The FDIC today proposed new rules to require banks with large
trading portfolios to more accurately project their future losses. Banks
would have to compare past estimates of market risk with actual results --
a process known as "backtesting." Banks proven to have a poor record
predicting market risks could be required to increase their capital holdings.
The Office of the Comptroller of the Currency and the Federal
Reserve Board are expected soon to issue the proposal for the banks they
"Regulators and bankers alike agree that 'backtesting' is an
important ingredient that should be carefully evaluated in the overall
framework of risk management. For that reason we are requesting
comments on this proposal," FDIC Chairman Ricki Helfer said. "The goal
is to give banks incentives for understanding and addressing market risks,
without creating undue regulatory burdens."
Today's proposal expands on a July plan to establish a capital
requirement for market risk in foreign exchange and commodity activities
and in the trading of debt and equity securities.
As with the July proposal, institutions with large trading activities
would calculate their risk-based capital requirements using their own internal
models of "value-at-risk" -- essentially the maximum amount a
trading portfolio is likely to decline during a set period. Today's proposal,
on which comments are requested, would require the banks to backtest
their internal models each quarter by comparing actual net gains or losses
to the previous projections. If the tests show the quality and accuracy of
the bank's risk management system to be lacking, the institution could be
required to increase capital. The first backtesting would begin in January
1999 comparing internal model projections to actual trading results since
The FDIC will accept public comments on the new proposal for 30
days after it appears in the Federal Register. The proposal was developed
on an interagency basis. Under the system proposed in July, approximately
25 of the largest U.S. banks plus a few smaller banks would be required
to base their capital levels partly on projections of market risk.
Congress created the Federal Deposit Insurance Corporation in 1933 to
maintain public confidence in the nation's banking system. The FDIC
insures deposits at the nation's 12,000 banks and savings associations and
it promotes the safety and soundness of these institutions by identifying,
monitoring and addressing risks to which they are exposed.