Skip to main content
U.S. flag
An official website of the United States government
Dot gov
The .gov means it’s official. 
Federal government websites often end in .gov or .mil. Before sharing sensitive information, make sure you’re on a federal government site.
Https
The site is secure. 
The https:// ensures that you are connecting to the official website and that any information you provide is encrypted and transmitted securely.

FIL-5-98 Attachment

[Federal Register: December 30, 1997 (Volume 62, Number 249)]

[Rules and Regulations]

[Page 68063-68069]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30de97-31]




 

[[Page 68063]]


 

_______________________________________________________________________


 

Part V


 

Department of the Treasury

Office of the Comptroller of the Currency


 

12 CFR Part 3


 

Federal Reserve System


 

12 CFR Parts 208 and 225


 

Federal Deposit Insurance Corporation


 

12 CFR Part 325


 

_______________________________________________________________________


 

Risk-Based Capital Standards: Market Risk; Interim Rule


 

[[Page 68064]]


 

DEPARTMENT OF THE TREASURY


 

Office of the Comptroller of the Currency


 

12 CFR Part 3


 

[Docket No. 97-25]

RIN 1557-AB14


 

FEDERAL RESERVE SYSTEM


 

12 CFR Parts 208 and 225


 

[Regulations H and Y; Docket No. R-0996]


 

FEDERAL DEPOSIT INSURANCE CORPORATION


 

12 CFR Part 325


 

RIN 3064-AC14



 

Risk-Based Capital Standards: Market Risk


 

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of

Governors of the Federal Reserve System; and Federal Deposit Insurance

Corporation.


 

ACTION: Joint interim rule with request for comment.


 

-----------------------------------------------------------------------


 

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) (collectively, the Agencies) are

amending their respective risk-based capital standards for market risk

applicable to certain banks and bank holding companies with significant

trading activities. The amendment eliminates the requirement that when

an institution measures specific risk using its internal model, the

total capital charge for specific risk must equal at least 50 percent

of the standard specific risk capital charge. The amendment implements

a revision to the Basle Accord that permits such treatment for an

institution whose internal model adequately measures specific risk. The

rule will reduce regulatory burden for institutions with qualifying

internal models because they will no longer be required to calculate a

standard specific risk capital charge.


 

DATES: This interim rule is effective December 31, 1997. Comments must

be received by March 2, 1998.


 

ADDRESSES: Comments should be directed to:

OCC: Comments may be submitted to Docket No. 97-25, Communications

Division, Third Floor, Office of the Comptroller of the Currency, 250 E

Street, S.W., Washington DC 20219. Comments will be available for

inspection and photocopying at that address. In addition, comments may

be sent by facsimile transmission to FAX number (202) 874-5274, or by

electronic mail to regs.comment@occ.treas.gov.

Board: Comments directed to the Board should refer to Docket No. R-

0996 and may be mailed to Mr. William W. Wiles, Secretary, Board of

Governors of the Federal Reserve System, 20th Street and Constitution

Avenue, N.W., Washington DC 20551. Comments addressed to the attention

of Mr. Wiles may also be delivered to Room B-2222 of the Eccles

Building between 8:45 a.m. and 5:15 p.m. weekdays, or the security

control room in the Eccles Building courtyard on 20th Street, N.W.

(between Constitution Avenue and C Street) at any time. Comments may be

inspected in Room MP-500 of the Martin Building between 9:00 a.m. and

5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's

Rules Regarding Availability of Information.

FDIC: Send written comments to Robert E. Feldman, Executive

Secretary, Attention: Comments/OES, Federal Deposit Insurance

Corporation, 550 17th Street, N.W., Washington, DC 20429. Comments may

be hand-delivered to the guard station at the rear of the 17th Street

Building (located on F Street), on business days between 7:00 a.m. and

5:00 p.m. (FAX number (202) 898-3838; Internet address:

comments@fdic.gov). Comments may be inspected and photocopied in the

FDIC Public Information Center, Room 100, 801 17th Street, N.W.,

Washington, DC 20429, between 9:00 a.m. and 4:30 p.m. on business days.


 

FOR FURTHER INFORMATION CONTACT:


 

OCC: Roger Tufts, Senior Economic Advisor (202/874-5070), Capital

Policy Division; Margot Schwadron, Financial Analyst (202/874-5670),

Treasury and Market Risk; or Ronald Shimabukuro, Senior Attorney (202/

874-5090), Legislative and Regulatory Activities Division.

Board: Roger Cole, Associate Director (202/452-2618), James Houpt,

Deputy Associate Director (202/452-3358), Barbara Bouchard, Senior

Supervisory Financial Analyst (202/452-3072), Division of Banking

Supervision; or Stephanie Martin, Senior Attorney (202/452-3198), Legal

Division. For the hearing impaired only, Telecommunication Device for

the Deaf (TDD), Diane Jenkins (202/452-3544).

FDIC: William A. Stark, Assistant Director (202/898-6972), Miguel

Browne, Manager (202/898-6789), John J. Feid, Chief (202/898-8649),

Division of Supervision; Jamey Basham, Counsel (202/898-7265), Legal

Division, Federal Deposit Insurance Corporation, 550 17th Street, N.W.,

Washington DC 20429.


 

SUPPLEMENTARY INFORMATION:


 

Background


 

The Agencies' risk-based capital standards are based upon

principles contained in the July 1988 agreement entitled

``International Convergence of Capital Measurement and Capital

Standards'' (Accord). The Accord, developed by the Basle Committee on

Banking Supervision (Committee) and endorsed by the central bank

governors of the Group of Ten (G-10) countries (G-10 Governors),

provides a framework for assessing an institution's capital adequacy by

weighting its assets and off-balance-sheet exposures on the basis of

counterparty credit risk.\1\ In December 1995, the G-10 Governors

endorsed the Committee's amendment to the Accord (effective by year-end

1997) to incorporate a measure for exposure to market risk into the

capital adequacy assessment. On September 6, 1996, the Agencies issued

revisions to their risk-based capital standards implementing the

Committee's market risk amendment (61 FR 47358).

---------------------------------------------------------------------------


 

\1\ The G-10 countries are Belgium, Canada, France, Germany,

Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom,

and the United States. The Committee is comprised of representatives

of the central banks and supervisory authorities from the G-10

countries and Luxembourg.

---------------------------------------------------------------------------


 

Under the Agencies' market risk rules, banks and bank holding

companies (institutions) with significant trading activities must

measure and hold capital for exposure to general market risk arising

from fluctuations in interest rates, equity prices, foreign exchange

rates, and commodity prices and exposure to specific risk associated

with debt and equity positions in the trading portfolio. General market

risk refers to changes in the market value of on-balance-sheet assets

and off-balance-sheet items resulting from broad market movements.

Specific risk refers to changes in the market value of individual

positions due to factors other than broad market movements and includes

such risks as the credit risk of an instrument's issuer.

Under the Agencies' current rules, an institution must measure its

general market risk using its internal risk measurement model, subject

to certain qualitative and quantitative criteria, to calculate a value-

at-risk (VAR) based capital charge.\2\ An institution may


 

[[Page 68065]]


 

measure its specific risk through a valid internal model or by the so-

called standardized approach. The standardized approach uses a risk-

weighting process developed by the Committee that is applied to

individual instruments and through which debt and equity positions in

the institution's trading account are assessed a category-based fixed

capital charge. However, the Agencies' current rules provide that an

institution using an internal model to measure specific risk must hold

capital for specific risk at least equal to 50 percent of the specific

risk charge calculated using the standardized approach (referred to as

the minimum specific risk charge). If the portion of the institution's

VAR which is attributable to specific risk does not equal the minimum

specific risk charge, the institution's VAR-based capital charge is

subject to an add-on charge for the difference. The sum of these

capital charges is factored into an institution's risk-based capital

ratio.

---------------------------------------------------------------------------


 

\2\ The VAR-based capital charge is the higher of (i) the

previous day's VAR measure, or (ii) the average of the daily VAR

measures for each of the preceding 60 business days multiplied by a

factor of three. Beginning no later than one year after adopting the

market risk rules, an institution is required to backtest its

internal model. An institution may be required to apply a higher

multiplication factor, up to a factor of four, based on backtesting

results.

---------------------------------------------------------------------------


 

When the Agencies included the minimum specific risk charge as part

of the market risk rules, the Agencies recognized that dual

calculations of specific risk--that is, calculating specific risk in

the internal model as well as using the standardized approach to

establish the minimum specific risk charge--would be burdensome.

However, the Agencies' decision to include the minimum specific risk

charge was consistent with the Committee's conviction, at the time the

Committee adopted its market risk amendment, that a floor was necessary

to ensure that modeling techniques for specific risk adequately

measured that risk.

Since the Committee adopted the market risk amendment, many

institutions have significantly improved their modeling techniques and,

in particular, their modeling of specific risk. In September 1997 the

Committee determined that sufficient progress had been made to

eliminate the use of the minimum specific risk charge and the burden of

a separate calculation. Accordingly, the Committee revised the market

risk amendment to the Accord so that an institution using a valid

internal model to measure specific risk may use the VAR measures

generated by the model without being required to compare the model-

generated results to the minimum specific risk charge as calculated

under the standardized approach.\3\ The revisions specify that the

specific risk elements of internal models will be assessed consistently

with the assessment of the general market risk elements of such models

through review by the relevant supervisor and backtesting.

---------------------------------------------------------------------------


 

\3\ The revisions are described in the Committee's document

entitled ``Explanatory Note: Modification of the Basle Capital

Accord of July 1988, as Amended January 1996'' and is available

through the Board's and the OCC's Freedom of Information Office and

the FDIC's Public Information Center.

---------------------------------------------------------------------------


 

To implement this revision to the market risk amendment, the

Agencies are issuing an interim rule with a request for comment. As

discussed in the section entitled ``Interim Effectiveness of the

Rule,'' the Agencies have found that good cause necessitates making the

amendments herein effective immediately, without opportunity for public

comment or a delayed effective date. Effectiveness of the amendments

herein is on an interim basis, until the Agencies issue a final rule,

following public comment on this interim rule, in accordance with the

procedures specified in section 553 of the Administrative Procedure

Act, 5 U.S.C. 553. The interim rule applies only to the calculation of

specific risk under the market risk rules. All other aspects of the

market risk rules remain unchanged.


 

Description of the Interim Rule


 

An institution whose internal model does not adequately measure

specific risk must continue to calculate the standard specific risk

capital charge and add that charge to its VAR-based capital charge to

produce its total regulatory capital requirement for market risk. An

institution whose internal model adequately captures specific risk may

base its specific risk capital charge on the model's estimates.

The Agencies will review an institution's internal model to ensure

that the model adequately measures specific risk. In order to clarify

the risks that must be assessed in this regard, the rule contains a new

definition that states that specific risk means the changes in market

value of specific positions due to factors other than broad market

movements, including such risks as idiosyncratic variation as well as

event and default risk. In order to adequately capture specific risk,

an institution's internal model must explain the historical price

variation in the portfolio and be sensitive to changes in portfolio

concentrations (both magnitude and changes in composition), requiring

additional capital for greater concentrations. The Agencies will also

take into account whether an internal model is robust to an adverse

environment. The model's ability to capture specific risk must be

validated through backtesting aimed at assessing whether specific risk

is adequately captured. In addition, the institution must be able to

demonstrate that its methodologies adequately capture event and default

risk. An institution that has been able to demonstrate to its

supervisor that its internal model adequately captures specific risk

consistent with the preceding discussion may use its VAR-based capital

charge as its measure for market risk. Such an institution will have no

specific risk add-on.

An institution whose model addresses idiosyncratic risk but does

not adequately capture event and default risk will continue to have a

specific risk add-on. The specific risk add-on for such an institution

may be calculated using either one of two approaches, both of which

have the effect of subjecting the modeled specific risk elements of the

institution's internal risk model to a multiplier of four.\4\

---------------------------------------------------------------------------


 

\4\ The multiplier applicable to the modeled general market risk

elements will not be affected. Thus, the multiplier for general

market risk will continue to be three, unless a higher multiplier is

indicated by virtue of the institution's backtesting results for

general market risk, or unless no multiplier is applied because the

previous day's VAR for general market risk is higher than the 60-day

average times the multiplier.

---------------------------------------------------------------------------


 

Under the first approach, an institution's internal model must be

able to separate its VAR measure into general market risk and specific

risk components. The institution's measure for market risk would equal

the sum of the total VAR-based capital charge (typically three times

the internal model's general and specific risk measure), plus an add-on

consisting of the isolated specific risk component of the VAR measure.

Alternatively, an institution whose internal model does not separately

identify the specific and general market risk of its VAR measure, may

use as its measure for market risk the sum of the total VAR-based

capital charge, plus an add-on consisting of the VAR measure(s) of the

subportfolios of debt and equity positions that contain specific risk.

An institution using this approach normally would identify its sub-

portfolio structures prior to calculating market risk capital charges

and may not alter those sub-portfolio structures without supervisory

consultation.

An institution using its internal model for specific risk capital

purposes must backtest its internal model to assess whether observed

price variation arising from both general market risk and specific risk

are accurately


 

[[Page 68066]]


 

explained by the model. To assist in model validation, the institution

should perform backtests on subportfolios containing specific risk,

i.e., traded debt and equity positions. The institution should conduct

these backtests with the understanding that subportfolio backtesting is

a productive mechanism for assuring that instruments with higher levels

of specific risk, especially event or default risk, are being

accurately modeled. If backtests of subportfolios reflect an

unacceptable internal model, especially for unexplained price variation

that may be arising from specific risk, the institution should take

immediate action to improve the internal model and ensure that it has

sufficient capital to protect against associated risks.

The Agencies, based on information available to them, presently

feel that the industry is making significant progress in developing

methodologies for modeling specific risk, although progress relating to

measurement of event and default risk lags somewhat. The Agencies'

consultation over the past two years with other national supervisors on

the Committee has supported this view. The Agencies expect institutions

to continue improving their internal models and particularly to make

substantial progress in measuring event and default risk for traded

debt and equity instruments. The Agencies intend to work with the

industry in these efforts and believe that, over time, market standards

for measuring event and default risk will emerge. As individual

modeling methodologies are improved and become accepted within the

industry as effective measurement techniques for event and default

risk, the Agencies will consider permitting all internal models based

on that methodology to be applied without any add-on charge. The Basle

Supervisors Committee may issue general guidance for capturing event

and default risk for trading book instruments. Until such time as

standards for measuring event and default risk are established within

the industry, the Agencies intend to cooperate with each other and

communicate extensively with other international supervisors to ensure

that the market risk capital requirements are implemented in an

appropriate and consistent manner.

The Agencies request comment on all aspects of these amendments to

their market risk rules.


 

Interim Effectiveness of the Rule


 

The Agencies' amendments to their market risk rules are effective

on December 31, 1997, but only on an interim basis during the Agencies'

full notice and comment rulemaking process. Section 553 of the

Administrative Procedure Act permits the Agencies to issue a rule

without public notice and comment when the agency, for good cause,

finds (and incorporates the finding and a brief statement of reasons

therefore in the rules issued) that notice and public procedure thereon

are impracticable, unnecessary, or contrary to the public interest. 5

U.S.C. 553(b)(B). Section 553 also permits the Agencies to issue a rule

without delaying its effectiveness for thirty days from the publication

if the agency finds good cause and publishes it with the rule. 5 U.S.C.

553(d)(3). In addition, section 302 of the Riegle Community Development

and Regulatory Improvement Act of 1994, 12 U.S.C. 4802(b), permits the

Agencies to issue a regulation which takes effect before the first day

of a calendar quarter beginning on or after the date on which the

regulations are published in final form when the agency determines for

good cause published with the regulation that the regulation should

become effective before such time. The Agencies have found that good

cause exists, for several reasons.

First, the amendments are extremely limited in scope. The number of

institutions subject to the Agencies' market risk rules, and

consequently to the amendments, is very small, in both absolute and

relative terms. The amendments will serve only to reduce regulatory

burden, by eliminating the need for institutions that model specific

risk to make dual calculations under the standardized approach in order

to determine their minimum specific risk charge. Such calculations,

while not necessarily difficult from an analytical standpoint, are a

voluminous and detailed operation to execute.

Second, immediate effectiveness of the amendments is necessary. The

market risk rules become mandatory for certain institutions in January

of 1998, and the Agencies will not be able to complete the full

rulemaking process by that time. Institutions covered by the market

risk rule that model specific risk would be needlessly forced to commit

significant internal resources to implement the dual calculation

approach potentially on a temporary basis. Contrary to the public

interest, they could also be placed at a competitive disadvantage vis a

vis their competitors (internationally-active banks in other G-10

countries) who, because of the recent G-10 Governors' endorsement of

the Committee's new approach, will not be subject to any dual

calculation requirement.


 

Regulatory Flexibility Act Analysis


 

Pursuant to section 605(b) of the Regulatory Flexibility Act, the

Agencies have determined that this interim final rule would not have a

significant economic impact on a substantial number of small entities

within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et

seq.). The Agencies' comparison of the applicability section of the

rule to which these amendments pertain to Consolidated Reports of

Condition and Income (Call Report) data on all existing institutions

shows that the rule will rarely, if ever, apply to small entities.

Accordingly, a regulatory flexibility analysis is not required.


 

Paperwork Reduction Act


 

The Agencies have determined that the interim final rule does not

involve a collection of information pursuant to the provisions of the

Paperwork Reduction Act of 1995 (44 U.S.C. 3501 et seq.).


 

OCC Executive Order 12866 Determination


 

The OCC has determined that the interim final rule does not

constitute a ``significant regulatory action'' for the purpose of

Executive Order 12866.


 

OCC Unfunded Mandates Reform Act of 1995 Determination


 

Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law

104-4 (Unfunded Mandates Act) requires that an agency prepare a

budgetary impact statement before promulgating a rule that includes a

Federal mandate that may result in expenditure by State, local, and

tribal governments, in the aggregate, or by the private sector, of $100

million or more in any one year. If a budgetary impact statement is

required, section 205 of the Unfunded Mandates Act also requires an

agency to identify and consider a reasonable number of regulatory

alternatives before promulgating a rule. As discussed in the preamble,

this interim rule eliminates the minimum specific risk charge for

institutions that use internal models that adequately capture specific

risk. The effect of this rule is to reduce regulatory burden by no

longer requiring institutions to make dual calculations under both the

institution's internal model and the standardized specific risk model.

The OCC therefore has determined that the effect of the interim rule on

national banks as a whole will not result in expenditures by State,

local, or tribal governments or by the private sector of $100 million

or more. Accordingly, the OCC has not prepared a budgetary impact

statement or specifically


 

[[Page 68067]]


 

addressed the regulatory alternatives considered.


 

List of Subjects


 

12 CFR Part 3


 

Administrative practice and procedure, Capital, National banks,

Reporting and recordkeeping requirements, Risk.


 

12 CFR Part 208


 

Accounting, Agriculture, Banks, banking, 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


 

Bank deposit insurance, Banks, banking, Capital adequacy, Reporting

and recordkeeping requirements, Savings associations, State non-member

banks.


 

Authority and Issuance


 

Office of the Comptroller of the Currency


 

12 CFR Chapter I


 

For the reasons set out in the joint preamble, part 3 of chapter I

of title 12 of the Code of Federal Regulations is amended as set forth

below:


 

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, 1828(n), 1828 note, 1831n

note, 1835, 3907, and 3909.


 

2. Section 2 of Appendix B to part 3 is amended by revising

paragraph (b)(2) to read as follows:


 

Appendix B To Part 3--Risk-Based Capital Guidelines; Market Risk

Adjustment


 

* * * * *


 

Section 2. Definitions


 

* * * * *

(b) * * *

(2) Specific risk means changes in the market value of specific

positions due to factors other than broad market movements and

includes default and event risk as well as idiosyncratic variations.

* * * * *

3. Section 5 of appendix B to part 3 is amended by revising

paragraphs (a) and (b) to read as follows:

* * * * *


 

Section 5. Specific Risk


 

(a) Specific risk surcharge. For purposes of section 3(a)(2)(ii)

of this appendix, a bank shall calculate its specific risk surcharge

as follows:

(1) Internal models that incorporate specific risk. (i) No

specific risk surcharge required for qualifying internal models. A

bank that incorporates specific risk in its internal model has no

specific risk surcharge for purposes of section 3(a)(2)(ii) of this

appendix if the bank demonstrates to the OCC that its internal model

adequately measures all aspects of specific risk, including default

and event risk, of covered debt and equity positions. In evaluating

a bank's internal model the OCC will take into account the extent to

which the internal model:

(A) Explains the historical price variation in the trading

portfolio; and

(B) Captures concentrations.

(ii) Specific risk surcharge for modeled specific risk that

fails to adequately measure default or event risk. A bank that

incorporates specific risk in its internal model but fails to

demonstrate that its internal model adequately measures all aspects

of specific risk, including default and event risk, as provided by

this section 5(a)(1), must calculate its specific risk surcharge in

accordance with one of the following methods:

(A) If the bank's internal model separates the VAR measure into

a specific risk portion and a general market risk portion, then the

specific risk surcharge equals the previous day's specific risk

portion.

(B) If the bank's internal model does not separate the VAR

measure into a specific risk portion and a general market risk

portion, then the specific risk surcharge equals the sum of the

previous day's VAR measure for subportfolios of covered debt and

equity positions.

(2) Specific risk surcharge for specific risk not modeled. If a

bank does not model specific risk in accordance with section 5(a)(1)

of this appendix, then the bank shall calculate its specific risk

surcharge using the standard specific risk capital charge in

accordance with section 5(c) of this appendix.

(b) Covered debt and equity positions. If a model includes the

specific risk of covered debt positions but not covered equity

positions (or vice versa), then the bank may reduce its specific

risk charge for the included positions under section 5(a)(1)(ii) of

this appendix. The specific risk charge for the positions not

included equals the standard specific risk capital charge under

paragraph (c) of this section.

* * * * *

Dated: December 19, 1997.

Eugene A. Ludwig,

Comptroller of the Currency.


 

Federal Reserve System


 

12 CFR Chapter II


 

For the reasons set forth in the joint preamble, parts 208 and 225

of chapter II of title 12 of the Code of Federal Regulations are

amended as follows:


 

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL

RESERVE SYSTEM (REGULATION H)


 

1. The authority citation for part 208 continues to read as

follows:


 

Authority: 12 U.S.C. 24, 36, 92(a), 93(a) 248(a), 248(c), 321-

338a, 371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),

1823(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1, 1835(a), 1882,

2901-2907, 3105, 3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b,

781(b), 781(g), 781(i), 78o-4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C.

5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.


 

2. In appendix E to part 208, section 1., paragraph (a), footnote 1

is revised to read as follows:


 

Appendix E to Part 208--Capital Adequacy Guidelines for State Member

Banks; Market Risk Measure


 

Section 1. Purpose, Applicability, Scope, and Effective Date


 

(a) * * * 1 * * *

---------------------------------------------------------------------------


 

\1\ This appendix is based on a framework developed jointly by

supervisory authorities from the countries represented on the Basle

Committee on Banking Supervision and endorsed by the Group of Ten

Central Bank Governors. The framework is described in a Basle

Committee paper entitled ``Amendment to the Capital Accord to

Incorporate Market Risks,'' January 1996. Also see modifications

issued in September 1997.

---------------------------------------------------------------------------


 

* * * * *

3. In appendix E to part 208, section 2., paragraph (b)(2) is

revised to read as follows:

* * * * *


 

Section 2. Definitions


 

* * * * *

(b) * * *

(2) Specific risk means changes in the market value of specific

positions due to factors other than broad market movements. Specific

risk includes such risk as idiosyncratic variation, as well as event

and default risk.

* * * * *

4. In appendix E to part 208, section 5., paragraphs (a), (b), and

(c) introductory text are revised to read as follows:

* * * * *


 

[[Page 68068]]


 

Section 5. Specific Risk


 

(a) Modeled specific risk A bank may use its internal model to

measure specific risk. If the bank has demonstrated to the Federal

Reserve that its internal model measures the specific risk,

including event and default risk as well as idiosyncratic variation,

of covered debt and equity positions and includes the specific risk

measures in the VAR-based capital charge in section 3(a)(2)(i) of

this appendix, then the bank has no specific risk add-on for

purposes of section 3(a)(2)(ii) of this appendix. The model should

explain the historical price variation in the trading portfolio and

capture concentration, both magnitude and changes in composition.

The model should also be robust to an adverse environment and have

been validated through backtesting which assesses whether specific

risk is being accurately captured.

(b) Add-on charge for modeled specific risk. If a bank's model

measures specific risk, but the bank has not been able to

demonstrate to the Federal Reserve that the model adequately

measures event and default risk for covered debt and equity

positions, then the bank's specific risk add-on is determined as

follows:

(1) If the model is susceptible to valid separation of the VAR

measure into a specific risk portion and a general market risk

portion, then the specific risk add-on is equal to the previous

day's specific risk portion.

(2) If the model does not separate the VAR measure into a

specific risk portion and a general market risk portion, then the

specific risk add-on is the sum of the previous day's VAR measures

for subportfolios of covered debt and covered equity positions.

(c) Add-on charge if specific risk is not modeled. If a bank

does not model specific risk in accordance with paragraph (a) or (b)

of this section, then the bank's specific risk add-on charge equals

the components for covered debt and equity positions as appropriate:

* * * * *


 

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL

(REGULATION Y)


 

1. The authority citation for part 225 continues to read as

follows:


 

Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,

1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and

3909.


 

2. In appendix E to part 225, the appendix heading is revised and

in section 1., paragraph (a), footnote 1 is revised to read as follows:


 

Appendix E To Part 225--Capital Adequacy Guidelines For Bank Holding

Companies: Market Risk Measure


 

Section 1. Purpose, Applicability, Scope, and Effective Date


 

(a) * * * 1 * * *

---------------------------------------------------------------------------


 

\1\ This appendix is based on a framework developed jointly by

supervisory authorities from the countries represented on the Basle

Committee on Banking Supervision and endorsed by the Group of Ten

Central Bank Governors. The framework is described in a Basle

Committee paper entitled ``Amendment to the Capital Accord to

Incorporate Market Risks,'' January 1996. Also see modifications

issued in September 1997.

---------------------------------------------------------------------------


 

* * * * *

3. In appendix E to part 225, section 2., paragraph (b)(2) is

revised to read as follows:

* * * * *


 

Section 2. Definitions


 

* * * * *

(b) * * *

(2) Specific risk. means changes in the market value of specific

positions due to factors other than broad market movements. Specific

risk includes such risk as idiosyncratic variation, as well as event

and default risk.

* * * * *

4. In appendix E to part 225, section 5., paragraphs (a), (b), and

(c) introductory text are revised to read as follows:

* * * * *


 

Section 5. Specific Risk


 

(a) Modeled specific risk. A bank holding company may use its

internal model to measure specific risk. If the institution has

demonstrated to the Federal Reserve that its internal model measures

the specific risk, including event and default risk as well as

idiosyncratic variation, of covered debt and equity positions and

includes the specific risk measures in the VAR-based capital charge

in section 3(a)(2)(i) of this appendix, then the institution has no

specific risk add-on for purposes of section 3(a)(2)(ii) of this

appendix. The model should explain the historical price variation in

the trading portfolio and capture concentration, both magnitude and

changes in composition. The model should also be robust to an

adverse environment and have been validated through backtesting

which assesses whether specific risk is being accurately captured.

(b) Add-on charge for modeled specific risk. If a bank holding

company's model measures specific risk, but the institution has not

been able to demonstrate to the Federal Reserve that the model

adequately measures event and default risk for covered debt and

equity positions, then the institution's specific risk add-on is

determined as follows:

(1) If the model is susceptible to valid separation of the VAR

measure into a specific risk portion and a general market risk

portion, then the specific risk add-on is equal to the previous

day's specific risk portion.

(2) If the model does not separate the VAR measure into a

specific risk portion and a general market risk portion, then the

specific risk add-on is the sum of the previous day's VAR measures

for subportfolios of covered debt and covered equity positions.

(c) Add-on charge if specific risk is not modeled. If a bank

holding company does not model specific risk in accordance with

paragraph (a) or (b) of this section, then the institution's

specific risk add-on charge equals the components for covered debt

and equity positions as appropriate:

* * * * *

By order of the Board of Governors of the Federal Reserve

System, December 19, 1997.

William W. Wiles,

Secretary of the Board.


 

Federal Deposit Insurance Corporation


 

12 CFR Chapter III


 

For the reasons set forth in the joint 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, 2386 (12 U.S.C. 1828 note).


 

2. In appendix C to part 325, section 1(a), footnote 1 is revised

to read as follows:


 

Appendix C to Part 325--Risk-Based Capital For State Non-Member Banks;

Market Risk


 

Section 1. Purpose, Applicability, Scope, and Effective Date


 

(a) * * * 1 * * *

---------------------------------------------------------------------------


 

\1\ This appendix is based on a framework developed jointly by

supervisory authorities from the countries represented on the Basle

Committee on Banking Supervision and endorsed by the Group of Ten

Central Bank Governors. The framework is described in a Basle

Committee paper entitled ``Amendment to the Capital Accord to

Incorporate Market Risks,'' January 1996. Also see modifications

issued in September 1997.

---------------------------------------------------------------------------


 

* * * * *

3. In appendix C to part 325, section 2., paragraph (b)(2) is

revised to read as follows:

* * * * *


 

Section 2. Definitions


 

* * * * *

(b) * * *

(2) Specific risk means changes in the market value of specific

positions due to factors other than broad market movements. Specific

risk includes such risk as idiosyncratic variation, as well as event

and default risk.

* * * * *

4. In appendix C to part 325, section 5., paragraphs (a), (b), and

(c) introductory text are revised to read as follows:

* * * * *


 

Section 5. Specific Risk


 

(a) Modeled specific risk. A bank may use its internal model to

measure specific risk. If


 

[[Page 68069]]


 

the bank has demonstrated to the FDIC that its internal model

measures the specific risk, including event and default risk as well

as idiosyncratic variation, of covered debt and equity positions and

includes the specific risk measure in the VAR-based capital charge

in section 3(a)(2)(i) of this appendix, then the bank has no

specific risk add-on for purposes of section 3(a)(2)(ii) of this

appendix. The model should explain the historical price variation in

the trading portfolio and capture concentration, both magnitude and

changes in composition. The model should also be robust to an

adverse environment and have been validated through backtesting

which assesses whether specific risk is being accurately captured.

(b) Add-on charge for modeled specific risk. If a bank's model

measures specific risk, but the bank has not been able to

demonstrate to the FDIC that the model adequately measures event and

default risk for covered debt and equity positions, then the bank's

specific risk add-on for purposes of section 3(a)(2)(ii) of this

appendix is as follows:

(1) If the model is susceptible to valid separation of the VAR

measure into a specific risk portion and a general market risk

portion, then the specific risk add-on is equal to the previous

day's specific risk portion.

(2) If the model does not separate the VAR measure into a

specific risk portion and a general market risk portion, then the

specific risk add-on is the sum of the previous day's VAR measures

for subportfolios of covered debt and covered equity positions.

(c) Add-on charge if specific risk is not modeled. If a bank

does not model specific risk in accordance with paragraph (a) or (b)

of this section, the bank's specific risk add-on charge for purposes

of section 3(a)(2)(ii) of this appendix equals the components for

covered debt and equity positions as appropriate:

* * * * *

Dated at Washington, D.C. this 9th day of December, 1997.


 

By order of the Board of Directors.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 97-33653 Filed 12-29-97; 8:45 am]

BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P

Last Updated: March 24, 2024