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Federal R eserve Bank OF DALLAS R O B E R T D. M C T E ER , J R . p r e s id e n t A N D C H IE F E X E C U T I V E O F F I C E R J&IlUciry 26 1995 DALLAS, TEXAS 7 5 2 6 5 -5 9 0 6 Notice 95-10 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to the Risk-based Capital Guidelines DETAILS The Board of Governors of the Federal Reserve System has issued amend ments to the risk-based capital guidelines for state member banks regarding concentra tion of credit risk and risks of nontraditional activities. The amendments implement Section 305 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) which directs each Federal banking agency to revise its risk-based capital standards to ensure that the standards take adequate account of these risks. As amended, the risk-based capital guidelines explicitly identify concentra tions of credit risk and an institution’s ability to manage them as important factors in assessing an institution’s overall capital adequacy. The amendments also identify an institution’s ability to adequately manage the risks posed by nontraditional activities as an important factor to consider in assessing an institution’s overall capital adequacy. The amendments became effective January 17, 1995. The Board initially approved these amendments on August 3, 1994. Publication of the joint final rule was delayed to reach interagency agreement. ATTACHMENT A copy of the Board’s notice as it appears on pages 64561-64, Vol. 59, No. 240, of the Federal Register dated December 15, 1994, is attached. F or additional copies, bankers and others are encouraged to use one of the following toll-free num bers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; H ouston 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 additional copies of this Bank’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, jfrW 1B- Federal Register / Vol. 59, No. 240 / Thursday, December 15, 1994 / Rules and Regulations 64561 EFFECTIVE DATE: Ja n u a ry 1 7 .1 9 9 5 . FOR FURTHER INFORMATION CONTACT: OCC: F o r is s u e s r e la tin g to c o n c e n tra tio n o f c re d it ris k a n d th e risk s o f n o n tr a d itio n a l a c tiv itie s , R oger T u fts, S e n io r E c o n o m ic A d v iso r (2 0 2 /8 7 4 5070), O ffice o f th e C h ie f N a tio n a l B an k E x am in er. F o r leg al is su e s, R o n a ld DEPARTMENT OF THE TREASURY S h im a b u k u ro , S e n io r A tto rn e y , B ank O p e ra tio n s a n d A ssets D iv isio n (202/ Office of the Comptroller of the 8 74— 4460), O ffice o f th e C o m p tro lle r o f Currency th e C u rre n c y , 2 50 E S tre e t, S .W ., 12 CFR Part 3 W a sh in g to n , DC 20 21 9. B o ard: F o r is su e s re la te d to [Docket No. 94-22] c o n c e n tra tio n o f c r e d it risk , D av id RIN 1557-AB14 W rig ht, S u p e rv is o ry F in a n c ia l A n aly st, (2 0 2 /7 2 8 -5 8 5 4 ) a n d for is s u e s re la te d to FEDERAL RESERVE SYSTEM th e risk s of n o n tr a d itio n a l a c tiv itie s, W illiam T reacy , S u p e rv is o ry F in a n c ia l 12 CFR Part 208 A n a ly st, (2 0 2 /4 5 2 -3 8 5 9 ), D iv is io n o f B an k in g S u p e rv is io n a n d R eg u latio n ; [Regulation H; D ocket No. R-0764] S co tt G. A lv arez, A sso c ia te G e n e ra l FEDERAL DEPOSIT INSURANCE C o u n sel (2 0 2 /4 5 2 — 3583), G reg o ry A. CORPORATION B aer, M an ag in g S e n io r C o u n s e l (20 2/ 4 5 2 -3 2 3 6 ), Legal D iv is io n , B o a rd o f 12 CFR Part 325 G o v ern o rs o f th e F e d e ra l R eserve S ystem . F o r th e h e a rin g im p a ir e d o n ly . RIN 3064-AB15 T e le c o m m u n ic a tio n D ev ice for th e D eaf (TDD). D o ro th e a T h o m p s o n (2 0 2 /4 5 2 DEPARTMENT OF THE TREASURY 3544), B o ard o f G o v ern o rs o f th e F ed eral Office of Thrift Supervision R eserv e S y ste m , 2 0 th a n d C S treets, N W ., W a s h in g to n . D C 205 51 . 12 CFR Part 567 FDIC: D a n ie l M . G a u tsc h , E x a m in a tio n S p e c ia lis t (2 0 2 /8 9 8 -6 9 1 2 ), [No. 94-152] S te p h e n G. Pfeifer, E x a m in a tio n RIN 1550-AA59 S p e c ia list (2 0 2 /8 9 8 -8 9 0 4 ), D iv is io n o f S u p e rv is io n , ot F re d S. C a m s , C hief, Risk-Based Capital Standards; F in a n c ia l M a rk ets S e c tio n , D iv is io n o f . Concentration of Credit Risk and Risks, R e se arch a n d S ta tis tic s (2 0 2 /8 9 8 -3 9 3 0 ). of Nontraditional Activities F o r leg al is su e s, P a m e la E. F L eC ren , S e n io r C o u n s e l (2 0 2 /8 9 8 -3 7 3 0 ) or AGENCIES: O ffioe o f th e C o m p tro lle r o f C la u d e A. R o llin , S e n io r C o u n se l (20 2/ th e C u rre n c y (OCC), T re a su ry , B oard o f 8 9 8 -3 9 8 5 ), Legal D iv isio n , F e d e ra l G o v e rn o rs o f th e F e d e ra l R eserve D ep o sit In s u ra n c e C o rp o ra tio n , 5 50 1 7 th S y stem (B oard); F e d e ra l D e p o sit S treet. N W ., W a sh in g to n , D C 20 42 9. In s u ra n c e C o rp o ra tio n (FDIC); a n d O T S ; Jo h n C o n n o lly , S e n io r P ro gram O ffice o f T h rift S u p e rv is io n (O T S), M an ag er, C a p ita l P o lic y (202) 9 0 6 -6 4 6 5 ; T re asu ry . D o re n e R o se n th a l. S e n io r A tto rn ey , ACTION: F in a l ru le . R e g u la tio n s, L e g is la tio n a n d O p in io n s SUMMARY: T h e O CC , th e B o a rd , th e FDIC D iv isio n (202) 9 0 6 -7 2 6 8 , O ffice o f T h rift a n d th e O T S (c o lle c tiv e ly “th e S u p e rv is io n , 1700 G S tre et, N W ., ag e n c ie s") a re is s u in g th is fin a l ru le to W a sh in g to n , DC 20552. im p le m e n t t h e p o rtio n s o f s e c tio n 305 o f SUPPLEMENTARY INFORMATION: th e F e d e ra l D e p o sit In s u ra n c e C o rp o ra tio n Im p ro v e m e n t A c t o f 1991 I. Background (FDICLA) t h a t re q u ire t h e a g e n c ie s to T h e risk -b a s e d c a p ita l s ta n d a rd s re v ise th e ir risk -b a s e d c a p ita l s ta n d a rd s a d o p te d b y th e a g e n c ie s ta ilo r a n fo r in s u r e d d e p o s ito r y in s titu tio n s to in s titu tio n 's m in im u m c a p ita l e n s u r e th a t th o s e s t a n d a r d s ta k e re q u ire m e n t to b ro a d c a te g o rie s o f c re d it a d e q u a te a c c o u n t o f c o n c e n tra tio n o f risk e m b o d ie d in its a ss e ts a n d offc re d it ris k a n d t h e ris k s o f b a la n c e -s h e e t in s tru m e n ts . T h e s e n o n tr a d itio n a l a c tiv itie s. T h e fin a l m l e sta n d a rd s r e q u ire in s titu tio n s to h a v e a m e n d s th e risk -b a s e d c a p i ta l s ta n d a rd s to ta l c a p ita l e q u a l to at le a s t 8 p e rc e n t b y e x p lic itly id e n tify in g c o n c e n tra tio n o f th e ir risk -w e ig h te d a s s e ts .1 o f c re d it ris k a n d c e rta in ris k s a ris in g In s titu tio n s w ith h ig h o r in o r d in a te from n o n tr a d itio n a l a c tiv itie s, a s w e ll a s a n in s ti tu t io n ’s a b ility to m a n a g e th e se 1 As defined risk-weighted assrts include credit risk s, a s im p o rta n t fa c to rs in a ss e ssin g exposures contained to off-balance-sheet a n in s titu tio n 's o v e ra ll c a p ita l a d e q u a c y . instruments. le v els o f risk a re e x p e c te d to o p e ra te a b o v e m in im u m c a p ita l s ta n d a rd s . C u rre n tly , e a c h a g e n c y a d d re s s e s c a p ita l a d e q u a c y th ro u g h a v a rie ty o f s u p e rv is o ry a c tio n s a n d c o n s id e rs th e risk s o f c re d it c o n c e n tra tio n s a n d n o n tr a d itio n a l a c tiv itie s in ta k in g th o s e v a rie d s u p e rv iso ry a c tio n s. « S e c tio n 305(b) o f FDICIA, P u b . L. 1 0 2 -2 4 2 (12 U .S.C . 1828 n o te ), re q u ire s th e a g e n c ie s to re v is e th e ir risk -b a se d c a p ita l s ta n d a rd s for in s u re d d e p o sito ry in s titu tio n s to e n s u r e th a t th o s e s ta n d a rd s ta k e a d e q u a te a c c o u n t of in te re s t ra te risk , c o n c e n tra tio n o f c re d it risk a n d th e risk s o f n o n tr a d itio n a l ac tiv itie s. T h i s fin a l r u l e a d d re s se s c o n c e n tra tio n o f c re d it ris k a n d th e risk s o f n o n tr a d itio n a l ac tiv itie s. T h e ag e n c ie s a re a d d re s s in g in te re s t rate risk th ro u g h s e p a ra te ru le m a k in g s. S ee OCC, B o ard a n d FDIC jo in t n o tic e of p ro p o s e d ru le m a k in g . 5 8 FR 48 20 6 (S e p te m b e r 14, 1993) a n d O T S fin a l ru le m a k in g , 58 FR 4 57 99 (A u g u st 3 1 ,1 9 9 3 ). In a d d itio n , th e a g en c ies is s u e d se p a ra te fin al ru le s to im p le m e n t th e se c tio n 305 re q u ire m e n t th a t risk -b ased c a p ita l s ta n d a rd s reflect th e a c tu a l p e rfo rm a n c e a n d e x p e c te d risk o f lo s s o f m u ltifa m ily m ortgages. F o r th e ris k s re la te d to c o n c e n tra tio n o f c re d it a n d n o n tr a d itio n a l a ctiv itie s, th e ag e n c ie s p u b lis h e d a jo in t n o tic e of p ro p o s e d ru le m a k in g o n F eb ru ary 22, 1994. S e e 59 FR 8420. T h e a g e n c ie s re c e iv e d 54 c o m m e n ts , in c lu d in g d u p lic a te c o m m e n ts a m o n g th e ag en cies. A d e s c r ip tio n o f th e jo in t p ro p o s e d r u le a lo n g w ith a d is c u s s io n o f th e c o m m e n ts fo llo w s. II. C oncentration o f C redit R is k A . P ro p o se d A p p r o a c h In th e jo in t p ro p o s e d ru le , th e a g e n c ie s s ta te d th a t it w a s n o t c u rr e n tly fe asib le to q u a n tify th e ris k re la te d to c o n c e n tra tio n s o f c r e d it fo r u s e in a fo rm u la -b a se d c a p ita l c a lc u la tio n . A lth o u g h m o s t in s titu tio n s c a n id e n tify a n d tra c k large c o n c e n tra tio n s o f c re d it risk b y in d iv id u a l o r re la te d g ro u p s o f b o rro w e rs , a n d so m e c a n id e n tify c o n c e n tra tio n s b y in d u s try , g e o g ra p h ic a re a , c o u n try , lo a n ty p e o r o th e r re le v a n t facto rs, th e re is n o g e n e ra lly a c c e p te d a p p ro a c h to id e n tify in g a n d q u a n tify in g th e m a g n itu d e o f risk a s s o c ia te d w ith c o n c e n tra tio n s o f c re d it. In p a rtic u la r, d e fin itio n s a n d a n a ly se s o f c o n c e n tra tio n s are n o t u n ifo rm w ith in th e i n d u s tr y a n d a re b a s e d in p a r t o n th e su b je c tiv e ju d g m e n ts o f e a c h in s titu tio n u s in g its e x p e rie n c e a n d k n o w le d g e o f its sp e c ific b o rro w e rs , m a rk e t a re a s a n d p ro d u c ts . N o n e th e le s s , te c h n iq u e s d o e x ist to id e n tify b ro a d c la sse s o f c o n c e n tra tio n s 64562 Federal Register / Vol. 59, No. 240 / Thursday, December 15, 1994 / Rules and Regulations a n d to re c o g n iz e sig n ifica n t e x p o su re s. T h e effectiv e tra c k in g a n d m a n a g e m e n t o f s u c h ris k is im p o rta n t to e n s u rin g th e safety a n d s o u n d n e s s o f fin a n c ia l in s titu tio n s . In s titu tio n s w ith sig n ifican t c o n c e n tra tio n s o f c re d it risk re q u ire c a p ita l a b o v e th e reg u lato ry m in im u m s . A s n e w d e v e lo p m e n ts in id e n tify in g a n d m e a su rin g c o n c e n tra tio n o f c re d it risk em erg e, th e agencies w ill c o n s id e r p o te n tia l re fin e m e n ts to th e risk -b a sed c a p ita l s ta n d a rd s. A c c o rd in g ly , th e age n c ies p ro p o s e d to ta k e a c c o u n t o f c o n c e n tra tio n o f c re d it risk in th e ir risk -b ased c a p ita l g u id e lin e s o r re g u la tio n s by a m e n d in g th e s ta n d a rd s to e x p lic itly c ite c o n c e n tra tio n s o f c re d it risk a n d an in s titu tio n ’s a b ility to m o n ito r a n d c o n tro l th e m as im p o rta n t factors in asse ssin g a n in s titu tio n ’s o v erall c a p ita l ad e q u a c y . T h e jo in t p ro p o s e d ru le c o n te m p la te d th a t in a d d itio n to re v ie w in g c o n c e n tra tio n s o f c re d it risk p u rs u a n t to s e c tio n 305, th e a g en c ies also m a y re v ie w a n in s titu tio n ’s m a n a g e m e n t o f c o n c e n tra tio n s o f c re d it risk for a d e q u a c y a n d c o n siste n c y w ith safety a n d s o u n d n e s s s ta n d a rd s reg a rd in g in te rn a l c o n tro ls, c re d it u n d e rw ritin g o r o th e r re le v a n t o p e ra tio n a l a n d m a n a g e ria l a re a s to b e p ro m u lg a te d p u rs u a n t to se c tio n 132 o f FDICIA. B. C o m m e n ts T h e v ast m a jo rity o f c o m m e n te rs s u p p o r te d th e a g e n c ie s’ d e c isio n n o t to p ro p o s e a n y q u a n tita tiv e fo rm u la o r s ta n d a rd . M a n y c o m m e n te rs, h o w e v e r, e x p re s se d a g e n eral c o n c e rn as to h o w th e a g e n c ie s w o u ld im p le m e n t a n d in te rp re t th e jo in t p ro p o s e d ru le . C o m m e n te rs n o te d w ith a p p ro v a l th e a g e n c ie s ’ o b se rv a tio n th a t ru le m a k in g in th is area c o u ld in a d v e rte n tly c re a te false in c e n tiv e s o r u n in te n d e d c o n se q u e n c e s th a t m ig h t d e c re a s e th e safety a n d -•so u n d n ess o f th e b a n k in g a n d th rift in d u s trie s o r u n n e c e s s a rily re d u c e th e a v a ila b ility o f c re d it to p o te n tia l b o rro w e rs. S ev eral c o m m e n te rs, p a rtic u la rly s m a lle r b a n k s, ag reed w ith th e a g en c ies th a t, w h ile p o rtfo lio d iv e rs ific a tio n is a d e sira b le goal, it m a y also in c re a se a n in s titu tio n ’s o v e rall risk i f a c c o m p lis h e d by le n d in g in u n fa m ilia r m a rk e t a re a s to out-ofte rrito ry b o rro w e rs o r b y ra p id e x p a n s io n o f n e w lo a n p ro d u c ts for w h ic h th e in s titu tio n d o e s n o t h av e a d e q u a te e x p ertise . A sig n ific a n t n u m b e r o f c o m m e n te rs w e n t fu rth e r, h o w e v e r, su g g estin g th a t a n y re q u ire m e n t for in s titu tio n s to h o ld a d d itio n a l c a p ita l for sig n ifican t c o n c e n tra tio n s o f c re d it risk , in c lu d in g th e case-b y -case a p p ro a c h p ro p o s e d by th e ag en cies, w o u ld h u r t sm a ll b a n k s w ith lim ite d p o rtfo lio s a n d w o u ld en c o u ra g e u n h e a lth y d iv e rsific a tio n . U n d e r th e “ Q u a lifie d T h rift L e n d e r” te st, for e x a m p le , th rifts m u s t h o ld 65 p e rc e n t o f th e ir assets in q u alify in g categories. T h is re q u ire m e n t n e c e ss a rily “ c o n c e n tra te s ” a th r if t’s p o rtfo lio in c e rta in ty p e s o f assets. A g ric u ltu ra l b a n k s d e s c rib e d th e ir p o s itio n as sim ila r, a n d th e re fo re o p p o s e d an y re q u ire m e n t o f a d d itio n a l c a p ita l in o rd e r to c o m p e n s a te for e x p o su re s to c o n c e n tra tio n s o f cre d it. O n e c o m m e n te r felt th a t th e p o te n tia l risk of lo ss from c o n c e n tra tio n s o f c re d it s h o u ld b e re fle c te d in th e a llo w a n c e for lo a n a n d le ase lo sses (ALLL). As d e sc rib e d in th e D ecem b er 21, 1993 In terag e n c y P o licy S ta te m e n t reg ard in g th e ALLL, th e c u rre n t a m o u n t o f th e lo a n a n d le ase p o rtfo lio th a t is n o t lik e ly to b e c o lle c te d s h o u ld b e re fle c te d in th e ALLL. In m a k in g a d e te rm in a tio n as to th e a p p ro p ria te lev el fo r th e ALLL, th e p o lic y sta te m e n t id e n tifie s c o n c e n tra tio n s o f c re d it risk as o n e o f sev eral facto rs to b e ta k e n in to a c c o u n t b y an in s titu tio n . W h ile b o th th e ALLL a n d c a p ita l se rv e as a c u s h io n a g ain st losses, th e d iffe re n c e b e tw e e n th e ALLL a n d c a p ita l is th a t th e ALLL s h o u ld b e m a in ta in e d a t a lev el th a t is a d e q u a te to absorb e s tim a te d losses, w h ile c a p ita l is m e a n t to p ro v id e a n a d d itio n a l c u s h io n for u n e x p e c te d fu tu re lo sses. B ecause th e m a g n itu d e a n d tim in g o f lo sses from c o n c e n tra tio n s are h a rd to p re d ic t a n d th e re fo re co m e u n e x p e c te d ly , in s titu tio n s w ith sig n ific a n t le v e ls o f c o n c e n tra tio n s o f c re d it risk s h o u ld h o ld c a p ita l a b o v e th e reg u la to ry m in im u m s . A t th e sam e tim e, in s titu tio n s w ith c o n c e n tra tio n s o f c re d it th a t a re e x p e rie n c in g a d e te rio ra tio n in c re d it q u a lity a n d co lle c ta b ility s h o u ld reflect d ie in c re a se d risk in th o s e c o n c e n tra tio n s in th e ALLL. A n y id e n tifia b le lo a n a n d lease lo sse s s h o u ld b e re c o g n ize d im m e d ia te ly by re d u c in g th e a s s e t's v a lu e a n d th e ALLL. C. F in a l R u le s A fter c a re fu l c o n s id e ra tio n o f all th e c o m m e n ts, th e ag en c ies h a v e d e c id e d to d d o p t th e p ro p o s e d ru le s o n c o n c e n tra tio n o f c re d it risk w ith o u t m o d ific a tio n . T h e age n c ies b e lie v e th a t th e re is n o t c u rre n tly a n a c c e p ta b le m e th o d to a d d a q u a n tita tiv e fo rm u la to th e risk -b a sed c a p ita l s ta n d a rd s in o rd e r to m e a su re c o n c e n tra tio n o f c re d it risk. H o w ev er, th e a g en c ies also b e lie v e th a t in s titu tio n s id e n tifie d th ro u g h th e e x a m in a tio n p ro c e ss a s h a v in g sig n ific a n t e x p o s u re to c o n c e n tra tio n of c re d it risk o r as n o t a d e q u a te ly m a n a g in g c o n c e n tra tio n risk , s h o u ld h o ld c a p ita l in ex cess o f th e reg u lato ry m in im u m s . T h e a g e n cie s h a v e re a c h e d th is c o n c lu s io n for tw o reaso n s. F irst, alth o u g h th e a g en cies reco g n ize th a t in so m e ca se s c o n c e n tra tio n s o f c re d it are in e v ita b le , th e y n o n e th e le ss c a n p o se im p o rta n t risk s. O th e r th in g s b ein g eq u al, a n in s titu tio n th a t is n o t d iv e rsifie d faces risk s th a t a d iv e rsifie d in s titu tio n d o e s n o t, a n d ac c o rd in g ly p re s e n ts risk s to th e d e p o s it in s u ra n c e fu n d th a t a d iv e rsifie d in s titu tio n d o es n ot. S e c o n d , C on gress in se c tio n 305 o f FDICIA c learly m a n d a te d th a t th e se risk s b e ta k e n in to a c c o u n t in d e te rm in in g a n in s titu tio n ’s c a p ita l a d eq u acy . O T S , h o w e v e r, d o es n o t b eliev e it is a p p ro p ria te to, a n d w ill not, im p le m e n t se c tio n 305 in a w ay th a t p e n a liz e s th rift in s titu tio n s for c o m p ly in g w ith th e sta tu to ry Q u a lifie d T h rift L e n d e r test. In a d d itio n , th e ag en c ies are n o t en c o u ra g in g o u t-o f te rrito ry le n d in g as a re s p o n se to d iv e rsific a tio n co n c e rn s. III. R isk s o f N o n tra d itio n a l A c tiv itie s A . P ro p o se d A p p ro a c h T h e a g e n c ie s p ro p o s e d to take a c c o u n t o f th e risk s p o se d by n o n tr a d itio n a l a c tiv itie s b y e n su rin g th a t, as m e m b e rs o f th e in d u s try began to en gage in , o r sig n ific a n tly e x p a n d th e ir p a rtic ip a tio n in , a n o n tra d itio n a l ac tiv ity , th e risk s o f th a t a c tiv ity w o u ld b e p ro m p tly a n a ly z e d a n d th e a c tiv ity g iv e n a p p ro p ria te c a p ita l tre a tm e n t. T h e ag e n c ies a lso p ro p o s e d to a m e n d th e ir risk -b ased c a p ita l s ta n d a rd s to e x p lic itly cite th e risk s a risin g from n o n tra d itio n a l a c tiv itie s, a n d m a n a g e m e n t’s a b ility to m o n ito r a n d c o n tro l th e se risk s, as im p o rta n t factors to c o n s id e r in asse ssin g a n in s titu tio n ’s ov erall c a p ita l ad eq u acy . N ew d e v e lo p m e n ts in te c h n o lo g y a n d fin a n c ia l m a rk e ts h av e in tro d u c e d sig n ific a n t c h an g es to th e b an k in g in d u s try , a n d in so m e cases h a v e led in s titu tio n s to en gage in a c tiv itie s n o t tr a d itio n a lly c o n s id e re d p a rt o f th e ir b u sin e ss. B oth in th e risk -b ased c a p ita l re g u la tio n s a n d g u id e lin e s a d o p te d b y th e a g e n c ie s in 1989 a n d in s u b se q u e n t re v isio n s a n d in te rp re ta tio n s, th e ag en c ies h a v e a d o p te d m e a su re s to tak e a d e q u a te a c c o u n t o f th e risk s o f n o n tr a d itio n a l a c tiv itie s u n d e r th e risk b a se d c a p ita l sta n d a rd s . F o r ex a m p le , th e FRB, FDIC a n d th e OCC h a v e re c e n tly p u b lis h e d for c o m m e n t a p ro p o s a l to c h a n g e th e w ay th a t th e c o u n te rp a rty c re d it risk s a re m e a su re d a n d in c o rp o ra te d in to a risk -b ased c a p ita l ra tio for e q u ity in d e x , c o m m o d ity , a n d p re c io u s m e ta ls offb a la n c e s h e e t in s tru m e n ts . T h e se Federal Register / Vol. 59, No. 240 / Thursday, December 15, 1994 / Rules and Regulations 64563 p ro p o s e d c h a n g e s w ere u n iq u e for e ach o f th e d is tin c t p ro d u c ts. T h e O TS in te n d s to is s u e a p a ra lle l p ro p o s a l in th e n e a r fu tu re . A s n o n tra d itio n a l a c tiv itie s d e v e lo p in th e fu tu re , th e ag en cie s w ill a d d re s s e a c h a c tiv ity o n a case-b y-case b a sis. T h u s , to th e ex te n t th a t se c tio n 305 c o n s titu te s a m a n d a te to th e ag e n c ie s to m ak e c e rta in th a t riskb a se d c a p ita l s ta n d a rd s are k e p t c u rre n t w ith in d u s try p ra c tic e s, th e age n c ies h av e b e e n a c tin g c o n siste n tly w ith th e in te n t of s e c tio n 305. B. C o m m e n ts a n d F in a l R u les W h ile m o st c o m m e n ts fo cu sed on c o n c e n tra tio n o f c re d it risk ra th e r th a n n o n tr a d itio n a l a c tiv itie s, so m e c o m m e n te rs n o te d th e ir a p p ro v a l o f th e a g e n c ie s’ a p p ro a c h w ith reg ard to b o th p a rts o f th e ru le m a k in g . O n ly a few c o m m e n te rs c ritic iz e d th e a g e n c ie s’ p ro p o s a l on n o n tr a d itio n a l ac tiv itie s, e x p re s sin g c o n c e rn th a t th e a g e n c ie s' p ro p o s a ls w e re to o vague for e x a m in e rs to a p p ly or th a t th e p ro p o s a ls w e re too inflex ib le. A fter c a re fu l c o n s id e ra tio n o f all th e co m m e n ts, th e ag en cie s are a d o p tin g th e jo in t p ro p o s e d ru le on n o n tra d itio n a l a c tiv itie s w ith o u t m o d ific a tio n . T h e age n c ies b e lie v e th a t th is fin al ru le a p p ro p ria te ly re c o g n iz e s th a t th e effect o f a n o n tr a d itio n a l a c tiv ity o n a n in s titu tio n ’s c a p ita l a d e q u a c y d e p e n d s o n th e a c tiv ity , th e p ro file o f th e in s titu tio n , a n d th e in s titu tio n ’s ab ility to m o n ito r a n d co n tro l th e risk s arisin g from th a t a ctiv ity . T h e a g e n c ie s w ill c o n tin u e th e ir efforts to in c o rp o ra te n o n tr a d itio n a l a c tiv itie s in to risk -b ased ca p ita l. In a d d itio n , to th e e x te n t a p p ro p ria te , th e agen cies w ill issu e e x a m in a tio n g u id e lin e s o n n e w d e v e lo p m e n ts in n o n tr a d itio n a l ac tiv itie s o r c o n c e n tra tio n s o f c re d it to e n s u re th a t a d e q u a te a c c o u n t is ta k e n o f th e risk s o f th e s e a ctiv itie s. IV. P ap erw ork R ed uction A ct N o c o lle c tio n s o f in fo rm a tio n p u rs u a n t to s e c tio n 3504(h) o f th e P a p e rw o rk R e d u c tio n A ct (44 U.S.C. 3501 e t seq.) are c o n ta in e d in th is final ru le. C o n se q u e n tly , n o in fo rm a tio n h a s b e e n s u b m itte d to th e O ffice o f M a n a g e m e n t a n d B udget for rev iew . V. R egulatory F lex ib ility A ct Statem ent E ach a g en c y h e re b y c e rtifie s p u rs u a n t to s e c tio n 6 0 5 b o f th e R eg ulato ry F le x ib ility A ct (5 U.S.C. 605(b)) th a t th e fin al ru le w ill n o t h av e a sig n ific an t e c o n o m ic im p a c t o n a su b s ta n tia l n u m b e r p f s m a ll e n titie s w ith in th e m e a n in g o f th e R egulato ry F le x ib ility A ct (5 U.S.C. 601 e t se q .\. T h is fin al ru le d o e s n o t n e c e s s ita te th e d e v e lo p m e n t of so p h is tic a te d re c o rd k e e p in g o r re p o rtin g sy ste m s b y sm a ll in s titu tio n s ; n o r w ill sm a ll in s titu tio n s n e e d to seek o u t th e e x p e rtis e o f s p e c ia liz e d a c c o u n ta n ts, la w y e rs, o r m a n ag ers in o rd e r to c o m p ly w ith th e re g u la tio n . VI. E xecu tive Order 12866 T h e OCC a n d O T S h a v e d e te rm in e d th a t th is fin a l ru le d o e s n o t c o n stitu te “ sig n ific a n t re g u la to ry a c tio n ” for p u rp o s e s o f E x ecu tiv e O rd e r 12866. List o f Subjects 12 CFR P art 3 A d m in is tra tiv e p ra c tic e a n d p ro c e d u re , C a p ita l risk , N a tio n a l b an k s, R ep o rtin g a n d re c o rd k e e p in g re q u ire m e n ts. 12 CFR P art 208 A cc o u n tin g , A g ricu ltu re, B anks, B anking, C o n fid e n tia l b u s in e s s in fo rm a tio n , C rim e, C u rre n cy , F e d e ra l R eserve S y stem , M ortgages, R ep o rtin g a n d re c o rd k e e p in g re q u ire m e n ts. S ecu ritie s. 12 CFR P art 325 B ank d e p o s it in s u ra n c e , B anks, B anking, C a p ita l ad e q u a c y , R ep o rtin g a n d re c o rd k e e p in g re q u ire m e n ts. S av in g s a ss o c ia tio n s, S tate n o n m e m b e r b an k s. (b) A b a n k i;eceiving sp e c ia l su p e rv iso ry a tte n tio n ; (c) A b a n k th a t h as, or is e x p e c te d to h av e, lo sses re s u ltin g in c a p ita l in a d eq u acy ; (d) A b a n k w ith sig n ific an t e x p o su re d u e to in te re s t rate risk, th e risk s from c o n c e n tra tio n s o f c re d it, c e rta in risk s arisin g from n o n tr a d itio n a l activ itie s, o r m a n a g e m e n t’s o v e ra ll in a b ility to m o n ito r a n d c o n tro l fin a n c ia l a n d o p e ra tin g risk s p re s e n te d by c o n c e n tra tio n s o f c re d it a n d n o n tr a d itio n a l a ctiv itie s; (e) A b a n k w ith sig n ific a n t e x p o su re d u e to fid u c ia ry o r o p e ra tio n a l risk; (f) A b a n k e x p o s e d to a h ig h degree o f asset d e p re c ia tio n , o r a lo w lev el o f liq u id asse ts in re la tio n to sh o rt-term liab ilities; (g) A b a n k e x p o s e d to a h ig h v o lu m e of, o r p a rtic u la rly sev ere, p ro b le m loan s; (h) A b a n k th a t is g ro w in g ra p id ly , e ith e r in te rn a lly o r th ro u g h a c q u isitio n s; or (i) A b a n k th a t m a y b e ad v e rse ly affected b y th e a c tiv itie s o r c o n d itio n of its h o ld in g c o m p a n y , affiliate(s), or o th e r p e rs o n s o r in s titu tio n s in c lu d in g c h a in b a n k in g o rg a n iz a tio n s, w ith w h ic h it h a s sig n ific a n t b u s in e s s re la tio n sh ip s. 12 CFR P art 5 6 7 Dated: N ovem ber 18,1994. Eugene A. Ludw ig, C a p ita l, R e p o rtin g a n d re c o rd k e e p in g re q u ire m e n ts. S av in g s a sso ciatio n s. FEDERAL RESERVE SYSTEM A uth ority and Issu an ce OFFICE OF THE COMPTROLLER OF THE CURRENCY 12 CFR C hapter I F o r th e re a s o n s se t o u t in th e jo in t p re a m b le , 12 CFR p a rt 3 is a m e n d e d as set fo rth b elo w : PART 3—MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES 1. T h e a u th o rity c ita tio n for p a rt 3 is re v ise d to re a d as follow s: Authority: 12 U.S.C. 93a, 161,1818, 1828(n), 1828 note, 1831n note, 3907 and 3909. 2. S e c tio n 3.1 is re v ise d to re a d as follow s: T h is p a rt is is su e d u n d e r th e a u th o rity o f 12 U.S.C. 1 e t seq ., 93 a, 161, 1818, 3907 a n d 3909. 3. S e c tio n 3.10 is re v ise d to re a d as follow s: §3.10 Applicability. T h e OCC m a y re q u ire h ig h e r m in im u m c a p ita l ra tio s for an in d iv id u a l b a n k in v ie w o f its c irc u m s ta n c e s . F o r e x a m p le , h ig h e r c a p ita l ra tio s m a y b e a p p ro p ria te for(a) A n e w ly c h a rte re d b an k r Comptroller o f the Currency. 12 CFR C hapter II F o r th e re a s o n s set fo rth in th e join t p re a m b le , J 2 CFR P art 208 is a m e n d e d as set fo rth belo w : PART 20S—MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM (REGULATION H) 1. T h e a u th o rity c ita tio n for P art 208 c o n tin u e s to re a d as follow s: A uthority: 12 U.S.C. 36, 248(a), 248(c), 321— 338a, 371d, 461, 481-486, 601, 611, 1814, 1823(j), 1828(o), 18310, 1 8 3 1 p -l, 3105, 3310, 3331-3351, an d 3906-3909; 15 U.S.C. 78b, 781(b), 781(g), 78l(i), 78o-4(c)(5), 78q, 78q— a n d 78 w; 31 U.S.C. 5318. 1, 2. A p p e n d ix A to P art 208 is a m e n d e d by re v isin g th e fifth a n d six th p a ra g ra p h s u n d e r "I. O verview " to read as follow s: A p p en d ix A to Part 208— Capital A dequ acy G u id elin es for State M ember Banks: R isk-B ased M easure I. Overview ■ . I- I ‘ ........ .. ' ' ' T he risk-based capital ratio focuses p rin cip ally on b road categories of credit risk although the fram ew ork for assigning assets and off-balance-sheet item s to risk categories 64564 Federal Register / Vol. 59, No. 240 / Thursday, December 15, 1994 / Rules and Regulations does in- o rpo rate elem ents of transfer risk as well as lim ited m stan. es of interest rate an d m arket risk T he fram ew ork incorporates risks arising from trad itio n al banking activ ities as w ell as risks arising from n o n trad itio n al activities T he risk-based ratio does not h o w ev er incorporate other factors that can affert an in stitu tio n 's financial co n d itio n T hese factors in clu de overall interest rate exp o su re, liquidity, funding and m arket risks, th e quality and level of earnings, inv estm en t, loan portfolio, and o th er c o ncen tratio n s of credit risk, certain risks arising from n o n trad itio nal activities, the quality of lo an s a n d investm ents, the effectiveness of loan an d investm ent policies, a n d m anagem ent s overall ability to m onitor and control financial and operating risks, includ in g th e n s k s presented by co n cen tratio n s o f credit a n d no n trad itio nal activities In ad d itio n to evaluating capital ratios, an overall assessm ent of capital adequacy m ust take accou n t of those factors, including, in p articu lar th e level and severity of problem a nd classified asse ts For this reason, the final su perv isory judgem ent on a b ank's capital adequacy m ay differ significantly from con clu sio n s that m ight be d raw n solely from th e level o f its risk-based capital ratio. ^ * * * * * Bv o rder o f the Board of G overnors of the Federal Reserve System , Decem ber 9, 1994 B a rb ara R. L ow rey, Associate Secretary of the Board FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR C hapter H I F o r th e re a s o n s set fo rth in th e jo in t p re a m b le , 12 CFR P art 32 5 is a m e n d e d a s follow s. PART 325—CAPITAL MAINTENANCE 1 T h e a u th o rity c ita tio n for p a rt 325 is re v ise d to re a d a s follow sA u tho rity : 12 t ' S C 1815(a), 1815(h), 1 8 1 6 ,1818(a), 1818(b), 1818(c) 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1828 note, 1831n note, 18310, 3907, 3909 § 325.3 [Amended] 2 S ec tio n 325 3(a) is a m e n d e d in th e fo u rth s e n te n c e b y a d d in g " s ig n ific a n t risk s from c o n c e n tra tio n s o f c re d it o r n o n tr a d itio n a l a c tiv itie s ,’* im m e d ia te ly after " f u n d in g r is k s ,” a n d by a d d in g “ w ill ta k e th e s e o th e r fac to rs in to a c c o u n t in a n a ly z in g th e b a n k ’s c a p ita l a d e q u a c y a n d ” im m e d ia te ly after '‘FDIC” a n d b efo re “ m a y ” 3 T h e fifth p a ra g ra p h o f th e in tro d u c to ry te x t o f A p p e n d ix A to P a rt 325 is re v ise d to re a d as fo llow s A p p en d ix A to Part 325— S tatem ent o f P olicy on R isk -B ased C apital * * * * * T he risk-based capital ratio focuses p rin cip ally o n b road categories of credit n sk , how ever, the ratio does not take account of m any oth er factors that can affect a b a n k ’s financial c o nd ition T hese factors in clu d e overall interest rate risk exposure, liq u id ity funding and m arket risks, the quality and level o f earnings, investmen* loan portfolio, and o th er t o n cen tratio n s of credit risk, certain risks arising from n ontraditional activities, the q u ality of loans a n d investm ents, th e effectiveness of loan and investm ent policies, and m an agem en t’s overall ability to m on itor and control financial a n d operating risks, in clu d in g the risk p resen ted by con cen tratio n s o f credit and n o n trad itio n al activities. In a d d itio n to evaluating capital ratios, an overall assessm ent of c ap ital adequacy m u st take account o f each of these o th er factors, including, in particu lar, the level and severity of problem a n d adversely classified assets For th is reason, th e final supervisory judgm ent o n a b a n k ’s capital adequacy m ay differ significantly from the c o nclu sion s that m ight be d raw n solely from th e absolute level of th e b a n k 's risk-based capita) ratio. * * * * * By o rder of the Board of Directors. Dated at W ashington, DC, th is 9th day of A ugust 1994 Federal Deposit In su ran ce C orporation. Robert E. Feldm an, Acting Executive Secretary OFFICE OF THRIFT SUPERVISION 12 CFR C hapter V F o r th e re a s o n s set fo rth in th e jo in t p re a m b le , 12 CFR P art 567 is a m e n d e d as follow s: SUBCHAPTER D—REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS PART 567—CAPITAL 1. T h e a u th o rity c ita tio n fo r p a rt 5 67 c o n tin u e s to re a d as follow s: Authority: 12 U.S C. 1 4 6 2 ,1462a, 1463, 1464, 1467a, 1828 (note). 2. S e c tio n 56 7.3 is a m e n d e d by re v isin g p a ra g r a p h s (b)(3) a n d (b)(9) to re a d as fo llo w s: § 567.3 Individual minimum capital requirem ents. * * * * * (b) * * * (3) A sa v in g s a ss o c ia tio n th a t h a s a h ig h deg ree o f e x p o s u r e to in te re s t ra te risk , p re p a y m e n t risk , c re d it risk , c o n c e n tra tio n o f c re d it risk , c e rta in risk s a risin g from n o n tr a d itio n a l a c tiv itie s, o r sim ila r risk s; o r a h ig h p ro p o r tio n o f offb a la n c e s h e e t risk , e sp e c ia lly s ta n d b y le tte rs o f c re d it; * * * * * (9) A sa v in g s a ss o c ia tio n th a t h a s a re c o rd o f o p e ra tio n a l lo sses th a t e x c e e d s th e av erag e o f o th e r, s im ila rly s itu a te d sav in g s a sso c ia tio n s; h a s m a n a g em en t d e fic ie n c ie s, in c lu d in g fa ilu re to a d e q u a te ly m o n ito r a n d co n tro l fin a n c ia l a n d o p e ra tin g risks, p a rtic u la rly th e ris k s p re s e n te d by c o n c e n tra tio n s o f c re d it a n d n o n tr a d itio n a l a c tiv itie s, o r h a s a p o o r re c o rd o f su p e rv is o ry c o m p lia n c e * * * * * Dated A ugust 12, 1994 By the Office o f T hrift Supervision )o n a th a n L. F iech ter, Acting Director [FR Doc 94 "30771 Filed 1 2 -1 4 -9 4 , 8 45 am) BIUJMG COOES: OCC 4810-33-P; Book) 6210-61-P ; FDtC 6714-01-P; OTS 6720-01-P
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