[Federal Register: November 3, 2000 (Volume 65, Number 214)]
[Proposed Rules]
[Page 66193-66197]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03no00-14]
=======================================================================
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 00-24]
RIN 1557--AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1084]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC44
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[Docket No. 2000-90]
RIN 1550-AB11
Simplified Capital Framework for Non-Complex Institutions
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: Advance notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), the Federal Deposit
Insurance Corporation (FDIC), and the Office of Thrift Supervision
(OTS) (collectively, the Agencies) are considering developing a
simplified regulatory capital framework applicable to non-complex banks
and thrifts (non-complex institutions). The Agencies believe that the
size, structure, complexity, and risk profile of many banking and
thrift institutions (banking organizations or institutions) may warrant
the application of a simplified capital framework that could relieve
regulatory burden associated with the existing capital rules.
The Agencies are considering the advantages and disadvantages
associated with developing a regulatory capital framework specifically
for non-complex institutions. The main objective of this advance notice
of proposed rulemaking is to obtain preliminary views from the industry
and the public regarding such a framework. The information gathered as
a result of this advance notice of proposed rulemaking will assist the
Agencies in determining whether to propose a simplified capital
framework and, if so, how the framework should be structured and
implemented.
In considering the development of a less burdensome regulatory
framework, the Agencies would not lower capital standards or encourage
a reduction in existing capital levels. Rather, a simplified, less
burdensome framework may result in higher minimum regulatory capital
requirements for certain institutions than required under current
capital standards. Many non-complex institutions currently maintain
levels of capital in excess of the regulatory minimum requirements, and
the Agencies would therefore expect that most banking organizations
subject to a simplified framework would not have to increase capital
levels.
This advance notice of proposed rulemaking sets forth broad options
for a simplified framework. The options advanced for comment include
adopting a simplified risk-based framework (and maintaining the
leverage ratio requirement) or adopting a leverage-based approach. The
leverage-based approach may include either a traditional leverage
framework or one that is modified to address off-balance sheet risks.
DATES: Comments must be received by no later than February 1, 2001.
ADDRESSES: Comments should be directed to:
OCC: Comments may be submitted to Docket No. 00-24, Communications
Division, Third Floor, Office of the Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219. Comments will be available for
inspection and photocopying at that address. In addition, comments may
be sent by facsimile transmission to (202) 874-5274, or by electronic
mail to regs.comments@occ.treas.gov. You can make an appointment to
inspect the comments by calling (202) 874-5043.
Board: Comments, which should refer to Docket No. R-1084, may be mailed
to Ms. Jennifer J. Johnson, Secretary, the Board of Governors of the
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551,
or mailed electronically to regs.comments@federalreserve.gov. Comments
addressed to Ms. Johnson may be delivered to the Board's mailroom
between 8:45 a.m. and 5:15 p.m., and to the security control room
outside of those hours. Both the mailroom and the security control room
are accessible from the courtyard entrance on 20th Street between
Constitution Avenue and C Street, NW.. Comments may be inspected in
Room MP-500 between 9 a.m. and 5 p.m. weekdays pursuant to Sec. 261.12,
except as provided in Sec. 261.14 of the Board's Rules Regarding
Availability of Information, 12 CFR 261.12 and 261.14.
FDIC: Send written comments to Robert E. Feldman, Executive Secretary,
Attention: Comments/OES, Federal Deposit Insurance Corporation, 550
17th Street, NW, Washington, DC 20429. Comments may be hand-delivered
to the 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.
(facsimile 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, NW, Washington, DC
20429, between 9 a.m. and 4:30 p.m. on business days.
OTS: Send comments to Manager, Dissemination Branch, Information
Management & Services Division, Office of Thrift Supervision, 1700 G
Street, NW, Washington, DC 20552, Attention Docket No. 2000-90. Hand
deliver comments to Public Reference Room, 1700 G Street, NW, lower
level, from 9 a.m. to 4 p.m. on business days. Send facsimile
transmissions to FAX number (202) 906-7755 or (202) 906-6956 (if the
comment is over 25 pages). Send e-mails to public.info@ots.treas.gov
and include your name and telephone number. Interested persons may
inspect comments at 1700 G Street, NW, from 10 a.m. until 4 p.m. on
Tuesdays and Thursdays, or obtain comments or an index of comments by
facsimile by telephoning the Public Reference Room at (202) 906-5900
from 9 a.m. until 5 p.m. on business days. Comments and the related
index will also be posted on the OTS Internet Site at
``www.ots.treas.gov.''
FOR FURTHER INFORMATION CONTACT:
OCC: Amrit Sekhon, Risk Specialist, Capital Policy Division, (202) 874-
5211; or Ron Shimabukuro, Senior Attorney, Legislative and Regulatory
[[Page 66194]]
Activities Division, (202) 874-5090, Office of the Comptroller of the
Currency, 250 E Street SW, Washington, DC 20219.
Board: Norah Barger, Assistant Director (202/452-2402), Barbara
Bouchard, Manager (202/452-3072), Division of Banking Supervision and
Regulation, or David Adkins, Supervisory Financial Analyst (202/452-
5259). For the hearing impaired only, Telecommunication Device for the
Deaf (TDD), Janice Simms (202/872-4984), Board of Governors of the
Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551.
FDIC: Mark S. Schmidt, Associate Director, (202/898-6918), Division of
Supervision, William A. Stark, Assistant Director, (202/898-6972),
Division of Supervision, or Keith A. Ligon, Chief, Policy Unit, (202/
898-3618), Division of Supervision.
OTS: Michael D. Solomon, Senior Program Manager for Capital Policy
(202/906-5654), or Teresa A. Scott, Counsel (Banking and Finance) (202/
906-6478), Office of Thrift Supervision, 1700 G Street, NW, Washington,
DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
In 1989, the Agencies each adopted regulatory capital standards
based on the Basel Capital Accord (1988 Accord).\1\ The 1988 Accord
sets forth a general framework for measuring the capital adequacy of
internationally active banks under which assets and off-balance-sheet
items are ``risk-weighted'' based on their perceived credit risk using
four broad risk categories.\2\ Institutions subject to the 1988 Accord
are required to maintain a minimum ratio of regulatory capital \3\ to
total risk-weighted assets of 8 percent.\4\
---------------------------------------------------------------------------
\1\ The 1998 Accord was developed by the supervisory authorities
represented on the Basel Committee on Banking Supervision and
endorsed by the G-10 Central Bank Governors. The framework is
described in a document entitled ``International Convergence of
Capital Measurement'' issued in July 1998 (with subsequent
amendments). The Basel Committee on Banking Supervision is comprised
of representatives of the central banks and supervisory authorities
from the G-10 countries (Belgium, Canada, France, Germany, Italy,
Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the
United States) and Luxembourg. The Agencies' risk-based capital
standards implementing the 1988 Accord are set forth in 12 CFR part
3 (OCC), 12 CFR parts 208 and 225, Appendices A and E (Board), 12
CFR part 325 (FDIC) and 12 CFR part 567 (OTS).
\2\ The categories are 100 percent (the standard risk weight for
most claims); 50 percent (primarily for residential mortgages); 20
percent for claims on, or guarantees provided by, certain entities
(for example, qualifying depository institutions); and zero percent
for very low risk assets (such as claims on, or guarantees provided
by, qualifying governments).
\3\ Regulatory capital may be comprised of three components. In
general terms, Tier 1 capital includes common stockholder's equity,
qualifying noncumulative perpetual preferred stock (and for bank
holding companies limited amounts of cumulative perpetual preferred
stock), and minority interests in the equity accounts of
consolidated subsidiaries. Tier 2 capital includes limited amounts
of the allowance for loan and lease losses, perpetual preferred
stock, hybrid capital instruments and mandatory convertible debt,
and term subordinated debt. Tier 3 capital (available only for
certain institutions that apply specific rules for market risk)
consists of short-term subordinated debt subject to certain
restrictions on repayment. Items deducted from regulatory capital
include goodwill and certain other intangible assets, investments in
unconsolidated subsidiaries, reciprocal holdings of other banking
institutions' capital instruments and some deferred tax assets. At
least 50 percent of regulatory capital must be Tier 1. See each
agency's capital rules referenced in footnote 1 for a more complete
discussion.
\4\ The 1988 Accord and the implementing United States standards
addressed capital in relation to credit risk. In January 1996, the
1988 Accord was amended to include a measure for market risk. The
amendment was incorporated into FRB, FDIC, and OCC standards in
September 1996.
---------------------------------------------------------------------------
In addition to risk-based capital requirements, United States
banking organizations must comply with a minimum leverage ratio
requirement. \5\ Generally, strong banking organizations (e.g.,
institutions assigned a composite rating of 1 under the Uniform
Financial Institutions Ratings System) must maintain a minimum ratio of
Tier 1 capital to average total consolidated on-balance sheet assets of
3 percent. For other banking organizations, the minimum leverage ratio
is 4 percent. The Agencies view the risk-based and leverage capital
requirements as minimums. Institutions should hold capital at a level
that is commensurate with their individual risk profile.
---------------------------------------------------------------------------
\5\ Leverage guidelines for each agency are located at 12 CFR
part 3 (OCC); 12 CFR part 208, Appendix B and 12 CFR part 225,
Appendix D (Board); 12 CFR part 325 (FDIC); and 12 CFR part 567
(OTS).
---------------------------------------------------------------------------
United States banking organizations are also subject to Prompt
Corrective Action (PCA) regulations. Generally, under these rules an
institution's regulatory capital ratios are used to classify the
institution into a PCA category. Institutions with the highest capital
ratios (i.e., at or above a 10 percent total risk-based capital ratio,
at or above a 6 percent Tier 1 risk-based capital ratio, and at or
above a 5 percent leverage capital ratio) are usually categorized as
``well capitalized.'' Institutions with lower capital ratios are
assigned to lower capital categories. Institutions that are less than
well capitalized have restrictions or conditions on certain activities
and may also be subject to mandatory or discretionary supervisory
action.
Although the 1988 Accord was developed for large and
internationally active banking organizations, when the Agencies adopted
the risk-based capital standards domestically, the standards were
applied to all banking organizations regardless of size, structure,
complexity, and risk profile. The four broad risk-weight categories,
while imperfect, were viewed as a significant improvement over the
previous domestic capital framework that did not take into account
asset credit quality and discouraged banking organizations from holding
low-risk assets. In addition, the capital adequacy framework
incorporated off-balance sheet items into the risk-based capital
formula. The consistent application of an international regulatory
capital regime was also expected to minimize competitive equity
concerns.
The 1988 Accord has had a stabilizing effect on the international
banking system. Since its inception, capital levels have risen and
competitive equity has been enhanced. Over the past decade, however,
the world financial system has become more complex and challenging. The
Basel Committee on Banking Supervision (Basel Committee) recognizes
that the 1988 Accord needs to evolve along with recent financial
innovations and changes in the financial marketplace. Accordingly, the
Basel Committee is working to develop a new capital adequacy framework
that would enhance the 1988 Accord.
As outlined in its June 1999 consultative paper, A New Capital
Adequacy Framework, the Basel Committee is contemplating substantial
revisions to the 1988 Accord. \6\ Among other things, the Basel
Committee is exploring the concept of using sophisticated internal risk
measurement systems in the development of minimum capital standards.
The Basel Committee is also developing a standardized approach that
proposes revisions to the risk-weight framework of the 1988 Accord
which might incorporate external ratings in the assessment of a minimum
capital requirement.
---------------------------------------------------------------------------
\6\ The Basel Committee consultative document was issued on June
3, 1999. Comment was requested through March 2000. The document is
available through the Bank for International Settlements website at
www.bis.org.
---------------------------------------------------------------------------
While the approaches contemplated in the proposed revisions to the
1988 Accord may be appropriate for some large, complex, internationally
active banks, many small domestic banking organizations may not have or
need the infrastructure to implement a sophisticated internal ratings-
based approach to regulatory capital.
[[Page 66195]]
Regardless of what revisions are made to the 1988 Accord, however,
given the complexity of existing regulatory capital rules, a simplified
capital framework could reduce regulatory burden for many institutions
without compromising the principles of prudential supervision.
The Agencies wish to explore all options in the development of a
regulatory framework for non-complex institutions. The following
discussion outlines the Agencies' preliminary views on ways to simplify
the regulatory capital framework for such institutions. The Agencies
encourage comments from the industry and the public on all aspects of
this advance notice of proposed rulemaking.
II. Discussion
A. Overview
This advance notice of proposed rulemaking discusses how non-
complex institutions could be defined and presents three possible
alternatives for measuring the regulatory capital of non-complex
institutions. The Agencies believe that three key factors could serve
to define a non-complex institution. These are the nature of the
institution's activities, its asset size, and its risk profile. Broadly
stated, a relatively small institution engaged in non-complex
activities that presents a low-risk profile could be subject to a more
simplified capital framework without compromising the safety and
soundness of the institution or the banking system. The three broad
alternatives for a simplified framework are a simple leverage ratio, a
modified leverage ratio and a risk-based framework.
Question 1: Do institutions view maintenance of the current risk-
based capital standards as posing undue burden for small institutions?
If so, how? Would views change if the current standards were revised to
make them more risk-sensitive, in line with the contemplated revisions
to the 1988 Basel Accord as set forth in the June 1999 consultative
paper?
Question 2: For non-complex institutions, should the Agencies
maintain the current risk-based capital standards or develop a
simplified capital adequacy framework? What are the advantages and
disadvantages of adopting a separate framework?
B. Defining a Non-Complex Institution
The Agencies are considering the nature of a non-complex
institution's activities, its asset size, and its risk profile as
determinants of eligibility for the simplified capital framework. In
general, the Agencies believe that a ``non-complex institution'' would
possess the following characteristics:
--A relatively small asset size (e.g., consolidated assets of less than
$5 billion).
--A relatively simple and low-risk balance sheet (e.g., primarily
traditional, nonvolatile assets and liabilities).
--A moderate level of off-balance sheet activity that is compatible
with core business activities (e.g., commitments, in the case of
residential lenders).
--A minimal use of financial derivatives (i.e., institution uses
financial derivatives solely for risk management purposes.)
--A relatively simple scope of operations and relatively little
involvement in nontraditional activities as a source of income.
In this section, the Agencies describe possible criteria that could
be used to determine whether an institution could be considered a non-
complex institution.
Nature of Activities
Objective criteria could be used to measure the level of complexity
associated with the activities conducted by domestic banking
organizations. The Consolidated Reports of Condition and Income and
Thrift Financial Reports (regulatory reports) provide the Agencies with
information on the structure and operations of an institution. While
subject to certain limitations, these data elements could provide
objective support for defining a set of non-complex institutions.
The Agencies are considering using various data elements as an
initial screen for determining whether a particular institution
exhibits a ``complex'' profile. That is, where an institution reports a
significant amount of certain data elements, the Agencies may consider
the institution to be complex. Items collected within regulatory
reports that could be used include: Trading assets and liabilities;
interest only strips; credit derivatives--guarantor and beneficiary;
foreign exchange spot contracts; other off-balance sheet assets and
liabilities; foreign exchange, equity, commodity, and other
derivatives; purchased mortgage servicing rights; purchased credit card
relationships; structured notes; performance standby letters of credit;
and interest rate derivatives. Data elements such as these could
provide an initial screen for determining whether a particular
institution exhibits a ``complex'' profile.
The Agencies envision using additional data elements that might
become available due to revisions to regulatory reporting requirements.
A concern about such screening criteria is setting an appropriate
threshold level for reported activities. The number of institutions
that may qualify as non-complex depends upon the threshold level set in
establishing the screening criteria.
Question 3: What specific data elements should be considered in
determining whether an institution is non-complex? At what level should
the thresholds be set for such elements to qualify for the non-complex
framework?
Question 4: What information sources other than regulatory reports
are available for measuring the level of complexity of domestic banking
organizations (e.g., examination reports or other supervisory
information or ratings)?
Asset Size
The Agencies believe that a strong relationship exists between the
asset size of an institution and its relative complexity. In general,
banking organizations of larger asset size exhibit greater levels of
complexity. The strength of this correlation changes with the size of
the institution. For example, banking organizations with assets of less
than $5 billion generally engage in less complex activities than larger
banking organizations. This effect is generally more pronounced for
institutions with less than $1 billion in assets. However, some smaller
banking organizations are engaged in activities reflecting a high level
of complexity. The Agencies are considering the extent to which asset
size alone might be sufficient to determine which banking organizations
may be eligible for the non-complex capital framework.
Question 5: What are the advantages and disadvantages of using
asset size to determine ``complexity''? What would be a reasonable and
appropriate asset size limit for banking organizations to qualify for
the non-complex framework?
Question 6: Should banking organizations within a holding company
be subject to an asset size limit based on an aggregate or individual
institution basis?
Question 7: Should the Agencies apply a simplified framework to all
non-complex institutions regardless of size?
Question 8 :Should off-balance sheet assets (e.g., securitized
assets) be considered within the asset size limit? If not, why not?
Risk Profile
The Agencies are considering whether banking organizations of any
size that present a higher risk profile should be
[[Page 66196]]
required to comply with a more sophisticated risk measurement and
capital adequacy framework. A small asset size and lack of complexity
do not necessarily equate to lower risk. There can be instances where a
small and otherwise non-complex banking organization may be exposed to
risks that warrant excluding the institution from the simplified
framework.
Factors considered when assessing an institution's overall risk
profile should include the level of involvement in activities that
present greater degrees of credit, liquidity, market, or other risks,
such as sub-prime lending activities, significant asset securitization
activities, or trading activities. The issues encountered in trying to
define ``high-risk'' are similar to those encountered in trying to
define ``non-complex.'' Approaches could include objective measures
derived from regulatory reporting data (as discussed previously) or
more subjective alternatives that incorporate assessments made by
supervisors in reports of examination, or some combination of objective
measures and subjective assessments.
Question 9: What methods for determining a ``low-risk'' institution
are reasonable and appropriate?
C. Setting a Minimum Capital Threshold for Non-Complex Institutions
While a simplified capital framework for non-complex institutions
might be less burdensome, such a framework might also be less risk
sensitive and flexible. For this reason, the Agencies believe that the
minimum capital standard should be set at a level that more than
adequately addresses the risks that may not precisely or specifically
be measured and identified by the simplified framework. The minimum
capital level in such a framework should be a relatively high threshold
above which supervisory concerns regarding capital adequacy are
minimized. Therefore, a higher minimum capital requirement may ensure
that banking organizations that are exempted from the risk-sensitive
measures continue to hold sufficient capital.
Setting a higher minimum capital threshold for non-complex
institutions raises issues and concerns. To the greatest extent
possible, the simplified framework should avoid creating regulatory
arbitrage incentives vis-a-vis the risk-based capital standards.
However, the minimum capital level for non-complex institutions must
continue to promote safety and soundness. A higher minimum threshold in
exchange for simpler standards, therefore, may be an appropriate trade-
off.
One method to address these concerns is to establish a system that
allows a degree of flexibility in designating an institution non-
complex and subject to the simplified capital framework. For example, a
non-complex institution could be allowed, but not required, to
calculate its capital under the simplified framework. A non-complex
institution could instead elect to use the more sophisticated, risk-
based framework applicable to international or ``complex'' banking
organizations. The trade-off between burden and benefit could be a
determination reached by the individual institution, with appropriate
supervisory oversight.
Question 10: What factors should be considered in the determination
of a minimum threshold capital level for non-complex institutions?
Should additional or different elements be included in the definition
of capital under a non-complex framework?
Question 11: Should the institution have the option to decide
whether to use the simplified framework?
D. Options for Measuring the Capital Adequacy of Non-Complex
Institutions
Each option should promote safety and soundness while minimizing
regulatory burden. In addition, any alternative to the existing
framework would have to be compatible with PCA mandates. The Agencies
have some flexibility in establishing a relevant capital measure for
non-complex institutions for PCA purposes.\7\ The Agencies do not
foresee eliminating the leverage requirements established under the
Prompt Corrective Action standards.
---------------------------------------------------------------------------
\7\ Section 38 of the Federal Deposit Insurance Act (12 U.S.C.
1831o) establishes PCA guidelines as they relate to capital
standards. In general, the capital standards prescribed by each
appropriate Federal banking agency shall include a leverage limit
and a risk-based capital requirement. However, the section also
states that an appropriate Federal banking agency may, by
regulation, establish any additional relevant capital measures to
carry out the purpose of this section, or rescind any relevant
capital measure upon determining that the measure is no longer an
appropriate means for carrying out the purpose of this section.
---------------------------------------------------------------------------
The alternatives set out in the following paragraphs are: (1) A
risk-based ratio (that maintains a leverage requirement); (2) a
leverage ratio; and (3) a modified leverage ratio that incorporates
certain off-balance sheet exposures. The Agencies also recognize that
the risk-based capital framework remains a viable option for non-
complex institutions. The Agencies are seeking input on these and any
other alternatives to measure regulatory capital commensurate with the
size, structure, complexity, and risk profile of non-complex
institutions. Comment is requested on the benefits and drawbacks and
potential impact on banking organizations of each approach.
A Risk-Based Ratio
One alternative for a non-complex framework is a risk-based capital
standard. Such a risk-based capital standard would be consistent with
the principles underlying the evolving risk-based standards under
discussion by the Basel Committee, but could be tailored to the size,
structure, and risk profile of less complex banking organizations. For
example, the risk-based approach could be based upon a modified risk-
weight system that is consistent with the structure of non-complex
institutions.
Potentially, such a risk-based standard for non-complex
institutions could both reduce burden and set capital requirements in
relation to risk. Implementation of such a system could also prove
advantageous because it would not require a structural overhaul to the
way banking organizations currently compute capital requirements.
A potential weakness of such an approach could be that, while
striving for the dual purposes of greater simplicity and a better match
between capital requirements and risk, the approach might fall short of
attaining either goal. In effect, it may turn out that greater
simplicity in risk-based capital measures means requirements that are
less closely aligned to risk (and closer to a leverage measure).
Alternatively, finer and more accurate measurements of risk that
require greater computational complexity in the determination of
regulatory capital means greater regulatory burden. A key consideration
in the development of a simplified framework is to strike an
appropriate balance between these potentially conflicting goals.
A Leverage Ratio
Another option for a capital adequacy measure for non-complex
institutions is to use only a leverage ratio. Under this alternative,
non-complex institutions would no longer be required to comply with the
risk-based capital framework. The leverage ratio provides a simple,
straightforward measure of capital relative to total assets.
A concern is that the leverage ratio does not adequately account
for off-balance sheet exposures and that a minimum capital requirement
should accommodate this expanding area of banking risk. Even non-
complex institutions can generate significant off-balance sheet
exposures (e.g., by issuing standby letters of credit, selling loans
with recourse, or extending short-term loan commitments). Another
weakness
[[Page 66197]]
of the leverage ratio is that it does not account for the wide spectrum
of credit risk and creates an incentive for the institution to avoid
investing in low-risk assets.
A Modified Leverage Ratio
To address some of the concerns with the leverage ratio discussed
above, it might be appropriate to consider modifying the measure to
account for off-balance sheet exposures. A modified leverage ratio
could incorporate the simplicity of the leverage ratio while seeking to
remedy its main weaknesses. A modified leverage ratio would be a
relatively simple measure--a major objective of the non-complex
framework. A disadvantage of the modified leverage ratio is that,
unlike the risk-based approach, it would provide no capital benefit to
banking organizations that maintain a low-risk profile and might
encourage institutions to invest in higher-risk assets.
The appropriate capital framework for a non-complex institution
depends partly on the screening criteria chosen to assess complexity or
risk. If complex or high-risk banking organizations can be effectively
screened out of the non-complex category, then the benefits of a
leverage-based approach will likely be enhanced. Similarly, if banking
organizations with significant off-balance sheet items are screened out
of the non-complex framework, then use of a modified leverage ratio
(that incorporates off-balance sheet items) might be unnecessary to
assure sufficient levels of regulatory capital.
Question 12: What elements of the current risk-based framework
should be retained within a simplified risk-based framework? What
elements should not be included?
Question 13: Should classes of assets be re-assigned to other and
potentially new risk weights, based on relative comparisons of
historical charge-off data or other empirical sources, including but
not limited to credit ratings?
Question 14: Is a leverage ratio a sufficient method for
determining capital adequacy of non-complex institutions in a range of
economic conditions?
Question 15: If off-balance sheet items are incorporated into a
modified leverage ratio, what items should be incorporated, and how?
Question 16: What degree of burden reduction is foreseeable
regarding any of the alternatives? Do the foreseeable benefits of
burden reduction outweigh any concerns about establishing a non-complex
domestic framework?
E. Implementation Issues
The establishment of a simplified capital framework presents a host
of implementation issues. How would banking organizations be placed
within the simplified framework? Once subjected to the simplified
framework, how would the institution transition to a more complex
framework, if needed? Would there be a transition or adjustment period?
These implementation issues can be foreseen, but not fully addressed,
until a framework is determined.
Moreover, the Agencies must determine the least burdensome and most
efficient manner to collect data necessary to identify the universe of
non-complex institutions and to provide this information to banking
organizations in a timely manner. Options include requiring the
Agencies to determine which banking organizations are subject to the
non-complex framework using current regulatory reports, or requiring a
banking organization to seek entry into the non-complex framework by
filing an application.
On an ongoing basis, a change in size, structure, complexity, or
risk profile of a non-complex institution could impact its continued
eligibility for the simplified framework. Institutions that were no
longer deemed ``non-complex'' could be required to comply with the
standards applicable to complex banking organizations or to take other
remedial steps. For an institution transitioning from the non-complex
framework to the complex regime, an adjustment period might be
necessary to meet reporting and capital requirements.
Establishment of a process for monitoring on-going eligibility for
the simplified framework should also be considered. The process used to
collect and report data should not undermine burden reduction, one of
the primary objectives of a non-complex framework.
Question 17: How could the non-complex capital adequacy framework
be initially implemented and thereafter applied on an ongoing basis?
Question 18: Should banking organizations no longer deemed ``non-
complex'' be required to comply with the otherwise applicable capital
standards? What other alternatives could be made available for these
banking organizations? What types of transition would be most
appropriate?
III. OCC and OTS Executive Order 12866 Determination
The Comptroller of the Currency and the Director of the Office of
Thrift Supervision have determined that this advance notice of proposed
rulemaking does not constitute a significant regulatory action under
Executive Order 12866.
Dated: October 26, 2000.
John D. Hawke, Jr.,
Comptroller of the Currency.
By order of the Board of Governors of the Federal Reserve
System, October 23, 2000.
Jennifer J. Johnson,
Secretary of the Board.
By order of the Board of Directors.
Dated at Washington, DC, this 17th day of October, 2000.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: October 19, 2000.
By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 00-28270 Filed 11-2-00; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P