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FIL-42-99 Attachment

[Federal Register: April 19, 1999 (Volume 64, Number 74)]

[Rules and Regulations]

[Page 19034-19039]

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

[DOCID:fr19ap99-4]


 

=======================================================================

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


 

DEPARTMENT OF THE TREASURY


 

Office of the Comptroller of the Currency


 

12 CFR Part 3


 

[Docket No. 99-04]

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 final rule.


 

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


 

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

adopting as a final rule an interim rule amending their respective

risk-based capital standards for market risk applicable to


 

[[Page 19035]]


 

certain banks and bank holding companies with significant trading

activities. The interim rule implemented a revision to the Basle Accord

adopted in 1997. Prior to the revision, an institution that measured

specific risk with an internal model that adequately measured such risk

was subject to a minimum capital charge. An institution's capital

charge for specific risk had to be at least as large as 50 percent of a

specific risk charge calculated using the standardized approach. The

rule will finalize the interim rule, which reduced regulatory burden

for institutions with qualifying internal models because they no longer

must calculate a standardized specific risk capital charge.


 

EFFECTIVE DATE: This final rule is effective on July 1, 1999.


 

FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert

(202/874-5070), Amrit Sekhon, Risk Specialist (202/874-5070), Capital

Policy Division; or Ronald Shimabukuro, Senior Attorney (202/874-5090),

Legislative and Regulatory Activities Division, Office of the

Comptroller of the Currency, 250 E Street, S.W., Washington, DC 20219.

Board: James Houpt, Deputy Associate Director (202/452-3358),

Barbara Bouchard, Manager (202/452-3072), T. Kirk Odegard, Financial

Analyst (202/530-6225), Division of Banking Supervision; or Stephanie

Martin, Senior Counsel (202/452-3198), Mark E. Van Der Weide, Attorney

(202/452-2263), Legal Division. For the hearing impaired only,

Telecommunication Device for the Deaf (TDD), Diane Jenkins (202/452-

3544), Board of Governors of the Federal Reserve System, 20th and C

Streets, N.W., Washington, DC 20551.

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; for legal issues, Jamey Basham, Counsel (202/

898-7265), Legal Division, Federal Deposit Insurance Corporation, 550

17th Street, N.W., Washington, DC 20429.


 

SUPPLEMENTARY INFORMATION:


 

I. 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 (Basle 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

general counterparty credit risk.1 In December 1995, the G-

10 Governors endorsed the Basle Committee's amendment to the Accord

(effective by year-end 1997) to incorporate a measure for exposure to

market risk (market risk amendment) into the capital adequacy

assessment. On September 6, 1996, the agencies issued revisions to

their risk-based capital standards implementing the Basle Committee's

market risk amendment (market risk rules) (61 FR 47358). In September

1997, the Basle Committee modified the market risk amendment and on

December 30, 1997, the agencies issued an interim rule implementing

that modification (62 FR 68064).

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


 

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

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

and the United States. The Basle 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 both general market risk and

specific risk. General market risk refers to changes in the market

value of on-and off-balance-sheet items resulting from broad market

movements in interest rates, equity prices, foreign exchange rates, and

commodity prices. An institution must measure its general market risk

using its internal risk measurement model, subject to certain

qualitative and quantitative criteria, to calculate a capital charge

based on the model-determined value-at-risk (VAR).2

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


 

\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 becoming

subject to 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.

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


 

Specific risk refers to changes in the market value of individual

debt and equity positions in a trading portfolio due to factors other

than broad market movements. Under the agencies' market risk rules, an

institution may measure its specific risk by using either the

standardized approach 3 or its own internal model, if the

institution can demonstrate to the appropriate banking agency that the

model adequately measures specific risk. When the agencies initially

adopted the market risk rules, an institution using its internal model

to measure specific risk was required to hold capital for specific risk

equal to at least 50 percent of the specific risk charge calculated

using the standardized approach (the minimum specific risk charge). If

the portion of the institution's VAR attributable to specific risk did

not equal the minimum specific risk charge, the institution's VAR-based

capital charge was subject to an add-on charge of the difference

between the two. In practice, this required an institution employing an

internal model to measure specific risk to also calculate the specific

risk charge using the standardized approach.

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


 

\3\ The standardized approach applies a risk-weighting process

developed by the Basle Committee to individual financial

instruments. Under this approach, debt and equity instruments in the

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

capital charge.

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


 

When the agencies included the minimum specific risk charge as part

of the market risk rules, they recognized that dual calculations of

specific risk--that is, calculating specific risk with internal models

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 Basle Committee's belief that a minimum charge was necessary

to ensure that modeling techniques for specific risk adequately

measured that risk. After the Basle Committee adopted the market risk

amendment, many institutions improved their modeling techniques and, in

particular, their modeling of specific risk. Recognizing these

improvements, in September 1997 the Basle Committee decided to

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

a separate calculation. The Basle Committee revised the market risk

amendment so that an institution using a valid internal model to

measure specific risk could use the VAR measures generated by the model

without comparing the model-generated results to the minimum specific

risk charge calculated under the standardized approach.4 The

revisions specified that the specific risk elements of internal models

would be assessed consistently with the assessment of the general

market risk elements of such models through backtesting and review by

the relevant agency.

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


 

\4\ 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


 

[[Page 19036]]


 

issued an interim rule with a request for comment (62 FR 68064) in

December 1997. As discussed in the interim rule, the agencies found

sufficient good cause to make the amendments effective immediately,

without prior opportunity for public comment or a delayed effective

date. The interim rule applied only to the calculation of specific risk

under the market risk rules, and all other aspects of the market risk

rules remained unchanged.


 

II. Comments Received


 

The agencies received a total of three public comments on the

interim rule (two from industry trade associations and one from a

financial institution). All three commenters supported the interim

rule, primarily because of its reduction of regulatory burden. None of

the commenters suggested any changes to the interim rule.


 

III. Final Rule


 

The agencies are adopting in final form, without substantive

change, the interim rule eliminating 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. This final rule does not apply

to institutions that use the standardized method to calculate specific

risk.

For those institutions using internal models to calculate their

specific risk charges, the agencies will continue to review the

internal models to determine whether or not they adequately measure

specific risk. In reviewing these internal models, the agencies will

evaluate the extent to which the internal models adequately capture

idiosyncratic price variations of debt and equity instruments due to

circumstances unique to the issuer, as well as the instruments'

exposure to event and default risk. In order to capture specific risk

adequately, an institution's internal model must explain the historical

price variation in the portfolio. Internal models must also be

sensitive to changes in portfolio concentrations (both magnitude and

changes in composition), and require additional capital for greater

concentrations. The agencies likewise will take into account whether an

internal model is sensitive to an adverse environment. If an

institution's internal model adequately captures specific risk, the

institution may base its specific risk capital charge on the internal

model's estimates.

If an institution's internal model does not adequately measure

specific risk, the institution must continue to calculate the standard

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

capital charge for general market risk to produce its total regulatory

capital requirement for market risk. If an institution's internal model

adequately addresses idiosyncratic risk but does not adequately capture

all other aspects of specific risk, including event and default risk,

the institution may use its internal model to calculate specific risk,

but it will have a ``specific risk add-on.'' The specific risk add-on

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

have the effect of subjecting the modeled specific risk to a minimum

multiplier of four.5

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


 

\5\ 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 whose internal model is

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

risk components must use as its measure for market risk 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. Under the second

approach, an institution whose internal model does not separately

identify the specific and general market risk components of its VAR

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

capital charge, plus an add-on consisting of the VAR measures of the

subportfolios of debt and equity positions that contain specific risk.

An institution using the second approach may not alter its subportfolio

structures for the sole purpose of decreasing its VAR measure.

An institution using its internal model for specific risk capital

purposes must backtest the model to assess whether the model accurately

explains observed price variations arising from both general market

risk and specific risk. To assist in internal model validation, the

institution should perform backtests on its traded debt and equity

subportfolios that contain specific risk. 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 modeled accurately. If subportfolio backtests indicate 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 expect institutions to continue improving their

internal models, particularly with respect to 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 methods are improved and become accepted

within the industry as effective measurement techniques for event and

default risk, the agencies will consider permitting such models to be

applied without any add-on charge. The Basle 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.


 

IV. Changes From the Interim Rule


 

In adopting the final rule, the Board and FDIC made certain wording

changes. These changes do not alter the effect or substance of the

final rule, and only conform or clarify the language.

First, both the Board and the FDIC changed their language which

states that a bank that incorporates specific risk into its internal

model but fails to demonstrate that its internal model adequately

measures all aspects of specific risk may use its internal model to

calculate specific risk subject to a ``specific risk add-on.'' This

change was made to make the agencies' language more consistent. Second,

the Board and the FDIC conformed their definition of ``specific risk''

to be more consistent with the OCC's language. Third, the FDIC has

changed paragraph (c) of Appendix C of Part 325 Section 5 to clarify

that, when an institution models the specific risk of either its

covered debt positions or its covered equity positions, but not both

components, the capital treatment specified for modeled specific risk

will apply as to the modeled component, and the standardized approach

will apply as to the non-modeled component. The add-on charge will

consist of the specific risk charge determined under the


 

[[Page 19037]]


 

standardized approach for the non-modeled component, plus the specific

risk add-on, if any, for the modeled component (because the model does

not adequately measure event and default risk). The FDIC's change in

this regard is technical. The language of the interim rule also

effectuated this approach, but the changes make it clearer to the

reader.


 

V. Regulatory Flexibility Act Analysis


 

Pursuant to section 603 of the Regulatory Flexibility Act (RFA),

RFA does not apply if any agency is not required to issue a Notice of

Proposed Rulemaking. Nevertheless, the agencies have considered the

impact of this final rule and determined that it will 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 final rule will rarely, if ever, apply to small entities.

Moreover, this final rule reduces 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.


 

VI. Paperwork Reduction Act


 

The agencies have determined that the 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.).


 

VII. Small Business Regulatory Enforcement Fairness Act


 

The Small Business Regulatory Enforcement Fairness Act of 1996

(SBREFA) (Title II, Pub. L. 1004-121) provides generally for agencies

to report rules to Congress for review. The reporting requirement is

triggered when a federal agency issues a final rule. Accordingly, the

agencies filed the appropriate reports with Congress as required by

SBREFA.

The Office of Management and Budget has determined that these final

rules do not constitute ``major rules'' as defined by SBREFA.


 

VIII. OCC Executive Order 12866 Determination


 

The OCC has determined that the final rule does not constitute a

``significant regulatory action'' for the purpose of Executive Order

12866.


 

IX. OCC Unfunded Mandates Reform Act of 1995 Determination


 

Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.

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 final rule eliminates the minimum specific risk charge for

institutions that use internal models that adequately capture specific

risk. The effect of this final 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 final

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 addressed the regulatory alternatives

considered.


 

X. FDIC Assessment of Impact of Federal Regulation on Families


 

The FDIC has determined that this final rule will not affect family

well-being within the meaning of section 654 of the Treasury and

General Government Appropriations Act of 1999 (Pub. Law 105-277).


 

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, the OCC's portion of

the joint interim rule with request for comment amending 12 CFR part 3

titled Risk-Based Capital Standards: Market Risk, published on December

30, 1997, at 62 FR 68067 is adopted as final without change.


 

Dated: March 24, 1999.

John D. Hawke, Jr.,

Comptroller of the Currency.


 

Federal Reserve System


 

12 CFR Chapter II


 

For the reasons set forth in the joint preamble, the Board's

portion of the joint interim rule with request for comment, amending 12

CFR parts 208 and 225, published on December 30, 1997, at 62 FR 68067

is adopted as final with the following changes:


 

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, 92a, 93a, 248(a), 248(c), 321-338a,

371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o),

1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-

3351, and 3906-3909; 15 U.S.C. 78b, 78l(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, the appendix heading is revised to

read as follows:


 

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

Member Banks; Market Risk Measure


 

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 and

includes event and default risk as well as idiosyncratic variations.

* * * * *

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

the


 

[[Page 19038]]


 

introductory text of paragraph (c) 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 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) Partially modeled specific risk. (1) A bank that

incorporates specific risk in its internal model but fails to

demonstrate to the Federal Reserve that its internal model

adequately measures all aspects of specific risk for covered debt

and equity positions, including event and default risk, as provided

by section 5(a), of this appendix must calculate its specific risk

add-on in accordance with one of the following methods:

(i) 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.

(ii) 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 equity positions that contain

specific risk.

(2) If a bank models the specific risk of covered debt positions

but not covered equity positions (or vice versa), then the bank may

determine its specific risk charge for the included positions under

section 5(a) or 5(b)(1) of this appendix, as appropriate. The

specific risk charge for the positions not included equals the

standard specific risk capital charge under paragraph (c) of this

section.

(c) Specific risk not modeled. If a bank does not model specific

risk in accordance with section 5(a) or 5(b) of this appendix, then

the bank's specific risk capital charge shall equal the standard

specific risk capital charge, calculated as follows:

* * * * *


 

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 to

read as follows:


 

Appendix E to Part 225--Capital Adequacy Guidelines for Bank

Holding Companies: Market Risk Measure


 

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 and

includes event and default risk as well as idiosyncratic variations.

* * * * *

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

the introductory text of paragraph (c) 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 organization 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 organization 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) Partially modeled specific risk. (1) A bank holding company

that incorporates specific risk in its internal model but fails to

demonstrate to the Federal Reserve that its internal model

adequately measures all aspects of specific risk for covered debt

and equity positions, including event and default risk, as provided

by section 5(a) of this appendix, must calculate its specific risk

add-on in accordance with one of the following methods:

(i) 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.

(ii) 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 equity positions that contain

specific risk.

(2) If a bank holding company models the specific risk of

covered debt positions but not covered equity positions (or vice

versa), then the bank holding company may determine its specific

risk charge for the included positions under section 5(a) or 5(b)(1)

of this appendix, as appropriate. The specific risk charge for the

positions not included equals the standard specific risk capital

charge under paragraph (c) of this section.

(c) Specific risk not modeled. If a bank holding company does

not model specific risk in accordance with section 5(a) or 5(b) of

this appendix, then the organization's specific risk capital charge

shall equal the standard specific risk capital charge, calculated as

follows:

* * * * *

By order of the Board of Governors of the Federal Reserve

System, April 7, 1999.

Jennifer J. Johnson,

Secretary of the Board.


 

Federal Deposit Insurance Corporation


 

12 CFR Chapter III


 

For the reasons set forth in the joint preamble, FDIC's portion of

the joint interim final rule with request for comment amending 12 CFR

part 325, published December 30, 1997, at 62 FR 66068 is adopted as

final with the following changes:


 

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, the appendix heading is revised to

read as follows:


 

Appendix C to Part 325--Risk-Based Capital for State Non-Member

Banks: Market Risk


 

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 and

includes event and default risk as well as idiosyncratic variations.

* * * * *

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

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

* * * * *


 

[[Page 19039]]


 

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 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. A bank that

incorporates specific risk in its internal model but fails to

demonstrate to the FDIC that its internal model adequately measures

all aspects of specific risk for covered debt and equity positions,

including event and default risk, as provided by section 5(a) of

this appendix, must calculate the bank's specific risk add-on for

purposes of section 3(a)(2)(ii) of this appendix as follows:

(1) If the model is capable of 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 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 sum of the

components for covered debt and equity positions. If a bank models,

in accordance with paragraph (a) or (b) of this section, the

specific risk of covered debt positions but not covered equity

positions (or vice versa), then the bank's specific risk add-on

charge for the positions not modeled is the component for covered

debt or equity positions as appropriate:

* * * * *

Dated at Washington, D.C. this 23rd day of March, 1999.


 

By order of the Board of Directors.


 

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 99-9185 Filed 4-16-99; 8:45 am]

BILLING CODES 4810-33-P; 6210-01-P; 6714-01-P

Last Updated: March 24, 2024