisory concerns
with many of these loans. The Agencies are considering assigning
certain ADC loans to a higher than 100 percent risk weight. However,
the Agencies recognize that a ``one size fits all'' approach to ADC
lending might not be risk sensitive, and could discourage banking
organizations from making ADC loans backed by substantial borrower
equity. Therefore, the Agencies are considering exempting ADC loans
from the higher risk weight if the ADC exposure meets the Interagency
Real Estate Lending Standards regulations 16 and the project is
supported by a substantial amount of borrower equity for the duration
of the facility (e.g., 15 percent of the completion value in cash and
liquid assets). Under this approach, ADC loans satisfying these
standards would continue to be assigned to the 100 percent risk-weight
The Agencies seek recommendations on improvements to these
standards that would result in prudent capital requirements for ADC
loans while not creating undue burden for banking organizations making
such loans. The Agencies also seek comments on alternative ways to make
risk weights for commercial real estate loans more risk sensitive. To
that end, they request comments on what types of risk drivers, like LTV
ratios or credit assessments, could be used to differentiate among the
credit qualities of commercial real estate loans, and how the risk
drivers could be used to determine risk weights.
J. Small Business Loans
Under the Agencies' risk-based capital rules, a small business loan
is generally assigned to the 100 percent risk-weight category unless
the credit risk is mitigated by an acceptable guarantee or collateral.
Banking institutions and other industry participants have criticized
the lack of risk sensitivity in the risk-based capital charges for
these exposures. To improve the risk sensitivity of their capital
rules, the Agencies are considering a lower risk weight for certain
business loans under $1 million on a consolidated basis to a single
Under one alternative, to be eligible for a lower risk weight, the
small business loan would have to meet certain requirements: full
amortization over a period of seven years or less, performance
according to the contractual provisions of the loan agreement, and full
protection by collateral. The banking organization would also have to
originate the loan according to its underwriting policies (or purchase
a loan that has been underwritten in a manner consistent with the
banking organization's underwriting policies), which would have to
include an acceptable assessment of the collateral and the borrower's
financial condition and ability to repay the debt. The Agencies believe
that under these circumstances the risk weight of a small business loan
could be lowered to, for example, 75 percent. The Agencies seek comment
on whether this relatively simple change would improve the risk
sensitivity without unduly increasing complexity and burden.
Another alternative would be to assess risk-based capital based on
a credit assessment of the business' principals and their ability to
service the debt. This alternative could be applied in those cases
where the business principals personally guarantee the loan.
The Agencies seek comment on any alternative approaches for
improving risk sensitivity of the risk-based capital treatment for
small business loans, including the use of credit assessments, LTVs,
collateral, guarantees, or other methods for stratifying credit risk.
K. Early Amortization
Currently, there is no risk-based capital charge against risks
associated with early amortization of securitizations of revolving
credits (e.g., credit cards). When assets are securitized, the extent
to which the selling or sponsoring entity transfers the risks
associated with the assets depends on the structure of the
securitization and the nature of the underlying assets. The early
amortization provision in securitizations of revolving retail credit
facilities increases the likelihood that investors will be repaid
before being subject to any risk of significant credit losses.
Early amortization provisions raise several distinct concerns about
the risks to seller banking organizations: (1) The subordination of the
seller's interest in the securitized assets during early amortization
to the payment allocation formula, (2) potential liquidity problems for
selling organizations, and (3) incentives for the seller to provide
implicit support to the securitization transaction--credit enhancement
beyond any pre-existing contractual obligations--to prevent early
amortization. The Agencies have proposed the imposition of a capital
charge on securitizations of revolving credit exposures with early
amortization provisions in prior rulemakings. On March 8, 2000, the
Agencies published a proposed rule on recourse and direct credit
substitutes (Proposed Recourse Rule).17 In that proposal, the
Agencies proposed to apply a fixed conversion factor of 20 percent to
the amount of assets under management in all revolving securitizations
that contained early amortization features in recognition of the risks
associated with these structures.18 The preamble to the Recourse
Final Rule,19 reiterated the concerns with early amortization,
indicating that the risks associated with securitization, including
those posed by an early amortization feature, are not fully captured in
the Agencies' capital rules. While the Agencies did not impose an early
amortization capital charge in the Recourse Final Rule, they indicated
that they would undertake a comprehensive assessment of the risks
imposed by early amortization.20
The Agencies acknowledge that early amortization events are
infrequent. Nonetheless, an increasing number of securitizations have
been forced to unwind and repay investors earlier than planned.
Accordingly, the Agencies are considering assessing risk-based capital
against securitizations of personal and business credit card accounts.
The Agencies are also considering the appropriateness of applying an
early amortization capital charge to securitizations of revolving
credit exposures other than credit cards, and request comment on this
One option would be to assess a flat conversion factor, (e.g., 10
percent) against off-balance sheet receivables in securitizations with early
amortization provisions. Another approach that would potentially be
more risk-sensitive would be to assess capital against these types of
securitizations based on key indicators of risk, such as excess spread
levels. Virtually all securitizations of revolving retail credit
facilities that include early amortization provisions rely on excess
spread as an early amortization trigger. Early amortization generally
commences once excess spread falls below zero for a given period of
Such a capital charge would be assessed against the off-balance
sheet investors' interest and would be imposed only in the event that
the excess spread has declined to a predetermined level. The capital
requirement would assess increasing amounts of risk-based capital as
the level of excess spread approaches the early amortization trigger
(typically, a three-month average excess spread of zero). Therefore, as
the probability of an early amortization event increases, the capital
charge against the off-balance sheet portion of the securitization also
The Agencies are considering comparing the three-month average
excess spread against the point at which the securitization trust would
be required by the securitization documents to trap excess spread in a
spread or reserve account as a basis for a capital charge. Where a
transaction does not require excess spread to be trapped, the trapping
point would be 4.5 percentage points. In order to determine the
appropriate conversion factor, a bank would divide the level of excess
spread by the spread trapping point.
The Agencies seek comment on whether to adopt either alternative
treatment of securitizations of revolving credit facilities containing
early amortization mechanisms and whether either treatment
satisfactorily addresses the potential risks such transactions pose to
originators. The Agencies also seek comment on whether other early
amortization triggers exist that might have to be factored into such an
approach, e.g., level of delinquencies, and whether there are other
approaches, treatments, or factors that the Agencies should consider.
III. Application of the Proposed Revisions
The Agencies are aware that some banking organizations may prefer
to remain under the existing risk-based capital framework without
revision. The Agencies are considering the possibility of permitting
some banking organizations to elect to continue to use the existing
risk-based capital framework, or portions thereof, for determining
minimum risk-based capital requirements so long as that approach
remains consistent with safety and soundness. The Agencies seek comment
on whether there is an asset size threshold below which banking
organizations should be allowed to apply the existing risk-based
capital framework without revision.
The Agencies are also considering allowing banking organizations to
choose among alternative approaches for some of the modifications to
the existing capital rules that may be proposed. For example, a banking
organization might be permitted to risk-weight all prudently
underwritten mortgages at 50 percent if that organization chose to
forgo the option of using potentially lower risk weights for its
residential mortgages based on LTV or some other approach that may be
proposed. The Agencies seek comment on the merits of this type of
Finally, the Agencies note that, under Basel II, banking
organizations are subject to a transitional capital floor (that is, a
limit on the amount by which risk-based capital could decline). In the
pending Basel II NPR, the Agencies expect to seek comment on how the
capital floor should be defined and implemented. To the extent that
revisions result from this ANPR process, the Agencies seek commenters'
views on whether the revisions should be incorporated into the
definition of the Basel II capital floor.
IV. Reporting Requirements
The Agencies believe that risk-based capital levels for most banks
should be readily determined from data supplied in the quarterly Call
and Thrift Financial Report filings. Accordingly, modifications to the
Call and Thrift Financial Reports will be necessary to track the
agreed-upon risk factors used in determining risk-based capital
requirements. For example, banking organizations would be expected to
segment residential mortgages into ranges based on the LTV ratio if
that factor were used in determining a loan's capital charge.
Externally-rated exposures could be segmented by the rating assigned by
the NRSRO. Additionally, all organizations would need to provide more
detail on guaranteed and collateralized exposures.
The Agencies seek comment on the various alternatives available to
balance the need for enhanced reporting and greater transparency of the
risk-based capital calculation, with the possible burdens associated
with such an effort.
V. Regulatory Analysis
Federal agencies are required to consider the costs, benefits, or
other effects of their regulations for various purposes described by
statute or executive order. This section asks for comment and
information to assist OCC and OTS in their analysis under Executive
Order 12866.21 Executive Order 12866 requires preparation of an
analysis for agency actions that are ``significant regulatory
actions.'' ``Significant regulatory actions'' include, among other
things, regulations that ``have an annual effect on the economy of $100
million or more or adversely affect in a material way the economy, a
sector of the economy, productivity, competition, jobs, the
environment, public health or safety, or state, local, or tribal
governments or communities. * * * '' 22 Regulatory actions that
satisfy one or more of these criteria are called ``economically
significant regulatory actions.''
If OCC or OTS determines that the rules implementing the domestic
capital modifications comprise an ``economically significant regulatory
action,'' then the agency making that determination would be required
to prepare and submit to the Office of Management and Budget's (OMB)
Office of Information and Regulatory Affairs (OIRA) an economic
analysis. The economic analysis must include:
For purposes of determining whether this rulemaking would
constitute an ``economically significant regulatory action,'' as
defined by E.O. 12866, and to assist any economic analysis that E.O.
12866 may require, OCC and OTS encourage commenters to provide
revisions described in this ANPR that the Agencies should consider.
Specifically, commenters are encouraged to provide information
addressing the direct and indirect costs of compliance with the
alternative, the effects of the alternative on regulatory capital
requirements, the effects of the alternative on competition, and the
economic benefits from the alternative.
Quantitative information would be the most useful to the Agencies.
However, commenters may also provide estimates of costs, benefits, or
other effects, or any other information they believe would be useful to
the Agencies in making the determination. In addition, commenters are
asked to identify or estimate start-up, or non-recurring, costs
separately from costs or effects they believe would be ongoing.
Dated: October 6, 2005.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, October 12, 2005.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 6th day of October, 2005.
By order of the Board of Directors, Federal Deposit Insurance
Robert E. Feldman,
Dated: October 6, 2005.
By the Office of Thrift Supervision.
John M. Reich,
[FR Doc. 05-20858 Filed 10-19-05; 8:45 am]
BILLING CODE 4810-33-P
1 See 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225, appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR part 567 (OTS). The risk-based capital rules generally do not apply to bank holding companies with less than $150 million in assets. On September 8, 2005, the Board issued a proposal that generally would raise this exclusion amount to $500 million. (See 70 FR 53320.) The comment period will end on November 11, 2005.
2 The Basel Committee on Banking Supervision was established in 1974 by central banks and authorities with bank supervisory responsibilities. Current member countries are Belgium, Canada, France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom, and the United States.
The complete text for Basel II is available on the Bank for
International Settlements Web site at
5 See Testimony before the Subcommittee on
Financial Institutions and Consumer Credit and the Subcommittee on Domestic
and International Monetary Policy, Trade and Technology of the Committee on
Financial Services, United States House of Representatives, May 11, 2005.
The testimony is available at
The specific numbers from the QIS 4 survey are currently under
A NRSRO is an entity recognized by the Division of Market
Regulation of the Securities and Exchange Commission (SEC) as a
nationally recognized statistical rating organization for various
purposes, including the SEC's uniform net capital requirements for
brokers and dealers.
11As more fully discussed in Section C of this ANPR, the Agencies are also considering using these tables to risk weight an exposure that is collateralized by debt that has an external rating issued by a NRSRO or that is guaranteed by an entity whose senior long-term debt has an external credit rating assigned by an NRSRO.
12 The Agencies' rules, however, differ
somewhat as is
described in the Agencies' joint report to Congress. See ``Joint
Report: Differences in Accounting and Capital Standards among the
Federal Banking Agencies'', 57 FR 15379 (March 25, 2005). The
Agencies intend to eliminate these differences in their respective
risk-based capital regulations relating to collateralized exposures.
13 To qualify, these loans must meet requirements for
amortization schedules, minimum maturity, LTV, and other
requirements. See 12 CFR part 3, appendix A, Sec. 3(a)(3)(v)(OCC);
12 CFR parts 208 and 225, appendix A, Sec. III.C.3 (Board); 12 CFR
part 325, appendix A, Sec. II.C (category 3-50 percent risk weight)
(FDIC); 12 CFR 567.1 (definition of qualifying multifamily mortgage
17 65 FR 12320 (March 8, 2000).
21 E.O. 12866 applies to OCC and OTS, but not the Board or
|Last Updated 10/20/2005||Regs@fdic.gov|