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F ed er a l R es e r v e Ban k
of

Dallas

ROBERT D. McTEER, JR.
DALLAS, TEXAS

PR ES ID EN T

75265-5906

AND CH IE F E X EC U TIVE O FFICER

January 16, 1998
Notice 98-05

TO: The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District
SUBJECT
Interim Rule and Request for Public Comment
on Risk-Based Capital Standards
DETAILS
The Office of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, and the Federal Deposit Insurance Corporation (collectively, the Agencies)
have issued an interim rule and requested public comment on their respective risk-based capital
standards for market risk applicable to certain banks and bank holding companies with signifi­
cant trading activities.
The amendment eliminates 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. The amendment implements a revision to the
Basle Accord that permits such treatment for an institution whose internal model adequately
measures specific risk. The rule will reduce regulatory burden for institutions with qualifying
internal models because they will no longer be required to calculate a standard specific risk
capital charge.
The interim rule became effective December 31, 1997. The Board must receive
comments by March 2, 1998. Please address comments to William W. Wiles, Secretary, Board
of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, N.W., Wash­
ington, DC 20551. All comments should refer to Docket No. R-0996.
ATTACHMENT
A copy of the Agencies’ notice as it appears on pages 68063-69, Vol. 62, No. 249 of
the Federal Register dated December 30, 1997, is attached.
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)

MORE INFORMATION
For more information, please contact Dorsey Davis at (214) 922-6051. For addi­
tional copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

Tuesday
December 30, 1997

Part V
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3

Federal Reserve System
12 CFR Parts 208 and 225

Federal Deposit Insurance
Corporation
12 CFR Part 325
Risk-Based Capital Standards: Market
Risk; Interim Rule

68063

68064

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket No. 97-25]
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

Office of the Comptroller of
the Currency, Treasury; Board of
Governors of the Federal Reserve
System; and Federal Deposit Insurance
Corporation.
ACTION: Joint interim rale with request
for comment.
AGENCIES:

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
amending their respective risk-based
capital standards for market risk
applicable to certain banks and bank
holding companies with significant
trading activities. The amendment
eliminates 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. The amendment
implements a revision to the Basle
Accord that permits such treatment for
an institution whose internal model
adequately measures specific risk. The
rale will reduce regulatory burden for
institutions with qualifying internal
models because they will no longer be
required to calculate a standard specific
risk capital charge.
DATES: This interim rule is effective
December 31, 1997. Comments must be
received by March 2,1998.
ADDRESSES: Comments should be
directed to:
OCC: Comments may be submitted to
Docket No. 97-25, Communications
Division, Third Floor, Office of the
Comptroller of the Currency, 250 E
Street, S.W., Washington DC 20219.

SUMMARY:

Comments will be available for
inspection and photocopying at that
address. In addition, comments may be
sent by facsimile transmission to FAX
number (202) 874-5274, or by electronic
mail to regs.comment@occ.treas.gov.
Board: Comments directed to the
Board should refer to Docket No. R 0996 and may be mailed to Mr. William
W. Wiles, Secretary, Board of Governors
of the Federal Reserve System, 20th
Street and Constitution Avenue, N.W.,
Washington DC 20551. Comments
addressed to the attention of Mr. Wiles
may also be delivered to Room B-2222
of the Eccles Building between 8:45 a.m.
and 5:15 p.m. weekdays, or the security
control room in the Eccles Building
courtyard on 20th Street, N.W. (between
Constitution Avenue and C Street) at
any time. Comments may be inspected
in Room MP-500 of the Martin Building
between 9:00 a.m. and 5:00 p.m.
weekdays, except as provided in 12 CFR
261.8 of the Board’s Rules Regarding
Availability of Information.
FDIC: Send written comments to
Robert E. Feldman, Executive Secretary,
Attention: Comments/OES, Federal
Deposit Insurance Corporation, 550 17th
Street, N.W., Washington, DC 20429.
Comments may be hand-delivered to the
guard station at the rear of the 17th
Street Building (located on F Street), on
business days between 7:00 a.m. and
5:00 p.m. (FAX 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, N.W., Washington, DC 20429,
between 9:00 a.m. and 4:30 p.m. on
business days.
FOR FURTHER INFORMATION CONTACT:

OCC: Roger Tufts, Senior Economic
Advisor (202/874-5070), Capital Policy
Division; Margot Schwadron, Financial
Analyst (202/874-5670), Treasury and
Market Risk; or Ronald Shimabukuro,
Senior Attorney (202/874-5090),
Legislative and Regulatory Activities
Division.
Board: Roger Cole, Associate Director
(202/452-2618), James Houpt, Deputy
Associate Director (202/452-3358),
Barbara Bouchard, Senior Supervisory
Financial Analyst (202/452-3072),
Division of Banking Supervision; or
Stephanie Martin, Senior Attorney (202/
452-3198), Legal Division. For the
hearing impaired only,
Telecommunication Device for the Deaf
(TDD), Diane Jenkins (202/452-3544).
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; Jamey Basham, Counsel

(202/898-7265), Legal Division, Federal
Deposit Insurance Corporation, 550 17th
Street, N.W., Washington DC 20429.
SUPPLEMENTARY INFORMATION:

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 (Committee) and
endorsed by the central bank governors
of the Group of Ten (G— countries
10)
(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 counterparty credit risk.1 In
December 1995, the G-10 Governors
endorsed the Committee’s amendment
to the Accord (effective by year-end
1997) to incorporate a measure for
exposure to market risk into the capital
adequacy assessment. On September 6,
1996, the Agencies issued revisions to
their risk-based capital standards
implementing the Committee’s market
risk amendment (61 FR 47358).
Under the Agencies’ market risk rales,
banks and bank holding companies
(institutions) with significant trading
activities must measure and hold capital
for exposure to general market risk
arising from fluctuations in interest
rates, equity prices, foreign exchange
rates, and commodity prices and
exposure to specific risk associated with
debt and equity positions in the trading
portfolio. General market risk refers to
changes in the market value of onbalance-sheet assets and off-balancesheet items resulting from broad market
movements. Specific risk refers to
changes in the market value of
individual positions due to factors other
than broad market movements and
includes such risks as the credit risk of
an instrument’s issuer.
Under the Agencies’ current rules, an
institution must measure its general
market risk using its internal risk
measurement model, subject to certain
qualitative and quantitative criteria, to
calculate a value-at-risk (VAR) based
capital charge.2 An institution may
1The G -10 countries are Belgium, Canada,
France, Germany, Italy, Japan, Netherlands,
Sweden, Switzerland, the U nited Kingdom, and the
U nited States. The Committee is com prised of
representatives of th e central banks and supervisory
authorities from th e G— countries and
10
Luxembourg.
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 m ultiplied by a factor

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations
measure its specific risk through a valid
internal model or by the so-called
standardized approach. The
standardized approach uses a riskweighting process developed by the
Committee that is applied to individual
instruments and through which debt
and equity positions in the institution’s
trading account are assessed a categorybased fixed capital charge. However, the
Agencies’ current rules provide that an
institution using an internal model to
measure specific risk must hold capital
for specific risk at least equal to 50
percent of the specific risk charge
calculated using the standardized
approach (referred to as the minimum
specific risk charge). If the portion of the
institution’s VAR which is attributable
to specific risk does not equal the
minimum specific risk charge, the
institution’s VAR-based capital charge is
subject to an add-on charge for the
difference. The sum of these capital
charges is factored into an institution’s
risk-based capital ratio.
When the Agencies included the
minimum specific risk charge as part of
the market risk rules, the Agencies
recognized that dual calculations of
specific risk—that is, calculating
specific risk in the internal model 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
Committee’s conviction, at the time the
Committee adopted its market risk
amendment, that a floor was necessary
to ensure that modeling techniques for
specific risk adequately measured that
risk.
Since the Committee adopted the
market risk amendment, many
institutions have significantly improved
their modeling techniques and, in
particular, their modeling of specific
risk. In September 1997 the Committee
determined that sufficient progress had
been made to eliminate the use of the
minimum specific risk charge and the
burden of a separate calculation.
Accordingly, the Committee revised the
market risk amendment to the Accord so
that an institution using a valid internal
model to measure specific risk may use
the VAR measures generated by the
model without being required to
compare the model-generated results to
the minimum specific risk charge as
calculated under the standardized

An institution whose internal model
does not adequately measure specific
risk must continue to calculate the
standard specific risk capital charge and
add that charge to its VAR-based capital
charge to produce its total regulatory
capital requirement for market risk. An
institution whose internal model
adequately captures specific risk may
base its specific risk capital charge on
the model’s estimates.
The Agencies will review an
institution’s internal model to ensure
that the model adequately measures
specific risk. In order to clarify the risks
that must be assessed in this regard, the
rule contains a new definition that
states that specific risk means the
changes in market value of specific
positions due to factors other than broad
market movements, including such risks
as idiosyncratic variation as well as
event and default risk. In order to
adequately capture specific risk, an
institution’s internal model must
explain the historical price variation in
the portfolio and be sensitive to changes
in portfolio concentrations (both
magnitude and changes in composition),
requiring additional capital for greater
concentrations. The Agencies will also
take into account whether an internal
model is robust to an adverse

of three. Beginning no later than one year after
adopting the m arket risk rules, an institution is
required to backtest its internal model. An
institution m ay be required to apply a higher
m ultiplication factor, u p to a factor of four, based
on backtesting results.

3 The revisions are described in the Com m ittee’s
docum ent entitled “Explanatory Note: M odification
of the Basle Capital Accord of July 1988, as
A m ended January 1996” and is available through
the Board’s and the OCC’s Freedom of Information
Office and the FDIC’s Public Inform ation Center.

approach.3 The revisions specify that
the specific risk elements of internal
models will be assessed consistently
with the assessment of the general
market risk elements of such models
through review by the relevant
supervisor and backtesting.
To implement this revision to the
market risk amendment, the Agencies
are issuing an interim rule with a
request for comment. As discussed in
the section entitled “Interim
Effectiveness of the Rule,” the Agencies
have found that good cause necessitates
making the amendments herein effective
immediately, without opportunity for
public comment or a delayed effective
date. Effectiveness of the amendments
herein is on an interim basis, until the
Agencies issue a final rule, following
public comment on this interim rule, in
accordance with the procedures
specified in section 553 of the
Administrative Procedure Act, 5 U.S.C.
553. The interim rule applies only to the
calculation of specific risk under the
market risk rules. All other aspects of
the market risk rules remain unchanged.
Description of the Interim Rule

68065

environment. The model’s ability to
capture specific risk must be validated
through backtesting aimed at assessing
whether specific risk is adequately
captured. In addition, the institution
must be able to demonstrate that its
methodologies adequately capture event
and default risk. An institution that has
been able to demonstrate to its
supervisor that its internal model
adequately captures specific risk
consistent with the preceding
discussion may use its VAR-based
capital charge as its measure for market
risk. Such an institution will have no
specific risk add-on.
An institution whose model addresses
idiosyncratic risk but does not
adequately capture event and default
risk will continue to have a specific risk
add-on. The specific risk add-on for
such an institution may be calculated
using either one of two approaches, both
of which have the effect of subjecting
the modeled specific risk elements of
the institution’s internal risk model to a
multiplier of four.4
Under the first approach, an
institution’s internal model must be able
to separate its VAR measure into general
market risk and specific risk
components. The institution’s measure
for market risk would equal the sum of
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. Alternatively, an
institution whose internal model does
not separately identify the specific and
general market risk of its VAR measure,
may use as its measure for market risk
the sum of the total VAR-based capital
charge, plus an add-on consisting of the
VAR measure(s) of the subportfolios of
debt and equity positions that contain
specific risk. An institution using this
approach normally would identify its
sub-portfolio structures prior to
calculating market risk capital charges
and may not alter those sub-portfolio
structures without supervisory
consultation.
An institution using its internal
model for specific risk capital purposes
must backtest its internal model to
assess whether observed price variation
arising from both general market risk
and specific risk are accurately
4 The m ultiplier applicable to the m odeled
general m arket risk elem ents w ill not be affected.
Thus, the m ultiplier for general m arket risk will
continue to be three, unless a higher m ultiplier is
indicated by virtue of the institu tio n ’s backtesting
results for general m arket risk, or unless no
m ultiplier is applied because the previous day’s
VAR for general m arket risk is higher than the 60day average tim es the m ultiplier.

68066

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations

explained by the model. To assist in
model validation, the institution should
perform backtests on subportfolios
containing specific risk, i.e., traded debt
and equity positions. 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 being
accurately modeled. If backtests of
subportfolios reflect 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, based on information
available to them, presently feel that the
industry is making significant progress
in developing methodologies for
modeling specific risk, although
progress relating to measurement of
event and default risk lags somewhat.
The Agencies’ consultation over the past
two years with other national
supervisors on the Committee has
supported this view. The Agencies
expect institutions to continue
improving their internal models and
particularly to make substantial progress
in 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
methodologies are improved and
become accepted within the industry as
effective measurement techniques for
event and default risk, the Agencies will
consider permitting all internal models
based on that methodology to be applied
without any add-on charge. The Basle
Supervisors 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.
The Agencies request comment on all
aspects of these amendments to their
market risk rules.
Interim Effectiveness of the Rule

The Agencies’ amendments to their
market risk rules are effective on
December 31, 1997, but only on an

Regulatory Flexibility Act Analysis
interim basis during the Agencies’ full
notice and comment rulemaking
Pursuant to section 605(b) of the
process. Section 553 of the
Regulatory Flexibility Act, the Agencies
Administrative Procedure Act permits
have determined that this interim final
the Agencies to issue a rule without
rule would not have a significant
public notice and comment when the
economic impact on a substantial
agency, for good cause, finds (and
number of small entities within the
incorporates the finding and a brief
meaning of the Regulatory Flexibility
statement of reasons therefore in the
Act (5 U.S.C. 601 et seq.). The Agencies’
rules issued) that notice and public
comparison of the applicability section
procedure thereon are impracticable,
of the rule to which these amendments
unnecessary, or contrary to the public
pertain to Consolidated Reports of
interest. 5 U.S.C. 553(b)(B). Section 553
Condition and Income (Call Report) data
also permits the Agencies to issue a rule on all existing institutions shows that
without delaying its effectiveness for
the rule will rarely, if ever, apply to
thirty days from the publication if the
small entities. Accordingly, a regulatory
agency finds good cause and publishes
flexibility analysis is not required.
it with the rule. 5 U.S.C. 553(d)(3). In
Paperwork Reduction Act
addition, section 302 of the Riegle
Community Development and
The Agencies have determined that
Regulatory Improvement Act of 1994, 12 the interim final rule does not involve
U.S.C. 4802(b), permits the Agencies to
a collection of information pursuant to
issue a regulation which takes effect
the provisions of the Paperwork
before the first day of a calendar quarter Reduction Act of 1995 (44 U.S.C. 3501
beginning on or after the date on which
et seq.).
the regulations are published in final
OCC Executive Order 12866
form when the agency determines for
Determination
good cause published with the
The OCC has determined that the
regulation that the regulation should
interim final rule does not constitute a
become effective before such time. The
“significant regulatory action” for the
Agencies have found that good cause
purpose of Executive Order 12866.
exists, for several reasons.
First, the amendments are extremely
OCC Unfunded Mandates Reform Act of
limited in scope. The number of
1995 Determination
institutions subject to the Agencies’
Section 202 of the Unfunded
market risk rules, and consequently to
Mandates Reform Act of 1995, Public
the amendments, is very small, in both
Law 104-4 (Unfunded Mandates Act)
absolute and relative terms. The
requires that an agency prepare a
amendments will serve only to reduce
budgetary impact statement before
regulatory burden, by eliminating the
need for institutions that model specific promulgating a rule that includes a
risk to make dual calculations under the Federal mandate that may result in
expenditure by State, local, and tribal
standardized approach in order to
governments, in the aggregate, or by the
determine their minimum specific risk
private sector, of $100 million or more
charge. Such calculations, while not
in any one year. If a budgetary impact
necessarily difficult from an analytical
statement is required, section 205 of the
standpoint, are a voluminous and
Unfunded Mandates Act also requires
detailed operation to execute.
an agency to identify and consider a
Second, immediate effectiveness of
reasonable number of regulatory
the amendments is necessary. The
market risk rules become mandatory for alternatives before promulgating a rule.
As discussed in the preamble, this
certain institutions in January of 1998,
interim rule eliminates the minimum
and the Agencies will not be able to
complete the full rulemaking process by specific risk charge for institutions that
use internal models that adequately
that time. Institutions covered by the
market risk rule that model specific risk capture specific risk. The effect of this
rule is to reduce regulatory burden by
would be needlessly forced to commit
no longer requiring institutions to make
significant internal resources to
dual calculations under both the
implement the dual calculation
institution’s internal model and the
approach potentially on a temporary
standardized specific risk model. The
basis. Contrary to the public interest,
OCC therefore has determined that the
they could also be placed at a
effect of the interim rule on national
competitive disadvantage vis a vis their
banks as a whole will not result in
competitors (intemationally-active
expenditures by State, local, or tribal
banks in other G-10 countries) who,
governments or by the private sector of
because of the recent G-10 Governors’
$100 million or more. Accordingly, the
endorsement of the Committee’s new
OCC has not prepared a budgetary
approach, will not be subject to any
impact statement or specifically
dual calculation requirement.

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations
addressed the regulatory alternatives
considered.
List of Subjects

3. Section 5 of appendix B to part 3
is amended by revising paragraphs (a)
and (b) to read as follows:
* * * * *

Dated: December 19, 1997.
Eugene A. Ludwig,
Comptroller o f the Currency.

Section 5. Specific R isk

12 CFR Chapter II

12 CFR Part 3
Administrative practice and
procedure, Capital, National banks,
Reporting and recordkeeping
requirements, Risk.

(b) * * *
(2) Specific risk means changes in the
m arket value of specific positions due to
factors other than broad market movements
and includes default and event risk as well
as idiosyncratic variations.

(a) Specific risk surcharge. For purposes of
section 3(a)(2)(ii) of this appendix, a bank
shall calculate its specific risk surcharge as
follows:
(1) Internal m odels that incorporate
specific risk, (i) No specific risk surcharge
required fo r qualifying internal m odels. A
bank that incorporates specific risk in its
internal m odel has no specific risk surcharge
for purposes of section 3(a)(2)(ii) of this
appendix if the bank dem onstrates to the
OCC that its internal m odel adequately
measures all aspects of specific risk,
including default and event risk, of covered
debt and equity positions. In evaluating a
bank’s internal m odel the OCC w ill take into
account the extent to w hich the internal
model:
(A) Explains the historical price variation
in the trading portfolio; and
(B) Captures concentrations.
(ii) Specific risk surcharge fo r m odeled
specific risk that fa ils to adequately m easure
default or event risk. A bank that
incorporates specific risk in its internal
m odel but fails to dem onstrate that its
internal m odel adequately m easures all
aspects of specific risk, including default and
event risk, as provided by this section 5(a)(1),
m ust calculate its specific risk surcharge in
accordance w ith one of the following
methods:
(A) If the bank’s internal m odel separates
the VAR m easure into a specific risk portion
and a general m arket risk portion, th en the
specific risk surcharge equals the previous
day’s specific risk portion.
(B) If the b ank’s internal m odel does not
separate the VAR m easure into a specific risk
portion and a general market risk portion,
then the specific risk surcharge equals the
sum of the previous day’s VAR measure for
subportfolios of covered debt and equity
positions.
(2) Specific risk surcharge fo r specific risk
n o t m odeled. If a bank does no t model
specific risk in accordance w ith section
5(a)(1) of this appendix, then the bank shall
calculate its specific risk surcharge using the
standard specific risk capital charge in
accordance w ith section 5(c) of this
appendix.
(b) Covered debt and equity positions. If a
m odel includes the specific risk of covered
debt positions b u t not covered equity
positions (or vice versa), then the bank may
reduce its specific risk charge for the
included positions u nd er section 5(a)(l)(ii) of
this appendix. The specific risk charge for
the positions not included equals the
standard specific risk capital charge under
paragraph (c) of this section.

*

*

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, part 3 of chapter I of title 12
of the Code of Federal Regulations is
amended as set forth below:
PART 3— MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES

1. The authority citation for part 3
continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907,
and 3909.

2. Section 2 of Appendix B to part 3
is amended by revising paragraph (b)(2)
to read as follows:
Appendix B To Part 3—Risk-Based
Capital Guidelines; Market Risk
Adjustment

*

*

*

*

*

Section 2. Definitions

*

*

*

*

*

*

*

*

*

68067

*

*

*

*

Federal Reserve System

For the reasons set forth in the joint
preamble, parts 208 and 225 of chapter
II of title 12 of the Code of Federal
Regulations are amended as follows:
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, 92(a), 93(a)
248(a), 248(c), 321-338a, 371d, 461, 481-486,
601, 611, 1814, 1816, 1 8 1 8 ,1820(d)(9),
1823(j), 1828(o), 1831, 18310, 1 83 1 p -l,
1831r— , 1835(a), 1882, 2901-2907, 3105,
1
3310, 3331-3351, and 3906-3909; 15 U.S.C.
78b, 781(b), 781(g), 781(i), 78o-4(c)(5), 78q,
7 8 q -l, and 78w; 31 U.S.C. 5318; 42 U.S.C.
4012a, 4104a, 4104b, 4106, and 4128.

2. In appendix E to part 208, section
1., paragraph (a), footnote 1 is revised to
read as follows:
Appendix E to Part 208—Capital
Adequacy Guidelines for State Member
Banks; Market Risk Measure
Section 1. Purpose, Applicability, Scope, and
Effective Date
*

*

*

*

*

*

1

*

*

*

*

*

3. In appendix E to part 208, section
2., paragraph (b)(2) is revised to read as
follows:
* * * * *
Section 2. D efinitions
*

*

*

*

*

(b) * * *

(2) Specific risk means changes in the
market value of specific positions due to
factors other than broad market
movements. Specific risk includes such
risk as idiosyncratic variation, as well as
event and default risk.
* * * * *
4. In appendix E to part 208, section
5., paragraphs (a), (b), and (c)
introductory text are revised to read as
follows:
* * * * *
1This appendix is based on a framework
developed jointly by supervisory authorities from
the countries represented on the Basle Committee
on Banking Supervision and endorsed by the Group
of Ten Central Bank Governors. The framework is
described in a Basle Committee paper entitled
“A m endm ent to the Capital A ccord to Incorporate
Market Risks,” January 1996. Also see
m odifications issued in Septem ber 1997.

68068

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations

Section 5. Specific R isk

*

(a) M odeled specific risk A bank m ay use
its internal m odel to m easure specific risk. If
the bank has dem onstrated to the Federal
Reserve that its internal m odel measures the
specific risk, including event and default risk
as w ell as idiosyncratic variation, of covered
debt and equity positions and includes the
specific risk m easures 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 m odel should explain the
historical price variation in the trading
portfolio and capture concentration, both
m agnitude and changes in com position. The
m odel should also be robust to an adverse
environm ent and have been validated
through backtesting w hich assesses w hether
specific risk is being accurately captured.
(b) A dd-on charge fo r m odeled specific
risk. If a bank’s m odel measures specific risk,
b u t the bank has not been able to
dem onstrate to the Federal Reserve that the
m odel adequately m easures event and default
risk for covered debt a n d equity positions,
the n the bank’s specific risk add-on is
determ ined as follows:
(1) If the m odel 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.
(2) If the m odel does not separate the VAR
m easure into a specific risk portion and a
general m arket risk portion, th en the specific
risk add-on is the sum of the previous day’s
VAR measures for subportfolios of covered
debt and covered equity positions.
(c) A dd-on charge i f specific risk is n ot
m odeled. If a bank does not m odel specific
risk in accordance w ith paragraph (a) or (b)
of this section, then the b ank’s specific risk
add-on charge equals the com ponents for
covered debt and equity positions as
appropriate:

3. In appendix E to part 225, section
2., paragraph (b)(2) is revised to read 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-l, 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 and in
section 1., paragraph (a), footnote 1 is
revised to read as follows:
Appendix E To Part 225—Capital
Adequacy Guidelines For Bank Holding
Companies:'Market Risk Measure
Section 1. Purpose, Applicability, Scope, and
Effective Date
(cl.) * * *

1 * *

*

1 This appendix is based on a framework
developed jointly by supervisory authorities from
the countries represented on the Basle Committee

*

*

*

*

Section 2. Definitions

*

*

*

*

*

(b) * * *
(2) Specific risk, m eans changes in the
market value of specific positions due to
factors other th an broad market movements.
Specific risk includes such risk as
idiosyncratic variation, as w ell as event and
default risk.

*

*

*

*

*

4. In appendix E to part 225, section
5., paragraphs (a), (b), and (c)
introductory text are revised to read as
follows:
* * * * *
Section 5. Specific R isk
(a) M odeled specific risk. A bank holding
com pany may use its internal m odel to
m easure specific risk. If the institution has
dem onstrated to the Federal Reserve that its
internal m odel 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 m easures in the VAR-based capital
charge in section 3(a)(2)(i) of this appendix,
then the institution has no specific risk add­
on for purposes of section 3(a)(2)(ii) of this
appendix. The m odel should explain the
historical price variation in the trading
portfolio and capture concentration, both
magnitude and changes in composition. The
m odel should also be robust to an adverse
environm ent and have been validated
through backtesting w hich assesses w hether
specific risk is being accurately captured.
(b) A dd-on charge fo r m odeled specific
risk. If a bank holding com pany’s m odel
measures specific risk, but the institution has
not been able to dem onstrate to the Federal
Reserve that the m odel adequately m easures
event and default risk for covered debt and
equity positions, then the institu tio n’s
specific risk add-on is determ ined as follows:
(1) If the m odel is susceptible to valid
separation of the VAR measure into a specific
risk portion and a general m arket risk
portion, th en the specific risk add-on is equal
to the previous day’s specific risk portion.
(2) If the m odel does not separate the VAR
m easure into a specific risk portion and a
general m arket risk portion, then the specific
risk add-on is the sum of the previous day’s
VAR measures for subportfolios of covered
debt and covered equity positions.
(c) Add-on charge i f specific risk is not
m odeled. If a bank holding com pany does not
m odel specific risk in accordance w ith
paragraph (a) or (b) of this section, then the
in stitution’s specific risk add-on charge
on Banking Supervision and endorsed by the Group
of Ten Central Bank Governors. The framework is
described in a Basle Committee paper entitled
“A m endm ent to the Capital Accord to Incorporate
Market Risks,” January 1996. Also see
m odifications issued in Septem ber 1997.

equals the com ponents for covered debt and
equity positions as appropriate:

*

*

*

*

*

By order of the Board of Governors of the
Federal Reserve System, December 19,1997.
W illiam W. Wiles,
Secretary o f the Board.

Federal Deposit Insurance Corporation

12 CFR Chapter III
For the reasons set forth in the joint
preamble, part 325 of chapter III of title
12 of the Code of Federal Regulations is
amended as follows:
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. 1 02242, 105 Stat. 2236, 2355, 2386 (12 U.S.C.
1828 note).

2. In appendix C to part 325, section
1(a), footnote 1 is revised to read as
follows:
Appendix C to Part 325—Risk-Based
Capital For State Non-Member Banks;
Market Risk
Section 1. Purpose, Applicability, Scope, and
Effective Date
(a) * * * i * * *

*

* * * *
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.
Specific risk includes such risk as
idiosyncratic variation, as w ell as event and
default risk.

*

* * * *
4. In appendix C to part 325, section
5., paragraphs (a), (b), and (c)
introductory text are revised to read as
follows:
* * * * *
Section 5. Specific R isk
(a) M odeled specific risk. A bank may use
its internal m odel to m easure specific risk. If
1This appendix is based on a framework
developed jointly by supervisory authorities from
the countries represented on the Basle Committee
on Banking Supervision and endorsed by the Group
of Ten Central Bank Governors. The framework is
described in a Basle Committee paper entitled
“A m endm ent to the Capital Accord to Incorporate
Market Risks,” January 1996. Also see
modifications issued in Septem ber 1997.

Federal Register / Vol. 62, No. 249 / Tuesday, December 30, 1997 / Rules and Regulations
the bank has dem onstrated to the FDIC that
its internal m odel 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 m easure 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
m odel should explain the historical price
variation in the trading portfolio and capture
concentration, both m agnitude and changes
in composition. The m odel should also be
robust to an adverse environm ent and have
been validated through backtesting w hich
assesses w hether specific risk is being
accurately captured.
(b) A dd-on charge for m odeled specific
risk. If a bank’s m odel measures specific risk,

but the bank has not been able to
dem onstrate to the FDIC that the model
adequately m easures event and default risk
for covered debt and equity positions, then
the bank’s specific risk add-on for purposes
of section 3(a)(2)(li) of this appendix is as
follows:
(1) If the m odel is susceptible to valid
separation of the VAR m easure into a specific
risk portion and a general m arket risk
portion, then the specific risk add-on is equal
to the previous day’s specific risk portion.
(2) If the m odel does not separate the VAR
m easure into a specific risk portion and a
general m arket risk portion, then the specific
risk add-on is the sum of the previous day’s
VAR measures for subportfolios of covered
debt and covered equity positions.

68069

(c) A dd-on charge i f specific risk is n ot
m odeled. If a bank does not m odel specific
risk in accordance w ith 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 com ponents for
covered debt and equity positions as
appropriate:

*

*

*

*

*

Dated at W ashington, D.C. this 9th day of
December, 1997.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldm an,
Executive Secretary.
[FR Doc. 97-33653 Filed 12-29-97; 8:45 am]
BILLING CODE 4810 -33 -P , 6 210 -01 -P , 6 7 14 -01 -P


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102