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Financial Institution Letter

Risk-Based Capital Rules Proposed Rule on Risk-Based Capital Standards: Market Risk

September 25, 2006
Notes
 
Summary: The federal bank and thrift regulatory agencies have jointly issued the attached notice of proposed rulemaking (NPR) on possible modifications to the risk-based capital standards for market risk. The proposed rule would incorporate improvements to the current trading book regime as proposed by the Basel Committee on Bank Supervision and the International Organization of Securities Commissions in the joint document The Application of Basel II to Trading Activities and the Treatment of Double Default Effects , published in July 2005. The proposed rule would also apply to certain savings associations, which currently are not covered under the rule. The FDIC will accept comments on the NPR through January 23, 2007.

Highlights:
The proposed rule:

  • Applies to banks with aggregate trading assets and liabilities equal to 10 percent or more of quarter-end total assets as reported on the most recent quarterly Call Report or Thrift Financial Report, or equal to $1 billion or more.
  • Establishes more explicit eligibility criteria for positions that receive market risk capital treatment; sets requirements for prudent valuation and robust stress testing, and for the control, oversight and validation mechanisms for models; and expects banks to have an internal capital assessment for market risk.
  • Introduces a new minimum regulatory capital charge, the incremental default risk requirement, which captures default risk over a time horizon of one year, taking into account the impact of liquidity, concentrations, hedging and optionality.
  • Updates standard specific risk capital requirements for sub-investment grade government debt positions and non-qualifying debt positions to conform to Basel II credit risk weights.
  • Replaces the current joint final rule on "Risk-Based Capital Standards: Market Risk," published in the Federal Register on September 6, 1996 (see FIL-84-96 , dated October 10, 1996).In reply to: Suggested Routing: Chief Executive Officer Chief Financial Officer Chief Risk Officer

Distribution:
FDIC-Supervised Banks (Commercial and Savings)

Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer

Note:
FDIC financial institution letters (FILs) may be accessed from the FDIC's Web site at www.fdic.gov/news/financial-institution-letters/2006/index.html .

To receive FILs electronically, please visit http://www.fdic.gov/about/subscriptions/fil.html .

Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 3501 Fairfax Drive, E-1002, Arlington, VA 22226 (1-877-275-3342 or 703-562- 2200).

Additional Related Topics:

  • Risk-Based Capital Rules 12 CFR Part 325 Basel II Market Risk
FIL-87-2006
Attachment(s)

Last Updated: September 25, 2006