[Federal Register Volume 71, Number 185 (Monday, September 25, 2006)]
[Proposed Rules]
[Pages 55958-55980]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-7673]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 06-10]
RIN 1557-AC99
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1266]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD10
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 566
[Docket No. 2006-34]
RIN 1550-AC02
Risk-Based Capital Standards: Market Risk
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 notice of proposed rulemaking.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) are proposing revisions to the
market risk capital rule to enhance its risk sensitivity and introduce
requirements for public disclosure of certain qualitative and
quantitative information about the market risk of a bank or bank
holding company. The Office of Thrift Supervision (OTS) currently does
not apply a market risk capital rule to savings associations and is
proposing in this notice a market risk capital rule for savings
associations. The proposed rules for each agency are substantively
identical.
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\75\ Unrealized gains (losses) recognized in the balance sheet
but not through earnings.
\76\ Unrealized gains (losses) not recognized either in the
balance sheet or through earnings.
\77\ This disclosure should include a breakdown of equities that
are subject to the 0%, 20%, 100%, 300%, and 400% risk weights, as
applicable.
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DATES: Comments must be received on or before January 23, 2007.
ADDRESSES: Comments should be directed to:
OCC: You should include OCC and Docket Number 06-10 in your
comment.
[[Page 55959]]
You may submit comments by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
OCC Web Site: http://www.occ.treas.gov. Click on ``Contact
the OCC,'' scroll down and click on ``Comments on Proposed
Regulations.''
E-mail address: [email protected].
Fax: (202) 874-4448.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
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:
Viewing Comments Personally: You may personally inspect
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.
Board: You may submit comments, identified by Docket No. R-1265, by
any of the following methods:
Agency Web site: http://www.Federalreserve.gov. Follow the
instructions for submitting comments on the http://www.Federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
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
http://www.Federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
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
Streets, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit written comments, identified by RIN number, by
any of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments
on the FDIC Web site.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include the RIN number in the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
Hand Delivery/Courier: Guard station at rear of the 550
17th Street Building (located on F Street) on business days between 7
a.m. and 5 p.m.
Instructions: All submissions received must include the agency name
and RIN number for this rulemaking. All comments received will be
posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided. Comments may
be inspected at the FDIC Public Information Center, Room E-1002, 3502
Fairfax Drive, Arlington, VA, 22226, between 9 a.m. and 5 p.m. on
business days.
OTS: You may submit comments, identified by No. 2006-34 by any of
the following methods:
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail address: [email protected]. Please
include No. 2006-34 in the subject line of the message and include your
name and telephone number in the message.
Fax: (202) 906-6518.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: No. 2006-34.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, No. 2006-34.
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/pagehmtl.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/pagehmtl.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
public.info@ots.treas.gov">public.info@ots.treas.gov, 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
request.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Risk Expert, Capital Policy (202-874-6022)
or Ron Shimabukuro, Special Counsel, Legislative and Regulatory
Activities Division, (202-874-5090).
Board: Barbara Bouchard, Deputy Associate Director (202-452-3072 or
[email protected]), Mary Frances Monroe, Manager (202-452-5231
or [email protected]), or Anna Lee Hewko, Senior Supervisory
Financial Analyst, (202-530-6260 or [email protected]), Division of
Banking Supervision and Regulation; or Allison Breault, Attorney (202-
452-3124 or [email protected]), Legal Division. For users of
Telecommunications Device for the Deaf (``TDD'') only, contact (202-
263-4869).
FDIC: Jason C. Cave, Associate Director (202-898-3548), Gloria
Ikosi, Senior Quantitative Risk Analyst (202-898-3997), or Karl R.
Reitz, Financial Analyst (202-898-3857), Capital Markets Branch,
Division of Supervision and Consumer Protection; or Michael B.
Phillips, Counsel, (202-898-3581), or Benjamin W. McDonough, Attorney
(202-898-7411), Supervision and Legislation Branch, Legal Division.
OTS: Michael D. Solomon, Director, Capital Policy (202-906-5654),
Austin Hong, Senior Analyst (202-906-6389), Christine A. Smith, Program
Manager (202-906-5740) or Karen Osterloh, Special Counsel, Regulations
and Legislation Division (202-906-6639).
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Introduction
A. Background
B. Summary of the Current Market Risk Capital Rule
1. Covered Positions
2. Capital Requirement for Market Risk
[[Page 55960]]
3. Internal Models-Based Capital Requirement
4. Specific Risk
5. Calculation of the Risk-Based Capital Ratio
II. Proposed Revisions to the Market Risk Capital Rule
A. Objectives of the Proposed Revisions
B. Description of the Proposed Revisions to the Market Risk
Capital Rule
1. Scope
2. Reservation of Authority
3. Modification of the Definition of Covered Position
4. Requirements for the Identification of Trading Positions and
Management of Covered Positions
5. Requirements for Internal Models in General
Model Use Requirements
Factors and Risks Reflected in Models
Quantitative Requirements for VaR-Based Measure
Control, Oversight, and Validation Mechanisms
Internal Assessment of Capital Adequacy
Documentation
Backtesting
6. Revised Modeling Standards for Specific Risk
7. Standard Specific Risk Capital Requirement
8. Incremental Default Risk Capital Requirement
9. Disclosure Requirements
I. Introduction
A. Background
The first international capital framework for banks \1\ entitled,
International Convergence of Capital Measurement and Capital Standards
(1988 Capital Accord), was developed by the Basel Committee on Banking
Supervision (BCBS) \2\ and endorsed by the G-10 governors in 1988. The
OCC, the Board, the FDIC, and the OTS (collectively, the agencies)
implemented the 1988 Capital Accord in 1989. In 1996, the BCBS amended
the 1988 Capital Accord to require banks to measure and hold capital to
cover their exposure to market risk associated with foreign exchange
and commodity positions and positions located in the trading account
(the Market Risk Amendment or MRA). The OCC, Board, and FDIC
implemented the MRA effective January 1, 1997 (market risk capital
rule).\3\
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\1\ For simplicity, and unless otherwise indicated, this notice
of proposed rulemaking (NPR) uses the term ``bank'' to include
banks, savings associations, and bank holding companies (BHCs). The
terms ``bank holding company'' and ``BHC'' refer only to bank
holding companies regulated by the Board.
\2\ The BCBS is a committee of banking supervisory authorities,
which was established by the central bank governors of the G-10
countries in 1975. It consists of senior representatives of bank
supervisory authorities and central banks from Belgium, Canada,
France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain,
Sweden, Switzerland, the United Kingdom, and the United States.
Publications of the BCBS, including the 1988 Capital Accord, the
market risk amendment (and amendments thereto in 1997 and 2005), the
New Accord, and the Trading Book Improvements (discussed later in
this preamble) are available through the Bank for International
Settlements Web site at http://www.bis.org.
\3\ 61 FR 47358 (September 6, 1996). The agencies' implementing
regulations are available at 12 CFR part 3, Appendices A and B
(national banks), 12 CFR part 208, Appendices A and E (state member
banks), 12 CFR part 225, Appendices A and E (bank holding
companies), and 12 CFR part 325, Appendices A and C (state nonmember
banks).
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In June 2004, the BCBS issued a final text of a revised regulatory
capital framework for banks entitled, International Convergence of
Capital Measurement and Capital Standards: A Revised Framework (New
Accord), which was intended for use by individual countries as the
basis for national consultation and implementation. The New Accord sets
forth a ``three pillar'' framework encompassing (1) minimum risk-based
capital requirements for credit risk, market risk, and operational
risk; (2) supervisory review of capital adequacy; and (3) market
discipline through enhanced public disclosures. The changes to the
capital framework for credit and operational risks are the subject of
the agencies' Notice of Proposed Rulemaking published elsewhere in
today's Federal Register (proposed advanced capital adequacy
framework).\4\
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\4\ -- FR ------ September 25, 2006.
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For market risk, the New Accord generally retains the approach
contained in the MRA. However, in releasing the New Accord, the BCBS
announced that work would continue on the treatment of double default
effects in the New Accord and that improvements to the MRA would be
developed immediately, especially with respect to the treatment of
specific risk. Given the interest of both banks and securities firms in
this issue, the BCBS worked jointly with the International Organization
of Securities Commissions (IOSCO) on this effort, which culminated in
the July 2005 publication of The Application of Basel II to Trading
Activities and the Treatment of Double Default Effects by the BCBS and
IOSCO.\5\ The July 2005 publication is now incorporated in the New
Accord and follows its ``three pillar'' structure. With respect to
market risk, the Pillar 1 changes clarify the types of positions that
are subject to the market risk capital framework and revise modeling
standards; the Pillar 2 changes require banks to conduct internal
assessments of their capital adequacy with respect to market risk,
taking into account the output of their internal models, valuation
adjustments, and stress tests; and the Pillar 3 changes require banks
to disclose quantitative and qualitative information on their valuation
techniques for covered positions, the soundness standard they employ
for modeling purposes, and the methodologies they use to make the
internal capital adequacy assessment.
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\5\ The treatment of double default effects is discussed in
section V.C.5 of the proposed advanced capital adequacy framework.
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In this proposal, the OCC, Board, and FDIC are proposing to amend
their market risk capital rules to implement the BCBS's 2005 changes to
the market risk capital rule. The OTS has not yet implemented a market
risk capital rule for savings associations and is proposing such a rule
in this NPR to ensure that savings associations with significant market
risk measure this exposure and hold commensurate amounts of regulatory
capital. The proposed rules will be substantively identical for each of
the agencies, and in this NPR the agencies are publishing a common rule
text with certain agency-specific text which appears at the end of the
common preamble.
Section I.B of this preamble summarizes the current market risk
capital rule and provides background information for banks and other
readers that are not currently subject to or not familiar with the
market risk capital rule. Part II of this preamble describes proposed
revisions to the market risk capital rule. The effective date of any
final rule associated with the proposed revisions to the market risk
capital rule would be January 1, 2008, with certain exceptions
described below.
B. Summary of the Current Market Risk Capital Rule
The current market risk capital rule supplements the general risk-
based capital rules \6\ by requiring any bank subject to the rule to
adjust its risk-based capital ratio to reflect explicitly market risk
in its trading activities. The rule applies to a bank with worldwide,
consolidated trading activity equal to at least 10 percent of total
assets or $1 billion. The primary Federal supervisor of a bank may
generally apply the market risk capital rule to a bank or exempt a bank
from application of the rule if the supervisor deems it necessary
[[Page 55961]]
or appropriate for safe and sound banking practices.
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\6\ The agencies' general risk-based capital rules are at 12 CFR
part 3, Appendix A (national banks); 12 CFR part 208, Appendix A
(state member banks); 12 CFR part 225, Appendix A (bank holding
companies); 12 CFR part 325, Appendix A (state nonmember banks); and
12 CFR part 567 (savings associations). For purposes of this
preamble, credit risk capital rules refers to the general risk-based
capital rules and the proposed advanced capital adequacy framework,
as applicable to the bank applying the proposed rule.
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1. Covered Positions
The market risk capital rule requires a bank to maintain capital
against the market risk of its covered positions. Covered positions are
defined as all on- and off-balance sheet positions in the bank's
trading account (as defined in the instructions to the Consolidated
Reports of Condition and Income (Call Report) or FR Y-9C Consolidated
Financial Statements for Bank Holding Companies (FR Y-9C)), and all
foreign exchange and commodity positions, whether or not in the trading
account. Covered positions exclude all positions in the trading account
that, in form or substance, act as liquidity facilities that provide
liquidity support to asset-backed commercial paper.
2. Capital Requirement for Market Risk
The market risk capital rule defines market risk as the risk of
loss resulting from movements in market prices. Market risk consists of
general market risk and specific risk components. General market risk
is defined as changes in the market value of positions resulting from
broad market movements, such as changes in the general level of
interest rates, equity prices, foreign exchange rates, or commodity
prices. Specific risk is defined as changes in the market value of a
position due to factors other than broad market movements and includes
event and default risk as well as idiosyncratic variations. Event risk
is the risk of loss on a position that could result from sudden and
unexpected large changes in market prices or specific events other than
default of the issuer. Default risk is the risk of loss on a position
that could result from the failure of an obligor to make timely
payments of principal or interest on its debt obligation, and the risk
of loss that could result from bankruptcy, insolvency, or similar
proceeding. For credit derivatives, default risk means the risk of loss
on a position that could result from the default of the reference
exposures.
A bank that is subject to the market risk capital rule is required
to use an internal model to calculate a value-at-risk (VaR)-based
measure of its exposure to market risk. A bank's total risk-based
capital requirement for covered positions generally consists of a VaR-
based capital requirement plus an add-on for specific risk, if specific
risk is not captured in the bank's internal model.\7\ A VaR-based
capital requirement is one that is based on an estimate of the maximum
amount that the value of one or more positions could decline during a
fixed holding period within a stated confidence interval. A bank may
determine its capital requirement for specific risk using a standard
specific risk approach or, with supervisory approval, may use internal
models to determine its capital requirement for specific risk.
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\7\ The primary Federal supervisor of a bank may also permit the
use of alternative techniques to measure the market risk of de
minimis exposures so long as the techniques adequately measure
associated market risk.
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3. Internal Models-Based Capital Requirement
In calculating the capital requirement for market risk, a bank is
required to use an internal model that meets specified qualitative and
quantitative criteria. The qualitative requirements reflect basic
components of sound market risk management. For example, the current
rule requires an independent risk control unit that reports directly to
senior management and an internal risk measurement model that is
integrated into the daily management process. The quantitative criteria
include the use of a VaR-based measure based on a 99 percent, one-
tailed confidence level. The VaR-based measure must be based on a price
shock equivalent to a ten-business-day movement in rates or prices.
Price changes estimated using shorter time periods must be adjusted to
the ten-business-day standard. The minimum effective historical
observation period for deriving the rate or price changes is one year
and data sets must be updated at least quarterly or more frequently if
market conditions warrant. For many types of covered positions it is
appropriate for a bank to update its data sets more frequently than
quarterly. In all cases a bank must have the capability to update its
data sets more frequently than quarterly in anticipation of market
conditions that would require such updating.
A bank need not employ a single model to calculate its VaR-based
measure. A bank's internal model may use any generally accepted
approach, such as variance-covariance models, historical simulations,
or Monte Carlo simulations. However, the level of sophistication of the
bank's internal model must be commensurate with the nature and size of
the positions it covers. The internal model must use risk factors
sufficient to measure the market risk inherent in all covered
positions. The risk factors must address interest rate risk, equity
price risk, foreign exchange rate risk, and commodity price risk.
The market risk capital rule imposes backtesting requirements that
must be calculated quarterly. A bank must compare its daily VaR-based
measure for each of the preceding 250 business days against its actual
daily trading profit or loss, which typically includes realized and
unrealized gains and losses on portfolio positions as well as fee
income and commissions associated with trading activities. If the
quarterly backtesting shows that the bank's daily net trading loss
exceeded its corresponding daily VaR-based measure, a backtesting
exception has occurred. If a bank experiences more than four
backtesting exceptions over the preceding 250 business days, it is
generally required to apply a multiplication factor in excess of 3 when
it calculates its risk-based capital ratio (see section I.B.5 of this
preamble).
A bank subject to the market risk capital rule is also required to
conduct stress tests to gain information about the impact of adverse
market events on its positions. Specific stress testing methodologies
are not prescribed.
4. Specific Risk
A bank may use an internal model to measure its exposure to
specific risk if it has demonstrated to its primary Federal supervisor
that the model measures the specific risk, including event and default
risk, as well as idiosyncratic variations, of its covered debt and
equity positions. A bank that incorporates specific risk in its
internal model but fails to demonstrate that the model adequately
measures all aspects of specific risk for covered debt and equity
positions, including event and default risk, is subject to a specific
risk add-on. If the bank can validly separate its VaR-based measure
into a specific risk portion and a general market risk portion, the
add-on is equal to the previous day's specific risk portion. If the
bank cannot separate the VaR-based measure into a specific risk portion
and a general market risk portion, the add-on is equal to the sum of
the previous day's VaR-based measures for subportfolios of covered debt
and equity positions that contain specific risk.
If the bank does not model specific risk, it must calculate its
specific risk capital requirement, termed an add-on, using the standard
approach. Under the standard approach for specific risk, the specific
risk add-on for covered debt positions is calculated by multiplying the
absolute value of the current market value of each net long or short
debt position by the appropriate specific risk weighting factor in the
rule. The specific risk weighting factor ranges from zero to 8 percent
and is based on the identity
[[Page 55962]]
of the obligor, and in the case of some positions, the credit rating
and remaining contractual maturity of the position. Derivative
instruments are risk-weighted according to the market value of the
effective notional amount of the relevant underlying position. A bank
may net long and short identical debt positions (including derivatives)
with exactly the same issuer, coupon, currency, and maturity. A bank
may also offset a matched position in a derivative and its
corresponding underlying instrument.
Under the standard approach, the specific risk add-on for covered
equity positions is the sum of the bank's long and short equity
positions, multiplied by a specific risk-weighting factor. A bank may
net long and short positions (including derivatives) in identical
equity issues or equity indices in the same market. The standard
specific risk add-on is 8 percent of the net equity position, unless
the bank's portfolio is both liquid and well-diversified, in which case
the add-on is 4 percent.\8\ For positions that are index contracts
comprising a well-diversified portfolio of equities, the specific risk
add-on is 2 percent of the net long or short position in the index.\9\
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\8\ Under the current market risk capital rule, a portfolio is
liquid and well-diversified if: (i) It is characterized by a limited
sensitivity to price changes of any single equity issue or closely
related group of equity issues held in the portfolio; (ii) the
volatility of the portfolio's value is not dominated by the
volatility of any individual equity issue or by equity issues from
any single industry or economic sector; (iii) it contains a large
number of individual equity positions, with no single position
representing a substantial portion of the portfolio's total market
value; and (iv) it consists mainly of issues traded on organized
exchanges or in well-established over-the-counter markets.
\9\ In addition, for futures contracts on broadly based indices
that are matched by offsetting equity baskets, a bank may apply a
two percent specific risk requirement to the futures and stock
basket positions if the basket comprises at least 90 percent of the
capitalization of the index. The two percent specific risk
requirement applies to only one side of certain futures-related
arbitrage strategies when either: (i) the long and short positions
are in exactly the same index at different dates or in different
markets; or (ii) the long and short positions are in different but
similar indices at the same date.
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5. Calculation of the Risk-Based Capital Ratio
A bank subject to the market risk capital rule must calculate its
adjusted risk-based capital ratios as follows. First the bank must
calculate its adjusted risk-weighted assets, which equals its risk-
weighted assets calculated under the general risk-based capital rule
excluding the risk-weighted amounts of covered positions (except
foreign exchange positions held outside the trading account and over-
the-counter derivative instruments) and cash-secured securities
borrowing receivables that meet the criteria of the market risk capital
rule.\10\
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\10\ See 71 FR 8932 (February 22, 2006).
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The bank next must calculate its measure for market risk, which
equals the sum of the VaR-based capital requirement for market risk,
the specific risk add-on (if any), and the capital requirement for de
minimis exposures (if any). The VaR-based capital requirement equals
the higher of (i) the previous day's VaR-based measure, and (ii) the
average of the daily VaR-based measures for each of the preceding 60
business days multiplied by three, or such higher multiplier as may be
required under the backtesting requirements of the market risk capital
rule. The measure for market risk is multiplied by 12.5 to calculate
market-risk-equivalent assets. The market-risk-equivalent assets are
added to adjusted risk-weighted assets to compute the bank's risk-based
capital ratio denominator.
To calculate the numerator, the bank must allocate tier 1 and tier
2 capital equal to 8 percent of adjusted risk-weighted assets, and
further allocate excess tier 1, excess tier 2, and tier 3 \11\ capital
equal to the measure for market risk. The sum of tier 2 and tier 3
capital allocated for market risk may not exceed 250 percent of tier 1
capital. As a result, tier 1 capital must equal at least 28.6 percent
of the measure for market risk. The sum of tier 2 (both allocated and
excess) and allocated tier 3 capital may not exceed 100 percent of tier
1 capital (both allocated and excess). Term subordinated debt and
intermediate-term preferred stock and related surplus included in tier
2 capital (both allocated and excess) may not exceed 50 percent of tier
1 capital (both allocated and excess). The sum of tier 1 and tier 2
capital (both allocated and excess) and allocated tier 3 capital is the
bank's total risk-based capital numerator.
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\11\ Tier 1 and tier 2 capital are defined in the general risk-
based capital rules. Tier 3 capital is subordinated debt that is
unsecured, is fully paid up, has an original maturity of at least
two years, is not redeemable before maturity without prior approval
by the primary Federal supervisor, includes a lock-in clause
precluding payment of either interest or principal (even at
maturity) if the payment would cause the issuing bank's risk-based
capital ratio to fall or remain below the minimum required under the
credit risk capital rules, and does not contain and is not covered
by any covenants, terms, or restrictions that are inconsistent with
safe and sound banking practices.
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II. Proposed Revisions to the Market Risk Capital Rule
A. Objectives of the Proposed Revisions
The key objectives of the proposed revisions to the current market
risk capital rule are to enhance the rule's sensitivity to risks that
are not adequately captured in the current methodologies of the rule,
to enhance modeling requirements consistent with advances in risk
management since the initial implementation of the MRA nearly 10 years
ago, and to modify the definition of covered position to better capture
positions for which the market risk capital rule is appropriate. The
objective of enhancing the risk sensitivity of the rule reflects the
growth in traded credit products, such as credit default swaps and
tranches of collateralized debt obligations, other structured products,
and less liquid products. The risks of these products are not
adequately captured in current VaR models and are not fully reflected
in a 10-business-day, 99 percent confidence level soundness standard.
The growth in traded credit products has given rise to an increase
in default risks that should be captured in a capital requirement for
specific risk but have proved difficult to capture adequately with
current specific risk models. Other structured and less liquid products
may give rise to risks that were not entirely contemplated when the
market risk capital rule was first adopted. Moreover, concentration
risk may not be adequately reflected in a VaR-based framework,
especially when banks rely on proxies to capture the risks of actual
holdings. Therefore, the agencies propose to implement an incremental
default risk capital requirement for a bank that models specific risk
for one or more portfolios of covered positions and to require the
consideration of liquidity and concentration risks in that requirement
and in the bank's stress tests and internal assessment of capital
adequacy. In addition, to address the agencies' concerns about
appropriate treatment of covered positions with limited price
transparency, the agencies propose to require banks to have a well-
defined valuation process for all covered positions. The specific
proposals are discussed below.
B. Description of the Proposed Revisions to the Market Risk Capital
Rule
1. Scope
With the exception of the addition of savings associations, the
proposed revisions to the market risk capital rule would not change the
set of banks to which the rule applies. Thus, the proposed rule would
continue to apply to any bank with aggregate trading assets and
liabilities equal to 10 percent or more of total assets, or $1 billion
or more. The proposed revisions would
[[Page 55963]]
apply to a bank meeting the market risk capital rule applicability
threshold regardless of whether the bank would adopt the proposed
advanced capital adequacy framework or remain under the general risk-
based capital rule. Question 1: The agencies seek comment on the
thresholds for the application of the market risk capital rule and, if
they should be changed, on what appropriate thresholds might be.
The primary Federal supervisor of a bank that does not meet the
threshold criteria may apply the market risk capital rule to the bank
if the supervisor deems it necessary or appropriate given the level of
market risk of the bank or to ensure safe and sound banking practices.
A bank that does not meet the threshold criteria may request that its
primary Federal supervisor apply the market risk capital rule to it. A
primary Federal supervisor may also exclude a bank that meets the
threshold criteria from the rule if appropriate based on the level of
market risk of the bank and provided such exemption would be consistent
with safe and sound banking practices.
2. Reservation of Authority
The proposed rule would contain a reservation of authority that
affirms the authority of a bank's primary Federal supervisor to require
the bank to hold an overall amount of capital greater than would
otherwise be required under the rule if the supervisor determines that
the bank's risk-based capital requirements under the rule are not
commensurate with the market risk of the bank's covered positions. In
addition, the agencies anticipate that there may be instances when the
proposed rule generates a risk-based capital requirement for a specific
covered position or portfolio of covered positions that is not
commensurate with the risks posed by such exposures. In these cases, a
bank's primary Federal supervisor may require the bank to assign a
different risk-based capital requirement to the covered position or
portfolio of covered positions that better reflects the risk of the
position or portfolio. The proposed rule also would provide authority
for a bank's primary Federal supervisor to require the bank to
calculate capital requirements for specific positions or portfolios
under the market risk capital rule or under the credit risk capital
rule to more accurately reflect the risks of the positions. Any agency
that exercises this reservation of authority would notify each of the
other agencies of its determination.
3. Modification of the Definition of Covered Position
The NPR modifies the definition of a covered position to include
only trading assets and trading liabilities (as reported on schedule
RC-D of the Call Report, Schedule HC-D of the Consolidated Financial
Statements for Bank Holding Companies, or as defined in the
instructions to the Thrift Financial Report) that are trading
positions. The definition also includes trading assets and liabilities
that hedge covered positions. In addition, the trading asset or
liability must be free of any restrictive covenants on its tradability
or the bank must be able to hedge its material risk elements in a two-
way market. A trading position would be defined as a position that is
held by the bank for the purpose of short-term resale or with the
intent of benefiting from actual or expected price movements or to lock
in arbitrage profits. The proposed definition of a trading position
recognizes that the accounting definition of trading assets and
liabilities includes positions that are not held with the intent or
ability to trade.
A trading asset or liability that hedges a trading position is a
covered position only if the hedge is within the scope of the bank's
hedging strategy (discussed below). The agencies encourage the sound
risk management of trading positions and therefore include hedges that
offset their risk in the definition of covered position and thus in the
measure for market risk. The agencies are concerned, however, that a
bank could craft its hedging strategies in order to bring non-trading
positions that are more appropriately treated under the credit risk
capital rules into the bank's covered positions. The agencies will
scrutinize a bank's hedging strategies to ensure that they are not
being manipulated in this manner. For example, mortgage-backed
securities that are not held with the intent to trade, but that are
hedged with interest rate swaps to mitigate interest rate risk, would
be subject to the credit risk capital rules. Question 2: The agencies
request comment on all aspects of the proposed definition of covered
position. The agencies are particularly interested in comment on
additional safeguards that the agencies might implement to prevent
abuse of the hedge component of the definition of covered position and
increase transparency for supervisors.
Consistent with the current definition, a covered position also
would include any foreign exchange or commodity position, whether or
not a trading asset or trading liability. With prior supervisory
approval a bank could exclude any structural position in a foreign
currency.\12\
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\12\ Structural foreign currency positions include positions
designed to hedge a bank's capital ratios against the effect of
adverse exchange rate movements on (1) subordinated debt, equity, or
minority interests in consolidated subsidiaries and capital assigned
to foreign branches that are denominated in foreign currencies, and
(2) any positions related to unconsolidated subsidiaries and other
items that are deducted from an institution's capital when
calculating its capital base.
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Also consistent with the current rule, the definition of a covered
position would explicitly exclude any position that, in form or
substance, acts as a liquidity facility that provides support to asset-
backed commercial paper. In addition, under the proposed rule the
definition of covered position would exclude any intangible asset,
including any servicing asset. Intangible assets are excluded from the
definition of covered position because their risks are explicitly
addressed in the credit risk capital rules, generally through deduction
from capital.
In addition, under the proposed rule, a credit derivative
recognized as a guarantee for risk-weighted asset amount calculation
purposes under the credit risk capital rules \13\ used to hedge a
position that is not a covered position (for example, a credit
derivative hedge of a loan that is not a covered position) would be
excluded from the definition of a covered position. This would require
the bank to include the credit derivative in its risk-based capital
measure for credit risk and exclude it from its VaR-based measure for
market risk. The proposed treatment of a credit derivative hedge for
regulatory capital purposes would avoid the mismatch that arises when
the hedged position (for example, a loan) is not a covered position and
the credit derivative hedge is a covered position. This mismatch has
the potential to inflate the VaR-based measure of market risk because
only one side of the transaction is reflected in that measure. Question
3: The agencies request comment on whether there is a better approach
that matches more effectively the true economic impact of these
transactions.
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\13\ See 12 CFR part 3, section 3 (national banks); 12 CFR part
208, Appendix A, section II.B (state member banks); 12 CFR part 225,
Appendix A, section II.B (bank holding companies); 12 CFR part 325,
Appendix A, section II.B.3 (state nonmember banks);12 CFR part 567.6
(savings associations). The treatment of guarantees is described in
sections 33 and 34 of the proposed advanced capital adequacy
framework and discussed in section V.C.5 of the framework's
preamble.
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A similar distortion of the VaR-based measure may arise in the
context of interest rate risk. Some banks manage their interest rate
risk on a portfolio basis without distinguishing between
[[Page 55964]]
covered and noncovered positions by using interest rate derivatives
with external third parties that are covered positions under the market
risk capital rule.\14\ The interest rate derivatives hedge the interest
rate risk of covered and noncovered positions together; however, only
the covered positions are included in the bank's VaR-based measure.
This may result in a regulatory capital requirement that does not
appropriately reflect the interest rate risk of all of the offsetting
transactions. This problem would not exist for interest rate
derivatives that are direct hedges of noncovered positions because,
under the proposed definition of covered position, the interest rate
derivative would not be a covered position. Question 4: The agencies
request comment on the extent and materiality of any distortion of the
VaR-based measure due to the inclusion of some, but not all, offsetting
transactions, and on any appropriate approaches to address this
distortion in the final rule, including, subject to certain
restrictions, (1) permitting a bank to include in its VaR-based measure
the interest rate risk associated with certain noncovered positions
that are hedged by covered positions (while remaining subject to a
credit risk capital requirement for the noncovered positions) or (2)
permitting a bank to include in its VaR-based measure certain internal
interest rate derivatives hedging noncovered positions. The agencies
also request comment on any operational considerations such approaches
would entail.
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\14\ Only transactions with external third parties are covered
positions because only such transactions are trading assets and
liabilities for consolidated reporting purposes. Internal
transactions, such as an interest rate derivative between a bank's
treasury function and its trading desk, are not covered positions.
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Under the proposed rule, the definition of a covered position would
exclude any securitization position that is a residual securitization
position,\15\ subject to a limited market maker exception. The market
maker exception would permit these securitization positions to be
included as covered positions only upon a determination by the bank's
primary Federal supervisor that: (i) A two-way market exists for the
securitization position, or in the case of a securitization position
that relies solely on credit derivatives, for the securitization
position or all of its material risk components; (ii) the bank holds
itself out as ready to buy or sell these securitization positions for
its own account on a regular and continuous basis at a quoted price,
(iii) the bank's internal models fully capture the general market risk
and specific risks of its securitization positions and sufficient
market data are available to model these risks reliably; and (iv) the
bank has adequate internal systems and controls for the trading of
securitization positions.
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\15\ A residual securitization position is any securitization
position subject to deduction under the proposed advanced capital
adequacy framework or subject to the following provisions under the
general risk-based capital rules: 12 CFR part 3, Appendix A,
sections 4 (b) and (f) (national banks); 12 CFR part 208, Appendix
A.III.B.3.b and III.B.3.e (State member banks); 12 CFR part 225,
Appendix A.III.B.3.b and III.B.3.e (bank holding companies); 12 CFR
part 325, Appendix A.II.B.5 (state nonmember banks); and 12 CFR
567.6(b)(1) and (2) (savings associations).
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The general exclusion of these securitization positions from the
definition of covered position provides a capital treatment for these
positions that is appropriate for their risk. The agencies recognize,
however, that a bank may be an active market maker in these
securitization positions and may have the models and internal controls
capacity to capture the risk of these positions in the bank's VaR-based
measure of market risk. The agencies also note that positions that meet
the definition of a residual securitization position might be different
for a bank that is subject to the proposed advanced capital adequacy
framework than for a bank that is subject to the general risk-based
capital rules. Question 5: The agencies seek comment on the proposed
definition of residual securitization position, and on the market maker
exception and the conditions to use that exception. With respect to
positions that do not qualify for the market maker exception, the
agencies request comment on the treatment of those positions under the
credit risk capital rules and whether such treatment could give rise to
any operational or other issues.
4. Requirements for the Identification of Trading Positions and
Management of Covered Positions
The proposal introduces new requirements for the identification of
trading positions and the management of covered positions. The agencies
believe that these new requirements are warranted based on the trend
towards the inclusion of more credit risk-related, less liquid, and
less actively traded products in banks' covered positions. The risks of
these positions may not be fully reflected in the requirements of the
market risk capital rule and may be more appropriately captured under
the credit risk capital rules.
A bank would be required to have clearly defined policies and
procedures for determining which of its trading assets and trading
liabilities are trading positions. In determining the scope of trading
positions, the bank would be required to consider (i) the extent to
which a position (or a hedge of its material risks) could be marked-to-
market daily by reference to a two-way market, and (ii) possible
impairments to the liquidity of a position.
In addition, the bank must have clearly defined trading and hedging
strategies. The bank's trading and hedging strategies for its trading
positions must be approved by senior management. The trading strategy
must articulate the expected holding period of and the market risk
associated with each portfolio of trading positions. The trading
strategy must also articulate whether the purpose of each portfolio of
trading positions is to accommodate customer flow, to engage in
proprietary trading, or to make a market in the positions. The hedging
strategy must articulate for each portfolio the level of market risk
the bank is willing to accept and must detail the instruments,
techniques, and strategies the bank will use to hedge the risk of the
portfolio. The hedging strategy must clearly articulate which positions
are being hedged and which positions serve as hedging instruments.
A bank would be required to have clearly defined policies and
procedures for actively managing all covered positions. In the context
of nontraded commodities and foreign exchange positions, active
management could focus on managing the risks of those positions within
the bank's risk limits. For all covered positions, these policies and
procedures would be required to address, at a minimum, marking
positions to market or model on a daily basis; assessing on a daily
basis the bank's ability to hedge position and portfolio risks and the
extent of market liquidity; and the establishment and daily monitoring
of position limits by a risk control unit independent of the trading
business unit. Senior management would be required to monitor all of
this information on a daily basis. The policies and procedures would be
required to provide for reassessment by senior management of
established position limits on at least an annual basis, as well as
annual assessments by qualified personnel of the quality of market
inputs to the valuation process, the soundness of key assumptions, the
reliability of parameter estimation in pricing models, and the
stability and accuracy of model calibration under alternative market
scenarios. Question 6: The agencies seek comment on these requirements
and on whether different or additional policies
[[Page 55965]]
and procedures would be beneficial for ensuring appropriate
identification of positions to which the market risk capital rule
should be applied and appropriate risk management of covered positions.
The proposal introduces new requirements for the prudent valuation
of covered positions that include policies and procedures on position
valuation, marking to market or model, independent price verification,
and valuation adjustments or reserves. The valuation process would be
required to consider, as appropriate, unearned credit spreads, close-
out costs, early termination, investing and funding costs, future
administrative costs, liquidity, and model risk. These new valuation
requirements reflect the agencies' concerns about possible shortcomings
in the valuation of less liquid trading positions, especially in light
of the historical focus of the market risk capital rule on a 10-
business-day time horizon and a 99 percent confidence level, which may
be inadequate to reflect the full extent of the risks of less liquid
positions.
5. Requirements for Internal Models in General
As under the current market risk capital rule, a bank would be
required to use one or more internal models to calculate a daily VaR-
based measure that reflects general market risk for all covered
positions. The daily VaR-based measure may also reflect the bank's
specific risk for one or more portfolios of covered debt or equity
positions. The requirements for internal models are discussed below.
Model Use Requirements. The proposed revisions would specify that a
bank must receive the prior written approval of its primary Federal
supervisor before using any internal model to calculate its risk-based
capital requirement for market risk and before extending the use of a
model for which it has received prior written approval to an additional
business line or product type. A bank would also be required to notify
its primary Federal supervisor promptly if it makes any changes to its
internal models that would result in a material change in the bank's
risk-weighted asset amount for a portfolio or when the bank makes any
material change to its modeling assumptions. The bank's primary Federal
supervisor could rescind its approval, in whole or in part, of the use
of any internal model if it determines that the model no longer
complies with the market risk capital rule or fails to reflect
accurately the risks of the bank's covered positions. For example, if
adverse market events or other developments reveal that a material
assumption in a bank's approved model is flawed, a primary Federal
supervisor may require the bank to revise its model assumptions and
resubmit the model specifications for review by the supervisor.
Factors and Risks Reflected in Models. As is the case under the
current rule, a bank would be required to integrate its internal models
into its daily risk management process, and the level of sophistication
of a bank's models would need to be commensurate with the nature and
size of its covered positions. The internal models used by a bank are
required to capture all material risks, including basis and prepayment
risks. The proposed revisions add credit spread risk to the list of
risk factors required to be captured as appropriate under the current
rule (that is, in addition to interest rate risk, equity price risk,
foreign exchange rate risk, and commodity price risk). Under the
current rule, a bank that has material exposure to credit spread,
basis, or prepayment risks should be capturing those risks in its
internal model. In the proposed revisions, the agencies decided to
specifically enumerate these risks to stress their importance in light
of the growth of traded credit products and products with prepayment or
basis risk at banks since the current rule was adopted. The proposed
revisions would require risks arising from less liquid positions and
positions with limited price transparency to be modeled conservatively
under realistic market scenarios.
The agencies are concerned that certain covered positions,
especially securitization positions, may contain prepayment risk that
is not adequately captured in the VaR-based measure of market risk.
Prepayment risk is the risk of loss to holders of debt exposures
arising from the repayment of principal differing from the expected or
scheduled principal repayment. The agencies recognize that the VaR-
based measure may capture a portion of prepayment risk for positions as
potential changes in the value of positions due to interest rate risk.
However, the agencies question the degree to which interest rate
volatility over the 10-business-day horizon adequately captures
prepayment risk associated with positions that are subject to
significant levels of prepayment. The agencies also recognize that
complete models of prepayment include pool and security-specific
factors that are not easily incorporated or modeled in daily
calculations of a VaR-based measure.
Question 7: The agencies request comment on all aspects of
prepayment risk, including the extent and materiality of prepayment
risk, whether material prepayment risk may warrant a further explicit
requirement that banks hold capital against prepayment risk over a one-
year horizon under both the internal models and standard approaches to
specific risk, and the interplay between prepayment risk and default
risk for purposes of determining the bank's overall measure for market
risk. The agencies also seek comment on how an explicit capital
requirement for prepayment risk could be designed.
The proposed rule also requires a bank to have a rigorous process
for reestimation, reevaluation and updating of its models to ensure
continued applicability and relevance. Further, the proposed rule would
continue to require models to include risks arising from the nonlinear
price characteristics of option positions, and to incorporate empirical
correlations across and within risk factors.
Quantitative Requirements for VaR-Based Measure. The proposed rule
includes the same quantitative requirements for the VaR-based measure
as the current market risk capital rule with respect to daily
computations, the one-tailed, 99 percent confidence level, the 10-
business-day holding period, and the one-year historical observation
period.
The current market risk capital rule requires a bank to include in
its VaR-based measure only covered positions. In contrast, the proposed
revisions would allow residual securitization positions that are
trading assets or liabilities and term repo-style transactions to be
included in the VaR-based measure even though these positions may not
be included within the definition of a covered position. A term repo-
style transaction would be defined as a repurchase or reverse
repurchase transaction or a securities borrowing or securities lending
transaction with an original maturity in excess of one day, provided
that, (i) the transaction is based solely on liquid and readily
marketable securities or cash, (ii) the transaction is marked-to-market
daily and subject to daily margin maintenance requirements, (iii) the
transaction is executed under an agreement that provides certain rights
of acceleration, termination, close-out, and set-off, and (iv) the bank
has conducted and documented sufficient legal review to conclude that
the agreement includes these rights and is legally binding. While repo-
style transactions typically are close adjuncts to trading activities,
Generally Accepted Accounting
[[Page 55966]]
Principles (GAAP) traditionally has not permitted companies to report
them as trading assets or liabilities. Repo-style transactions included
in the VaR-based measure will continue to be subject to the credit risk
capital requirements in order to capture counterparty credit risks.
The agencies believe that residual securitization positions should
be subject to the credit risk capital requirements. The agencies also
recognize, however, that these positions may be hedged by covered
positions and believe that it is appropriate to allow banks to
recognize the hedge in calculating their VaR-based measures. Residual
securitization positions even if included in the VaR-based measure will
continue to be subject to the credit risk capital requirements. A bank
may choose whether or not to include all residual securitization
positions that are trading assets or liabilities or all term repo-style
transactions in its VaR-based measure, and must choose whether or not
to include them consistently over time.
Control, Oversight, and Validation Mechanisms. The proposed rule
would continue the requirement that a bank have a risk control unit
that reports directly to senior management and is independent of its
business trading units. In addition, the proposed rule would impose
specific model validation standards that are similar to the standards
in the proposed advanced capital adequacy framework. A bank would be
required to validate its internal models initially and on an ongoing
basis. The validation process must be independent of the internal model
development, implementation, and operation, or the validation process
must be subject to an independent review of its adequacy and
effectiveness. The review personnel must be independent of internal
model development, implementation, and operation personnel, but not
necessarily external to the bank.
Validation would include evaluation of the conceptual soundness of
the internal models; an ongoing monitoring process that includes
verification of processes and the comparison of the bank's model
outputs with relevant internal and external data sources or estimation
techniques; and an outcomes analysis process that includes the
comparison of a bank's internal estimates with actual outcomes during a
sample period not used in model development. The evaluation of
conceptual soundness should include evaluation of empirical evidence
and documentation supporting the methodologies used, important model
assumptions and their limitations, adequacy and robustness of empirical
data used in parameter estimation and model calibration, and evidence
of the model's strengths and weaknesses.
A comparison of the bank's model outputs with relevant internal and
external data sources or estimation techniques is helpful to draw
inferences about the performance of model outputs. Results of this
comparison can be a valuable diagnostic tool in identifying potential
weaknesses in a bank's model. As part of this comparison, the bank
should investigate the source of any differences between the model
estimates and the relevant internal or external data or estimation
techniques and whether the extent of the differences is appropriate.
The proposed revisions expand upon the current market risk capital
rule's stress testing requirement. Specifically, the proposed rule
would require a bank to stress test the market risk of its covered
positions at a frequency appropriate to the portfolio, and in no case
less frequently than quarterly. The stress tests must take into account
concentration risk, illiquidity under stressed market conditions, and
other risks that may not be captured adequately in the bank's VaR-based
measure of market risk. For example, it may be appropriate for a bank
to include in its stress testing gapping of prices, one-way markets,
non-linear or deep out-of-the-money products, jumps-to-default, or
significant shifts in correlation. With respect to concentration risk,
the relevant types include concentration by name, industry, sector,
country, and market. Market concentration occurs when a bank holds a
position that represents a concentrated share of the market for a
security. A market concentration is a position that is so large,
relative to the liquidity typically available in the market, that it
requires a longer than usual liquidity horizon to liquidate the
position without moving the market. A bank's primary Federal supervisor
would evaluate the robustness and appropriateness of a bank's stress
tests through the supervisory review process.
The bank would be required to have an internal audit function
independent of business-line management that at least annually assesses
the effectiveness of the controls supporting the bank's market risk
measurement systems, including the activities of the business trading
units and of the independent risk control unit, and compliance with
policies and procedures. At least annually, internal audit should
review the validation processes, including validation procedures,
responsibilities, results, timeliness, and responsiveness to findings.
Further, internal audit should evaluate the depth, scope, and quality
of the risk management system review process and conduct appropriate
testing to ensure that the conclusions of these reviews are well
founded.
Internal Assessment of Capital Adequacy. The proposed revisions
include a requirement that a bank have a rigorous process for assessing
its overall capital adequacy in relation to its market risk. The
assessment must take into account market concentration and liquidity
risks under stressed market conditions, as well as other risks that may
not be captured appropriately in the VaR-based measure.
Documentation. A bank would be required to document adequately all
material aspects of its internal models, the management and valuation
of covered positions, its control, oversight, and validation
mechanisms, and its internal assessment of capital adequacy. This
documentation would facilitate the supervisory review process as well
as the bank's internal audit or other review procedures.
Backtesting. The proposal modifies the regulatory backtesting
framework for determining the multiplication factor based on the number
of backtesting exceptions. Under the current market risk rule, a bank
must compare its daily VaR-based measure to its actual daily trading
profit or loss, which typically includes realized and unrealized gains
and losses on portfolio positions as well as fee income and commissions
associated with trading activities. Under the proposed rule, a bank
would be required to compare its actual daily trading profit or loss
excluding fees, commissions, reserves and net interest income to its
daily VaR-based measure. These excluded components of trading profit
and loss are not modeled as part of the VaR-based measure and excluding
them will improve the accuracy of the backtesting and provide a better
assessment of the bank's internal model. The agencies believe that bank
trading and reporting systems have improved sufficiently to allow this
type of backtesting.
As noted above, the proposal also imposes specific model validation
standards that include outcomes analysis. The agencies expect that
outcomes analysis used for model validation would include hypothetical
backtesting, that is, comparison of the daily VaR-based measure to
hypothetical changes in portfolio value that would occur if there were
no intra-period changes. The hypothetical changes in portfolio value
would exclude the effects of changes in
[[Page 55967]]
positions due to intraday trading, new positions, or other sources of
intra-period changes, and also exclude fees, commissions, reserves and
net interest income. Question 8: The agencies request comment on the
exclusion of fees, commissions, reserves, and net interest income for
the trading profit or loss used for regulatory backtesting, including
the appropriateness and feasibility of these exclusions, and whether
additional items should also be excluded. The agencies also request
comment on the role of hypothetical backtesting-- specifically, whether
hypothetical backtesting is feasible as part of model validation;
whether other forms of backtesting should also be used; and whether
regulatory backtesting should be based on hypothetical backtesting.
6. Revised Modeling Standards for Specific Risk
The proposed rule would more clearly specify the modeling standards
for specific risk and, after a transition period, eliminate the current
option for a bank to model some but not all material aspects of
specific risk for an individual portfolio of covered debt or equity
positions. As under the current market risk capital rule, a bank may
use one or more internal models to measure specific risk. The internal
model would be required to explain the historical price variation in
the portfolio, be responsive to changes in market conditions, be robust
to an adverse environment, and capture all material aspects of specific
risk for covered debt and equity positions. Specifically, the proposed
revisions would require that a bank's internal models capture default
risk, event risk, and idiosyncratic variations; capture concentrations
and demonstrate sensitivity to changes in portfolio construction or
concentrations; and capture material basis risk and demonstrate
sensitivity to material idiosyncratic differences between similar, but
not identical, positions. The requirement to capture default and event
risk specifies that for debt positions, migration risk must be
captured, and for equity positions, events reflected in large changes
or jumps in prices must be reflected.
Under the current market risk capital rule, if a bank incorporates
specific risk in its internal model but fails to demonstrate to its
primary Federal supervisor that its internal model adequately measures
all aspects of specific risk for covered debt and equity positions,
including event and default risk, it is subject to a specific risk add-
on. On and after January 1, 2010, the proposed rule would require a
bank that does not have an approved internal model that captures all
material aspects of specific risk for a particular portfolio to use the
standard specific risk add-on for that portfolio. This proposed change
reflects the agencies' interest in creating incentives for more robust
specific risk modeling, while providing banks with a reasonable period
of time in which to improve current modeling techniques.
The proposed phase-out of partial modeling of specific risk would
not preclude a bank from using an internal model to calculate the
specific risk of some, but not all, portfolios of covered debt and
equity positions and using the standard approach to calculate the
specific risk of other portfolios. Rather, effective January 1, 2010, a
bank would not be permitted to use an internal model to calculate the
specific risk add-on of a portfolio if the model did not capture all
material aspects of specific risk for that portfolio. The bank would be
required to use the standard approach to calculate the specific risk
add-on for the portfolio until it receives written approval from its
primary Federal supervisor to measure the specific risk for the
portfolio using its internal model. Question 9: The agencies request
comment on the proposed timeframe for phasing out partial modeling of
specific risk and on whether it would allow banks enough time to
implement the proposed changes.
While the proposed rule would continue to provide for flexibility
and a combination of approaches to measure market risk, including the
use of different models to measure general market risk and the specific
risk of one or more portfolios of covered debt and equity positions,
the agencies strongly encourage banks to develop and implement models
that integrate the measurement of VaR for general market risk and
specific risk. A bank's use of a combination of approaches would be
subject to supervisory review to ensure that the overall capital
requirement for market risk is commensurate with the risks of the
bank's covered positions.
The proposed rule does not contain explicit specific risk capital
requirements for exposures to commodities and foreign exchange
positions. Question 10: The agencies seek comment on the extent and
materiality of specific risk for commodities and foreign exchange
positions and on whether and how a specific risk capital requirement
for those positions could be developed under both the internal models
and standard approaches.
7. Standard Specific Risk Capital Requirement
The standard specific risk add-ons are largely unchanged from the
current market risk capital rule, as summarized above. The proposed
rule would make the following modifications to the treatment of covered
debt positions, largely to parallel the increased recognition of
external ratings in the New Accord. The government category would be
expanded to include all sovereign debt, and the risk weight for
sovereign debt would change from zero percent to a range from zero to
12 percent based on the external rating of the obligor and remaining
contractual maturity of the covered debt position. The proposed rule
would change the qualifying category to include all non-sovereign
covered debt positions that are (i) rated investment grade by at least
two nationally recognized statistical rating organizations (NRSROs);
(ii) rated investment grade by one NRSRO and not rated less than
investment grade by any other NRSRO; and (iii) unrated debt of
financial firms and of other firms that have publicly traded securities
or instruments, provided the bank deems the debt to have credit risk
comparable to that of investment grade. The risk weight in the other
category would be raised from 8 percent to 12 percent for covered debt
positions rated more than two categories below investment grade.
Finally, the proposed rule would expand the recognition of netting
effects for covered debt positions. In this regard, there would be no
standard specific risk add-on when a covered debt position is fully
hedged by a total return swap (or similar instrument where there is a
matching of payments and changes in market value of the position) and
there is an exact match between the reference obligation of the swap
and the covered debt position and between the maturity of the swap and
the covered debt position.
If a set of transactions consisting of a covered debt position and
its credit derivative hedge does not meet these criteria for no
specific risk add-on, the add-on would be equal to 20 percent of the
specific risk capital requirement for the side of the transaction with
the higher specific risk add-on when the credit risk of the position is
fully hedged by a total return swap, credit default swap or similar
instrument and there is an exact match in terms (including maturity) of
the reference obligation of the credit hedge and the covered debt
position, and of the currency of the credit derivative and the covered
debt position.
[[Page 55968]]
For a set of transactions that consists of a covered debt position
and its credit hedge but do not meet the criteria for full offset or
the 80 percent offset above, the standard specific risk add-on for the
set would be the standard specific risk add-on for the side of the
transaction with the higher specific risk capital requirement.
8. Incremental Default Risk Capital Requirement
Under the proposed rule, a bank that models specific risk for one
or more portfolios of covered positions would be required to measure
the incremental default risk of those positions. Incremental default
risk would be defined as the default risk of a covered position that is
not reflected in the bank's VaR-based measure because it reflects risk
beyond a 10-business-day horizon and a 99 percent confidence level. In
the case of a securitization exposure, incremental default risk
includes the risk of losses that could result from default of the
assets underlying the securitization exposure. A bank would be required
to measure incremental default risk for both covered debt and equity
positions.
Under the proposed rule, a bank may use one or more internal models
to measure its incremental default risk. The agencies propose to set
the soundness standard for the incremental default risk capital
requirement at the 99.9th percentile, rather than the 99th percentile
generally used to capture market risk. Incremental default risk would
be measured consistent with a one-year time horizon and a one-tailed,
99.9 percent confidence level (that is, comparable to the internal
ratings-based approach under the proposed advanced capital adequacy
framework), under the assumption of a constant level of risk and
adjusted where appropriate to reflect the impact of liquidity,
concentrations, hedging, and optionality. An incremental default risk
capital requirement would be consistent with an internal ratings-based
capital requirement for credit risk if it produced a default risk
measure for an infinitely granular portfolio over a one-year time
horizon that roughly equals the credit risk charge under the proposed
advanced capital adequacy framework.
The proposed assumption of a constant level of risk reflects that a
bank makes decisions about capital and business planning over a horizon
that is longer than the liquidity horizon of many of its trading
portfolios. It assumes that, while the bank would likely change its mix
of positions in the event of market losses, it would not automatically
reduce its aggregate level of risk-taking. The agencies believe that
this assumption is more realistic than assuming that a bank's trading
positions at a point in time would be held constant over a longer
horizon.
The agencies are evaluating how a bank should adjust the
incremental default risk capital requirement to adjust for the impact
of liquidity, concentrations, hedging, and optionality. One possible
approach to liquidity would be to measure default risk out to an
appropriate liquidity horizon. The liquidity horizon of a position or
portfolio is the amount of time it takes to sell the position or hedge
all of its material risks. To produce a prudent measure of incremental
default risk, a bank would set the liquidity horizon in a conservative
manner reflecting stressed market conditions and the bank's own
policies and procedures for identifying stale positions. Some covered
debt and equity positions such as publicly traded equities may have a
liquidity horizon shorter than the VaR-based measure's 10-business-day
horizon and thus would not have an incremental default risk capital
requirement.
The proposed adjustment of the incremental default risk measure for
concentrations of positions would require a bank to consider all types
of concentrations, including name concentration and market
concentration, when measuring incremental default risk. The adjustment
for hedging would reflect offsets of short and long positions in a
single instrument when they are expected to be maintained at least over
the liquidity horizon. The incremental default risk measure could
include the effects of optionality by reflecting the nonlinearity of
options or other nonlinear positions when it has a material impact on
default risk. The agencies note that nonlinearity would be relevant for
products such as synthetic collateralized debt tranches or nth to
default baskets, where the loss upon the default of one name depends on
which other names are defaulting in the same time period. Question 11:
The agencies request comment on how a bank should adjust the
incremental default risk capital requirement to adjust for the impact
of liquidity, concentrations, hedging, and optionality.
The proposed rule would provide flexibility to a bank in developing
an approach for the calculation of any incremental default risk capital
requirement for a covered position. At present, the agencies anticipate
that most, if not all, banks would utilize a separate model for
calculating the incremental default risk capital requirement, given the
difficulties of modeling to two different soundness standards. Question
12: The agencies request comment on all aspects of the proposal to
reflect in the market risk capital requirement a measure of incremental
default risk. Specifically, the agencies seek comment on the
feasibility of measuring incremental default risk at a one-year, 99.9
percent confidence level and the appropriateness of the assumption of a
constant level of risk.
A bank's primary Federal supervisor would review its internal model
for incremental default risk and approve its use for regulatory capital
purposes. The incremental default risk capital requirement would not be
subject to the multiplier described in paragraphs (a)(2)(B) and (c) of
section 4 of the proposed rule. A bank could adjust its incremental
default capital requirement to minimize double-counting of default risk
already reflected in the 10-business-day, 99 percent confidence level
VaR-based measure using an approach agreed upon with its primary
Federal supervisor.
In order to provide sufficient time for banks to develop
methodologies to capture fully incremental default risk, a bank would
have until January 1, 2010 to obtain the approval of its primary
Federal supervisor to adopt an approach to measure incremental default
risk. Early adoption would be encouraged. If a bank subject to the
general risk-based capital rules is unable to develop internal models
for incremental default risk on or after January 1, 2010, it would be
required to use the standard method for specific risk. If a bank
subject to the proposed advanced capital adequacy framework is unable
to develop an approach to incremental default risk on or after January
1, 2010, it would be required to use the proposed advanced capital
adequacy framework to calculate its incremental default risk capital
requirement.
The agencies note that they are working with the banking industry
through the Accord Implementation Group of the BCBS to develop guidance
on acceptable approaches to determining the incremental default risk
capital charge. Question 13: The agencies request comment on the extent
to which banks, at present, measure incremental default risk and the
prospects for development of methodologies to capture this risk fully
in internal models by the proposed January 1, 2010 deadline. The
agencies also request comment on the fallback methods proposed for
banks unable to develop an internal model to capture
[[Page 55969]]
incremental default risk by January 1, 2010.
9. Disclosure Requirements
The proposed revisions would impose disclosure requirements
designed to improve market discipline on the top-tier consolidated bank
that is subject to the market risk capital rule. The agencies recognize
the importance of market discipline in encouraging sound risk
management practices and fostering financial stability. With sufficient
relevant information, market participants can better evaluate a bank's
risk management performance, earnings potential, and financial
strength. Many of the proposed disclosure requirements reflect
information already disclosed publicly by the banking industry. A bank
would be encouraged, but not required, to make these disclosures in a
central location on its Web site.
Consistent with the proposed advanced capital adequacy framework,
the proposed revisions would require a bank to comply with the
requirements of section 8 of the proposed rule unless it is a
consolidated subsidiary of another depository institution or bank
holding company that is subject to the disclosure requirements. A bank
subject to section 8 would be required to adopt a formal disclosure
policy approved by its board of directors that addresses the bank's
approach for determining the disclosures it makes. The policy must
address the associated internal controls and disclosure controls and
procedures. The board of directors and senior management must verify
that the bank has made all required disclosures and maintains effective
internal controls and disclosure controls and procedures. The chief
financial officer would be required to certify that disclosures
required by the proposed rule are appropriate, and the board of
directors and senior management are responsible for establishing and
maintaining an effective internal control structure over financial
reporting, including the information required by this proposed rule.
The proposed revisions would require a bank, at least quarterly, to
disclose publicly for each portfolio of covered positions (i) the high,
low, and mean VaR-based measures over the reporting period; (ii)
separate VaR-based measures for interest rate risk, credit spread risk,
equity price risk, foreign exchange rate risk, and commodity price
risk; and (iii) a comparison of VaR-based measures with actual results
and analysis of important outliers. A bank would be required to make
qualitative disclosures at least annually, or more frequently in the
event of material changes, of the following information: (i) The
composition of material portfolios of covered positions; (ii) the
bank's valuation policies, procedures, and methodologies; (iii) the
characteristics of its internal models; (iv) a description of its
approaches for validating the accuracy of its internal models and
modeling processes; (v) a description of the stress tests applied to
each market risk factor; (vi) the results of a comparison of the bank's
internal estimates with actual outcomes during a sample period not used
in model development; and (vii) the soundness standard on which its
internal capital adequacy assessment is based, including a description
of the methodologies used to achieve a capital adequacy assessment that
is consistent with the soundness standard and the requirements of the
market risk capital rule.
In addition to the public disclosures that would be required by the
consolidated bank, the agencies would require certain regulatory
reporting from all banks applying the market risk capital rule in order
to assess the reasonableness and accuracy of the bank's calculation of
its minimum capital requirements under this rule and the adequacy of
the bank's capital in relation to its risks. The agencies believe that
requiring certain common reporting across banks would facilitate
comparable application of the proposed rule. Proposed regulatory
reporting requirements for banks subject to the rule are the subject of
a separate joint notice and request for comment by the agencies
[reference].
Question 14: The agencies seek comment on all aspects of the
proposed public disclosure requirements.
Regulatory Flexibility Act Analysis
The Regulatory Flexibility Act (RFA) requires an agency that is
issuing a proposed rule to prepare and make available for public
comment an initial regulatory flexibility analysis that describes the
impact of the proposed rule on small entities. 5 U.S.C. 603(a). The RFA
provides that an agency is not required to prepare and publish an
initial regulatory flexibility analysis if the agency certifies that
the proposed rule will not, if promulgated, have a significant economic
impact on a substantial number of small entities. 5 U.S.C. 605(b).
Under regulations issued by the Small Business Administration (13
CFR 121.201), a ``small entity'' includes a bank holding company,
commercial bank, or savings association with assets of $165 million or
less.\16\ The proposed rule would require a bank holding company, bank,
or savings association to maintain regulatory capital against the
market risk of covered positions. The proposed rule would apply only if
the bank holding company, bank, or savings association has aggregated
trading assets and liabilities equal to 10 percent or more of quarter
end total assets, or $1 billion or more. The agencies estimate that no
small bank holding company, bank, or savings association would satisfy
these criteria, and that no small entities would be subject to this
rule. Accordingly, each agency certifies that the proposed rule will
not, if promulgated in final form, have a significant economic impact
on a substantial number of small entities.
---------------------------------------------------------------------------
\16\ Currently, there are approximately 2,934 small bank holding
companies, 1,090 small national banks, 491 small State member banks,
3,249 small State nonmember banks, and 446 small savings
Associations.
---------------------------------------------------------------------------
OCC/OTS Executive Order 12866
Executive Order 12866 requires Federal agencies to prepare a
regulatory impact analysis for agency actions that are found to be
``significant regulatory actions.'' ``Significant regulatory actions''
include, among other things, rulemakings 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. The OCC and OTS each has
determined that its portion of the rule is not a significant regulatory
action.
OCC/OTS Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 (Pub. L. 104-4) (UMRA)
requires that an agency prepare a budgetary impact statement before
promulgating a rule that includes a Federal mandate that may result in
the expenditure by state, local, and tribal governments, in the
aggregate, or by the private sector of $100 million or more (adjusted
annually for inflation) in any one year. The current inflation-adjusted
expenditure threshold is $119.6 million. If a budgetary impact
statement is required, section 205 of the UMRA also requires an agency
to identify and consider a reasonable number of regulatory alternatives
before promulgating a rule. The OCC and OTS each have determined that
their respective proposed rule will not result in expenditure by state,
local, and tribal governments, or by the private sector, of
[[Page 55970]]
$119.6 million or more. Accordingly, neither the OCC nor OTS has
prepared a budgetary impact statement or specifically addressed the
regulatory alternatives considered.
Paperwork Reduction Act
A. Request for Comment on Proposed Information Collection
In accordance with the requirements of the Paperwork Reduction Act
of 1995, the agencies may not conduct or sponsor, and the respondent is
not required to respond to, an information collection unless it
displays a currently valid Office of Management and Budget (OMB)
control number. The agencies are requesting comment on a proposed
information collection. The agencies are also giving notice that the
proposed collection of information has been submitted to OMB for review
and approval.
Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the agencies' functions, including whether the
information has practical utility;
(b) The accuracy of the estimates of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start up costs and costs of operation,
maintenance, and purchase of services to provide information.
Comments should be addressed to:
OCC: Communications Division, Office of the Comptroller of the
Currency, Public Information Room, Mail stop 1-5, Attention: 1557-NEW,
250 E Street, SW., Washington, DC 20219. In addition, comments may be
sent by fax to 202-874-4448, or by electronic mail to
[email protected]. You can inspect and photocopy the comments
at the OCC's Public Information Room, 250 E Street, SW., Washington, DC
20219. You can make an appointment to inspect the comments by calling
202-874-5043.
Board: You may submit comments, identified by the Docket number, by
any of the following methods:
Agency Web site: http://www.federalreserve.gov. Follow the
instructions for submitting comments on the http://
www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected]. Include docket
number in the subject line of the message.
Fax: 202-452-3819 or 202-452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
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 http://www.federalreserve.gov/generalinfo/foia/
ProposedRegs.cfm as 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 Streets, NW.) between 9 a.m. and 5 p.m. on
weekdays.
FDIC: You may submit written comments, which should refer to 3064-
AD10, by any of the following methods:
Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow the instructions for submitting comments
on the FDIC Web site.
Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: [email protected].
Mail: Steve Hanft, PRA Clearance Officer, Legal Division,
FDIC, 550 17th Street, NW., Washington, DC 20429.
Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m.
Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal/propose/html
including any personal information provided. Comments may be inspected
at the FDIC Public Information Center, Room 100, 801 17th Street, NW.,
Washington, DC, between 9 a.m. and 4:30 p.m. on business days.
OTS: Information Collection Comments, Chief Counsel's Office,
Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552;
send a facsimile transmission to (202) 906-6518; or send an e-mail to
[email protected]. OTS will post comments and the
related index on the OTS Internet site at http://www.ots.treas.gov. In
addition, interested persons may inspect the comments at the Public
Reading Room, 1700 G Street, NW., by appointment. To make an
appointment, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov">public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-7755.
A copy of the comments may also be submitted to the OMB desk
officer for the agencies: By mail to U.S. Office of Management and
Budget, 725 17th Street, NW., 10235, Washington, DC 20503 or
by facsimile to 202-395-6974, attention: Federal Banking Agency Desk
Officer.
B. Proposed Information Collection
Title of Information Collection: Risk-Based Capital Standards:
Market Risk.
Frequency of Response: Varied--some requirements are done at least
quarterly and some at least annually.
Affected Public:
OCC: National banks and Federal branches and agencies of foreign
banks.
Board: State member banks and bank holding companies.
FDIC: Insured State non-member banks, insured State branches of
foreign banks, and certain subsidiaries of these entities.
OTS: Savings associations and certain of their subsidiaries.
Abstract: The information collection requirements are found in
sections 3, 5, 6, and 9 of the proposed rule. They will enhance risk
sensitivity and introduce requirements for public disclosure of certain
qualitative and quantitative information about a bank's or bank holding
companies' market risk. The collection of information is necessary to
ensure capital adequacy according to the level of market risk.
Section-by-section Analysis. Section 3 sets forth the requirements
for applying the market risk framework. Section 3(a)(1)(i) requires
clearly defined policies and procedures for determining which trading
assets are trading positions and specifies what must be taken into
account. Section 3(a)(2) requires a clearly defined trading and hedging
strategy for trading positions approved by senior management and
specifies what the strategy must articulate. Section 3(b)(1) requires
clearly defined policies and procedures for actively managing all
covered positions and specifies the minimum that they must require.
Section 5(b)(1) specifies what internal models must include and
address. Sections 6(a) and 6(b) require prior written approvals for
incremental default risk. Section 8(b) requires a formal disclosure
policy approved by the board of directors that addresses the bank's
approach for determining the market risk disclosures it makes.
[[Page 55971]]
Estimated Burden
The burden associated with this collection of information may be
summarized as follows:
OCC
Number of Respondents: 10.
Estimated Burden Per Respondent: 680 hours.
Total Estimated Annual Burden: 6,800 hours.
Board
Number of Respondents: 22.
Estimated Burden Per Respondent: 680 hours.
Total Estimated Annual Burden: 14,960 hours.
FDIC
Number of Respondents: 2.
Estimated Burden Per Respondent: 680 hours.
Total Estimated Annual Burden: 1,360 hours.
OTS
Number of Respondents: 1.
Estimated Burden Per Respondent: 2088 hours.
Total Estimated Annual Burden: 2088 hours.
Text of the Proposed Common Rules (All Agencies)
The text of the proposed common rules appears below:
[Rule] is revised to read as follows:
Section 1 Purpose, Applicability, and Reservation of Authority
Section 2 Definitions
Section 3 Requirements for Application of the Market Risk Capital
Rule
Section 4 Adjustments to the Risk-Based Capital Ratio Calculations
Section 5 Specific Risk
Section 6 Incremental Default Risk
Section 7 Standard Method for Specific Risk
Section 8 Market Risk Disclosures
Section 1. Purpose, Applicability, and Reservation of Authority
(a) Purpose. This rule establishes risk-based capital requirements
for banks with significant exposure to market risk and provides methods
for these banks to calculate their risk-based capital requirements for
market risk. This rule supplements and adjusts the risk-based capital
calculations under [the general risk-based capital rules] and [the
proposed advanced capital adequacy framework] and establishes public
disclosure requirements.
(b) Applicability--(1) This rule applies to any bank with aggregate
trading assets and liabilities (as reported in the bank's most recent
quarterly Consolidated Report of Condition and Income (Call Report) or
as defined in the Instructions to the Thrift Financial Report and as
computed at the end of the most recent calendar quarter), equal to:
(i) 10 percent or more of quarter-end total assets as reported on
the most recent quarterly Call Report or Thrift Financial Report; or
(ii) $1 billion or more.
(2) The [Agency] may apply this rule to any bank if the [Agency]
deems it necessary or appropriate because of the level of market risk
of the bank or to ensure safe and sound banking practices.
(3) The [Agency] may exclude a bank that meets the criteria of
paragraph (b)(1) of this section from coverage under this rule if the
[Agency] determines that the exclusion is appropriate based on the
level of market risk of the bank and is consistent with safe and sound
banking practices.
(c) Reservation of authority--(1) The [Agency] may require a bank
to hold an amount of capital greater than otherwise required under this
rule if the [Agency] determines that the bank's capital requirement for
market risk as calculated under this rule is not commensurate with the
market risk of the bank's covered positions. In making determinations
under this paragraph, the [Agency] will apply notice and response
procedures generally in the same manner as the notice and response
procedures described in [12 CFR 3.12, 12 CFR 263.202, 12 CFR 325.6(c),
12 CFR 567.3(d)].
(2) If the [Agency] determines that the risk-based capital
requirement calculated under this rule by the bank for one or more
covered positions or portfolios of covered positions is not
commensurate with the risks associated with those positions or
portfolios, the [Agency] may require the bank to assign a different
risk-based capital requirement to the positions or portfolios that more
accurately reflects the risk of the positions or portfolios.
(3) The [Agency] may also require a bank to calculate risk-based
capital requirements for specific positions or portfolios under this
rule, or under [the proposed advanced capital adequacy framework] or
[the general risk-based capital rules], as appropriate, to more
accurately reflect the risks of the positions.
(4) Nothing in this rule limits the authority of the [Agency] under
any other provision of law or regulation to take supervisory or
enforcement action, including action to address unsafe or unsound
practices or conditions, deficient capital levels, or violations of
law.
Section 2. Definitions
For purposes of this rule, the following definitions apply:
Bank holding company is defined in section 2(a) of the Bank Holding
Company Act of 1956 (12 U.S.C. 1841(a)).
Commodity position means a position for which price risk arises
from changes in the value of a commodity.
Covered position means the following positions:
(1) A trading asset or trading liability (whether on- or off-
balance sheet),\1\ as reported on Schedule RC-D of the Call Report,
Schedule HC-D of the Consolidated Financial Statements for Bank Holding
Companies, or as defined in the Instructions to the Thrift Financial
Report, that meets the following conditions:
---------------------------------------------------------------------------
\1\ Securities subject to repurchase and lending agreements are
included as if they are still owned by the lender.
---------------------------------------------------------------------------
(i) The position is a trading position or hedges another covered
position \2\ and
---------------------------------------------------------------------------
\2\ A position that hedges a trading position must be within the
scope of the bank's hedging strategy described in paragraph (a)(2)
of section (3).
---------------------------------------------------------------------------
(ii) The position is free of any restrictive covenants on its
tradability or the bank is able to hedge the material risk elements of
the position in a two-way market.
(2) A foreign exchange or commodity position, whether or not a
trading asset or trading liability (excluding any structural position
in a foreign currency that the bank chooses to exclude with prior
supervisory approval).
(3) Notwithstanding paragraphs (1) and (2) of this definition, a
covered position does not include:
(i) An intangible asset, including any servicing asset;
(ii) Any hedge of a trading position that the [Agency] determines
to be outside the scope of the bank's hedging strategy required in
paragraph (a)(2) of section 3;
(iii) Any position that, in form or substance, acts as a liquidity
facility that provides support to asset-backed commercial paper;
(iv) A credit derivative recognized as a guarantee for risk-
weighted asset amount calculation purposes under [the proposed advanced
capital adequacy framework] or [the general risk-based capital rules],
as applicable, used to hedge a position that is not a covered position;
or
(v) A securitization position that is a residual securitization
position, unless the [Agency] has determined in writing that:
(A) A two-way market exists for the securitization position or, in
the case of
[[Page 55972]]
a securitization that relies solely on credit derivatives, for the
securitization position or all of its material risk components;
(B) The bank holds itself out as ready to buy and sell these
securitization positions for its own account on a regular and
continuous basis at a quoted price;
(C) The bank's internal models fully capture the general market
risk and specific risks of the bank's securitization positions and
sufficient market data are available to model these risks reliably; and
(D) The bank has adequate internal systems and controls for the
trading of securitization positions.
Credit derivative means a financial contract executed under
standard industry documentation that allows one party (the protection
purchaser) to transfer the credit risk of one or more exposures
(reference exposure) to another party (the protection provider).
Debt position means:
(1) Any security or similar instrument (such as a bond, debenture,
or note) that is not an equity position and evidences a liability of
the issuer;
(2) Preferred stock that is not an equity position; and
(3) A derivative for which the underlying position is described in
paragraph (1) or (2) of this definition.
Default risk means the risk of loss on a position that could result
from the failure of an obligor to make timely payments of principal or
interest on its debt obligation, and the risk of loss that could result
from bankruptcy, insolvency, or similar proceeding. In the case of
credit derivatives, default risk means the risk of losses that could
result from the default of the reference exposures.
Depository institution is defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
Equity position means:
(1) A security or instrument, whether voting or non-voting, that
represents a direct or indirect ownership interest in, and a residual
claim on, the assets or income of a company;
(2) A security or instrument that is mandatorily convertible into a
security or instrument described in paragraph (1) of this definition;
and
(3) Any other security or instrument, to the extent its return is
based on the performance of one or more securities or instruments
described in paragraph (1) of this definition.
Event risk means the risk of loss on a position that could result
from sudden and unexpected large changes in market prices or specific
events other than default of the issuer.
Financial firm means a depository institution, a bank holding
company, a savings and loan holding company (as defined in section
10(a)(1)(D) of the Home Owners' Loan Act (12 U.S.C. 1467a(a)(1)(D)), a
securities broker or dealer registered with the SEC, or a banking or
securities firm that the bank has determined is subject to consolidated
supervision and regulation comparable to that imposed on U.S. banks or
securities broker-dealers.
Foreign exchange position means a position for which price risk
arises from changes in foreign exchange rates.
General market risk means the risk of loss that could result from
broad market movements, such as changes in the general level of
interest rates, credit spreads, equity prices, foreign exchange rates,
or commodity prices.
Hedge means a position that offsets all or substantially all of the
price risk of another position.
Idiosyncratic variation means variation in the value of a position
that results from factors unique to that position.
Incremental default risk means the default risk of a position that
is not reflected in the bank's VaR-based measure under paragraph (c) of
section 3 of this rule. In the case of securitization positions,
incremental default risk includes the risk of losses that could result
from the default of the underlying assets.
Market risk means the risk of loss on a position that could result
from movements in market prices.
Nationally Recognized Statistical Rating Organization (NRSRO) means
an entity recognized by the Division of Market Regulation (or any
successor division) of the SEC as a nationally recognized statistical
rating organization for various purposes, including SEC Rule 15c3-1
(broker-dealer net capital requirements).
Over-the-counter (OTC) derivative means a derivative contract that
is not traded on an exchange that requires the daily receipt and
payment of cash-variation margin.
Publicly traded means a financial instrument that is traded on:
(1) Any exchange registered with the SEC as a national securities
exchange under section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the financial
instrument.
Qualifying securities borrowing transaction means a cash-
collateralized securities borrowing transaction that meets the
following conditions:
(1) The transaction is based on liquid and readily marketable
securities;
(2) The transaction is marked-to-market daily;
(3) The transaction is subject to daily margin maintenance
requirements; and
(4)(i) The transaction is a securities contract for the purposes of
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified
financial contract for the purposes of section 11(e)(8) of the Federal
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract
between or among financial institutions for the purposes of sections
401-407 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR part
231); or
(ii) If the transaction does not meet the criteria in paragraph
(4)(i) of this definition, either:
(A) The bank has conducted sufficient legal review to reach a well-
founded conclusion that:
(1) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set off collateral promptly upon an event of
counterparty default, including in a bankruptcy, insolvency, or other
similar proceeding of the counterparty; and
(2) Under applicable law of the relevant jurisdiction, its rights
under the agreement are legal, valid, binding, and enforceable and any
exercise of rights under the agreement will not be stayed or avoided;
or
(B) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(1) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and
to liquidate or set off collateral promptly upon an event of
counterparty default; and
(2) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
Residual securitization position means any securitization position
subject to deduction under [the proposed advanced capital adequacy
framework] or subject to the following provisions under [the general
risk-based capital rules]: 12 CFR part 3, Appendix A, sections 4 (b)
and (f) (national banks); 12 CFR part 208, Appendix A, section
[[Page 55973]]
III.B.3.b and III.B.3.e (state member banks); 12 CFR part 225, Appendix
A.III.B.3.b and III.B.3.e (bank holding companies); 12 CFR part 325,
Appendix A.II.B.5 (state nonmember banks); and 12 CFR 567.6(b)(1) and
(2) (savings associations)
SEC means the U.S. Securities and Exchange Commission.
Securitization position means:
(1) An on- or off-balance sheet position arising from a transaction
in which:
(i) All or a portion of the credit risk of one or more underlying
positions is transferred to one or more third parties (other than
through a guarantee that transfers only the credit risk of an
individual residential mortgage);
(ii) The credit risk associated with the underlying positions has
been separated into at least two tranches reflecting different levels
of seniority;
(iii) Performance of the securitization positions depends upon the
performance of the underlying positions; and
(iv) All, or substantially all, of the underlying positions are
financial positions (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, corporate bonds, or equity securities); and
(2) A mortgage-backed pass-through security guaranteed by Fannie
Mae or Freddie Mac.
Sovereign entity means a central government (including the U.S.
government) or an agency, department, ministry, or central bank of a
central government.
Specific risk means the risk of loss on a position that could
result from factors other than broad market movements and includes
event and default risk, and idiosyncratic variations in rates, spreads,
prices, or other risk factors.
Term repo-style transaction means a repurchase or reverse
repurchase transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the bank acts as agent
for a customer and indemnifies the customer against loss, that has an
original maturity in excess of one business day, provided that:
(1) The transaction is based solely on liquid and readily
marketable securities or cash;
(2) The transaction is marked-to-market daily and subject to daily
margin maintenance requirements;
(3) The transaction is executed under an agreement that provides
the bank the right to accelerate, terminate, and close-out the
transaction on a net basis and to liquidate or set off collateral
promptly upon an event of default (including bankruptcy, insolvency, or
similar proceeding) of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions; \3\ and
---------------------------------------------------------------------------
\3\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' or ``repurchase agreements'' under section
555 or 559, respectively, of the Bankruptcy Code (11 U.S.C. 555 or
559), qualified financial contracts under section 11(e)(8) of the
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting
contracts between or among financial institutions under sections
401-407 of the Federal Deposit Insurance Corporation Improvement Act
of 1991 (12 U.S.C. 4407), or the Federal Reserve Board's Regulation
EE (12 CFR part 231).
---------------------------------------------------------------------------
(4) The bank has conducted and documented sufficient legal review
to conclude with a well-founded basis that the agreement meets the
requirements of paragraph (3) of this definition and is legal, valid,
binding, and enforceable under applicable law in the relevant
jurisdictions.
Tier 1 capital is defined in [the general risk-based capital rules]
or [the proposed advanced capital adequacy framework], as applicable.
Tier 2 capital is defined in [the general risk-based capital rules]
or [the proposed advanced capital adequacy framework], as applicable.
Tier 3 capital is subordinated debt that is unsecured, is fully
paid up, has an original maturity of at least two years, is not
redeemable before maturity without prior approval of the [Agency],
includes a lock-in clause precluding payment of either interest or
principal (even at maturity) if the payment would cause the issuing
bank's risk-based capital ratio to fall or remain below the minimum
required under [the general risk-based capital rules] or [the proposed
advanced capital adequacy framework], as applicable, and does not
contain and is not covered by any covenants, terms, or restrictions
that are inconsistent with safe and sound banking practices.
Trading position means a position that is held by the bank for the
purpose of short-term resale or with the intent of benefiting from
actual or expected price movements or to lock in arbitrage profits.
Two-way market means a market where there are enough independent
bona fide offers to buy and sell so that a price reasonably related to
the last sales price or current bona fide competitive bid and offer
quotations can be determined within one day and settled at such price
within a relatively short period of time conforming to trade custom.
Value-at-risk (VaR) means the estimate of the maximum amount that
the value of one or more positions could decline due to market price or
rate movements during a fixed holding period within a stated confidence
interval.
Section 3. Requirements for Application of the Market Risk Capital Rule
(a) Trading positions--(1) Identification of trading positions. A
bank must have clearly defined policies and procedures for determining
which of its trading assets and trading liabilities are trading
positions. These policies and procedures must take into account:
(i) The extent to which a position, or a hedge of its material
risks, can be marked-to-market daily by reference to a two-way market;
and
(ii) Possible impairments to the liquidity of a position or its
hedge.
(2) Trading and hedging strategies. A bank must have clearly
defined trading and hedging strategies for its trading positions that
are approved by senior management of the bank.
(i) The trading strategy must articulate the expected holding
period of, and the market risk associated with, each portfolio of
trading positions. The trading strategy must also articulate whether
the purpose of each portfolio of trading positions is to accommodate
customer flow, to engage in proprietary trading, or to make a market in
the positions.
(ii) The hedging strategy must articulate for each portfolio the
level of market risk the bank is willing to accept and must detail the
instruments, techniques, and strategies the bank will use to hedge the
risk of the portfolio.
(b) Management of covered positions--(1) Active management. A bank
must have clearly defined policies and procedures for actively managing
all covered positions. At a minimum, these policies and procedures must
require:
(i) Marking positions to market or to model on a daily basis;
(ii) Daily assessment of the bank's ability to hedge position and
portfolio risks, and of the extent of market liquidity;
(iii) Establishment and daily monitoring of limits on positions by
a risk control unit independent of the trading business unit;
(iv) Daily monitoring by senior management of information described
in paragraphs (b)(1)(i) through (b)(1)(iii) of this section;
[[Page 55974]]
(v) At least annual reassessment of established limits on positions
by senior management; and
(vi) At least annual assessments by qualified personnel of the
quality of market inputs to the valuation process, the soundness of key
assumptions, the reliability of parameter estimation in pricing models,
and the stability and accuracy of model calibration under alternative
market scenarios.
(2) Valuation of covered positions. The bank must have a process
for prudent valuation of its covered positions that includes policies
and procedures on the valuation of positions, marking to market or to
model, independent price verification, and valuation adjustments or
reserves. The valuation process must consider, as appropriate, unearned
credit spreads, close-out costs, early termination, investing and
funding costs, future administrative costs, liquidity, and model risk.
(c) Internal models. A bank must use one or more internal models to
calculate daily a VaR-based measure that reflects its general market
risk for all covered positions. The daily VaR-based measure may also
reflect the bank's specific risk for one or more portfolios of covered
debt and equity positions, if the internal models meet the requirements
of paragraph (b)(1) of section 5.
(1) A bank must obtain the prior written approval of the [Agency]
before using any internal model to calculate its risk-based capital
requirement under this rule or extending the use of a model for which
it has received prior written approval to an additional business line
or product type.
(2) A bank must meet all of the requirements of this section on an
ongoing basis. The bank must promptly notify the [Agency] when the bank
makes any change to any internal model used to calculate risk-based
capital requirements under this rule that would result in a material
change in the bank's risk-weighted asset amount for a portfolio of
covered positions, or when the bank makes any material change to its
modeling assumptions. The [Agency] may rescind its approval, in whole
or in part, of the use of any internal model if it determines that the
model no longer complies with this rule or fails to reflect accurately
the risks of the bank's covered positions.
(3) The bank must integrate its internal models into the daily risk
management process.
(4) The level of sophistication of a bank's internal models must be
commensurate with the nature and size of its covered positions. A
bank's internal models may use any of the generally accepted
approaches, such as variance-covariance models, historical simulations,
or Monte Carlo simulations, to measure market risk.
(5) The bank's internal models must use risk factors sufficient to
measure the market risk inherent in all covered positions. The risk
factors must include, as appropriate, interest rate risk, credit spread
risk, equity price risk, foreign exchange risk, and commodity price
risk. For material positions in the major currencies and markets,
modeling techniques must incorporate enough segments of the yield
curve--in no case less than six--to capture differences in volatility
and less than perfect correlation of rates along the yield curve.
(6) The bank's internal models must properly measure all of the
material risks in its covered positions, including basis risks and
prepayment risks.
(7) The bank's internal models must conservatively assess the risks
arising from less liquid positions and positions with limited price
transparency under realistic market scenarios.
(8) The bank must have a rigorous and well-defined process for
reestimation, reevaluation, and updating of its internal models to
ensure continued applicability and relevance.
(9) The VaR-based measure may incorporate empirical correlations
within and across risk factors, provided that the bank's process for
measuring correlations is sound. If the VaR-based measure does not
incorporate empirical correlations, the bank must add the separate VaR-
based measures for the appropriate market risk factors (interest rate
risk, credit spread risk, equity price risk, foreign exchange rate
risk, and/or commodity price risk) to determine its aggregate VaR-based
measure.
(10) The VaR-based measure must include the risks arising from the
non-linear price characteristics of options positions or positions with
embedded optionality and the sensitivity of the market value of the
positions to changes in the volatility of the underlying rates, prices,
or other key risk factors. A bank with a large or complex options
portfolio must measure the volatility of options positions or positions
with embedded optionality by different maturities and/or strikes, where
material.
(11) If a bank uses internal models to measure specific risk, the
internal models must satisfy the requirements in paragraph (b)(1) of
section 5.
(d) Quantitative requirements for VaR-based measure. (1) A bank
must calculate a VaR-based measure of the general market risk of its
covered positions and, if applicable under section 5, its specific risk
for one or more portfolios of covered debt and equity positions. A bank
may elect to include in its VaR-based measure term repo-style
transactions and residual securitization positions that are trading
assets or liabilities provided that the bank includes all such term
repo-style transactions or securitization positions and that it
includes them consistently over time.
(2) The VaR-based measure must be calculated on a daily basis using
a one-tailed, 99.0 percent confidence level, and a holding period
equivalent to a ten-business-day movement in underlying risk factors,
such as rates, spreads, and prices. To calculate VaR-based measures
using a ten-business-day holding period, the bank may calculate ten-
business-day measures directly or may convert VaR-based measures using
holding periods other than ten business days to the equivalent of a
ten-business-day holding period.
(3) The VaR-based measure must be based on a historical observation
period of at least one year. Data used to determine the VaR-based
measure must be relevant to the bank's actual exposures and of
sufficient quality to support the determination of risk-based capital
requirements. For banks that use a weighting scheme or other method for
the historical observation period, the effective observation period
must be at least one year. The bank must update data sets at least once
every three months or more frequently as market conditions warrant.
(e) Control, oversight, and validation mechanisms. (1) The bank
must have a risk control unit that reports directly to senior
management and is independent from the business trading units.
(2) The bank must validate its internal models initially and on an
ongoing basis. The bank's validation process must be independent of the
internal models' development, implementation, and operation, or the
validation process must be subjected to an independent review of its
adequacy and effectiveness. Validation must include:
(i) Evaluation of the conceptual soundness of (including
developmental evidence supporting) the internal models;
(ii) An ongoing monitoring process that includes verification of
processes and the comparison of the bank's model outputs with relevant
internal and external data sources or estimation techniques; and
(iii) An outcomes analysis process that includes the comparison of
a bank's internal estimates with actual outcomes during a sample period
not used in model development.
[[Page 55975]]
(3) The bank must stress-test the market risk of its covered
positions at a frequency appropriate to each portfolio, and in no case
less frequently than quarterly. The stress tests must take into account
concentration risk (including but not limited to concentrations in
single issuers, industries, sectors, or markets), illiquidity under
stressed market conditions, and risks arising from the bank's trading
activities that may not be adequately captured in the bank's internal
models.
(4) The bank must have an internal audit function independent of
business-line management that at least annually assesses the
effectiveness of the controls supporting the bank's market risk
measurement systems, including the activities of the business trading
units and of the independent risk control unit, and compliance with
policies and procedures.
(f) Internal assessment of capital adequacy. The bank must have a
rigorous process for assessing its overall capital adequacy in relation
to its market risk. The assessment must take into account concentration
and liquidity risk under stressed market conditions as well as other
risks that may not be captured appropriately in the VaR-based measure.
(g) Documentation. The bank must adequately document all material
aspects of its internal models, management and valuation of covered
positions, control, oversight, and validation mechanisms, and internal
assessment of capital adequacy.
Section 4. Adjustments to the Risk-Based Capital Ratio Calculations
(a) Risk-based capital ratio denominator. The bank must calculate
its risk-based capital ratio denominator as follows:
(1) Adjusted risk-weighted assets. The bank must calculate adjusted
risk-weighted assets, which equal risk-weighted assets (as determined
in accordance with [the proposed advanced capital adequacy framework]
or [the general risk-based capital rules], as applicable), with the
following adjustments:
(i) The bank must exclude the risk-weighted asset amounts of all
covered positions (except foreign exchange positions that are not
trading positions and over-the-counter derivative positions).
(ii) A bank subject to [the general risk-based capital rules] may
exclude receivables that arise from the posting of cash collateral and
are associated with qualifying securities borrowing transactions to the
extent the receivable is collateralized by the market value of the
borrowed securities;
(2) Measure for market risk. The bank must calculate the measure
for market risk which equals the sum of the following:
(i) VaR-based capital requirement. The VaR-based capital
requirement equals the higher of:
(A) The previous day's VaR-based measure; and
(B) The average of the daily VaR-based measures for each of the
preceding 60 business days multiplied by three, except as provided in
paragraph (c) of section 4 of this rule.
(ii) Any specific risk add-on. The specific risk add-on is
calculated in accordance with sections 5 and 7 of this rule.
(iii) Any incremental default risk capital requirement. The
incremental default risk capital requirement is calculated under
section 6 of this rule.
(iv) Any capital requirement for de minimis exposures. The [Agency]
may grant prior written approval to a bank to calculate a capital
requirement for de minimis exposures and risks using alternative
techniques that adequately measure associated market risk.
(3) Market risk equivalent assets. The bank must calculate market
risk equivalent assets as the measure for market risk (as calculated in
paragraph (a)(2) of this section) multiplied by 12.5.
(4) Denominator calculation. The bank must add market risk
equivalent assets (as calculated in paragraph (a)(3) of this section)
to adjusted risk-weighted assets (as calculated in paragraph (a)(1) of
this section). The resulting sum is the bank's risk-based capital ratio
denominator.
(b) Risk-based capital ratio numerator. The bank must calculate its
risk-based capital ratio numerator by allocating capital as follows:
(1) Credit risk allocation. The bank must allocate tier 1 and tier
2 capital equal to 8.0 percent of adjusted risk-weighted assets (as
calculated in paragraph (a)(1) of this section). A bank may not
allocate tier 3 capital to support credit risk (as calculated under
[the proposed advanced capital adequacy framework] or [the general
risk-based capital rules]).
(2) Market risk allocation. The bank must allocate tier 1, tier 2,
and tier 3 capital equal to the measure for market risk as calculated
in paragraph (a)(2) of this section. The sum of tier 2 and tier 3
capital allocated for market risk must not exceed 250 percent of tier 1
capital allocated for market risk. As a result, tier 1 capital
allocated in this paragraph (b)(2) must equal at least 28.6 percent of
the measure for market risk.
(3) Restrictions. (i) The sum of tier 2 capital (both allocated and
excess) and tier 3 capital (allocated under paragraph (b)(2) of this
section) may not exceed 100 percent of tier 1 capital (both allocated
and excess). Excess tier 1 capital means tier 1 capital that has not
been allocated in paragraphs (b)(1) and (b)(2) of this section. Excess
tier 2 capital means tier 2 capital that has not been allocated in
paragraph (b)(1) and (b)(2) of this section, subject to the
restrictions in paragraph (b)(3) of this section.
(ii) Term subordinated debt (and intermediate-term preferred stock
and related surplus) included in tier 2 capital (both allocated and
excess) may not exceed 50 percent of tier 1 capital (both allocated and
excess).
(4) Numerator calculation. The bank must add tier 1 capital (both
allocated and excess), tier 2 capital (both allocated and excess), and
tier 3 capital (allocated under paragraph (b)(2) of this section). The
resulting sum is the bank's risk-based capital ratio numerator.
(c) Backtesting. A bank must compare each of its most recent 250
business days' actual trading profit or loss (excluding fees,
commissions, reserves, and net interest income) with the corresponding
daily VaR-based measures and calibrated to a one-day holding period and
a one-tailed, 99.0 percent confidence level.
(1) Once each quarter, the bank must identify the number of
exceptions (that is, the number of business days for which the actual
daily net trading loss, if any, exceeds the corresponding daily VaR-
based measure) that have occurred over the preceding 250 business days.
(2) A bank must use the multiplication factor in Table 1 of this
rule to determine its VaR-based capital requirement for market risk
under paragraph (a)(2)(i) of this section until it obtains the next
quarter's backtesting results, unless the [Agency] advises the bank in
writing that a different adjustment or other action is appropriate.
Table 1.--Multiplication Factors Based on Results of Backtesting
------------------------------------------------------------------------
Multiplication
Number of exceptions factor
------------------------------------------------------------------------
4 or fewer.............................................. 3.00
5....................................................... 3.40
6....................................................... 3.50
7....................................................... 3.65
8....................................................... 3.75
9....................................................... 3.85
10 or more.............................................. 4.00
------------------------------------------------------------------------
[[Page 55976]]
Section 5. Specific Risk
(a) General requirement. A bank must use one of the methods in this
section to measure the specific risk for each of its portfolios of
covered debt and equity positions.
(b) Modeled specific risk. A bank may use one or more internal
models to measure the specific risk of covered debt and equity
positions.
(1) Requirements for specific risk modeling. If a bank uses
internal models to measure the specific risk of a portfolio of covered
debt or equity positions, the internal models must:
(i) Explain the historical price variation in the portfolio;
(ii) Be responsive to changes in market conditions;
(iii) Be robust to an adverse environment, including signaling
rising risk in an adverse environment; and
(iv) Capture all material components of specific risk for the
covered debt and equity positions in the portfolio, except as permitted
under the transitional rule described in paragraph (d) of this section.
Specifically, the internal models must:
(A) Capture default risk, event risk, and idiosyncratic variations,
including, for debt positions, migration risk, and for equity
positions, events that are reflected in large changes or jumps in
prices;
(B) Capture material basis risks and demonstrate sensitivity to
material idiosyncratic differences between positions that are similar
but not identical; and
(C) Capture concentrations (magnitude and changes in composition)
and demonstrate sensitivity to changes in portfolio composition or
concentrations.
(2) Specific risk fully modeled for all portfolios. If the bank's
VaR-based measure captures all material aspects of specific risk for
all of its portfolios of covered debt and equity positions, the bank
has no specific risk add-on for purposes of paragraph (a)(2)(ii) of
section 4.
(3) Specific risk fully modeled for some but not all portfolios. If
the bank's VaR-based measure captures all material aspects of specific
risk for one or more of its portfolios of covered debt and equity
positions, the bank has no specific risk add-on for those portfolios
for purposes of paragraph (a)(2)(ii) of section 4. The bank must
calculate a specific risk add-on under the standard method as described
in section 7 of this rule for any portfolio of covered debt or equity
positions for which the bank's VaR-based measure does not capture all
material aspects of specific risk.
(c) Specific risk not modeled. If the bank's VaR-based measure does
not capture all material aspects of specific risk for any of its
portfolios of covered debt and equity positions, the bank must
calculate a specific-risk add-on for all portfolios of covered debt and
equity positions under the standard method as described in section 7 of
this rule.
(d) Transitional Rule--Specific risk partially modeled for one or
more portfolios. Until January 1, 2010, if a bank has received the
[Agency's] prior written approval to model the specific risk of one or
more portfolios of covered debt or equity positions but the [Agency]
has determined that the internal models do not adequately measure all
material aspects of specific risk for covered debt and equity positions
in the portfolio, including event and default risk, the bank must
calculate a specific risk add-on for the partially modeled portfolios
using one of the following methods:
(1) If the [Agency] has determined that the bank can validly
separate its VaR-based measure into a specific risk portion and a
general market risk portion, the specific risk add-on is equal to the
higher of:
(i) The previous day's specific risk portion; or
(ii) The average of the daily specific risk portions for each of
the preceding 60 business days.
(2) If the [Agency] has determined that the bank cannot validly
separate its VaR-based measure into a specific risk portion and a
general market risk portion, the specific risk add-on equals the higher
of:
(i) The sum of the previous day's VaR-based measures for portfolios
of covered debt and equity positions; or
(ii) The average of the sum of the daily VaR-based measures for
portfolios of covered debt and equity positions for each of the
preceding 60 business days.
Section 6. Incremental Default Risk
(a) General requirement. On and after January 1, 2010, a bank that
models specific risk for one or more portfolios of covered debt or
equity positions must use one of the methods in this section to measure
the incremental default risk of those portfolios. With the prior
written approval of the [Agency], a bank may adjust its incremental
default risk capital requirement to minimize double-counting of default
risk already reflected in the 10-business-day, 99 percent confidence
level VaR-based measure. The incremental default risk capital
requirement is not subject to the multiplier described in paragraphs
(a)(2)(i)(B) and (c) of section 4.
(b) Modeled incremental default risk. With prior written approval
of [Agency], a bank may use one or more internal models to measure its
incremental default risk capital requirement. A bank that models its
incremental default risk must measure the incremental default risk of
its portfolios of covered debt or equity positions, consistent with a
one-year time horizon and a one-tailed, 99.9 percent confidence level,
under the assumption of a constant level of risk and adjusted where
appropriate to reflect the impact of liquidity, concentrations,
hedging, and optionality.
(c) Alternative for banks subject to [the proposed advanced capital
adequacy framework]. If a bank subject to [the proposed advanced
capital adequacy framework] does not have a model that meets the
criteria of paragraph (b) of this section for a portfolio of covered
debt or equity positions, the bank's incremental default risk capital
requirement for the portfolio is equal to the capital requirement
calculated for those positions under [the proposed advanced capital
adequacy framework].
(d) Alternative for banks subject to [the general risk-based
capital rules]. If a bank subject to [the general risk-based capital
rules] does not have a model that meets the criteria in paragraph (b)
of this section for a portfolio of covered debt or equity positions,
the bank must calculate a specific risk add-on for the portfolio using
the standard method under section 7. A bank that calculates a specific
risk add-on using the standard method described in section 7 for a
portfolio is not subject to an incremental default risk capital
requirement for that portfolio.
Section 7. Standard Method for Specific Risk
(a) General requirement. A bank using the standard method of
calculating the specific risk add-on must calculate it in accordance
with this section.
(b) Covered debt positions. The standard specific risk add-on for
covered debt positions is the sum of the risk-weighted asset amounts
for individual covered debt positions, as computed under this
paragraph. A bank must multiply the absolute value of the current
market value of each net long or short covered debt position by the
appropriate specific risk weighting factor in Table 2, subject to the
following requirements:
(1) For covered debt positions that are non-option derivatives, a
bank must risk-weight the market value of the effective notional amount
of the underlying debt instrument or index
[[Page 55977]]
portfolio. Swaps must be included as the notional positions in the
underlying debt instrument or portfolio, with a receiving side treated
as a long position and a paying side treated as a short position. For
covered debt positions that are options, whether long or short, a bank
must risk-weight the market value of the effective notional amount of
the underlying debt instrument or portfolio multiplied by the option's
delta;
(2) A bank may net long and short covered debt positions (including
derivatives) in identical debt issues or indices;
(3) There is no standard specific risk add-on when a covered debt
position is fully hedged by a total return swap (or similar instrument
where there is a matching of payments and changes in market value of
the position) and there is an exact match between the reference
obligation of the swap and the covered debt position and between the
maturity of the swap and the covered debt position;
(4) The standard specific risk add-on for a set of transactions
consisting of a covered debt position and its credit derivative hedge
that do not meet the criteria of paragraph (b)(3) of this section is
equal to 20 percent of the specific risk add-on for the side of the
transaction with the higher specific risk add-on when the credit risk
of the position is fully hedged by a total return swap, credit default
swap or similar instrument and there is an exact match in terms
(including maturity) of the reference obligation of the credit hedge
and the covered debt position, and of the currency of the credit
derivative and the covered debt position.
(5) The standard specific risk add-on for a set of transactions
consisting of a covered debt position and its hedge that do not meet
the criteria of either paragraph (b)(3) or (b)(4) of this section is
equal to the specific risk add-on for the side of the transaction with
the higher specific risk add-on.
Table 2.--Specific Risk Weighting Factors for Covered Debt Positions
----------------------------------------------------------------------------------------------------------------
Applicable NRSRO rating Specific risk
Category (illustrative rating Remaining contractual risk weight
example) maturity (percent)
----------------------------------------------------------------------------------------------------------------
Sovereign........................... Highest investment grade to ............................ 0
second highest investment
grade (for example, AAA to
AA-).
Third highest investment Residual term to final 0.25
grade to lowest investment maturity 6 months or less.
grade (for example, A+ to
BBB-).
............................ Residual term to final 1.00
maturity greater than 6 and
up to and including 24
months.
............................ Residual term to final 1.60
maturity exceeding 24
months
One category below ............................ 8.00
investment grade to two
categories below investment
grade (for example, BB+ to
B-).
More than two categories ............................ 12.00
below investment grade.
Unrated..................... ............................ 8.00
Qualifying.......................... Not applicable.............. Residual term to final 0.25
maturity 6 months or less.
Residual term to final 1.00
maturity greater than 6 and
up to and including 24
months.
Residual term to final 1.60
maturity exceeding 24
months.
Other............................... One category below ............................ 8.00
investment grade to two
categories below investment
grade (for example, BB+ to
B-).
More than two categories ............................ 12.00
below investment grade.
Unrated..................... ............................ 8.00
----------------------------------------------------------------------------------------------------------------
(c) The following definitions apply to this section:
(1) The sovereign category includes all debt instruments issued or
guaranteed by sovereign entities.
(2) The qualifying category includes debt instruments not issued or
guaranteed by sovereign entities that are:
(i) Rated investment grade by at least two NRSROs;
(ii) Rated investment grade by one NRSRO and not rated less than
investment grade by any other NRSRO; or
(iii) Unrated, but the bank deems to be of credit risk comparable
to that of investment grade and either:
(A) The issuer is a financial firm; or
(B) The issuer has publicly traded securities or instruments.
(3) The other category includes debt positions that are not
included in the sovereign or qualifying categories.
(d) Covered equity positions. The standard specific risk add-on for
covered equity positions is the sum of the risk-weighted asset amounts
of individual covered equity positions, as computed under this
paragraph (d):
(1) For covered equity positions that are non-option derivatives, a
bank must risk-weight the market value of the effective notional amount
of the underlying equity instrument or equity portfolio. Swaps must be
included as the effective notional position in the underlying equity
instrument or portfolio, with a receiving side treated as a long
position and a paying side treated as a short position.
(2) For covered equity positions that are options, whether long or
short, a bank must risk-weight the market value of the effective
notional amount of the underlying equity instrument or portfolio
multiplied by the option's delta.
(3) A bank may net long and short covered equity positions
(including derivatives) in identical equity issues or identical equity
indices. A bank may also net positions in depository receipts against
an opposite position in an identical equity in different markets,
provided that the bank includes the costs of conversion.
(4)(i) The bank must multiply the absolute value of the current
market
[[Page 55978]]
value of each net long or short covered equity position by a risk
weighting factor of 8.0 percent, or 4.0 percent if the equity is held
in a portfolio that is both liquid and well-diversified.\4\ For covered
equity positions that are index contracts comprising a well-diversified
portfolio of equity instruments, the absolute value of the current
market value of each net long or short position is multiplied by a
risk-weighting factor of 2.0 percent.
---------------------------------------------------------------------------
\4\ A portfolio is liquid and well-diversified if: (i) It is
characterized by a limited sensitivity to price changes of any
single equity issue or closely related group of equity issues held
in the portfolio; (ii) the volatility of the portfolio's value is
not dominated by the volatility of any individual equity issue or by
equity issues from any single industry or economic sector; (iii) it
contains a large number of individual equity positions, with no
single position representing a substantial portion of the
portfolio's total market value; (iv) it consists mainly of issues
traded on organized exchanges or in well-established over-the-
counter markets; and (v) a two-way market exists for all or
substantially all of the positions in the portfolio.
---------------------------------------------------------------------------
(ii) For covered equity positions arising from the following
futures-related arbitrage strategies, a bank may apply a 2.0 percent
risk-weighting factor to one side (long or short) of each position with
the opposite side exempt from a specific risk add-on:
(A) Long and short positions in exactly the same index at different
dates or in different market centers; or
(B) Long and short positions in index contracts at the same date in
different but similar indices.
(iii) For futures contracts on broadly based indices that are
matched by offsetting positions in a basket of stocks comprising the
index, a bank may apply a 2.0 percent risk weighting factor to the
futures and stock basket positions (long and short), provided that such
trades are deliberately entered into and separately controlled, and
that the basket of stocks is comprised of stocks representing at least
90 percent of the capitalization of the index.
Section 8. Market Risk Disclosures
(a) Scope. A bank must comply with this section unless it is a
consolidated subsidiary of a bank holding company or a depository
institution that is subject to these requirements.
(b) Disclosure policy. The bank must have a formal disclosure
policy approved by the board of directors that addresses the bank's
approach for determining the market risk disclosures it makes. The
policy must address the associated internal controls and disclosure
controls and procedures. The board of directors and senior management
must ensure that appropriate verification of the disclosures takes
place and that effective internal controls and disclosure controls and
procedures are maintained. The chief financial officer of the bank must
certify that the disclosures required by this section are appropriate,
and the board of directors and senior management are responsible for
establishing and maintaining an effective internal control structure
over financial reporting, including the disclosures required by this
section.
(c) Quantitative disclosures for internal models. For each
portfolio of covered positions, the bank must publicly disclose the
following information at least quarterly:
(1) The high, low, and mean VaR-based measures over the reporting
period;
(2) Separate VaR-based measures for interest rate risk, credit
spread risk, equity price risk, foreign exchange risk, and commodity
price risk; and
(3) A comparison of VaR-based estimates with actual gains or losses
experienced by the bank, with analysis of important outliers.
(d) Qualitative disclosures for internal models. The bank must
publicly disclose the following information at least annually, or more
frequently in the event of material changes:
(1) The composition of material portfolios of covered positions;
(2) The bank's valuation policies, procedures, and methodologies
for covered positions;
(3) The characteristics of the internal models used for purposes of
this rule;
(4) A description of the approach used for validating and
evaluating the accuracy of the internal models and modeling processes
for purposes of this rule;
(5) For each market risk factor (that is, interest rate risk,
credit spread risk, equity price risk, foreign exchange risk, and
commodity price risk), a description of the stress tests applied to the
positions subject to the factor;
(6) The results of a comparison of the bank's internal estimates
for purposes of this rule with actual outcomes during a sample period
not used in model development; and
(7) The soundness standard on which the bank's internal capital
adequacy assessment under this rule is based, including a description
of the methodologies used to achieve a capital adequacy assessment that
is consistent with the soundness standard and the requirements of this
rule.
[END OF COMMON TEXT]
List of Subjects
12 CFR Part 3
Administrative practices and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, reporting and recordkeeping requirements,
Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Administrative practice and procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State non-member banks.
12 CFR Part 566
Capital, reporting and recordkeeping requirements, Savings
associations.
Authority and Issuance
Adoption of Common Rule
The adoption of the proposed common rules by the agencies, as
modified by agency-specific text, is set forth below:
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons set forth in the common preamble, part 3 of chapter
I of title 12 of the Code of Federal Regulations is amended as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 3907 and 3909.
2. Appendix B to part 3 is revised to read as set forth at the end
of the common preamble:
Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment
3. Appendix B is further amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``OCC'';
b. Removing ``[the proposed advanced capital adequacy framework]''
wherever it appears and adding in its place 12 CFR part 3, Appendix C;
c. Removing ``[Rule]'' wherever it appears and adding in its place
``Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment''; and
[[Page 55979]]
d. Removing ``[the general risk-based capital rules]'' wherever it
appears and adding in its place 12 CFR part 3, Appendix A.
Federal Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, part 208 of
chapter II of title 12 of the Code of Federal Regulations is amended as
follows:
PART 208--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 208 continues to read as
follows:
Authority: Subpart A of Regulation H (12 CFR part 208, Subpart
A) is issued by the Board of Governors of the Federal Reserve System
(Board) under 12 U.S.C. 24, 36; sections 9, 11, 21, 25 and 25A of
the Federal Reserve Act (12 U.S.C. 321-338a, 248(a), 248(c), 481-
486, 601 and 611); sections 1814, 1816, 1818, 1831o, 1831p-l, 1831r-
l and 1835a of the Federal Deposit Insurance Act (FDI Act) (12
U.S.C. 1814, 1816, 1818, 1831o, 1831p-l, 1831r-l and 1835); and 12
U.S.C. 3906-3909.
2. Appendix E to part 208 is revised to read as set forth at the
end of the common preamble:
Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
3. Appendix E is further amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``Board'';
b. Removing ``[the proposed advanced capital adequacy framework]''
wherever it appears and adding in its place ``Appendix F'';
c. Removing ``[Rule]'' wherever it appears and adding in its place
``Appendix E to Part 208--Capital Adequacy Guidelines for State Member
Banks: Market Risk Measure''; and
d. Removing ``[the general risk-based capital rules]'' wherever it
appears and adding in its place 12 CFR part 208, Appendix A.
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the common preamble, part 225 of
chapter II of title 12 of the Code of Federal Regulations is amended as
follows:
PART 225--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
1. The authority citation for part 225 continues to read as
follows:
Authority: This part 1 (Regulation Y) is issued by the Board of
Governors of the Federal Reserve System (Board) under section 5(b)
of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1844(b)) (BHC Act); sections 8 and 13(a) of the International
Banking Act of 1978 (12 U.S.C. 3106 and 3108); section 7(j)(13) of
the Federal Deposit Insurance Act, as amended by the Change in Bank
Control Act of 1978 (12 U.S.C. 1817(j)(13)) (Bank Control Act);
section 8(b) of the Federal Deposit Insurance Act (12 U.S.C.
1818(b)); section 914 of the Financial Institutions Reform, Recovery
and Enforcement Act of 1989 (12 U.S.C. 1831i); section 106 of the
Bank Holding Company Act Amendments of 1970 (12 U.S.C. 1972); and
the International Lending Supervision Act of 1983 (Pub. L. 98-181,
title IX). The BHC Act is codified at 12 U.S.C. 1841, et seq.
2. Appendix E to part 225 is revised to read as set forth at the
end of the common preamble:
Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
3. Appendix E is further amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``Board'';
b. Removing ``[the proposed advanced capital adequacy framework]''
wherever it appears and adding in its place ``Appendix F'';
c. Removing ``[Rule]'' wherever it appears and adding in its place
``Appendix E to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Market Risk Measure''; and
d. Removing ``[the general risk-based capital rules]'' wherever it
appears and adding in its place 12 CFR part 225, Appendix A.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons set forth in the common preamble, part 325 of
chapter III of title 12 of the Code of Federal Regulations is amended
as follows:
PART 325--CAPITAL MAINTENANCE
1. The authority citation for part 325 continues to read as
follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12
U.S.C. 1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended
by Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).
2. Appendix C to part 325 is revised to read as set forth at the
end of the common preamble:
Appendix C to Part 325--Risk-Based Capital for State Nonmember Banks:
Market Risk
3. Appendix C is further amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``FDIC'';
b. Removing ``[the proposed advanced capital adequacy framework]''
wherever it appears and adding in its place ``Appendix D'';
c. Removing ``[Rule]'' wherever it appears and adding in its place
``Appendix C to Part 325--Risk-Based Capital for State Nonmember Banks:
Market Risk''; and
d. Removing ``[the general risk-based capital rules]'' wherever it
appears and adding in its place ``12 CFR part 325, Appendix A.''
Office of Thrift Supervision
2 CFR Chapter V
Authority and Issuance
For the reasons set forth in the common preamble, the Office of
Thrift Supervision proposes to add part 566 of chapter V of title 12 of
the Code of Federal Regulations to read as follows:
1. Add a new part 566 to read as follows:
PART 566--ADVANCED CAPITAL ADEQUACY FRAMEWORK AND MARKET RISK
ADJUSTMENT
Sec.
566.1 Purpose
Appendix A to Part 566 [Reserved]
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, and
1828(note).
Sec. 566.1 Purpose
(a) [Reserved]
(b) Market Risk. Appendix B of this part establishes risk-based
capital requirements for banks with significant exposure to market
risk, provides methods for these banks to calculate their risk-based
capital requirements for market risk, and prescribes public disclosure
requirements regarding market risk for these savings associations.
Appendix A to Part 566 [Reserved]
2. Appendix B to part 566 is added and revised to read as set forth
at the end of the common preamble.
3. Appendix B to part 566 is further amended by:
a. Removing ``[Agency]'' wherever it appears and adding in its
place ``OTS'';
b. Removing ``[the proposed advanced capital adequacy framework]''
wherever it appears and adding in its place ``12 CFR part 566, Appendix
A'';
c. Removing ``[Rule]'' wherever it appears and adding in its place
[[Page 55980]]
``Appendix B to Part 566--Market Risk Adjustment''; and
d. Removing ``[the general risk-based capital rules]'' wherever it
appears and adding in its place 12 CFR part 567.
Dated: September 5, 2006.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, September 11, 2006.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 5th day of September 2006.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: August 31, 2006.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. 06-7673 Filed 9-22-06; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P