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Federal Reserve 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 DALLAS, TEXAS 7 5 2 2 2 O F F IC E R January 25, 1993 Notice 93-09 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Adoption of Modifications to the Risk-based Capital Guidelines DETAILS The Federal Reserve Board has announced adoption of modifications to its risk-based capital guidelines affecting the treatment of certain collater alized transactions. The revised guidelines for state member banks and bank holding companies lower the risk weight assigned to such transactions to a level more commensurate with the minimal risks involved. The revision lowers the risk weight from 20 percent to zero for certain transactions that are collateral ized by cash and Organisation for Economic Cooperation and Development central government securities, including U.S. government agency securities, provided the transactions meet specified criteria. The change is consistent with international bank capital standards. This rule became effective on December 30, 1992. ATTACHMENT A copy of the Board’s notice as it appears on pages 62180-83, Vol. 57, No. 251, of the Federal Register dated December 30, 1992, is attached. MORE INFORMATION For more information, please contact Dorsey Davis at (214) 922-6051. For additional copies of this Bank’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) ADOPTION OF MODIFICATIONS TO THE RISK-BASED CAPITAL GUIDELINES (DOCKET NO. R-0756) 62180 Federal Register / Vol. 57 , No. 251 / W ednesday, December 30, 1992 / Rules and Regulations Government agency securities3 that met certain criteria. The criterion particularly considered in this regard was the maintenance on a daily basis of a positive collateral margin, which was intended to mitigate significantly the risks normally associated with collateralized transactions. Discussion As a consequence of this review, on April 10,1992, the Board issued for SUPPLEMENTARY INFORMATION: public comment a proposal to modify Under the international bank capital the risk-based capital guidelines that standards (the Basle Accord).1 claims collateralized by cash and OECD central would lower the risk weight for collateralized transactions meeting government securities may be assigned certain criteria from the 20 percent risk to the zero percent risk category. category to the zero percent risk However, the U.S. Federal banking category . In this regard, the Board agencies exercised national discretion, proposed that a claim collateralized by as permitted under the Basle Accord, to cash on deposit in the banking assign such claims to the 20 percent risk organization or by OECD central category. This decision has had the government or U.S. Government agency effect of essentially limiting the zero securities could be assigned to the zero percent risk category to cash assets and percent risk category, provided that a claims (including securities) on OECD positive collateral margin is maintained central governments and claims directly on a daily basis, fully taking into and unconditionally guaranteed by such account any change in the banking governments Claims secured by cash or organization’s exposure (to the obligor securities issued or guaranteed by OECD or counterparty) under the claim in central governments are assigned to-the relation to the market value of the next highest risk category, i.e.. 20 collateral held in support of that claim percent, in order to take into account 12 (CFIR Parts 208 and 225 If the market value of the collateral the operational risks that are present in received from the obligor or [ R e g u la tio n s H a n d Y; Docket No. R -0 7 5 6 ] most conventional secured lending counterparty falls below 100 percent of arrangements.2 Capital!; Capital Adequacy Guidelines the amount of the banking In some instances, however, the organization’s exposure under such a /AGENCY; Board of Governors of the application of a 20 percent risk weight collateralized claim, the borrower must Federal Reserve System, to very low-risk collateralized immediately post enough additional /ACTON: Final rule. transactions—such as certain collateral to cover any shortfall and indemnified securities lending maintain a positive margin. SUMMARY: The Board is revising its riskarrangements—could place U.S. banking The Board sought specific comment based capital guidelines for state organizations at a competitive on whether additional criteria should be member banks and bank holding • disadvantage to foreign banks subject to required in order to better ensure that companies to lower the risk weight the Basle Accord that are applying a only truly low-risk collateralized assigned to certain collateralized zero percent risk weight to such transactions are assigned to the zero transactions to a level more transactions. In an effort to address this percent risk category. The Board also commensurate with the minimal risks disparity in treatment and to arrive at a requested comment on whether a higher involved. The revision is consistent capital treatment for such transactions risk weight, for example 10 percent, with the international bank capital that is more commensurate with the might be more appropriate than the zero standards. minimal risks entailed, the Board percent risk weight for these EFFECTIVE DATE: December 30,1992. reviewed the possibility of assigning a transactions, which can be associated FOR FURTHER INFORMATION CONTACT: zero percent risk weight to claims with some, albeit small, risk. Rhoger H. Pugh, Assistant Director (202/ collateralized by cash or OECD central The proposal also stated the Board's 728-5883), Norah M. Barger, Manager government securities or U.S. intention to continue to require, (202/452-2402), Robert E. Motyka. consistent with the Basle Accord, that Senior Financial Analyst (202/452for a claim collateralized by cash to be ' T h e B asle A ccord is a risk-based fram ew ork th at 3621), or Alfred D. Teuscher, w as p ro p o se d by th e B asle C om m ittee on B anking eligible for a preferential risk weight for Supervisory Financial Analyst (202/452- S u p e rv isio n a n d en d o rsed by th e c en tra l bank risk-based capital purposes, the cash governors o f the G roup o fT e n (G-10) c o u n trie s in 3007), Division of Banking Supervision must be on deposit in the banking July 1988. T h e co m m itte e is co m p rise d of and Regulation, Board of Governors of organization. In this connection, re p re sen ta tiv e s o f the c en tra l b an k s a n d su p erv iso ry a u th o ritie s from th e G-10 co u n trie s (B elgium , however, the Board proposed to clarify C anada, France, G erm any, Italy. Japan, N eth erlan d s. ^ L o a n s that q u alify as loans sec u re d b y one- to that in a securities lending transaction S w ed en , S w itz e rla n d , the U nited K ingdom , a n d th e four-fam ily re sid en tial p ro p e rties are liste d in tha where the banking organization is acting U n ite d States) a n d Luxem bourg. in stru c tio n s to th e FR Y-9C Report. In a d d itio n , for the Federal Reserve System. For the hearing impaired only. Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/4523544), Board of Governors of the Federal Reserve System, 20th and C Street. NW„. Washington. DC 20551. n sk -b a se d cap ital p u rp o se s, loans sec u re d by oneto four-fam ily re sid e n tia l p ro p e rties in c lu d e loans to b u ild e rs w ith s u b sta n tia l p roject e q u ity for the c o n stru ctio n of one- to four-fam ily re sid en c e s that have been p reso ld u n d e r firm c o n tra c ts to p u rc h a se rs w h o h av e o b ta in e d firm c o m m itm en ts for p e rm a n e n t q u alify in g m ortgage lo a n s a n d have m ade su b sta n tia l e arn est m o n ey d e p o sits. 2 A c laim sec u re d by c ash or OECD gov ernm ent sec u rities m ay b e assig n ed to th e 20 p e rc e n t risk category o n ly to th e e x te n t that th e face a m o u n t o f th e c laim is cov ered by th e m arket v a lu e o f th e collateral. T h e p o rtio n o f th e c laim that is n o t covered by reco g n ized co llateral is a ssig n e d to th e risk category a p p ro p ria te to th e ob lig o r or, if re le v a n t, th e guaran to r. 3 T h e d e fin itio n o f U.S. G o v e rn m e n t agency sec u rities in th e risk-b ased c ap ital g u id e lin e s does n o t in c lu d e U.S. G o v e rn m e n t-sp o n so red agency secu rities. U n d er th e g u id e lin e s, claim s c o lla te ra liz ed b y U S. G ov e rn m e n t-sp o n so red agency sec u rities are assig ned to the 20 p e rc en t risk category. Federal Register / Vol. 57, No. 251 / Wednesday, December 30, 1992 / Rules and Regulations 62181 as agent for a customer that is the beneficial owner of the lent securities and where the borrower has delivered cash collateral to the banking organization that is not maintained on deposit, the transaction will be deemed to be collateralized by cash on deposit and, thus, eligible for a preferential risk weight only if: (1J Any reinvestment risk associated with the cash collateral is borne by the customer and (2) Any indemnification provided by the banking organization is limited to the difference between the market value of the lent securities and the amount of cash received as collateral. If these two conditions are not met, the transaction would not be deemed to be collateralized by cash on deposit and, thus, would not be eligible for a preferential risk weight. The second question asked whether these transactions should be assigned to a risk weight higher than zero percent, for example 10 percent. Of the thirteen commenters addressing this question, twelve opposed the assignment of a higher risk weight. One trade organization was not opposed to a higher risk weight but felt that a 10 percent risk weight would still overstate the risk inherent in these transactions. Final Rule Based upon the comments received and further consideration of the very limited risk associated with assigning collateralized transactions meeting the indicated criteria to the zero percent risk weight, the Board is adopting its proposed revision to the risk-based capital guidelines for state member banks and bank holding companies with regard to these transactions. Comments Received This revision will permit banking Public comments were received from organizations to assign to the zero twenty-two respondents: fifteen banking percent risk category claims organizations (three multinational, one collateralized by cash on deposit in the superregional, nine regional, and two banking organization or by OECD community banks); two savings central government or U.S. Government institutions; and five trade associations. agency securities for which a positive All of the respondents agreed that the collateral margin is maintained on a proposal to lower the risk weight from daily basis, fully taking into account any 20 percent to zero percent for certain change in the banking organization’s transactions collateralized by cash or exposure to the obligor or counterparty OECD central government securities under a claim in relation to the market would result in a more accurate value of the collateral held in support of reflection of the very limited risk that claim. The Board will not require associated with such transactions. Two that a specific minimum margin of commenters suggested that a zero collateral be maintained on percent risk weight should be extended collateralized transactions assigned to to any portion of a claim collateralized the zero percent risk category. However, by cash or OECD central government the Board expects that banking securities. One of these commenters also organizations will establish, as a part of recommended that claims collateralized prudent operating procedures, a by securities issued by U.S. minimum level of margin for these Government-sponsored agency transactions based upon such factors as securities should be accorded a zero the volatility of the securities involved percent risk weight. Two commenters so as to avoid unduly frequent margin suggested technical wording changes to calls. The Board is also adopting, with a few the proposed clarification with regard to technical wording changes, its proposed securities lending transactions clarification with regard to certain collateralized by cash where a bank is requirements pertaining to transactions acting in an agent capacity. The first question on wnich the Board collateralized by cash where the sought specific comment asked whether banking organization is acting as agent. additional criteria should be set forth in This clarification indicates that where a order to better ensure that only truly banking organization is acting as agent low-risk collateralized transactions are for a customer in a transaction involving assigned to the zero percent risk the lending or sale of securities that is category. Of the thirteen commenters collateralized by cash delivered to the addressing this question, eleven banking organization, the transaction is indicated that additional criteria were deemed to be collateralized by cash on not needed. Of the two respondents deposit for purposes of determining the supporting the establishment of a appropriate risk weight, provided that minimum positive margin, one any indemnification is limited to no indicated that a minimum collateral more than the difference between the coverage of 101 percent of the claim market value of the securities and the should be specified, while the other did amount of cash collateral received and not indicate a specific level of coverage. any reinvestment risk associated with the cash collateral is borne by the customer. This rule is effective immediately in order to implement in the most expeditious manner a capital charge that is more commensurate with the risks entailed in collateralized transactions meeting the specified criteria and that will help place U.S. banking organizations engaging in such transactions on a more equal footing with foreign banks subject to the Basle Accord. In addition, the Board believes an immediate effective date is appropriate because the revision would reduce, rather than expand regulatory burden. Regulatory Flexibility Act Analysis The Federal Reserve Board does not believe the adoption of this final rule will have a significant economic impact on a substantial number of small business entities (in this case, small banking organizations), in accord with the spirit and purposes of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.). In this regard, the revised final rule will reduce certain regulatory burdens on bank holding companies, as it reduces the capital charge on certain transactions. In addition, because the risk-based capital guidelines generally do not apply to bank holding companies with consolidated assets of less than $150 million, the final rule will not affect such companies. List of Subjects 12 CFR Part 208 Accounting, Agricultural loan losses, Applications, Appraisals, Banks, banking, Branches, Capital adequacy, Confidential business information, Currency, Dividend payments, Federal Reserve System, Flood insurance, Publication of reports of condition, Reporting and recordkeeping requirements, Securities, State member banks. 12 CFR Part 225 Administrative practice and procedure, Appraisals, Banks, banking, Capital adequacy, Federal Reserve System, Holding companies, Reporting and recordkeeping requirements, Securities, State member banks. For the reasons set forth in this notice, and pursuant to the Board's authority under section 5(b) of the Bank Holding Company Act of 1956 (12 U.S.C. 1844(b)), and section 910 of the International Lending Supervision Act of 1983 (12 U.S.C. 3909), the Board is amending 12 CFR parts 208 and 225 to read as follows: 62182 Federal Register / VoL 57, No. 251 / Wednesday, December 30, 1992 / Rules and Regulations the bank's exposure to the obligor or counterparty under a claim in relation to the market value of the collateral held in support of that claim. * * * 1. The authority citation for part 208 2. * • * This category also includes the portions of claims (including repurchase continues to read as follows: transactions) collateralized by cash on Authority: Sections 9 , 11(a), 11(c), 19, 21. deposit in the bank or by securities issued or 25 , and 25(a) of the Federal Reserve Act, as guaranteed by OECD central governments or amended (12 U.S.C. 321-338, 248(a), 248(c). U S. government agencies that do not qualify 461, 481-486, 601, and 611, respectively); for the zero percent risk-weight category: sections 4 and 13(j) of the Federal Deposit collateralized by securities issued or Insurance Act, as amended (12 U.S.C. 1814 guaranteed by U S. government-sponsored and 1823(j), respectively); section 7(a) of the agencies; or collateralized by securities International Banking Act of 1978 (12 U S.C 3105); sections 907-910 of the International issued by multilateral lending institutions or Lending Supervision Act of 1983 (12 U S.C. regional development banks in which the 3906-3909); sections 2 ,12(b), 12(g), 12(i), U.S. government is a shareholder or 15B(c) (5). 1 7 ,17A, and 23 of the Securities contributing memberExchange Act of 1934 (15 U.S.C. 78b, 781(b), * * * * * 78/(g), 78/(i). 78o-4(c) (5), 78q, 78q-l, and D * * * 78w, respectively); section 5155 of the 1. * * » w here a bank is acting as agent Revised Statutes (12 U.S.C. 36) as amended for a customer in a transaction involving the by the McFadden Act of 1927; and sections lending or sale of securities that is 1101-1122 of the Financial Institutions collateralized by cash delivered to the bank, Reform, Recovery, and Enforcement Act of the transaction is deemed to be collateralized 1989 (12 U S.C. 3310 and 3331-3351). by cash on deposit in the bank for purposes Appendix A—[Amended] of determining the appropriate risk-weight 2 Appendix A is amended by replacing thecategory, provided that any indemnification second sentence in the first paragraph, is limited to no more than the difference adding a sentence at the end of the first between the market value of the securities paragraph, and replacing the first and second and the cash collateral received and any sentences of the second paragraph of section reinvestment risk associated with that cash III.B.l ; adding a paragraph to the end of collateral is borne by the customer. * * * section IILC.1.; replacing the third paragraph * * * * * of section IILG2.; by adding a new sentence to the end of the ninth paragraph of section Attachment III * * * III.D.l.; and by adding a new item 5. under Category 1; Zero Percent * * * "Category 1; Zero Percent” and revising item 8 under “Category 2: 20 Percent” of 5. Claims collateralized by cash on deposit Attachment III, to read as follows: in the bank or by securities issued or guaranteed by OECD central governments or * * * * * U S. government agencies for which a III.* * * positive margin of collateral is maintained on A. * * * a daily basis, fully taking into account any B * * * Claims fully secured by such change in the bank's exposure to the obligor collateral generally are assigned to the 20 or counterparty under a claim in relation to percent risk-weight category. Collateralized the market value of the collateral held in transactions meeting all the conditions support of that claim.* * * described in section UI.Gl. may be assigned a zero percent risk weight. Category 2: 20 Percent * * * With regard to collateralized claims that 8. The portions of claims that are may be assigned to the 20 percent risk-weight collateralized3 by cash on deposit in the category, the extent to which qualifying bank or by securiUes issued or securities are recognized as collateral is determined by their current market value. If guaranteed by the U.S. Treasury, the such a claim is only partially secured, that central governments of other OECD is, the market value of the pledged securities countries, and U.S government agencies is less than the face amount of a balancethat do not qualify for the zero percent sheet asset or an off-balance-sheet item, the risk-weight category, or that are portion that is covered by the market value collateralized by securities issued or of the qualifying collateral is assigned to the guaranteed by U.S. government20 percent risk category, and the portion of sponsored agencies. * * * the claim that is not covered by collateral in * * * * * the form of cash or a qualifying security is assigned to the risk category appropriate to the obligor or, If relevant, the guarantor. PART 225— BANK HOLDING * * * COMPANIES AND CHANGE IN BANK G * • * 1 * * * This category also includes claims CONTROL collateralized by cash on deposit in the bank 1. The authority citation for part 225 or by securities issued or guaranteed by continues to read as follows: OECD central governments or U.S. government agpneies for which a positive margin of collateral is maintained on a daily 3 The extent of colUteraliratton U determined by basis fully taking into account any change in current market value. PART 208— MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM Authority: 12 U.S.C. 1817(j)(13), 1818, 1831i, 1843(c)(8), 1844(b), 3106, 3108, 3907 3909. 3310, and 3331-3351. Appendix A—(Amended) 2. Appendix A is amended by replacing the second sentence in the first paragraph, adding a sentence at the end of the first paragraph, and replacing the first and second sentences of the second paragraph of section III.B.l., adding a paragraph to the end of section III.C.1./replacing the third paragraph of section III.G2.; by adding a new sentence to the end of the ninth paragraph of section III.D.l.; and by adding a new item 5. under “Category 1: Zero Percent" and revising it'em 8. under "Category 2: 20 Percent” of Attachment III, to read as follows: * * * * * III.* * * A .* * * B. * * * Claims fully secured by such collateral generally are assigned to the 20 percent risk-weight category. Collateralized transactions meeting all the conditions described in section III.C l may be assigned a zero percent risk weight. With regard to collateralized claims that may be assigned to the 20 percent risk-weight category, the extent to which qualifying securities are recognized as collateral is determined by their current market value. If such a claim is only partially secured, that is, the market value of the pledged securities is less than the face amount of a balancesheet asset or an off-balance-sheet item, the portion that is covered by the market value of the qualifying collateral is assigned to the 20 percent risk category, and the portion of the claim that is not covered by collateral in the form of cash or a qualifying security is assigned to the risk category appropriate to the obligor or, if relevant, the guarantor. # ik * C. * * * 1. * * * This category also includes claims collateralized by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by OECD central governments or U.S. government agencies for which a positive margin of collateral is maintained on a daily basis, fully taking into account any change in the banking organization's exposure to the obligor or counterparty under a claim in relation to the market value of the collateral held in support of that claim. * * * 2. * * * This category also includes the portions of claims (including repurchase transactions) collateralized by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by OECD central governments or U.S. government agencies that do not qualify for the zero percent risk-weight category; collateralized by securities issued or guaranteed by U S. government-sponsored agencies; or collateralized by securities issued by multilateral lending institutions ot regional development banks in which the U.S. government is a shareholder or contributing member. * * * * * * * * D. * * * 1. * * * Where a banking organization is acting as agent for a customer in a transaction Federal Register / Vol. 57, No. 251 / W ednesday, December 30, 1992 / Rules and Regulations 62183 involving the lending or sale of securities that is collateralized by cash delivered to the banking organization, the transaction is deemed to be collateralized by cash on deposit in a subsidiary lending institution for purposes of determining the appropriate riskweight category, provided that any indemnification is limited to no more than the difference between the market value of the securities and the cash collateral received and any reinvestment risk associated with that cash collateral is borne by the customer. *. * * * * * A tta c h m e n t Hi * * * * * Category 1: Zero Percent * * * 5. Claims collateralized by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by OECD central governments or U.S. government agencies for which a positive margin of collateral is maintained on a daily basis, fully taking into account any change in the bank's exposure to the obligor or counterparty under a claim in relation to the market value of the collateral held in support of that claim.* * * Category 2: 20 Percent * * * 8 The portions of claims that are collateralized-1by cash on deposit in the subsidiary lending institution or by securities issued or guaranteed by the U.S. Treasury, the central governments of other OECD countries, and U.S. government agencies that do not qualify for the zero percent riskweight category, or that are collateralized by securities issued or guaranteed by U.S. government-sponsored agencies.* * * * * * * * Board of Governors of the Federal Reserve System, December 23, 1992. William W. Wiles, Secretary o f the Board. |FR Doc. 92-31702 Filed 12-29-92; 8:45 am] BILUNG CODE 6 2 1 0 -0 1 -F
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