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Federal R eserve Bank
OF DALLAS
ROBERT

D. M C T E E R , J R .

P R E S ID E N T
AND

C H IE F E X E C U T IV E

O F F IC E R

DALLAS, TEXAS 7 5 2 2 2

September 9, 1992

Notice 92-76
TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Joint Advance Notice of Proposed Rulemaking
Concerning Risk-Based Capital Standards
DETAILS

The Federal Reserve Board, Federal Deposit Insurance Corporation
(FDIC), and Office of the Comptroller of the Currency (OCC) have issued a
joint advance notice of proposed rulemaking requesting comments on revisions
to their risk-based capital guidelines to take account of interest rate risk.
Comments are also requested on proposals for revisions to accommodate concen­
tration of credit risk and the risks of nontraditional activities. These
revisions are required by section 305 of the FDIC Improvement Act of 1991.
The Boa r d’s comment deadline is October 9, 1992. Comments should be
addressed to William W. Wiles, Secretary, Board of Governors of the Federal
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, D.C.
20551. All comments should refer to Docket No. R-0764.
ATTACHMENT
Attached is a copy of the policy statement as it appears on pages
35507-11, Vol. 57, No. 154, of the Federal Register dated August 10, 1992.
MORE INFORMATION
For more information, please contact Dorsey Davis at (214) 744-7420.
For additional copies of this B a n k’s notice, please contact the Public Affairs
Department at (214) 922-5254.
Sincerely yours,

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas:
Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162,
Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

Federal Register / Vol. 57, No. 154 / Monday, August 10, 1992 / Proposed Rules_______ 35507

Corporation (FDIC); Office of the
Comptroller of the Currency (OCC),
Treasury; and Board of Governors of the
Federal Reserve System (Board).
a c t i o n : Joint advance notice of
proposed rulemaking.

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket No. 92-13]
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 AND 225
[D o c k e t No. R -0 7 6 4 ]

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
RIN 3064-A A 15

Risk-Based Capital Standards
a g e n c ie s:

Federal Deposit Insurance

s u m m a r y : The FDIC, the OCC, and the
Board (the Banking Agencies) solicit
comments on a proposed framework for
revising their risk-based capital
guidelines to take adequate account of
interest rate risk. The Banking Agencies
are also soliciting comments on how
their r,isk-based capital guidelines may
be revised to take account of
concentration of credit risk and the risks
of nontraditional activities. These
revisions are required by section 305 of
the Federal Deposit Insurance
Corporation Improvement Act of 1991
(FDICIA).
OATES: Comments must be received on
or before October 9,1992.
ADDRESSES: Commenters may respond
to any or all of the Banking Agencies.
All comments will be shared among all
the Banking Agencies.

FDIC: Hoyle L. Robinson, Executive
Secretary, Attention: Room F-400,
Federal Deposit Insurance Corporation,
55017th Street, NW„ Washington, DC
20429. Comments may be handdelivered to room F-400,1776 F Street
NW., Washington, DC, on business days
between 8:30 a.m. and 5 p.m. [FAX
number (202) 898-3838]. Comments will
be available for inspection and
photocopying in room F-400 between
8:30 a.m. and 5 p.m. on business days.
OCC: Written comments should be
submitted to Docket No. 92-13,
Communications Division, Ninth Floor,
Office of the Comptroller of the
Currency, 250 E Street SW., Washington,
DC 20219. Attention: Karen Carter.
Comments will be available for
inspection and photocopying at that
address.
B oard o f Governors: Comments,
which should refer to Docket No. R0764, may be mailed to Mr. William
Wiles, Secretary, Board of Governors of
the Federal Reserve System, 20th and
Constitution Avenue, NW„ Washington,
DC 20551. Comments addressed to Mr.

35508

Federal Register / Vol. 57, No. 154 / Monday, August 10, 1992 / Proposed Rules

Wiles may also be delivered to the
Board’s mail room between 8:45 a.m.
and 5:15 p.m. and to the security control
room outside of those hours. Both the
mail room and control room art
accessible from the courtyard entrance
on 20th Street between Constitution
Avenue and C Street, NW. Comments
may be inspected in room B-1122
between 9 a.m. and 5 p.m., except as
provided in § 261.8 of the Board's Rules
Regarding Availability of Information,
12 CFR 261.8.
FOR FURTHER INFORMATION CONTACT!

FDIC: For issues relating to interest
rate risk, William A. Stark, Assistant
Director (202/898-6972) or Susan
Dingilian, Capital Markets Specialist
(202/898-7327), Division of Supervision;
for issues relating to concentration of
credit risk and the risks of
nontraditional activities, Daniel M.
Gautsch, Examination Specialist (202/
898-6912), Division of Supervision; For
legal issues, Claude A. Rollin, Counsel
(202/898-3985), Legal Division, Federal
Deposit Insurance Corporation, 55017th
Street, NW., Washington, DC 20429.
OCC: Christina Benson. Capital
Markets Specialists (202/874-5070) or
Kurt Wilhelm, National Bank Examiner
(202/874-5070). Office of the Chief
National Bank Examiner; Kevin Jacques,
Financial Economist, Economic and
Regulatory Policy Analysis (202/8745220), and Ronald Shimabukuro, Senior
Attorney, Legal Advisory Services
Division (202/874-5330), Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.

ensure that those standards take
adequate account of (1) interest rate
risk, (2) concentration of credit risk, and
(3) the risks of nontraditional activities.
See, 12 U.S.C. 1828 note. The agencies
must pubjish final regulations
implementing section 305 by June 19,
1993, and establish reasonable transition
rules to facilitate compliance with those
regulations.
The Banking Agencies are issuing this
advance notice of proposed rulemaking
to seek public comment that will enable
them to develop a proposed rule. The
Banking Agencies solicit comments on
all aspects of a proposed method for
incorporating an interest rate risk (IRR)
component into the current risk-based
capital guidelines for banking
institutions and, more generally, on
ways that they may revise their riskbased capital guidelines to account for
the risks created by concentration of
credit and nontraditional activities. The
Banking Agencies also request comment
on any or all of the specific numbered
questions presented below, though
commenters may address any aspect of
the proposal and need not confine their
remarks to the numbered questions.
A. Proposal on Interest R ate R isk

Interest rate risk is the risk that
changes in market interest rates might
adversely affect a bank’s financial
condition. As financial intermediaries,
banks and other depository institutions
accept interest rate risk as a normal part
of their business. They assume this risk
whenever the interest rate sensitivity of
their assets does not match the
Board o f Governors: James V. Houpt,
sensitivity of their assets does not match
Assistant Director (202/452-3358), James the sensitivity of their liabilities or offEmbersit, Supervisory Financial Analyst balance-sheet positions.
(202/452-5249), Division of Banking
While mismatched positions often
Supervision and Regulation; Scott G.
permit institutions to profit from
Alvarez, Associate General Counsel
favorable changes in interest rates, they
(202/452-3583), Gregory A. Baer, Senior
also expose a bank’s earnings and
Attorney (202/452-3236), Legal Division, capital to potential losses. For a bank
Board of Governors of the Federal
with more interest-sensitive liabilities
Reserve System. For the hearing
than assets, a rise in interest rates can
impaired only, Telecommunication
reduce net interest income by increasing
Device for the Deaf (TDD), Dorothea
the institution’s cost of funds relative to
Thompson (202/452-3544), Board of
its yield on assets. Conversely, a bank
Governors of the Federal Reserve
with assets that reprice faster than
System, 20th and C Streets, NW.,
liabilities may experience a decline in
Washington, DC 20551.
net interest income if interest rates
decline in net interest income if interest
SUPPLEMENTARY INFORMATION:
rates decline.
I. Background and Introduction
Changes in interest rates may affect
Section 305 of the Federal Deposit
not only an institution’s current earnings
Insurance Corporation Improvement Act but also its future earnings and the
(FDICIA), Public Law 102-242, requires
economic value of its capital. These
the federal banking agencies to revise
effects are reflected in changes in the
their risk-based capital guidelines to
present value of an institution’s

financial instruments. For the bank with
liabilities repricing faster than assets,
the present value of its assets will
decline by more than the present value
of its liabilities should interest rates rise.
Hence, the economic value of its capital
will decline if rates increase.
An objective of the IRR framework
described herein is to ensure that banks
with high levels of IRR have sufficient
capital to cover their exposure. IRR
exposures would be quantified using a
measurement system that weights an
institution's assets, liabilities and offbalance sheet positions by risk factors
that approximate each instrument’s
price sensitivity to changes in interest
rates. The net amount of these weighted
values, the “Net Risk-Weighted
Position," would serve as the basis for
measuring an institution's IRR exposure
for capital adequacy purposes.
Under the proposal, institutions with
IRR exposures in excess of some
"threshold” level of IRR would be
required to hold capital proportional to
that excess risk. A supervisory decision
regarding what constitutes an
acceptable absolute level of measured
IRR exposure would be used in
conjunction with an industry
distribution of measured exposures to
specify the threshold level.
The proposed measurement system is
designed to minimize reporting burdens
while meeting regulatory needs. In view
of the number of simplifying
assumptions the system employs, the
Banking Agencies do not intend for it to
replace other, more sophisticated
procedures that banks may use in their
asset and liability management process.
B. Issues Concerning the R isks o f
Concentration o f Credit and
N ontraditional A ctivities
The Banking Agencies are not
presenting a proposal for revising
current risk-based capital guidelines to
account for concentration of credit risk
and the risks of nontraditional activities.
Before proceeding with a proposal for
these two risks, the Banking Agencies
are seeking guidance on how these risks
should be defined and on the factors
that should be considered when
incorporating these risks into capital
guidelines. These comments will be
considered in proposing any changes to
the risk-based capital guidelines.
C. Relationship o f Section 305 to the
Basle A ccord
Section 305 reflects an awareness by
Congress that capital standards are an

Federal Register / Vol. 57, No. 154 / Monday, August 10, 1992 / Proposed Rules
international issue. Section 305(b)(2)
requires the federal banking agencies to
discuss the development of comparable
standards with members of the
supervisory committee of the Bank for
International Settlements. In
implementing section 305, the Banking
Agencies seek to create a workable
system for measuring the risks identified
by section 305, while at the same time
continuing to work with international
organizations to develop consistent
capital standards.
The three distinctive types of risk
addressed by section 305 of FDICIA are
not explicitly incorporated in the Basle
Accord on risk-based capital that was
implemented by the three federal
banking agencies in 1989.1 The Basle
Accord tailors a bank’s minimum capital
requirement to broad categories of
credit risk embodied in its assets of offbalance-sheet instruments. Overall, the
Basle Accord requires banks to have
total capital equal to at least 8 percent
of their risk-weighted assets by the end
of 1992.2 Banks with high or inordinate
levels of risk are expected to operate
well above minimum capital standards.
The Basle Accord makes a bank’s
minimum capital requirements sensitive
to the risk of its assets and off-balancesheet positions. The Basle Accord,
however, focuses primarily on credit
risk. It does not impose explicit capital
charges tied to other factors that can
affect a bank’s financial condition,
including interest rate risk.
With current risk-based capital
guidelines based primarily on credit
risk, institutions may have an incentive
to substitute interest rate risk for credit
risk in structuring their balance sheets.
Recognizing this possibility, the Basle
Committee on Bank Supervision, under
1 T he “B asie A cco rd " refers to the A greem ent on
in te rn a tio n a l C o n v erg en ce of C ap ital M ea su re m en t
a n d C ap ital S ta n d a rd s o f July 1936. a s re p o rte d by
the B asle C om m ittee on Banking S upervision. T he
B asle A cco rd h a s b e e n im plem en ted by th e tw elv e
m em b er in d u stria l c o u n trie s p a rtic ip a tin g in the
B asle C om m ittee on Banking S u p erv isio n u n d e r the
a u sp ic e s o f th e B ank for In te rn a tio n a l Settlem en ts,
in Basle, S w itz e rla n d (Belgium. C a n a d a . France.
G erm any, Italy, Japan, Luxem bourg, the
N e th erla n d s, Sw ed en , S w itzerlan d , th e U nited
Ikingriom, a n d th e U n ited S tates) a s w ell a s o th e r
c o u n trie s th a t h a v e a s s e n te d to a p p ly th e prin cip les
o f the B asle A ccord. In the U nited S ta te s, the
B anking A gencies im p lem en ted th e B asle A ccord
through th e pro m u lg atio n o f risk -b a sed c ap ital
g u idelines. See 12 CFR p a rt 3, a p p e n d ix A (n atio nal
banks): 12 CFR p a rt 208, a p p e n d ix A (s ta te m em b er
ban k s); 12 CFR p a rt 225. a p p e n d ix A (b a n k holding
com pan ies); 12 CFR p a rt 325. a p p e n d ix A (state
n o n m e m b e r ban k s); 54 FR 4188, Jan u a ry 25.1989.
in terim re q u ire m e n ts b e ca m e effective at the e n d of
1990. a n d final re q u ire m e n ts w ill ta k e effect a t the
e n d o f 1992.
2 A s defined, risk -w eighted a s s e ts inclu d e cred it
e x p o su re s c o n ta in e d in o ff-b alan ce-sh eet
in stru m ents.

35509

the aegis of the Bank for International
the identification of institutions with
high or significant levels of risk.
Settlements (BIS), has been working to
Institutions identified as having IRR
address the treatment of interest rate
exposure greater than a supervisorrisk.
determined threshold would be required
The Banking Agencies are actively
to allocate additional capital to support
participating in that international effort.
their higher level of measured risk.
However, several factors suggest the
The proposal focuses on estimating
need for developing a separate
the effect that changes in market
“domestic” approach for addressing
interest rates might have on the net
interest rate risk. One consideration is
economic value of an institution.
that the time frame involved in
Exposures would be measured in terms
developing and implementing an
of the interest rate sensitivity of the net
international standard is, as yet,
present value of a bank’s on- and offuncertain. Accordingly, an international
balance-sheet positions. Specifically, the
standard would, most likely, not be
change in an institution's net economic
available to meet the deadline of June
value attributable to IRR would be
19,1993 specified in section 305 of
computed as the change in the present
FDICIA. Moreover, an international
standard that is designed for a myriad of value of its assets minus the change in
the present value of its liabilities and
financial instruments, often present at
only the largest and most internationally off-balance sheet positions for an
assumed 100 basis point parallel shift in
active bank3, may be needlessly
market interest rates.
complex for many of the nearly 12,000
A measurement methodology using
small and medium-size U.S. banks.
data submitted on an expanded
Finally, once an international
Consolidated Report of Condition and
framework emerges for the assessment
Income (Call Report) schedule would be
of interest rate risk, every country may
used to approximate the change in the
need to tailor it to the specific
present value of an institution’s assets,
characteristics and structure of its own
liabilities and off-balance-sheet
banking system.
positions for the assumed change in
In view of these considerations, and
rates. The methodology involves
pursuant to section 305 of FDICIA, the
assigning risk weights to both on- and
Banking Agencies will be proposing a
system for incorporating an interest rate off-balance-sheet positions. The risk
weights approximate the price volatility
risk component into the current riskof the positions in relation to changes in
based capital guidelines. The objective
interest rates and would be established
of this proposal is to make a bank’s
by the Banking Agencies. The resulting
capital requirement responsive to
significant levels of IRR. The proposal is estimate of the change in net economic
value for the 100 basis point shift,
designed to ensure that banks with high
levels of IRR have capital commensurate expressed as a percent of total assets,
would be used as the primary measure
with that risk, thereby reducing the
of an institution’s level of IRR.
exposure of the federal depository
The proposed measurement system is
institution insurance funds. The
designed to minimize reporting burdens
proposed approach uses a measure of
while meeting the regulatory need for
interest rate risk that is consistent
identifying basic asset and liability
with—although not identical to—that
mismatches that can materially affect a
being pursued internationally. As such,
the measure should be adaptable to any bank’s financial condition. The system
is not designed to derive precise
international agreement that may
measures of IRR exposure, but rather to
emerge.
provide an index that identifies relative
II. Interest Rate Risk—General
orders of magnitude of IRR exposure
Framework of Proposal
among banks. Accordingly, the proposed
measurement system is not intended to
An underlying principle of the
replace other, more sophisticated
proposal for incorporating IRR into the
procedures that banks may use in their
risk-basetl capital guidelines is that a
asset and liability management process.
certain amount of IRR is inherent and
Under the proposal, an institution
appropriate in commercial banking. In
with IRR exposure in excess of a
addition, the proposal acknowledges
threshold level would be required to
that the level of IRR in banks is difficult
allocate additional capital equal to the
to measure with a high degree of
dollar amount of the estimated change
confidence. Finally, the approach takes
in its net economic value that is in
into consideration the fact that, to date.
excess of that level, This would provide
IRR has not been a principal threat to
complete coverage of any incremental
the financial health of commercial
banks. Accordingly, the proposal targets exposures above the established

35510

Federal Register / Vol. 57, No. 154 / Monday, August 10, 1992 / Proposed Rules

threshold. For example, if threshold
levels of IRR exposure were set at 1.00
percent of total assets, an institution
with a measured exposure of 1.50
percent of assets would be required to
allocate a dollar amount of capital equal
to 0.50 percent of total assets.
The distribution of the exposures of
individual institutions across the
banking industry would be used to help
identify a threshold level of IRR.
However, in identifying what constitutes
the threshold level, the Banking
Agencies will focus greater attention on
what absolute level of IRR is consistent
with safety and soundness. The amount
of potential measurement error will also
be considered. It is envisioned that the
identified threshold level of IRR would
remain relatively stable over time. With
a stable definition of the threshold level
of IRR, changing risk patterns within the
industry would not cause shifts in the
level of risk that would require capital
coverage. Nevertheless, the Banking
Agencies may need to adjust
periodically the definition of the
threshold level of IRR in order to
account for changing market conditions,
improvements in the proposed
measurement system, and other factors.
The amount of any additional capital
required under the proposed
quantitative approach would represent
the minimum capital requirement for
IRR assuming that adequate internal
controls and management are in place.
On-site reviews could lead to higher
assessments for IRR than the proposed
quantitative measure would suggest if
an institution's specific positions
differed sufficiently from those assumed
by the measure. In addition, qualitative
factors such as a bank's asset/liability
policies, procedures, systems and
management expertise would also be
considered. To the extent that such
qualitative factors are determined to be
inadequate during the examination
process, institutions may be required to
hold additional capital beyond that
implied by their quantitative measure
and may also be required to correct any
noted deficiencies.
Section 305(b)(3) requires each federal
banking agency to establish reasonable
transition rules to facilitate compliance
with regulations issued under section
305. The Banking Agencies envision that
their proposed regulation will specify
implementation of the IRR component in
phases over a suitable transition period.
Once implemented, institutions would
need to meet capital requirements for
IRR contemporaneously with the
reporting date.

A. Proposed Interest R ate Risk
M easurem ent System
1. Overview
The methodology for measuring an
institution’s IRR exposure applies the
principles of duration to a standard
maturity gap report in order to
approximate the net change in the
economic value of the institution arising
from a change in interest rates.3
Institutions would slot their assets,
liabilities and off-balance-sheet
positions into a maturity ladder report
based upon their remaining maturities or
nearest repricing dates. The positions
reported in each maturity range would
then be multiplied by an IRR weight that
represents the interest rate sensitivity of
the respective positions. The IRR
weights would be established by the
Banking Agencies and would be based
on the modified duration of instruments
with maturities, cash flows, coupons
and yields that are assumed to be
representative of the position being
weighted.
Modified duration measures the
sensitivity of the present value of a
financial instrument to changes in
market rates. Specifically, modified
duration measures the percentage
change in the present value of an
instrument for small changes in yields.
The mathematical relationship is as
follows:
Percentage
change in
price

Modified

BP change
in yield

duration
too

The greater the duration of the
instrument, the more sensitive is its
value to changes in market rates.4
3 T h e p ro p o s e d m e a su re m e n t s y ste m w a s
p re s e n te d in p re lim in ary form In "A M eth o d for
E v a lu a tin g In te re s t R ate R isk in U.S. C om m ercial
B an k s," F e d e ra l R e s e rv e B ulletin, A u g u st 1891, p.
625-637.
8 T h e d u ra tio n o f a n in stru m e n t is the w eig h ted
a v e ra g e m a tu rity o f a n in s tru m e n t’s c a s h flow s,
w h e re th e p re s e n t v a lu e s o f th e c ash flo w s serv e as
th e w eig h ts. It is c a lc u la te d by first m ultiplying the
tim e u n til th e re c eip t o f e a c h c a s h flow by th e ra tio
o f th e p re s e n t v a lu e o f th a t c a s h flow to the
in s tru m e n t's to ta l p re s e n t v alue. T h e sum o f th e se
w e ig h te d tim e p e rio d s is k n o w n a s th e Mf&caulay
d u ra tio n o f th e in stru m e n t. T h is m e a su re c a n b e
m o d ified to e x p re ss th e p rice sen sitiv ity o f an
in stru m e n t to a g iv en ch an g e in ra te s. T h is is k n o w n
a s m o d ified d u ra tio n . M odified d u ra tio n is d e riv e d
b y d ividing a n in s tru m e n t's M a c a u la y d u ra tio n by
th e q u a n tity (1 + Y ie ld /K ) w h e re K is th e n u m b e r of
tim es p e r y e a r th a t in te re s t is co m p o u n d e d . T his
d iv isio n a d ju sts th e M a c a u la y d u ra tio n for th e
n o n c o n tin u o u s co m p o u n d in g o f in te re s t a n d
in c re a se s th e a c c u ra c y o f du ra tio n a s a m e a su re of
in te re s t ra te sensitiv ity.
Fo r sm all ch an g e s in ra te s, the p e rc en tag e ch an g e
in th e v a lu e o f a n in s tru m e n t is e q u a l to m in u s
d u ra tio n tim es th e p e rc e n ta g e p o in t ch an g e in rates.

The duration-based risk weights used
in the proposed measurement system
are expressed in percentage terms, and
the basis point change in rates is
assumed to be 100 basis points.
Therefore, the weighting of assets,
liabilities and off-balance-sheet
positions results in an approximation of
the nominal change in the present value
of the reported position for an assumed
one percentage point change in rates.
Netting these weighted positions both
within and across time bands (weighted
assets minus weighted liabilities plus (or
minus) weighted net off-balance-sheet instruments) results in a "Net RiskWeighted Position” that serves as a
rough approximation of the nominal
change in an institution’s net economic
value that would arise from a one
percentage point change in rates. This
net risk-weighted position, expressed as
a percent of total assets, is the primary
quantitative measure that would be used
to evaluate an institution’s exposure to
IRR.
The Banking Agencies recognize that
the proposed measurement system may
not provide a precise measure of IRR
and that errors may exist.5
Nevertheless, several factors argue for a
relatively simple measure of IRR over
other, more complex methodologies.
One factor is the potential for spurious
precision that can be introduced by
complex models. Often, the complexity
of a methodology and the precision of
the data collected are dominated by the
underlying assumptions used to derive
an IRR exposure measure. Even the
most sophisticated measures of IRR
require certain assumptions that can
materially affect the results. For banks,
many of these assumptions relate to
assets and liabilities with embedded
options that make their interest rate
sensitivity difficult to estimate; the
interest rate sensitivity of core deposits
is an important example. The overriding
influence of such assumptions suggests
caution in trying to estimate absolute
levels of IRR across the entire industry
using complex, but still generalized,
measurement systems.
T he m in u s sign re flects th e in v e rse re la tio n s h ip o f
b o n d p rices a n d in te re s t ra te s.
5 Fo r ex am p le, th e re la tio n s h ip b e tw e e n a n
in s tru m e n t’s d u ra tio n a n d c h an g e s in v a lu e is e x a c t
only for in fin itesim al c h an g e s in ra te s a n d is only
a p p ro x im a te for la rg e r c h an g e s in ra te s. D u ra tio n is
only a lin e a r a p p ro x im a tio n of in te re s t ra te
sen sitiv ity a n d its c o n v ex ity lim its d u ra tio n ’s
e x p la n a to ry ab ility . M oreover, its u se w ith in th e
m e a su re m e n t sy stem a ss u m e s p a ra lle l sh ifts in th e
yield curve. T h e s e a n d o th e r fa c to rs c a n re su lt in
e stim atio n erro rs of th e chan g e in e co n o m ic v a iu e
w h e n c o m p a re d to sim ilar m e a su re s d e riv e d using
m ore co m p lex tec h n iq u es.

Federal Register / Vol. 57, No. 154 / Monday, August 10, 1992 / Proposed Rules_______ 35511
An additional factor supporting a
relatively simple approach is the need to
minimize reporting requirements while
meeting regulatory needs. In general,
bank supervisors do not need the same
level of precision that bank management
may need. The Banking Agencies also
do not with to become involved in the
day-to-day operations of the institutions
they regulate. Rather, regulators are
concerned principally with identifying
significant threats to a bank’s solvency
and understanding the nature of its
business; they are less concerned with
small changes to its earnings.
By focusing supervisory attention and
capital requirements on banks with high
levels of IRR, supervisors hope to avoid
developing and administering dateintensive models. Although some
estimation errors may exist under the

proposed measurement system, the
imprecision of the measure and the use
of some underlying assumptions are not
likely to mask the exposures of banks
facing the highest risk or cause truly
low-risk institutions to appear as having
high levels of IRR. The most significant
errors are expected to be introduced by
the treatment of core deposits, for which
no measure is precise. Accordingly,
because of its simplicity, the #proposed
measurement system is not intended to
replace other, more sophisticated
procedures that banks use in their asset
and liability management process.
2. Information Requirements
Table 1 illustrates the repricing
schedule that could be used in the
proposed IRR measurement system.
Summary instructions for compiling this

information in an expanded Gall Report
schedule are presented in the Appendix.
Institutions would slot their interest
bearing assets, interest bearing
liabilities, demand deposits and offbalance-sheet items across six maturity
ranges or time bands based on the
instrument’s remaining maturity or next
repricing date. For illustrative purposes,
lines for “Other Assets” and “Other
Liabilities” are included in Table 1 to
allow the schedule to “foot” to an
institution’s balance sheet (Call Report
Schedule RC). However, only positions
distributed across the time bands would
be risk-weighted. All institutions would
be expected to submit the proposed
reporting schedule on a quarterly basis.
BtU-MG CODE 4810-33-M (210-01-M S7I4-01-M


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