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Federal R eserve Bank
OF DALLAS
ROBERT
D. M c T E E R , J R .
P R E S ID E N T
AND
C H IE F
E XE C U T IV E
O F F IC E R
,
September 28, 1993
DALLAS, TEXAS 7 5 2 2 2
Notice 93-103
TO:
The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District
SUBJECT
Request for Public Comment on Proposed
Interagency Rule to Revise Risk-based Capital Guidelines
DETAILS
The Federal Reserve Board has requested public comment on an
interagency notice revising risk-based capital standards to implement Section
305 of the Federal Deposit Insurance Corporation Improvement Act regarding
interest rate risk (IRR).
The proposed rule is designed to ensure that banking institutions
effectively measure and monitor interest rate risk and that this risk is
adequately considered in the Board’s risk-based capital standards. As part of
this proposal, the Board is requesting comment on procedures for measuring IRR
exposures and two alternative methods for determining the additional capital,
if any, a bank may be required to have for interest rate risk.
The agencies sought public comment on a proposed framework for IRR
in August 1992, and the current proposal has been revised to take account of
the commenters’ concerns and recommendations.
The Board must receive comments by October 29, 1993. Comments
should be addressed to William W. Wiles, Secretary, Board of Governors of the
Federal Reserve System, 20th Street and Constitution Avenue, N.W., Washington,
D.C. 20551. All comments should refer to Docket No. R-0802 and will be shared
among the banking agencies.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 48205-43, Vol.
58, No. 176, of the Federal Register dated September 14, 1993, 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)
- 2 -
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,
J9.
Tuesday
September 14, 1993
Part III
Department of the Treasury
Office of the Comptroller of the Currency
Federal Reserve System
Federal Deposit Insurance
Corporation
12 CFR Parts 3, et al.
Risk-Based Capital Standards: Interest
Rate Risk; Proposed Rule
48206
Federal Register / VoL 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
proposal reQerts substantial
m o d if i c a t i o n s t o t h a t proposal in
response to the concerns raised a n d
Shimabukuro, Senior Attorney, Bank
Operations and A ssets D ivision (202/
874—
4460), Office of the Comptroller of
th e Currency, 250 E Street, SW..
Washington, DC 20219.
B o a rd o f G overnors: James Houpt,
Assistant Director (202/452-3358),
Janies Embersit, Manager (2 0 2 /4 5 2 5249), W illiam Treacy, Supervisory
Financial A nalyst (202/452-3859),
D ivision o f Banking Supervision and
Regulation; Scott G. Alvarez, Associate
General Counsel (202/452-3583),
Gregory A. Baer, Senior Attorney (202/
452-3236), Legal D ivision. Board of
Governors o f the Federal Reserve
System. For the hearing impaired only,
Telecom m unication D evice for the Deaf
(TDD), Dorothea Thom pson (20 2 /4 5 2 3544), Board of Governors of the Federal
Reserve System , 20th and C Streets,
NW., W ashington, DC 20551.
FDIC: W illiam A. Stark, Assistant
Director (202/898-6972) or Sharon Lee,
Capital Markets Specialist (20 2 /8 9 8 6789), D ivision o f Supervision; for legal
issues, Claude A. Rollin, Senior Counsel
(202/898—
3985), Legal D ivision, Federal
D eposit Insurance Corporation, 550 17th
Street. NW., Washington, DC 20429.
recom m endations made by commenters.
The proposed am endm ents to the
12 CFR Part 3
regulations differ among the Banking
A gencies to take account of the existing
[Docket No. 93-11]
regulatory structure at each Agency.
N onetheless, the proposed am endm ents
FEDERAL RESERVE SYSTEM
are intended to have the same effect
12 CFR Part 208
DATES: Comments must be received o n
or before October 29,1993.
[Docket No. R-0802]
ADDRESSES: Interested parties are
invited to submit written com m ents to
FEDERAL DEPOSIT INSURANCE
any or all o f the Banking A gencies. A ll
CORPORATION
com m ents w ill be shared among the
Banking Agencies.
12 CFR Part 325
OCC: Written com m ents should be
RIN 3064-AB22
submitted to Docket No. 93 -1 1 ,
unications D ivision,
Risk-Based Capital Standards: Interest Comm of the Comptroller o fN inth Floor.
Office
the
Rate Risk
Currency, 250 E Street, SW„
Washington, DC 20219, Attention:
AGENCIES: Office o f the Comptroller of
Karen Carter. Comments w ill be
the Currency (OCC), Treasury, Board of
available for inspection and
Governors o f the Federal Reserve
photocopying at that address.
System (Board), and Federal Deposit
Board o f Governors: Comments,
Insurance Corporation (FDIC).
w hich should refer to Docket No. R—
ACTION: N otice o f proposed rulemaking.
0802, may be m ailed to Mr. W illiam
W iles, Secretary, Board of Governors of
SUMMARY: The OCX:, the Board, and the
SUPPLEMENTARY INFORMATION:
FDIC (the Banking Agencies) are issuing the Federal Reserve System, 20th and
Constitution Avenue, NW„ Washington, A. Background
this proposed rule to im plem ent the
DC 20551. Comments addressed to Mr.
portion o f section 305 of the Federal
1. S ectio n 305 a n d th e B asle A cco rd
W iles may also be delivered to the
Deposit Insurance Corporation
Board’s m ail room between 8:45 ajn.
Improvement Act o f 1991 (FDICIA) that
IRR is the adverse effect that changes
and 5:15 p.m . and to the security control in market interest rates may have on a
requires a revision o f their risk-based
room outside o f those hours. Both the
capital gu idelin es to ensure that those
bank’s financial condition. This risk is
m ail room and control room are
standards take adequate account of
inherent to the business of banking.
accessible from the courtyard entrance
interest rate risk (IRR). Other revisions
Section 305 o f the Federal Deposit
on 20th Street between Constitution
to the risk-based capital standards as
Insurance Corporation Improvement Act
A venue and C Street, NW. Comments
prescribed in section 305 o f FDICIA are
of 1991 (FDICIA), Public Law 102-242,
to be addressed in separate rulemakings. may be inspected in Room B -1122
requires the Banking A gencies to revise
betw een 9 a.m. and 5 p.m., except as
This proposal w ould am end the
their risk-based capital guidelines to
provided in § 261.8 of the Board’s
Banking A gencies’ capital adequacy
take adequate account o f IRR. FDICIA
“ Rules Regarding Availability of
standards to provide for consideration
also requires the Banking A gencies to
Information,” 12 CFR 261.8.
o f IRR in the overall determination of a
publish final regulations im plem enting
FDIC: H oyle L. Robinson, Executive
bank’s m inim um capital ratios. The
section 305 and to establish transition
400,
intended effect o f the proposal w ould be Secretary, Attention: Room F—
rules to facilitate com pliance w ith those
Federal D eposit Insurance Corporation.
to ensure that banking institutions
regulations.
550 17th Street, NW., W ashington, DC
effectively measure and m onitor their
Section 305(b)(2) o f FDICIA requires
20429. Comments may be handIRR and that they maintain adequate
th e Banking A gencies to discuss the
delivered to Room F - 4 0 0 ,1776 F Street
capital for that risk.
developm ent of comparable standards
NW., W ashington, DC 20429, on
As part o f the proposal, the Banking
w ith m embers of the supervisory
business days between 8:30 a.m. and 5
A gencies are publishing for com m ent
com m ittee of the Bank for International
procedures for measuring IRR exposures p.m. [FAX number (202) 898-3838].
Settlem ents (BIS), w hich has also been
Comments w ill be available for
and two alternative m ethods for
working on w ays to incorporate IRR into
inspection and photocopying in Room
determining what amount of additional
th e risk-based capital standard. The
7118, 550 17th Street, NW., Washington, Banking A gencies are actively
capital, if any, a bank may be required
to have for interest rate risk. In addition, DC 20429, between 9 a.m. and 4:30 p.m. participating in that international effort.
on business days.
the Banking A gencies w ill recommend
However, the time required for
to the Federal Financial Institutions
FOR FURTHER INFORMATION CONTACT:
developing and im plem enting an
Examination Council (FF1EC) expanded
OCC: Christina Benson, Capital
international standard is uncertain and
Call Report requirements to facilitate the Markets Specialist (202/874-5070), or
an international standard is as yet
m onitoring o f IRR exposures of
Kurt W ilhelm , National Bank Examiner
u nav ailab le.
com m ercial banks.
In im plem enting section 305 o f
(202/874-5070), Office o f the Chief
The Banking A gencies sought public
National Bank Examiner; Kevin Jacques, FDICIA, the Banking A gencies seek to
com m ent on a proposed framework for
create a viable system for measuring
Financial Economist, Econom ics and
IRR in August, 1992. The current
Evaluation (202/874-5220), and Ronald
IRR, w h ile at the sam e tim e continuing
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
to work with international organizations
to develop consistent international
capital standards. Many elem ents o f the
supervisory measurement system
proposed in this notice are consistent
w ith, although not identical to, key
elem ents of the approach being pursued
internationally. At the time that an
international agreement emerges, the
Banking A gencies w ill revisit this
approach in light of the international
standard. Such reevaluation may occur
during the biennial review of capital
standards that is required by section 305
o f FDICIA.
Comments are requested on all
aspects of this proposal. Issues on
w hich comment is specifically
requested are identified in numbered
questions in section D.
2. A d va n c e N o tice o f Proposed
R ulem aking (ANPR)
In August 1992, the Banking Agencies
issued an ANPR soliciting com m ents on
a framework for revising their risk-based
capital standards to take adequate
account of IRR, as w ell as approaches to
address the risks arising from credit
concentrations and nontraditional
activities (57 FR 35507, August 10,
1992). The ANPR outlined a possible
IRR measurement system and asked for
comments on that system, including its
use as a basis for determining a capital
requirement.
The framework outlined w as designed
to ensure that banks with significant
levels of IRR w ould have sufficient
capital to cover their exposure. IRR
exposures were quantified by a
proposed supervisory risk measure that
sought to estimate the econom ic effect
of an interest rate change on the present
value of a bank’s net worth, rather than
the effect on current or near-term
earnings. This measure required banks
to slot their assets, liabilities, and offbalance-sheet instruments into a
maturity schedule based on each
instrument’s remaining contractual
maturity or next repricing date. The
proposed maturity schedule used six
maturity ranges or time bands, with
balances in each tim e band w eighted by
a risk factor, or “risk weight,” that
estimated the price sensitivity o f the
instrument to changes in market interest
rates. H ie summation of these w eighted
values, the "Net Risk-Weighted
Position,” w as u sed to estimate the
change in a bank’s equity value for a 100
basis point change in interest rates. This
measure w as to serve as the basis for
determining a bank’s IRR exposure for
capital adequacy purposes. To mitigate
concerns about the im precision in
measuring IRR and to recognize that
som e degree o f IRR is inherent in
banking activities, only those banks
with relatively significant measured
exposure w ould have been required to
allocate capital for IRR. A s proposed,
banks with exposures in excess o f a
“threshold” level o f measured risk equal
to plus or m inus 1.0 percent o f assets
were required to allocate capital in an
amount equal to that excess exposure.
3. R esponses to th e A N P R
The Banking Agencies collectively
received a total o f 214 responses to the
ANPR. Of these, 182 addressed the
proposed framework for IRR w h ile 32
addressed only issues relating to credit
concentrations or nontraditional
activities.
The letters on the IRR proposal
expressed a w id e and diverse range of
opinions. Most commenters
recommended m odifications to, or
expressed concern with, som e aspect of
the proposal. Many commenters
acknowledged the need for the Banking
A gencies to monitor and evaluate the
level of interest rate risk taken by banks.
However, many commenters did not
believe that the framework, as proposed,
w ould lead to more effective
supervision of IRR. A s a result of these
com m ents and further analysis, the
Banking Agencies have m odified the
framework outlined in the ANPR in
important ways. The public com m ents
and key changes are summarized below.
a. Public Comments
Most respondents focused on the use
o f the measure as the basis for
determining a regulatory capital
requirement for IRR. Many urged greater
discretion and flexibility in its use and
recommended that it be used as an
examiner tool, rather than as the basis
for a capital charge. Many institutions
believed that the precision o f the
measure should be enhanced if it is to
be used to determine a capital charge.
Therefore, they requested greater
sophistication in som e areas w hich
w ould increase com plexity and require
more information. Others, however,
cited concerns with the com plexity and
reporting burden of the measure and
requested an exem ption test to exclude
banks with low IRR from added
reporting or capital requirements.
Many commenters argued against a
standard supervisory m odel and set of
assumptions for measuring IRR, often
citing the diversity w ithin the
commercial banking industry caused by
the size, location, or general nature of
each bank’s activities. Many institutions
also d te d the greater accuracy of their
ow n risk measurement m odels and
urged the Banking A gencies to rely more
heavily on them. Som e cautioned that
48207
im posing a capital charge based on a
supervisory m odel might cause som e
institutions to make decisions in
deference to that m odel even though the
bank’s internal analysis might indicate
that other actions were advisable.
Many respondents also stated that
certain assumptions made in the
supervisory m odel were improper for
their institutions and perhaps for the
industry as a w hole. For example, many
criticized the proposed treatment o f
deposits that do not have specified
maturities (referred to as non-maturity
deposits). These deposits can be
withdrawn at any time but are typically
rather stable both in price and volume.
They include demand deposits, money
market demand accounts (MMDA),
negotiable order o f withdrawal (NOW)
accounts, and savings deposits. Other
com m ents regarding specific aspects o f
the proposed supervisory model
included criticisms and
recommendations on the interest rate
scenario used and the construction of
the risk weights.
b. Responses to Comments
In response to the com m ents received,
the Banking A gencies are proposing a
measurement o f IRR exposure with
major changes from that in the ANPR
and are considering two alternative uses
o f the measured exposure. Major
changes are summarized below.
However, other changes also have been
incorporated to increase accuracy or
reduce regulatory burden.
(1) A proposed quantitative screen
w ould exem pt banks identified as
potentially low-risk institutions from
additional reporting and, most likely,
from any capital requirement for IRR.
(2) U se o f a bank’s internal risk
measure w ould be permitted for
evaluating IRR w hen the m ethodology
and key assum ptions of that measure are
deem ed adequate by the appropriate
Banking Agency. Examination
guidelines and analytical tools w ould be
provided to examiners for this purpose.
Banks w ould be expected to maintain
appropriate internal risk measurement
system s consistent with their risk
profiles.
(3) Various refinements have been
m ade to the supervisory measure that
w ould be used to evaluate IRR for non
exem pt banks where internal m odels are
not available or are deemed inadequate.
These modifications include changes to
the method for determining risk
w eights, the specific treatment o f non
maturity deposits, the reporting o f
amortizing and non-amortizing financial
instruments, and the addition o f another
tim e band to provide for greater
48208
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
accuracy and consistency w ith existing
Call Report information.
B. D iscussion o f P ro p o sa l
t. O verview
The Banking Agencies propose to
m odify their existing risk-based capital
standards to provide for the explicit
consideration o f IRR w hen assessing the
capital adequacy o f an institution. This
proposal addresses tw o elements: A
measure o f IRR exposure and an
approach for assessing capital adequacy
for IRR. Exposures to IRR w ould be
measured as the effect that a specified
change in market interest rates would
have on the net econom ic value of a
bank.t This econom ic perspective
considers the effect that changing
market interest rates may have on the
value o f a bank’s assets, liabilities, and
off-balance-sheet positions.
The Banking A gencies propose to
measure an institution’s exposure using
either a supervisory m odel or the bank’s
ow n internal m odel. In either case, the
results could be used in one or two
ways w hen assessing capital adequacy
for IRR. One approach w ould be to
reduce an institution’s risk-based capital
ratios by an amount based on the level
of measured risk. The other w ould be to
use the measured exposure as only one
of several factors in assessing the need
for capital. The measurement systems
and their possible uses are discussed in
greater detail in sections that follow.
a. Structure o f the Supervisory Model
The supervisory m odel w ould require
banks to report their assets, liabilities
and off-balance-sheet positions into
tim e bands based upon their remaining
maturities or nearest repricing dates.
Each position w ould then be m ultiplied
by an IRR “risk w eight” developed by
the Banking Agencies that represents
the estimated sensitivity o f the
econom ic value o f that position to a
specified change in market interest
rates. The risk-weighted positions o f all
balances w ould be sum m ed to produce
a net risk-weighted position. This net
position represents the estimated
change in d ie bank’s net econom ic value
and w ould be the primary quantitative
measure used to assess a bank’s level of
IRR
To avoid collecting information about
the maturities, cash flows, coupons, and
yields of each bank's assets, liabilities,
and off-balance-sheet positions, the risk
w eights w ould be developed using
• The change in an institution's net economic
value is defined as the change in the present value
of its assets minus the change in the present value
of its liabilities plus the change in the present value
of its off-balance-sheet positions.
hypothetical instruments that are
deem ed to be representative o f the
position being weighted. The risk
w eights developed w ould be the
percentage change in the present value
o f those hypothetical instruments for
the given interest rate change.
Tne structure, reporting requirements,
and key assum ptions o f the model are
discussed in section 3 below . The
Banking Agencies believe that this basic
measure can be useful for supervisory
purposes in evaluating the IRR o f many
banks. However, the Banking Agencies
recognize that this basic m odel would
not offer the precision o f many
acceptable internal m odels and that
certain types of financial instruments
have risk profiles that may be difficult
to incorporate accurately into this basic
model. For these reasons, the Banking
Agencies are proposing to make use of
a bank’s ow n m odel, if it is deemed
accurate.
b. U se of a Bank’s Internal Model
The Banking A gencies recognize that
many banking institutions have
sophisticated internal m odels for
measuring IRR that take account of
com plexities not addressed in the basic
supervisory m odel and that are tailored
to circumstances at each bank.
Consequently, the Banking Agencies
propose to make use o f a bank’s own
IRR model if it is deem ed adequate by
examiners. To make this determination,
examiners w ould consider the types of
instruments held or offered by the bank,
the integrity o f the data, and whether
the assumptions and relationships
underlying the m odel are reasonable.
The supervisory m odel and other
analytical tools could be used to assist
examiners in evaluating the adequacy of
a bank’s internal m odel. The other
analytical tools w ould be developed by
the Banking Agencies over time. Such
tools might include an options-pricing
model to assist in the evaluation o f
explicit and embedded option products
and the capability to use more detailed
coupon and maturity information in
estimating market value sensitivities. A s
experience is gained w ith the basic
model and these supplem ental tools, the
Banking A gencies may seek to refine the
basic measure to include additional or
more sophisticated measurement
m ethodologies or m odels.
When examiners determine that the
risk profile generated by a bank’s
internal m odel is an adequate measure
o f the bank’s risk position, that measure
w ould be used for supervisory purposes.
The bank, however, w ould continue to
report the proposed expanded Call
Report information used in the
supervisory m odel. In banks without
internal m odels, examiners would reply
on the supervisory m odel. If warranted
by the size and com plexity o f the bank's
activities, however, exam iners may
require an institution to have an
adequate internal m odel in the interest
o f bank safety and soundness. This
approach should create incentives for
banks to improve their ability to
measure risk.
When reviewing a bank’s internal
model, examiners w ould evaluate its
analytical approach and underlying
assumptions. To the extent the model
contains material w eaknesses or its
assumptions are judged to be
unreasonable, examiners may require
the bank to m odify its procedures before
judging the m odel to be acceptable or,
alternatively, may rely on results of the
supervisory m odel. At a minimum,
examiners w ould identify the
com ponents o f an internal model that
incorporate assum ptions or calculations
that differ significantly from those used
in the supervisory m odel, assess the
importance o f these differences, and
then determine whether the bank has a
sufficient basis for its treatment.
Examiners w ould also monitor changes
to an institution’s assum ptions or
calculation procedures over time in
order to assure the on-going integrity of
the measure.
If the Minimum Capital Standard
approach is adopted, an institution may
be required to base that calculation on
the results o f a more sophisticated
internal m odel, if available. Such an
institution w ould not be permitted to
use the basic supervisory m odel to
determine its exposure for capital
purposes, but rather w ould have to use
an internal m odel. This requirement
w ould be based upon the size and
com plexities o f an institution’s
activities and w ould reflect the
recognition that the supervisory model
may not fully capture the risks o f certain
types of financial instruments or
activities. The Banking A gencies seek
comment on the appropriateness of such
a requirement and on the types and
scopes of activities that should trigger it.
c. Threshold Level
When evaluating a bank’s need for
capital IRR, the Banking A gencies
propose to focus on institutions with
relatively high levels o f measured risk.
This focus on “outliers” reflects that
view that a certain amount of IRR is
inherent and appropriate in commercial
banking, that the level o f risk is difficult
to measure precisely, and that IRR has
not been a principal threat to the
financial health o f commercial banks in
the past.
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
A threshold level representing a
decline in net econom ic value equal to
1.0 percent o f assets is proposed to
account for m easurement imprecision
and som e amount o f IRR im plicit in the
current risk-based capital standard.
Measured exposures resulting in a
d ecline in value o f less than the 1.0
percent o f assets level w ould generally
be considered insufficient to require
capital, although examiners could
determine otherw ise in unusual
circum stances. The Banking Agencies
m ay need to reconsider this proposed
threshold level w hen other aspects o f
the proposal have been decided.
Moreover, sin ce the threshold exists in
part to account for measurement
im precision, the Banking Agencies also
request com m ent on the merits o f using
a lower threshold w hen results o f more
accurate internal m odels are used to
evaluate IRR.
RC-J, currently com pleted only by
FDIC-supervised savings banks, w ith
this new Call Report schedule. A ll
FDIC-supervised savings banks w ould
com plete the n ew Call Report schedule
and w ould not be afforded the reporting
exem ption as described in section E
below . Comment is also requested on a
second schedule that w ould be
com pleted only by banks that elect or
that may be required to use the results
o f their internal m odels. This second
schedule w ould be required only if the
Banking Agencies relied on the
information to provide an explicit
capital charge for IRR and w ould not be
need ed if the measured exposure was
considered only as one elem ent of
broader guidelines for assessing capital
adequacy for IRR.*
The proposed reporting schedules
(Schedules 1 and 2) are illustrated and
discu ssed in sections 3 and 4 below .
d. Reporting Requirements
W hile the regulatory changes
proposed are expected to result in
changes to the Call Report, no
paperwork changes are specifically
contained in this rule. The exam ples o f
Call Report schedules are provided to
assist the reader in analyzing the full
im plications o f the proposal. They are
not intended as proposed forms.
However, realistically, if the agencies
adopt the final rule substantially as
proposed, the resulting changes to the
Call Report w ill probably be similar to
the m odels provided and to what is
recom m ended by the Banking A gencies
to the Federal Financial Institutions
Examination Council (FFIEC). The
agencies w ill subm it any Call Report
changes to OMB for review as required
under the Paperwork Reduction Act (44
U .S .C 3501 e t seq.). Opportunity for
public com m ent is alw ays provided in
relation to such a subm ission.
N evertheless, the agencies invite
com m ents regarding the paperwork
im plications o f this notice o f proposed
rulemaking, and w ill carefully consider
any com m ents received in the
developm ent o f the final rule, as w ell as
in the developm ent o f proposed
revisions to the Call Report.
To collect the information necessary
to monitor the level o f IRR and assess
the need for additional capital at banks
that may have significant exposures, the
Banking A gencies believe that
additional Call Report information w ill
be needed. A ccordingly, the Banking
A gencies seek com m ent on a Call Report
schedu le currently under consideration
w hich w ould provide information
necessary for calculating the
supervisory measure. The FDIC w ould
also replace supplem ental Schedule
e. Reporting Exemptions
To m inim ize the reporting and other
regulatory burdens associated w ith this
proposal, the Banking Agencies propose
to exem pt from any additional reporting
requirements institutions that meet
certain criteria associated with “low risk” institutions. The Banking A gencies
propose that an institution w ould have
to m eet the follow ing two criteria to
qualify for such an exemption:
(1) The total notional principal amount of
all of the institution’s off-balance-sheet
interest rate contracts a does not exceed 10
percent of its total assets; and
(2) 15 percent of the sum of the
institution’s fixed- and floating-rate loans
and securities that mature or reprice beyond
5 years is less than 30 percent of its total
capital.
The first criterion evaluates whether an
institution has a significant amount o f
off-balance-sheet obligations that may
warrant further scrutiny. The second
criterion tests whether a significant
decline in the market value o f those
assets most exposed to changing interest
rates w ould reduce the institution’s
capital substantially.
To qualify for the reporting
exem ption, banks w ould need to meet
these criteria at each quarterly Call
Report date. Based on data for December
3 1 ,1 9 9 2 , approximately 8,400
institutions w ith about 30 percent o f
U.S. com m ercial bank assets w ould
m eet these criteria. However, the
Banking A gencies reserve the right to
require an institution to report the
*Tbe Banking Agencies may choose to treat the
proposed second schedule as confidential.
3Off-balance-sheet interest rate contracts are
those reported on Schedule RC-L items ll.a „ U .b.,
ll.c .(l) and llx .(2 ) of the Consolidated Report of
Financial Condition.
48209
additional information even i f the
institution satisfies these criteria. If a
previously exem pted bank fails to meet
these criteria, or otherw ise becom es
non-exem pt, it w ould be required to
report the additional data at the next
tw o Call Report dates, regardless o f its
future exem ption status. Therefore,
exem pted banks w ould n eed to ensure
that they are able to provide the
requested information, i f necessary.
Although exem pted banks w ould not
be required to report any additional
data, they w ould be expected to
maintain adequate policies and
procedures for measuring, controlling,
and managing interest rate risk.
f. Implementation Schedule
The Banking A gencies propose to
require the additional reporting by non
exem pt banks beginning w ith the March
1994 Call Reports. Full implementation
o f the guidelines for assessing the
adequacy o f bank capital w ould be
effective December 3 1 ,1 9 9 4 . However,
the Banking A gencies also propose that
examiners apply these standards on an
advisory basis beginning w ith
exam inations com m encing after
December 3 1 ,1 9 9 3 , to the extent that
data are reasonably available.
Comments are requested on all
aspects o f the proposal, including the
suggested im plem entation schedule.
2. M ajor C onsiderations in M easuring
In terest R ate R isk
Obtaining meaningful results from
either the supervisory or internal
m odels requires appropriate treatment
o f three critical elements:
(1) The interest rate scenario used to
measure the effect of changing rates;
(2) The asymmetrical rate sensitivity that
results for certain bank products when both
rising and falling interest rate scenarios are
considered; and
(3) The treatment of non-maturity deposits,
i.e., demand deposits, NOW and savings
accounts, and MMDAs.
Another important consideration,
especially w hen evaluating the risk of
an individual bank that is part o f a
multi-bank holding com pany, is the
relationship o f that bank’s exposure to
positions held by its parent or other
affiliated institutions. Each o f these
issues is discussed below .
a. Interest Rate Scenario
The interest rate scenario used to
determine risk w eights should cover an
appropriate range o f possible interest
rate changes and reflect these factors:
(1) A tim e horizon over w hich
institutions and supervisors can
reasonably be expected to identify an
institution’s risk and im plem ent
48210
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
meaningful and loss-lim iting responses,
taking into account both the frequency
o f reporting and examinations; and
(2) A n appropriate probability o f
occurrence, as reflected by the historical
volatility o f market interest rates over
the chosen tim e horizon.
The chosen tim e horizon is an
important determinant o f the size o f the
specified rate change. In general, a
shorter tim e horizon im plies a sm aller
potential rate change; generally,
nom inal rate changes based on quarterly
tim e horizons are roughly one half o f
those derived from annual time
horizons. A quarterly interval w ould
correspond to the regulatory reporting
cycle and may also allow sufficient time
for bank management to identify and
reposition an interest rate risk exposure.
However, an annual or semi-annual
tim e horizon m ay better reflect the time
necessary for management to recognize
trends in interest rates and determine an
appropriate response, and for the results
o f management’s actions to be reflected
to a material degree in the bank’s
positions. It m ay also be more
appropriate than a quarterly time
horizon given the sluggishness o f non
maturity deposit rates to respond to
market changes.
The Banking A gencies recognize that
interest rate volatility varies with
different maturities and that this
volatility generally increases w ith the
level o f rates (i.e., that volatility is
roughly proportional to the absolute
level o f rates).* Holding other factors the
same, longer-term rates are typically less
volatile than short-term rates.
Monthly
changes
Quar
terly
changes
Annual
changes
.0711
.0642
.0574
.0468
.0424
.0393
.0346
.1515
.1358
.1200
.0978
.0880
.0810
.0721
.2949
.2665
.2327
.1953
.1827
.1733
.1590
3 M o_____ ____
1 Yf............ ........
2 Yr....................
5 Yr......... ..........
7 Yr ..................
10 Yr........... .......
30 Yr.............. ..
percent w ould be measured as a
movem ent o f 50 basis points, as w ould
a change from 10.0 percent to 10.5
percent. Scenarios w ould be based on
two standard deviations (covering 95
percent of the observations) of quarterly
basis point changes over a selected
sample period—for exam ple, 5 years.
The observed range o f historical
m ovem ents in interest rates over the
selected tim e horizon w ill differ
depending on the sam ple period used.
Volatility experienced over a long
sam ple period (e.g., the past 15 years)
could be significantly different from that
experienced over a shorter sam ple
period (e.g., the prior 3 to 5 years).
Longer sam ple periods could be used to
ensure that the estim ated volatilities
reflect the full range o f potential
changes in rates over entire interest rate
cycles and thus, might be more
representative than shorter sam ple
periods. On the other hand, shorter and
more recent sam ple periods w ould
better reflect prevailing rates and
volatilities.
The Banking Agencies solicit
com m ents on the appropriate tim e
horizon, volatility measure and
historical sam ple period to use in
developing an interest rate scenario for
assessing interest rate risk exposures.
Specifically, com m ents are sought on
alternative m ethodologies for
determining scenarios. The first
alternative m easures historical volatility
using nom inal basis point changes in
market rates. For exam ple, a change in
the 6-month rate from 3.0 percent to 3.5
A second alternative measures
historical volatility as a proportion by
w hich rates change. For exam ple, the
same increase from 3.0 to 3.5 percent
w ould be measured as a movem ent of
16.6 percent o f the in itial rate (i.e.,
0.005/0.03) whereas the increase from
10.0 to 10.5 percent w ould be measured
as a change of 5 percent (0.005/.10).*
Under this alternative, a volatility factor
covering tw o standard deviations o f the
distribution of proportional rate changes
over the sam ple period w ould be
applied to the prevailing level of rates
at each point along the yield curve. A
30.0 percent proportional rate change
represents roughly tw o standard
deviations of quarterly m ovem ents o f 3month instruments, or annual
m ovem ents o f 30-year instruments
observed during the period 1977 to
1992. This “volatility factor” w ould
produce a 90 basis point change if
applied to a market rate of 3.0 percent
(0.300.03). The sam e factor, if applied to
a 10.0 percent market rate, w ould
produce a 300 basis point change
(0.300.10).
Possible interest rate scenarios using
both alternative m ethods and quarterly
and annual time horizons are show n
below:
Scenarios using nominal change
Scenarios using proportional change
Maturity
Quarterly horizon
Quarterly horizon
Annual horizon
(Col-1)
0-3 Months ....
3-12 Months
1-3 Years ......
3-5 Years ___
5-10 Years ....
10-20 Years ..
Over 20 Years
Annual horizon
(Col. 2)
(Col. 3)
(Col. 4)
115 b p ._
_
120 b p .......
130 b p .......
125 b p .__
1 1 0 b p ......
100 b p .......
80 b p ____
320 b p .
300 b p .
250 b p .
200 b p .
170 b p .
140 b p .
130 b p .
100 bp
100 bp
110 bp
115 bp
110 bp
110 bp
110 bp
190 bp
190 bp
210 bp
235 bp
235 bp
235 bp
240 bp
Columns 1 and 2 illustrate scenarios
using nom inal changes in rates for a
quarterly and an annual tim e horizon,
respectively, as exhibited during the
past five years. Colum ns 3 and 4
illustrate the rate changes derived using
volatility factors for quarterly and
annual tim e horizons, respectively,
applied to the average level o f rates
during the fourth quarter o f 1992. T he
relative uniformity o f rate changes
across the term structure under the
proportional m ethodology (colum ns 3
and 4) reflects the steepness of the yield
curve during that quarter; the sharply
* Based on the following standard deviations of
the percent change in rates on U.S. Treasury
securities estimated over the period 1977 to 1992,
one standard deviation of annual rate changes in
the 3-month Treasury Bill is approximately 29.5%
of the outstanding 3-month Bill rate. One standard
deviation of annual changes for the 30-year U.S.
Treasury bond is roughly 15.9% of the prevailing
30-year bond rate. The corresponding absolute
changes in rates depend on the level of rates to
which the percent change is applied.
» Under current industry convention,
proportional volatility is expressed as a percent
change in the level of a given market Interest rate.
This can create some confusion, in that it represents
a "percent of a percent.” Alternatively, the
volatility can be considered to be a multiple of the
level of a market rate (e.g., 30 percent of the rate
is the same as .30 of the rate).
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
higher level o f longer-term rates more
than offsets the effect of their lower
proportional volatility. A less steep
yield curve w ould generally produce
smaller changes for long-term rates than
those for short-term rates.
Currently, the results under either
proposed methodology indicate rate
changes that are about 100 basis points
using a quarterly tim e horizon and 200
basis points using annual volatilities. In
the interest of sim plicity, the Banking
A gencies also seek comment on the use
of a parallel 100 or 200 basis point shift.
For purposes o f this proposed
rulemaking, a sim ple 200 basis point
shift is illustrated in the proposed
amendments to the regulations of the
Banking Agencies.
Whichever rate scenario is selected,
the rate change w ould be treated as an
instantaneous movement in market
interest rates and w ould be used for
both the supervisory and internal
m odels for purposes of assessing capital
adequacy. The selected rate scenario
w ould be reconsidered periodically as
market conditions change. However, it
is the intent of the Banking Agencies to
m inim ize changes to the specified
scenarios. Therefore, barring
extenuating circumstances, the Banking
A gencies propose to make changes to
the specified scenarios no more
frequently than annually.
b. Rising and Falling Rate Scenarios
Another issue is whether the Banking
A gencies should evaluate IRR under
scenarios reflecting both rising and
declining market interest rates. The
interest rate sensitivity o f many
financial instruments can differ, in
amount, under rising and declining rate
scenarios. This difference can reflect
differences in consumer behavior as
w ell as management’s pricing strategies.
Evaluating exposures for both rising and
declining rate scenarios w ould allow
consideration of the asymmetry in a
bank’s assets, liabilities and off-balancesheet items. Although banks can face
potential losses in econom ic value
under either situation, historically a
rising rate environm ent has been more
threatening to depository institutions.
Important exceptions include
institutions that have purchased large
amounts of mortgage servicing rights,
that hold large volum es of certain types
o f high-risk mortgage derivative
instruments, or that have created certain
types of exposures in off-balance-sheet
positions.
One possible approach, reflected in
the proposed rule, w ould be to evaluate
exposures to both rising and declining
rates. Internal m odels could estimate the
change in econom ic value for both
scenarios. For the supervisory m odel,
different risk weights w ould be used for
the rising and declining rate scenarios to
reflect the asymmetric behavior of
certain instruments. In the interest of
avoiding com plexity, another approach
w ould be to consider only the risk of
rising rates in the supervisory model
and to address exposure to declining
rates during on-site examinations.
Comments are requested regarding the
burden associated with either approach.
c. Treatment of Non-Maturity Deposits
The treatment o f deposits without
specific maturity or repricing dates may
be one of the most important elem ents
in calculating an institution's level of
IRR exposure, whether an internal
m odel or the basic supervisory measure
is used. For purposes of calculating the
supervisory measure, the Banking
A gencies propose to permit banks
limited flexibility in distributing their
non-maturity deposits among time
bands. Within these limits, banks w ould
distribute the balances as they believe
most appropriately reflects the price
sensitivity of these deposits. Banks
using their own m odels w ould be
subject to the same effective maturity
ranges when estimating the sensitivity
o f their deposits. Details on the
proposed maturity ranges that w ould be
allow ed are provided in section 3 below
under the discussion of "Reporting for
Non-Maturity Deposits.”
Considering the inherent difficulties
in determining the appropriate
treatment of non-maturity deposits, the
Banking Agencies solicit comment and
any relevant empirical evidence on the
price sensitivity and market valuation of
these deposits. Information relevant to
assessing the changes in the market
value of these deposits relative to
changing interest rates w ould be most
helpful. The Banking A gencies also seek
comment on whether banks that have
w ell reasoned and documented
calculations showing rate sensitivities
that are outside the proposed
supervisory ranges should be allow ed to
use those calculations. Of particular
interest are the specific types of
analyses that should be required from
banks to support such calculations.
d. Multi-bank Holding Companies
48211
Although recognizing these diverse ,
practices, the Banking Agencies propose
that each subsidiary depository
institution report its assets, liabilities
and off-balance-sheet positions
separately (provided that the subsidiary
is not exempted from the reporting
requirement based on the criteria
described in section 1 above). Multi
bank holding com panies that use their
ow n m odels also w ould need to
calculate the exposure of each
individual bank, although the actual
calculation could be done by staff at the
corporate or lead-bank level. This
procedure w ill allow the Banking
A gencies to monitor the IRR exposure of
individual banks and to evaluate the
ability of the banks to manage their
measured levels o f risk. This approach
seem s most consistent with the
structure of existing capital standards
and legislative requirements.
3. D escription o f S up erviso ry M odel
a. General Comments
This section describes the structure,
possible reporting requirements, and
key assumptions and procedures of the
proposed supervisory m odel. The
measurement system is designed to
m inim ize reporting burdens w hile
m eeting the supervisory need to
estimate the extent to w hich the net
econom ic value o f an institution would
change under a specified change in
market interest rates. A s such, it is not
intended to replace other, more
sophisticated procedures that banks
may use in their risk management
process.
A key com ponent of the proposed
supervisory system is a set of “risk
w eights” that—w hen applied to
reported asset, liability and off-balancesheet positions—estim ates the
sensitivity of the present value o f each
position to a specified change in interest
rates. The sum o f all weighted values of
a bank’s assets, liabilities and offbalance-sheet positions represents the
amount by w hich the bank’s net
econom ic value is estimated to change,
given an assumed change in interest
rates. This number, called the “Net
Risk-Weighted Position”, is the primary
quantitative measure that w ould be used
to evaluate an institution’s exposure to
IRR.
Banking organizations manage the IRR
b. Information Requirements
o f their bank and nonbank subsidiaries
U se o f the supervisory measurement
in a variety o f ways. Techniques include
system requires information on the
managing risk separately for each
maturity and repricing characteristics o f
subsidiary depository institution and
an institution's assets, liabilities and offnonbank affiliate, on a consolidated
balance-sheet positions. A s described in
basis for all banking entities, or on a
section 1 above, an IRR reporting
fully consolidated basis for the holding
exem ption w ould be granted to
com pany and all its subsidiaries.
4 8212
Federal Register / Vol. 58, No. 176 / Tuesday. September 14, 1993 / Proposed Rules
institutions meeting certain criteria.
Non-exempt institutions and FDICinsured savings banks w ould be
required to report maturity and
repricing information for both on- and
off-balance-sheet items in a Call Report
schedule such as that illustrated in
Schedule 1. Non-exempt commercial
banks w ould no longer need to report
the similar maturity and repricing data
currently collected on the memoranda
items o f Schedules RC-B, RC-C, and
RC-E. Exempt institutions with the
exception of FDtC-insured savings
banks, however, would continue to
report these memoranda items.
BILLING CODE 4810-39-M ; M l# -* -* ;
M
DRAFT
Proposed Interest Rate Risk Schedule
Schedule 1
(to be com pleted by non-exem pt institutions only)
\
> 5 years and
<
Dollar Amounts in Thousands^
Bil
> 10 years and
10 ye ars
Mil
<
1Thou
BU
20 y e a rs_
.J>^20 yeys
Mil
Thou
3
250
xxxx
(KHl
0
xxxx
Bil
' Mil
Thou
Securities:
a.
Adjustable-rate mortgage securities.
b.
Fixed rate mtgs, asset backed securities,
c
Zero or low coupon securities
•CFD^
d.
• cfd
XXXX
All other securities
_
0
(XXX
0 an
High risk mortgage securities
e.
*«*
564
Loan and Leases
W
■CFD
XXXX
a.
Adjustable rate mortgages
xxxx
6
000
b.
Fixed rate mtg, consumer loans
xxxx
•CFD
XXXX
nr F )
T
23
4 20
61
198
All Other Int-Bearing Assets (Bal Due. Fed Fund£ xxxx
1
45 0
xx»
KHI
XXXX
»CfD
XXXX
71
070
■CFD
xxxx
c
3
a.
All other loans (CAI. etc )
Time deposits
■CFD
xxxx
■CFD
XXXX
All other (include repos and sub. debt).
c
MMDAs & DDAs
d
NOWs & savings - rising rates.
e
MMDAs & DDAs declining rates.
xxxx
f
NOWs A savings- declining rates
xxxx
rising rates.
xxxx
K ill
14
258
59
287
21
b.
525
59
287
21
525
rro
xxxx
■CFD
XXXX
4
000
1
50 0
15
672
1
433
&
•c
■c m
SO xxxx
.»«,
■r'F u
xxxx
• fin
xxxx
450
21
■CFD
XXXX
•CFD
xxxx
« n
•cn>
1
65 0
0
0
XXXX
•CFD
11
0 00
*00
21
|
9 5 0 1 ,,..’ .
I36^«»> )
|
4
j
i
156 ,
13 ) 0 0 8 | «««.
620
0
0
•CIO
_ 9 ( 090
_ 0
xxxx
o r FD
xxxx
•CFD
XXXX
•CFD
0
8
500
4
•TFT)
x rx x
I lio n [
2
^ ___2
0
-
■TFT)
x rxx
000
64
•CFD
xxxx
•CM)
XXXX
• cfd
xxxx
•CM)
J
j )
0
0
0
0
000 Z i
0
•CFD
XXXX
•CFD
XXXX
•CFD
XXXX
3
'2 0 4
.0
0
•CFD
XXXX
•CFD
XXXX
■CFD
XXXX
■CFD
XXX
X
■CFD
XXXX
■CFD
XXXX
0
0
0
•CFD
XXXX
•CT1)
XXXX
•CFD
XXXX
■CFD
XXXX
■CFD
XXXX
•CFD
XXXX
■CFD
0
0
0
3
0301
0
0
0
0
0
0
■CFD
XXXX
■CTO
con
0
0
Off Balance Sheet Positions
a.
b
Options, caps, floors, etc
c
6.
Swaps, futures. FRAs. etc
Mortgages A other amortizing instruments.
Trading Account
•CFD
a
Cash positions
0
Off-balance sheet positions
3
►C
FD
XX
0 XX
■C
FD
XX
0 XX
!
J
i j i
•CFD
b.
■CFD
V fd
xxxx
■CFD
xxxx
■TFT'
XX
XX
I
1
•TFT*j
XX
000 XX 1
■CFD\
000
•C I
FD
00 0 xxxx/
■CFD
975
■cm
0 xxxx
_ 2
5 50
0
•CFD
XXXX
•CFD
XXXX
•cm
i -450
0
0
I
High-Risk Securities Evaluated
2.
High Risk Securities Not Evaluated.
2 | 160 [n x «
0
0
0
0
■Cll*.
_ 0 /
D
b Qo
)
■CFD
XXXX
■CFD
0 con
■cm ■
r~T
Declining F
Memoranda
xxxx
■CFD
XXXX
•CFD
XXX
X
0
■CFD
XXX
X
■CFD
XXXX
■CFD
XXXX
- 0
^
0
0
0
0
■CTO
XXXX
•CFD
XXXX
■CFD
XXXX
■CFD
XXXX
■CFD
XXXX
0
0
0
0
0
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed
Maturity and repricing data
Please break out the following items
according to their remaining term to
maturity or time to repricing
Rules
Revision Date
09/02/93
48213
BILLING CODE 4 8 1 0 -0 3 -C ; 6 2 1 0 -1 0 -C ; 6 7 1 4 -0 1 -C
4 8214
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rutes
The reporting format being proposed
w ould require institutions to report
assets, liabilities and off-balance-sheet
items across seven maturity ranges {time
bands) based on the time remaining to
maturity or next repricing date. The
proposed time bands are:
• Up to 3 Months.
• 3 to 12 Months,
• 1 to 3 Years,
• 3 to 5 Years.
• 5 to 10 Years,
• 10 to 20 Years,
• Greater than 20 years.
In the interest of m inim izing reporting
burdens, no coupon or yield data would
be collected. Rather, the supervisory
model w ould apply general assumptions
regarding coupon rates and other
characteristics of the underlying assets,
liabilities, and off-balance-sheet
instruments in developing the interest
rate sensitivity weights. When used as
an alternative, internal m odels would be
expected to reflect actual coupons and
yields of the specific holdings of the
institution.
R eporting fo r assets. The price
sensitivity of a financial instrument is
determined by the instrument’s cash
flow characteristics. Accordingly,
maturity and repricing data on most
assets would be collected in one of four
categories that reflect different types of
cash flows:
• Adjustable-rate mortgages (ARMs) and
mortgage securities;
• Fixed-rate mortgage securities, assetbacked securities, fixed-rate mortgages,
consumer loans and other easily identifiable
instruments that involve scheduled periodic
amortization of principal:
• Zero or low coupon securities with
either no periodic interest payments or
interest coupons of 2 percent or lower, and
• All other instruments, which are
assumed to involve scheduled periodic
payments of interest and the payment of
principal at maturity.
As proposed, those ARMs tied to a
current market index (e.g., Constant
Maturity Treasury rates) would be
reported in the time band according to
their next repricing date. ARMs tied to
a lagging index (e.g., 11th District Cost
of Funds) have greater price sensitivity
ow ing to the lagging nature of their
repricing behavior. These instruments
would be reported in the 3 to 5 year
time band to reflect this price
sensitivity.
Only outstanding principal balances
would be distributed across the time
bands. This distribution would be based
on each instrument's remaining
contractual maturity or repricing date. A
bank’s ow n estim ate o f expected cash
flows w ould not be reported. Instead,
the Banking A gencies would
Securities Purchased Under Agreement
to Resell (i.e., reverse repurchase
agreements) and other interest-bearing
assets would also be reported in the
proposed reporting form as a single line
item.
R eporting fo r tim e deposits a nd
p urch a sed fu n d s. All tim e deposits and
other interest-bearing liabilities w ith
w ell-defined m aturities—such as
Federal funds purchased, securities sold
u n der agreem ent to repurchase and
other borrow ed funds—w ould be
distributed across the tim e b an ds of
S chedule 1 in th e “ All O ther" category.
R eporting fo r n on -m a tu rity deposits.
T he Banking A gencies are proposing
uniform rules for distributing deposits
w ithout w ell-defined m aturities or
repricing d ates (dem and deposits,
MMDAs, NOWs a n d savings deposits)
across the tim e bands. T hese proposed
rules w o u ld specify th e longest tim e
band that could be used for each type
of deposit and th e m axim um percentage
am o un t that could be slotted into that
tim e band. Institutions w ould distrib ute
such deposits across the tim e bands
according to their in dividual
assum ptio ns a n d experience, subject to
the following constraints:
• Demand deposits and MMDAs may be
distributed across any of the first three time
bands, with a maximum of 40 percent of
these balances in the 1 to 3 year time band;
and
• Savings and NOW account balances may
be distributed across any of the first four time
“ Effective February 10, 1992 the Banking
bands, with a maximum of 40 percent of the
Agencies and the Office of Thrift Supervision
adopted revised supervisory policies on securities
total of these balances in the 3 to 5 year time
activities that were developed under the auspices
band.
of the FFIEC. The revised policies established a
As w as noted in section 2 above, the
framework for identifying “high-risk mortgage
securities” which must be reported as securities t
Banking A gencies are proposing to
held for sale or for trading. A “high-risk mortgage
m easure a bank's IRR exposure u n d er
security” is defined as any mortgage derivative
both a rising a n d falling rate scenario.
product that, at the time of purchase, or at a
T hese deposit slotting rules w ould
subsequent date, meets any of the following tests:
(1) Average Life Test: The mortgage derivative
allow an institution som e flexibility to
product has an expected weighted average life
slot deposits w ith undefined m aturities
greater than 10.0 years.
differently for rising and falling rate
(2) Average Life S ensitivity Test: The expected
scenarios.
weighted average life of the product:
R eporting fo r off-balance-sheet
(a) Extends by more than 4.0 years, assuming an
immediate and sustained parallel shift in the yield
position s. In stitutions w o uld be
curve of plus 300 basis points, or
required to d istribute off-balance-sheet
(b) Shortens by more than 6.0 years, assuming an
positions am ong th e tim e bands o f
immediate and sustained paraiiel shift in the yield
S chedule 1. T he Banking A gencies
curve of minus 300 basis points.
(3) Price S ensitivity Test: The estimated change in expect banks that engage in a significant
the price of the mortgage derivative product is more
am ount of off-balance-sheet activities to
than 17 percent, due to an immediate and sustained
have internal system s, including o ption s
parallel shift in the yield curve of plus or minus 300
pricing m odels as appropriate, that can
basis points.
properly value the types of transactions
In general, a mortgage derivative product that
does not meet any of the three tests is considered
they use in th eir risk m anagem ent
to be a M
nonhigh-risk mortgage security.”
activities. A ccordingly, the Banking
7 All underlying assumptions used in calculating
A gencies propose to allow banks to
the average life of these instruments must be
estim ate the interest sensitivity of offreasonable and available for examiner review. For
example, if an institution’s prepayment
balance-sheet instrum en ts using internal
assumptions differ significantly from the median
m odels. If a separate Call Report
prepayment assumptions of several major dealers as
schedu le for reporting internal m odel
selected by examiners, the examiners may use these
results is n ot a d o p ted or required (see
median prepayment assumptions in determining
the appropriate average life of the instrument.
discussion in section 4 below), the
incorporate th e rate of anticipated
prepaym ents on am ortizing instrum ents,
such as residential mortgages and
mortgage pass-through securities, into
the IRR risk w eights using standardized
assum p tion s a n d market expectations.
Mortgage derivative pro du cts w ould
be treated differently. U nder the FFIEC
Policy S tatem ent on Securities
Activities, mortgage derivative products
are defined as strip p e d mortgage-backed
securities, tranches of collateralized
mortgage obligations (CMOs) and real
estate mortgage inv estm en t co nd uits
(REMICs), CMO and REMIC residual
securities and oth er instrum ents having
the sam e characteristics as these
securities. In general, banks w ould
report “ high-risk” mortgage derivative
products differently from those th a t are
“ nonhigh-risk.” e Banks w ould report
only th e total carrying value of “ highrisk” mortgage derivative products that
are h eld for sale. A m em orandum item
w ould be used to collect inform ation on
the interest rate sensitivity of these
instrum ents. All other mortgage
derivative p ro ducts w ould be classified
as “ n onhigh-risk” an d w o uld be
distributed across the tim e b and s of th e
proposed reporting form, in the “All
O ther S ecu rities” category, according to
their current average life as calculated
by bank m anagem ent.7
T im e deposits held at other
institutions. Federal funds sold.
Federal Register / Vol. 58, No. 176 J Tuesday, Septem ber 14, 1993 / Proposed Rales
results of these internal .models .could be
incorporated as .a memorandum item on
Schedule 1. These m odels w ould be
reviewed by examiners as part o f the
examination process and exposures
based-on internal m odels w ould b e used
for supervisory purposes w hen available
and deemed acceptable to the examiner.
Comment is requested on the reporting
burden-associated with distributing offbalance-sheet positions am ong time
bands, w hen results o f internal m odels
are also provided.
With regard to reporting off-balancesheet positions in the proposed maturity
reporting schedule, Those with option
characteristics (e.g., sw aptions, caps,
floors and options) w ould be reported
separately from those representing fi rm
commitments [e.g., swaps, futures, and
forward-rate agreements). Mortgagerelated fixed-rate com m itm ents and
other off-balance-sheet derivative
instruments w hose value depends on
the-value of am m derlying asset or
index with amortizing characteristics
also w ould be reported separately.
Futures, forwards, options ana firm
com mitments to b u y or sell loans and
securities w ould b e reported using two
entries, with one entry reported in the
tim e band corresponding to th e
settlement date o f the contract plus the
maturity o f the underlying instrument,
and an offsetting entry of opposite sign
slotted in the time band corresponding
to th e settlement date o f the contract.
Interest rate swaps, and floors w ould
also be reported using two separate
entries, with one entry reported in the
time band corresponding to the maturity
of the instrument and an offsetting entry
in the time band corresponding to the
next repricing o f the floating sid e of the
instrument.
The dollar entries reported for firm
commitments w ould equal the national
principal values o f the instruments. The
dollar entries reported for instrum ents
with option characteristics w ould be
derived using one of tw o alternative
methods. The first method, reflected in
the proposed rule, w ould require the
reporting of positions using deltaequivalent values.a The second
reporting alternative w ould require the
reporting of position only if, on the
report date, the index rate or the rate to
be received is w ithin 100 b asis p oints of
the strike rate (price). If the position is
6The delta value of an option represents the
expected change in the option’s price as a
proportion of a small change in the price of the
underlying instrument. An option whose price
changes by $1 for every $2 change in the price of
the underlying instrument has a delta of 0.5. The
delta-equivalent value of an option position is equal
to the option’s current delta multiplied by its
principal or notional value.
48215
supervisory policies and are, therefore,
reported, th e notional value w ould b e
not subject to th e quarterly IRR risk
used. Comment is requested o n this
evaluation criteria. For su ch holdings,
reporting methodology as w ell as the
institutions w o u ld iia v e the option to:
u se o f delta-equivalent values for *>ff(1).Report die interest rate sensitivityx>f
balance-sheet positions w ith option
characteristics.
these holdings in a similar fashion a s
R eporting fo r tra din g acco nn t
post-February 10,1 9 9 2 , purchases; or
p ositio ns. Institutions w ould be
(2)
report nnly the current carrying
required to distribute trading .account
value o f those securities. Balances
securities, including off-balance-sheet
reported under the second option would
positions associated with the trading
be assum ed to have significant price
account, by maturity in the rows-and
volatility, similar to long dated, .zero or
colum ns sp ecified in Schedule i . A s
low coupon instruments. However,
with off-balance-sheet instrum ents, the
unlike zero coupon and m ost other debt
Banking A gencies propose to allow
instruments, the prices of certain highbanks to u se and report the results j>T
risk mortgage securities d o not a l ways
internal m odels for estimating th e
m ove in the opposite direction of a
interest rate sensitivity o f trading
change in market interest rates (i.e.,
portfolios. This information w ould be
decline in price w hen interest rates rise
collected either through the proposed
or increase in price w hen interest rates
separate Call Report schedule or
decline). Because the directional change
through a memorandum item an
in the price of these securities is
Schedule 1. Comment is requested on
difficult to ascertain unless the specific
the reporting burden associated with
cash flow s of each security are reported,
distributing trading account positions
the Banking A gencies propose .to
among time bands w hen results nf
assume that th e balances reported under
internal m odels are also provided.
the second option w ill depreciate in
T h e Banking A gencies w ould expect
value under both a rising and a falling
banks to have prudential internal risk
interest rate scenario. T o reflect this
lim its and effective risk measurement
assumption, the balances w ould be
systems'for their trading activities. For
assigned the risk weight that is applied
banks with significant trading
to long-term, zero or low coupon
operations, the adequacy and results of
securities under the rising interest rate
those system s w ill be closely reviewed
scenario. The Banking A gencies request
by examiners and w ould be
comment on the reasonableness o f this
incorporated into their assessm ent of
approach. For illustrative purposes, the
the bank’s overall risk p osition.
exam ple bank in Schedule 1 that has $3
The Basle Committee on Bank
m illion in high-risk mortgage derivative
Supervision is also considering methods securities hqs elected to report only the
of evaluating IRR in trading accounts
current carrying value for $1 m illion of
and determining appropriate capital
securities that w ould otherwise meet the
requirements. This work, which-relates
current high-risk tests but were
to activities o f internationally active
purchased prior to February 10,1992.
banks could affect the treatment for
R eporting fo r.m u lti-b a n k h old in g
trading activities for U.S. banks if it
com panies. As noted in section 2 above,
leads to an international agreement.
the Banking A gencies propose that each
M em oranda item s fo r “H igh-Risk
subsidiary depository institution report
M ortgage S ecurities’’. ‘ nder revised
U
its assets, liabilities and off-balancesupervisory policies on securities
sheet positions separately.
activities that became effective on
R eporting o f fo re ig n currency
February 10,1992, institutions must
positio n s. The Banking A gencies
evaluate at least quarterly whether their
propose that positions not denominated
holdings o f high-risk mortgage securities in U.S. dollars be converted into U.S.
reduce interest rate risk. The reporting
dollar equivalents using prevailing
form takes advantage of the availability
exchange rates end reported along with
o f this information by allow ing an
all other on- and off-balance-sheet
institution to report, in a memorandum
positions on the same reporting form.
item, the current carrying value of high- Although this treatment ignores
imperfect correlation among exchange
risk mortgage derivative products that
rates, it avoids the com plexity entailed
are held for sale along with the
b y separate reporting for each currency,
estimated changes in market va lu e for
the specified interest rate scenario. Such and the need to derive and distribute
correlation statistics to reporting banks.
data w ould be used directly in
However, a basic supervisory
calculating an institution’s IRR
principle in evaluating bank
exposure.
management is that an institution's
Mortgage derivative securities that
p olicies, procedures and general
were purchased prior to February 10,
1992 and meet the high-risk tests are
capabilities should be consistent w ith
the nature o f the bank’s business.
subject to previously existing
48216
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
in each rate scenario in accordance w ith
a consensus of market prepayment
estim ates. Amortizing instruments w ith
maturities of less than 5 years w ould be
assum ed to represent consumer
installm ent loans with prepayment rates
o f approximately 1.0 percent (1 percent
ABS) of outstanding principal per
m onth.”
The risk w eights for the “A ll Other”
category w ould be calculated assuming
semi-annual interest payments, a
maturity equal to the m id-point of each
tim e band, and an assumed coupon and
Bank supervisors w ould construct risk yield equal to the effective yield on the
c. Derivation of Risk Weights
weights using hypothetical market
industry’s earning assets in 1992.
In the proposed measurement system, instruments that are representative of
Similarly, the “Zero or Low Coupon”
the category being measured. The
reported positions w ould be m ultiplied
risk w eights are calculated using the
instruments chosen w ould vary
by an IRR weight. Each risk weight is
percentage change in the price o f a zero
depending on the category o f instrument coupon instrument w ith an assumed
constructed to approximate the
and the time band. A 30-year mortgage
percentage change in value o f the
maturity equal to the m id-point of each
pass-through security w ith the
position resulting from a specified
time band and the same industry
com posite characteristics (e.g., gross and average effective yield assum ed above.
change in interest rates. The risk
net coupons, original and remaining
w eights are based on the percentage
Only one set of risk w eights w ould be
maturity) of a current coupon, 30-year
change in present value (i.e., price) of
used for liabilities: The percentage price
conventional mortgage pass-through
hypothetical instruments, as calculated
change for a semi-annual interestsecurity at par value w ould be used to
using static cash flow analysis. Such
bearing instrument with an assumed
estimate the price change for fixed-rate
w eights directly incorporate convexity
coupon and yield equal to the effective
mortgages and mortgage securities
for the rate scenario.® These weights
yield on interest bearing liabilities.1*
reported in the greater than 20 year time
also facilitate the measurement of
For illustrative purposes, Table 1
band. Similarly, a current coupon 15options in certain types of assets, such
show s the risk weights developed for a
year conventional mortgage pass
as the prepayment option in mortgage
200 basis point parallel shift in interest
through security w ould be used to
loans.
rates, as w ell as the parameters used to
The risk weights used w ould depend
estimate the risk weight for mortgages
derive them. The specific risk weights
on the interest rate scenario for w hich
and mortgage securities reported in the
used to evaluate exposures w ould be
the change is measured. A s discussed
10 to 20 year tim e band. For the 5 to 10
derived in a similar fashion w hen the
above, com m ents are being sought on
year time band, a current coupon 15Banking Agencies adopt a specific
alternative m ethodologies for
year mortgage pass-through security
supervisory scenario. In the illustration
determining supervisory interest rate
with a remaining maturity equal to 7.5
risk w eights for both a rising and
scenarios and whether these scenarios
years w ould be used.
declining interest rate scenario have
For amortizing instruments w ith
should include both rising and falling
been constructed. Under the proposed
rates.
maturities less than 5 years, a
measurement system, the Banking
If both a rising-rate and declining-rate hypothetical monthly amortizing
A gencies expect that the risk w eights
scenario are used, as reflected in the
instrument w ould be used that had
w ould be reasonably stable over tim e so
proposed rule, separate risk w eights
these characteristics: (1) An original
as to facilitate a bank’s risk management
w ould be calculated to account for the
maturity equal to the end point of the
and capital planning. However, they
asymmetrical price behavior o f various
specific tim e band; (2) a remaining
may need to be adjusted periodically as
bank assets, liabilities and off-balancematurity equal to the m idpoint of the
market conditions, or as part of the
sheet instruments. An alternative and
tim e band; and (3) a coupon and yield
biennial review of risk-based capital
sim pler approach w ould u se the same
equal to the effective yield on the
required biennial review o f risk-based
risk w eights for both rising and
industry’s earning assets.10
capital required by section 305(a) of
declining rate scenarios. The Banking
An important consideration in
FDICIA.
A gencies seek com m ent on whether the
estimating the price sensitivity of
BILUNG CODE 4810-33-M; 8210-01-M; 6714-01-M
distortions introduced by such a sim pler amortizing instruments is the change in
prepayments as interest rates change. In
i> ABS stands for Asset-Backed Security. 1
•Convexity refer* to the non-linear price/yield
calculating the risk w eights from the 15percent ABS assumes 1 percent prepayment of
relationship of fixed-rate financial instruments.
and 30-year fixed-rate mortgages,
Instruments without option features, such as
expected prepayments w ould be applied outstanding principal balance per month
Treasury notes, have positive convexity, meaning
throughout the life of the loan.
Accordingly, examiners w ould expect
institutions that have significant
positions denominated in foreign
currencies or that conduct significant
foreign exchange transactions to have
the capability to measure and assess the
related risks. Examiners w ould consider
both the adequacy and result of a bank’s
internal risk measure, along w ith other
available information, in the overall
evaluation of the bank’s m odel. When
appropriate, internal m odels should
take adequate account of changes in
foreign exchange rates.
that as the price of the instrument falls, its yield
will increase by a proportionately greater am ount
Other instruments, such as certain mortgage-backed
securities, have negative convexity.
approach are meaningful w ithin the
overall context of the supervisory
model.
In general, the set o f risk w eights used
for each scenario w ould consist of:
• Seven ‘‘Amortizing’’ risk weights (i.e.,
one for each time band) to be used for
mortgages, pass-through mortgage securities,
asset-backed securities, consumer loans and
amortizing off-balance-sheet instruments:
• Seven "Zero or Low Coupon” risk
weights;
• Seven ‘‘All Other” risk weights; and,
• Seven liability risk weights.
<»For 1992 the average effective yield on earning
assets at all commercial banks was approximately
8.5 percent.
’>For the liability weights a 4.75 percent coupon
is assumed, which approximates the effective yield
on interest bearing liabilities at all commercial
banks during 1992.
Derivation o f Risk Weights
DRAFT
Am ortizing Instruments
________ 200BashPoint wm_______ _______ 200
Table 1
Scenario I
Maturity
1.5 Mo.
7.5 Mo.
2 Yean
4 Yean
7.5 Yean
15 Yean
25 Years
Cc
8.5%
8.5%
8.5%
8.5%
7.0%»
7.0%*
7.5% •*
A ll Other Instruments
)-3 Months
5-12 Months
1-3 Years
3-5 Years
5-10 Years
10-20 Yean
Over 20 Yean
1.5 Mo.
7.5 Mo.
2 Yean
4 Yean
7.5 Yean
15 Yean
25 Years
8.5%
8.5%
8.5%
8.5%
8.5%
8.5%
8.5%
1.5 Mo.
7.5 Mo.
2 Yean
4 Yean
7.5 Yean
15 Yean
25 Yean
4 75%
4.75%
4.75%
4.75%
4.75%
4.75%
4.75%
Liabilities
3-3 Months
3-12 Months
1-3 Yean
3-5 Yean
5-10 Yean
10-20 Yean
> er2 0 Years
Initial PSA/
1.0% ABS
1.0% ABS
1.0% ABS
1.0% ABS
166% PSA
166% PSA
242% PSA
Expected PSA/
1.0% ABS
1.0% ABS
1.0% ABS
1,0% ABS
137% PSA •••
137% PSA •••
146% PSA *•*
Price
% Change In
Present Value
ft> ifetiw
uit
-0.10%
-0.50%
-1.60%
-3.00%
-5.30%
-8 80%
-920%
99.90%
99 50%
98.40%
97 00%
94.70%
91.20%
90.80%
% Change id
Price
EipectedPSA/
Pf-esent Valui
AB$
... (•;i of Pari - niisK wd^ittsi
1.0% ABS
100.10%
0.10%
100.66%
1.0% ABS
060%
101 70%
10% ABS
i.1o%
103.10%
1.0% ABS
116%
501% PSA *•<
103.40%
3.40%
501% PSA
165.90%
$ 90%
590% PSA*W _ .. 103.60% - - , J.60%
-0.25%
-1.20%
-3.50%
-6.40%
-10.20%
-14.90%
-.i
106.2$%
0.25%
101.20%
1.20%
103.70%
3.70%
107.00%
7.00%
iii7 o %
11.70%
119.00%
19.00%
124*0% - - -24.60%
100.00% k.**ft
100.00%
100.00%
100.00%
100.00%
100.00%
100.00%
99 75%
98.80%
96.50%
93.60%
89.80%
85.10%
82.40% _..
100.00% ftftftft
100 00% • ••ft '
100.00%
100.00%
100.00%
100.00%
100.00%
99.75%
98.80%
9630%
93.10%
88.40%
8130%
76.00%
0.25%
1.20%
3.70%
6.90%
11.60%
18.70%
.. . 24,00%
lotteSfc
101.20%
10i.90%
i07.50*/S
lli5fi*/.
12450%
43^.00%.
-0.25%
-1J0%
-3.90%
4.50%
-li.50%
-24.50%
-36.00%
98.72%
93.81%
8153%
66.38%
46.44%
21 55%
7.74%
-0.25%
-1.20%
-3.70%
-7.40%
-13.30%
-24.90%
99.22%
96 09%
87.96%
77.41%
61.92%
38 30%
20)21V
«
0.25%
120%
3.90%
8.00%
15.60%
33.50%
- -61.90%
Zero or Low Coupon Securities
>3 Months
3-12 Months
1-3 Yean
)-5 Yean
5-10 Yean
10-20 Yean
2m 2S Ysaa__
1.5 Mo.
7.5 Mo.
2 Yean
4 Yean
7.5 Yean
15 Yean
25 Yean
8.5%
8.5%
8.5%
8.5%
8.5%
8.5%
8.5%
98.97%
94.95%
;84.66% - . ; ‘ .
•■
71.68%
■ ' . ,.':V
53.56%
28 69% ;H '.: 'v '. "•
12.48% >
-38.00%
• Current coupon of 15-year conventional mortgage securities as of 12/31 /92
** Current coupon of 30-year conventional mortgage securities as of 12/31/92
• • • Consensus of dealer prepayment estimates for 15- & 30-year conventional mortgage securities for selected scenarios as of 12/31/92
•••* Actual initial price is slightly less than par
BILL!NO CODE 4S10-33-C ; M 10-A1-C; *714-01-0
48217
Revision Date: 12-Jul-93
—
.Register ./ Kol. 58, No. 176 ./ Tuesday., vSeptemher 11, 1933 ./ ffrqppsfid ’Rules
Time band
>3 Months
3-12 Months
1-3 Yean
3-5 Years
5-10 Years
10-20 Years
>cr2'.
Initial
Price
/•/ of Par)
100.00%
100 00%
100 00%
100.00%
100.00%
100.00%
100.00%
SttrHrlri 2
48218
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
d. Calculation o f the Interest Rate Kisk
Measure
Tables 2 and 3 are IRR worksheets
that illustrate the method by w hich an
institution’s IRR exposure w ould be
calculated under the proposed
supervisory m ethodology using a 200
basis point parallel shift in interest
rates. Data collected on the reporting
forms and the existing Call Report
Schedules w ould be transcribed to
colum n A. For illustrative purposes,
non-interest-sensitive balances are
included in "Other Assets” and “Other
Liabilities” to allow the worksheet to
represent an institution’s entire balance
sheet.
Under the proposed measure system,
the risk w eights (shown in colum n B of
Tables 2 and 3) represent the estimated
percentage change in the value of the
instrument under the designated rate
shock. Therefore, multiplying the
reported positions by the risk weights
produces an estimate of the dollar
change in the present value o f that
position for the specified change in rates
(column C of the Tables). In Table 2, for
example, the $5.5 m illion of ARMs,
fixed-rate mortgages, asset-backed
securities and consumer loans repricing
w ithin 3 months and reported on line
I.l.(a) are m ultiplied or “w eighted” by
0.0010 (or .10 percent as shown in the
second colum n) to produce an estimated
change o f $6,000 in present value o f that
position. This risk weight carries a
negative sign, reflecting that the present
value of these assets would decline if
market rates were to rise. Conversely,
Table 3 illustrates the changes in value
for a d ecline in rates.
BILUNG CODE 4810-33-M ; (210-01-M ; «714-01-M
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Rising Rate Scenario)
DRAFT
Table 2
REPORTING INSTITUTION: Sample Bank
Date: 1231/92
S Thousands
(A)
L INTEREST-SENSITIVE ASSETS
(B)
R isk
TO TA L
1 ARM s, FRM s, asset-backed securities, consumer loan*
(a) Up to 3 months
R isk W eighted
CD)
T o tal Rtek
Post bon
W ei* h ted Position
(O
W ei*hts
IA )X (B )
$5,500
$4,950
( b )3 to 12 months
(c) I to 3 years
^
(d) 3 to 5 yean
-010%
-0 50V.
-1 6 0 S
-300V .
t ___
T
_
..14.050
(e )5 to 10 y ean
C$6)
($25)
C$65)
($125)
($351)
-5.30V.
$6,620
$6,454
$10,430
-8 80%
C$568)
-9.20%
($960)
$1,000
-0.25%
( b )3 to 12 months
(c) 1 to 3 y ean
______ ___ $1,000
_________ $ 1,000
-1 20%
-3 70%
(S3)
($12)
(d) 3 to 5 y ean
( e ) 5 to 10 y ean
________ . ....
. . . . ._ .... .
(0 10 to 20 y ean
(g) Greater than 2 0 y ean
-
2. Zero o r low coupon securities
(a) Up to 3 months
(g) Greater than 20 yean
3 'A ll other* securities, loans,
(a) Up to 3 months
St trading account
-3 50%
-6 40%
-10 20%
a 1.078)
-14.90%
-17,60%
C$1,665)
-38 00*/.
$160
C$380)
% \9 :m
. . .
510,564
(f) 10 to 2 0 y ean
(a) Self-reporting
(b) R isk weighting
5 Total Interest-Sensitive A ssets
-0.25%
-1.20%
$31,136
(e) 5 to 10 y ean
(g) Greater than 20 y e a n
4 H igh-nsk mortgage securities
-24.90%
-3800%
$26,672
$28,432
(d) 3 to 5 yean
$8,837
........... .
.
• :»
$0
$0
$0
$0
..............
( b )3 to 12 months
(c) 1 to 3 yean
.
C$37>
-740%
-13.30%
50
JO
( 0 10 to 20 y ean
..
$9,462
$0
- ■
f$l-263)
C$1,317)
• ' .
D ALL OTHER ASSETS
HL TOTAL ASSETS
•
C$341)
($1,090)
$2,000
....................... 51.000
................... $183,000
.
;.
.
f$67>
.-I"-: ■
• '■
*. *>!
($9,190)
($9,190}
$3,000
$186,000
IV. INTEREST-SENSITIVE LIABILITIES
.
1 N an-m atunty deposits, tim e deposits and *tll other*
(a) Up to 3 months
-
$23,083
0.25%
$58
1.20%
$895
(c) 1 to 3 yean
_______$.74,532
$51,321
370%
$1,899
(d) 3 to 5 y ean
$17,090
690%
$1,179
$64
$0
$0
11.60%
18 70%
_ ___ r
(b )3 to 12 months
_
( e )S to 10 y ean
(f) 10 to 20 y ean
(g) Greater than 20 y ean
2. Total Interest-Sensitive L iabilities
V NONINTEREST -SENSITIVE LIABILITIES
VI TOTAL LIABILITIES
VIL EQUITY CAPITAL
.......... _
$0
$0
24 00%
$4,038
_____ ,$!66J.4C .
____
$860
$ 1$7,000
$19,001
- .
.
.t ■
\ .
$4,038
.
••■ C .
•'
*'
.
->
$4,038
V IE OFF-BALANCE-SHEET POSITIONS
1. Interest rate contracts
(•) U p to 3 months
(b )3 to 12 m onths
(c) 1 to 3 yean
(d) 3 to 5 y ean
(e) S to 10 y ean
( 0 10 to 20 y ean
(g) G reater than 2 0 y ean
2. M ortgage and other m o rtiz in g contracts
(a) Up to 3 months
( b )3 to 12 months
(c)
1 to 3 years
(d) 3 to 5 yaws
(e) 5 to 10 y ean
( 0 1 0 to 20 y ean
(g) Greater than 2 0 y ean
3. Total O ff-B alance-Sheet P ositions
•;i.
N et R isk W eighted Position
N et Position^ /
-*.r
.
■
.■
_ ::
.
.
U
:
-2.68%
48219
48220
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Declining Rate Scenario)
DRAFT
Tabic 3
REPORTING INSTITUTION: Sample Bank
Date: 12/31/92
S Thousands
i
INTEREST-SENSITIVE ASSETS
1. ARMs, FR M t, asset-backed securities, consumer lo in s
(a) Up to 3 months
(b) 3 to 12 months
(c) 1 to 3 years
(d) 3 to 5 y e n s
( e )S to 10 years
(0 10 to 20 y e n
(g) G reater than 20 years
2. Zero o r low coupon securities
(a) Up to 3 m onths
(b) 3 to 12 months
(c) 1 to 3 years
(d) 3 to 5 y ean
(e) 5 to 10 years
( 0 10 to 20 y ean
(g) Greater than 20 y ean
3. *All other* securities, loans, & trading sceount
(a) Up to 3 months
(b) 3 to 12 m onths
(c) 1 to 3 y e a n
(d) 3 to 5 y ean
(e) 5 to 10 y ean
(f) 10 to 20 y ean
(g) Greater than 20 y e a n
4. High-risk mortgage securities
(a) Self-reporting
(b) R isk w eighting
5. Total Interest-Sensitive A ssets
H ALL OTHER ASSETS
D I TOTAL ASSETS
IV. INTEREST-SENSITIVE LIABILITIES
1. Non-m atunty deposits, tuna deposits and*sB other*
(a) U p to 3 months
(b) 3 to 12 m onths
(c) 1 to 3 y e a n
(d) 3 to 5 y e a n
( e )S to 10 y ean
(f)
10 to 20 y e a n
(g) Greater than 2 0 years
2. Total Interest-Sensitive L iabilities
V. NONINTEREST-SENSITIVE LIABILITIES
V I TOTAL LIABILITIES
VH EQUITY CAPITAL
VIIL OFF-BALANCE-SHEET POSITIONS
1. Interest rate contracts
(a) Up to 3 m onths
(b) 3 to 12 m onths
(c) 1 to 3 y ean
(d) 3 to 5 y ean
(e ) 3 to 10 y e a n
(f)
10 to 20 y ean
(g) Greater than 20 y e a n
1 Mortgage and o ther anartizing contracts
(s) U p to 3 m onths
(b) 3 to 12 m onths
(c) 1 to 3 y e sn
(d) 3 to 5 yean
( e ) 3 to lO y e sn
(0 1 0 to 2 0 y ea ss
(g) Greater th an 20 y e a n
3. Total OfT-Bslsnce-Shoat Ptw Q ons
N et R isk W eighted P osition
N et P osition/A ssets
BILLING CODE 4 8 1 0 -3 3 -C ; & 210-01-C ; 6 7 1 4 -0 1 -C
1534431
2-87H
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
T he sum of th e estim ated changes in
present value for each category of
instrum ent provides an estim ate of the
in stitutio n's overall interest rate risk,
that is, th e change in the net econom ic
value of th e institution that w o u ld result
from the specified shift in m arket
interest rates. As show n in Table 2, the
specified 200 basis point increase in
rates is estim ated to reduce the present
value of th e b an k ’s assets by roughly
$9.19 m illion, raise the p resent value of
its liabilities by an estim ate $4.04
m illion an d raise the value of its offbalance-sheet item s by $170,000. T he
net result, or the “ Net Risk-W eighted
P osition” (bottom of the w orksheet) is a
decline of roughly $4.98 m illion in the
net econom ic value of th is institution.
T his net risk-weighted position w ou ld
be the prim ary m easure o f th e level of
an in stitu tio n ’s interest rate risk.
Table 3 show s the effect of a d ecline
in rates. T his declin e is estim ated to
increase th e p resent value of the
exam ple b an k ’s assets by $8.87 m illion,
low er th e present value of its liabilities
by $3.35 m illion, and red uce th e value
of its off-balance-sheet item s by
$181,000. T he Net Risk-W eighted
Position represents an increase of
roughly $5.34 m illion in the net
econom ic value of this institution. T he
differences in th e m agnitude of.the
change in value from that deriv ed for
the rising rate scenario is attributable to
asym m etries in th e price sensitivity of
financial instrum ents as interest rates
change (i.e., convexity) an d different
slotting of non-m aturity dep osits in th e
rising and falling rate scenarios.
The rate scenario that p ro d u ces th e
larger loss or negative net position
w ould be used in the assessm ent of
capital for IRR. In th e case of th e
exam ple bank illustrated in T ables 2
and 3, the exposure to rising rates
w ould be used to evaluate capital
adequacy for IRR.
48221
4. R eporting o f Intern al M odel R esults
T he Banking Agencies request
com m ent on a second Call Report
schedule u n d er consideration that co uld
be used by banks that elect or that m ay
be required to have their exposures
evaluated on th e basis of th e results of
th e ir ow n internal models. T his
supplem ental sch edu le w ould be
recom m ended to the Federal Financial
Institution Exam ination Council if th e
Banking Agencies relied on the
inform ation to provide an explicit
capital charge for IRR.
The sch edu le (Schedule 2) consist of
several asset, liability, an d off-balancesheet categories, w ith tw o scenarios for
each category:
• Scenario 1 represents a specified
increase in interest rates over the rates
prevailing as of the report date. In each
category under Scenario 1, the bank would
report its estimate of the change in present
value of the instruments if rates were to rise
as specified in Scenario 1.
Proposed Internal Interest Rate Scenario Analysis Schedule:
DRAFT
T o be filed by institutions that use an internal interest rate risk
m easurem ent system for com pliance with guidelines.
D ollar Am ounts in Thousands
Interest R ate Risk Sensitivity A nalysis - Estim ated C hange in Econom ic Value
1.
Securities
KCru
XX
XX
ucnr
xxxx
R "
LTD
xxxx
xxxx
RT
LD
xxxx
tS S !
\W A
2.
3.
4.
5.
L oan and L eases
b.
6.
n
m
RcTu
T T1
5JO T
XX
XX
Rcnr
xxxx
c.
All o ther loans (C & I, e tc .)....................................................................................
■
•
All O ther Int-B earing A ssets (Bal. D ue, Fed Funds)..............................................
T otal Liabilities:
1
TC Fu
XX
XX
TSTF-r
b.
T im e deposits.............................................................................................................. X X ,
XX
"R T T
LT
c.
A ll o ther finclude repos and sub. debt)............................................................. xxxx
O ff-Balance-Sheet C ontracts
O ptions, caps, floors, e tc ........................................................................................
T rading A ccount
b.
D eclining Rates
Bil 1 Mi! ! T hou |
Rising Rates
1 M il I Thou
1
25!
■ ____ i
■Rmr
TOT
XX
XX
ROTT
XX
XX
ir c n r *
xxxx
;v
1
1
XLru
XX
XX
KCVlT
XX
XX
KUHU
XX
XX
( 2 2
KCFu
1
?!
xxxx
RV"
CD
XX
XX
RV
LU
XX
XX
.
..............
KCru
T frn r
XX
XX
O ff-balance-sheet positions.................................................................................... xxxx
h c f ir
xxxxj
TTCFIT
XXXX
xxxx
XXXX
■RCFIT
1
-
1
48222
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
• Likewise, Scenario 2 represents a
specified decrease in interest rates below the
rates prevailing as of the report date. In each
category under Scenario 2, the bank would
report its estimates of the dollar change in
present value of the respective instruments
should rates fall as specified in Scenario 2.
T he rate scenarios w o u ld be the sam e
as those u se d for th e supervisory m odel.
T he rate scenario that produces th e
higher loss o r negative n et position
w o u ld he used in the assessm ent of
capital for IRR. W hen used, internal
m odels w o u ld be expected to reflect
actual co u p o n s a n d y ields for the
in stitu tio n ’s p o sition s, rather than those
incorporated in the co nstru ction o f the
risk w eights u sed in th e supervisory
m odel.
As cu rrently drafted, th is schedule
w ould b e a su p p le m e n tal o n e an d non*
exem p ted banks w o u ld stil! be required
to com plete, in its entirety, th e proposed
schedu le illu strated b y Schedule 1,
found in section Z above. However, th e
Banking A gencies recognize that
spreading trading account and offbalance-sheet positio ns across tim e
ban d s m ay be especially b urdensom e for
ban ks w ith larger portfolios an d that, in
m any instances, the results of internal
m odels m ay pro vide a m ore accurate
assessm ent of th e risk in these
portfolios. H ence. th e Banking A gencies
request com m en t on th e regulatory
b u rden associated w ith reporting such
positions by tim e bands.
C. A ssessm ent o f C ap ital A dequacy for
IRR
Tw o alternative m ethods are proposed
for assessing a b a n k ’s capital adequacy
for IRR. U n der o ne approach the
Banking A gencies w o u ld establish
m in im u m capital stan dard s for IRR,
relying on results of eith er the
supervisory m easure or th e ban k ’s
internal m odel. Banks w ould be
required to h ave capital sufficient to
cover the am o un t of m easured exposure
in excess o f the th resh o ld level (e.g., the
am o u n t o f th e ir “excess” exposure). T he
second app roach w o uld not establish an
explicit m in im u m capital requirem ent
for IRR. Rather, ex am in ers w ould
co n sid er results of quantitative
m easures of IRR ex posure along w ith
other factors in evaluating a b an k’s
capital adequacy for IRR. Both of these
alternatives a re discussed in greater
detail below.
C urrent supervisory policies require
exam iners to review IRR exposure an d
b an k IRR m anagem ent system s d uring
th e exam ination process. T his review
w o u ld c o n tin u e u n d e r either approach
to capital, bu t m ore specific procedures
or ex am in er tools w o u ld exist. In
ad d itio n to review ing th e risk m easures
T he follow ing ex am p le illustrates
how capital for IRR w ou ld be calculated
and in corporated into a bank's riskbased capital ratio. In this exam ple, a
bank h as $125 m illion in total assets,
$100 m illion in risk-w eighted assets,
an d $10 m illion in total capital. T he
b an k ’s ow n m odel is used for m easuring
its IRR exposure a n d th e model
indicates, u sin g th e specified rate
scenarios, a $2.25 m illion decline in net
econom ic value for th e rising rate
scenario an d a $3.0 m illion increase for
th e declin in g rate scenario. For this
bank, the rising rate scenario is used to
1. M in im u m C apital S ta n d a rd A pproach evaluate capital because it is this
scenario w h ich pro du ces a decline in
U n der th is a pproach, institution s
net econ om ic value. The bank’s excess
w ould be req uired to h old capital for
exposure, a n d hence th e am ount of
IRR sufficient to cover their “excess
capital required for IRR, is $1 m illion
exposure.” Excess ex p o su re is defined
($2.25 m illion m easured exposure less
as the aggregate do llar decline in th e n et th e th resh o ld level o f 1 percent of total
eco no m ic v alue of th e institution, as
assets or $1.25 m illion). T h is $1 m illion
m easured by eith er th e supervisory or
capital charge is th e n m ultiplied by 12.5
the internal b an k m odel, that exceeds
w ith th e result ($12.5 m illion) added to
the proposed su perv iso ry thresh old o f 1 th e b an k ’s risk-w eighted assets. T he
percent of assets.«
new level of risk-w eighted assets that
T he d o llar am o u n t of capital required
w o u ld be u sed to calculate the b an k’s
for IRR w o u ld be incorporated into th e
risk-based capital ratio w ould be $112.5
risk-based capital requirem ents by
m illion. T h e resu ltin g risk-based capital
increasing the b a n k ’s risk-weighted
ratio w o u ld be 8.89 percent.
assets. Because th e am ount of riskT h is ap pro ach w o u ld explicitly
w eighted assets forms the denom inator
incorporate IRR into th e existing risko f the risk-based capital ratios, any
based capital framework. Banks w ould
increase to that d en om inato r w ill low er
be required to have capital equal to at
a b an k ’s m easu red ratio. Specifically,
least 8 percent of th e n ew risk-weighted
th e d ollar am o u n t of the capital
assets. H ow ever, because m ost banks
requirem ent for IRR w o uld be
currently h av e risk-based capital ratios
m u ltip lied by 12.5, w hich is the
above th e 8 percent m inim u m , this
reciprocal o f th e 8 percent m inim um
add itio nal co m p o n en t of risk-weighted
risk-based capital ratio. T his am ount
assets w o u ld not requ ire m ost banks to
w o u ld b e ad d e d to th e total of the
raise ad d itio n al capital. The additional
b an k ’s risk-w eighted assets for purposes com p on en t w o uld, how ever, reduce a
of calculating th e risk-based capital
b a n k ’s calculated risk-based capital
ratios. T h is a p proach does not reduce
ratios an d , in c ertain cases, could affect
the am o u n t of T ier 1 or total capital
the b a n k ’s treatm en t u n d er th e
used to derive a b a n k ’s risk-based
provisions o f p ro m p t corrective action,
capital ratio, a n d therefore, avoids
as w ell as its d epo sit insurance
reducing the b a n k ’s leverage ratio or
prem ium s.
prod ucing o ther u n in te n d e d results.1*
As w ith th e ap pro ach taken in
adm inisterin g th e c u rren t international
"That is. when the measured exposure indicates
risk-based capital stand ard, any am o un t
a decline in net economic value that is greater than
of capital required for IRR by th is risk
1% of total assets, then:
Required Minimum Capital = Measured Exposure m easurem ent process w o uld represent a
m inim um capital requirem ent. T h e
- (.01 Total Assets)
Otherwise, required minimum capital for IRR
exp osu re w o u ld b e calculated each
would be zero.
quarter u sing Call R eport data, a nd
'♦A n alternative technique being considered by
banks w o u ld be exp ected to m eet any
the Banking Agencies would directly deduct the
capital req u irem en t o n a continuous
amount of excess measured exposure from Tier 1
basis. Banks u sin g exam iner-approved
or total capital. For an institution with an ft percent
described in th is proposal, exam iners
w o u ld co n tin u e to con sid er the
following m anagerial factors w hen
evaluating safety an d soundness:
• T he ad eq uacy of and com pliance
w ith th e b an k ’s w ritten policies,
p roced ures an d in tern al controls;
• T he existence of a n d adherence to
specific risk lim its relating to both Joss
of incom e a n d capital;
• M anagem ent’s know ledge and
ability to identify an d m anage sources of
interest rate risk effectively; and
• T he adequacy of in ternal risk
m easurem en t a n d m onitoring system s.
risk-based capital ratio, the amount of capital
required for IRR would be the same using either
technique. However, this alternative capital
calculation might have certain undesirable results.
A deduction from Tier 1 would unintentionally
complicate the calculation of an institution's
leverage ratio and might require a different
definition of Tier 1 capital for use in the leverage
calculation. A deduction from total capital could,
under certain conditions, leave an institution with
Tier 1 risk-based capital ratio that is greater than its
total capital ratio, even though total capital was
intended to be the broader definition of capital.
Moreover, in isolated cases, a deduction from
capital for IRR could exceed the institution’s
regulatory capital, creating a negative capital,
position. In Section D, the Banking Agencies seek
comments on whether the proposed method or the
alternative technique is more appropriate to use in
calculating capital under the Minimum Capital
Standard approach.
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
internal m odels to evaluate IRR for
supervisory purposes w ould report the
results of those m odels.
T h e adequacy o f a b an k ’s IRR
m anagem ent process a n d the precise
characteristics of the b a n k ’s assets,
liabilities and o th er positions w ould
also be evaluated during on-site
exam inations. T he on-site exam ination
process w ou ld play a critical role in this
approach by allow ing exam iners, d u ring
th e exam ination, to consider specific
factors relevant to that institution. A
bank could be required to have higher
am o u n ts o f capital for IRR is exam iners
found m aterial d eficiencies in its risk
m anagem ent policies, procedures, or
controls or if its specific circum stances
w ere substantially different from those
assum ed by th e supervisory m easure.15
approach by allow ing exam iners, d u rin g
th e exam ination, to consider specific
factors relevant to th at institution.
U nique characteristics of each bank
w arrant evaluation o n a case-by-case
basis. H owever, uniform ity in the
exam ination process also is im portant
a n d th e guidelines m entioned above
w o u ld be d esigned to en sure greater
uniform ity in th is process.
To assess th e level of interest rate risk
exposure, exam iners w ou ld initially u se
th e supervisor}' m odel as a basis for
discussions w ith bank m anagem ent. All
data, in cluding trading account
positions, w o uld be d raw n from
S chedule 1 for use in th is m odel.
However, greater reliance w o uld be
p laced on the results of a b an k ’s ow n
m odel if the exam iner determ in ed that
th e m odel provided a m ore accurate
2. B isk A ssessm en t A pproach
m easure of the b an k ’s risk. T he
exam iner w ould evaluate the results of
U nder this app ro ach , th e level of
th e internal m odel during on-site
m easured interest rate exposure w ould
exam inations, b u t banks w ould not be
be just o ne of several factors that
required to report this inform ation in
exam iners w o uld co n sid er w hen
th e Call Report. W hen an internal m odel
determ ining a b an k's capital n eed s for
is not available or is inadequate,
interest rate risk. O ther factors that
w o uld be considered include tne quality exam iners w o u ld rely on th e results of
the supervisory m odel.
of a b ank 's IRR m anagem ent, internal
In general, a bank w ould be view ed as
controls, an d th e overall financial
having high levels o f IRR if its m easured
con dition o f the bank, inclu ding its
exposure indicated a d ecline in th e
earnings capacity, capital base, an d the
econom ic v alue of th e institution that
level of other risks w hich may im pair
exceeded a thresho ld level of 1.0
future earnings or capital.
percent of total assets. Banks that pass
Exam iners w o uld evaluate a b an k ’s
th e reporting exem ption test, or that
capital adequacy as part of the on-site
otherw ise have sm all m easured interest
exam ination process a n d theJBanking
Agencies w ould provide exam iners w ith rate risk exposures, w ou ld typically be
considered to h ave low levels of risk.
g uidance to determ ine th e am ount,
O th er banks w hose m easured exposures
w h ich m ight be expressed as a range of
w ere below thresho ld levels b ut were
capital, that m ay be needed for IRR in
not m inim al, or that held com plex
light p f the above factors. T hese
financial in strum ents w ith significant
guidelines w ould provide exam iners
options-related risks th at w o u ld result
w ith criteria for assessing capital based
in significant risk m easurem ent error,
on th e adequacy of th e b ank ’s interest
w o u ld generally be v iew ed as having
rate risk m anagem ent process as w ell as
m oderate levels of interest rate risk.
th e level of its interest rate risk
At the com pletion of each
exposure. In general, banks w hose
exam ination, exam iners w o uld form and
m easured exposure exceeded the
docum en t conclusions as to the
established thresh old or w hose risk
adequacy of a b a n k ’s capital an d risk
m anagem ent system s w ere judged to be
m anagem ent process w ith regard to
deficient w ould b e expected to hold
interest rate risk. An exam iner’s
add itional capital com m ensurate w ith
conclusions about both the level of risk
the risks being taken. H owever, any
and the adequacy of th e risk
capital requ ired for IRR w o uld not be
m anagem ent process w o u ld play an
autom atically incorporated into a bank's integral role in determ ining a b an k ’s
risk-based capital ratio.
n ee d for capital for IRR. Banks w ith
T h is approach em p hasizes the
high levels of m easured exposure and
im portance of risk factors that are not
w eak m anagem ent system s generally
easily incorporated into quantitative
w o u ld need to h o ld capital for IRR,
m easures a nd the role of exam iner
w h ile those w ith low levels of
judgm ent. T h e on-site exam ination
exposures and adequate m anagem ent
process w ould play a critical role in this system s m ight n o t be required to hold
add itio nal capital for IRR. T he specific
When internal models are used, by design, their
a m o u n t of capital th a t m ight be needed
results would always reflect the specific
by a bank w ould be determ ined by the
characteristics of the bank's on-and off-balancesheet positions.
exam iner u sing guidelines provided by
48223
th e Banking Agencies. T h e exam iner's
findings w ould be discussed w ith bank
m anagem ent at th e close of each
exam ination.
D uring th e intervals betw een
exam inations, the Banking Agencies
w o u ld m onitor b ank IRR exposures
through Call Report data and the
supervisory m odel. Information about
results of internal m odels w ould not be
required in the Call Report. Significant
changes in reported exposures or in a
b a n k ’s overall financial condition w ould
be analyzed by the supervisors to
determ ine w h eth e r additional capital
m ay be n eeded. T h is review of a bank's
capital adequacy w ou ld also be required
for any bank w hose m easured exposure
exceeded the established threshold. T he
conclusions of this review w ould be
docum ented by th e supervisor and
shared w ith b ank m anagem ent.
However, bank m anagem ent w ould be
given th e o p p ortu nity to respond to th is
review before any ad ditional capital
w o u ld be required.
D. Issues for Comment
1. S upervisory M easurem ent System
As proposed, th e Banking Agencies
w ould use the percent change in the net
presen t value of a hypothetical
instrum en t as the risk w eight for
balances represented by that instrum ent.
Does use of the change in net present
value sufficiently overcom e the
w eakness of using the in strum ent’s
m odified duration so as to provide a
reasonable basis for risk weights?
2. T reatm ent o f “N on-M aturity"
D eposits
T h e Banking A gencies propose limits
on th e slotting of deposits w ithout
specified m aturities (DDA, NOW,
MMDA and savings) am ong tim e bands
because of th e problem s in herent in
m easuring th e p rice sensitivity of these
dep osits and the significant effect that
different treatm ents for them can have
on m easuring a b an k ’s IRR.
a. Do the proposed rules provide
sufficient flexibility to reflect an
in stitu tio n ’s deposit behavior w ithout
u n derm ining the risk m easurem ent
process?
b. S hould in stitu tion s that have wellreasoned a n d d ocum en ted internal
assessm ents show ing ra:e sensitivities
that are outside of the p roposed ranges
be allow ed to use those assessm ents?
W hat specific types of analyses and
su ppo rtin g do cum entation should be
req uired from banks that are allow ed
su ch an exception? W ould most
institu tio n s h ave th e capability of
producing such types o f analyses?
c. W hat is th e approp riate basis for
m easuring changes in th e price
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Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
sensitivity or “m arket v alu e” o f these
deposits?
T he Banking Agencies also solicit
com m ent an d any relevant em pirical
evidence o n the price sensitivity and
m arket valuation of these deposits.
Inform ation relevant to assessing the
changes in th e m arket value of these
deposits relative to changing interest
rates w o u ld be m ost helpful.
3. In terest R ate Scenarios
In varying degrees, th e proposed
interest rate scenarios reflect the
historical volatility of rates, the current
level of rates, a n d the slope of the yield
curve.
a. S hould th e sam ple p eriod u sed to
calculate th e historical volatility of
interest rates be based on a shorter
period such as 5 years or a longer period
su ch as 15 years?
b. S hould the tim e interval u sed to
m easure volatility a n d to determ ine th e
corresponding rate scenarios be based
on quarterly, sem i-annual or an n u a l
interest rate volatilities?
c. W hich is the preferred scenario to
be used for both the supervisory an d
internal m odels?
d. Is it appropriate to use th e same
interest rate scenario for both th e
supervisory m odel and in tern al models?
e. Can b an k s’ intern al m odels
incorporate th e rate scenarios u n d er
consideration?
f. S h ould th e Banking A gencies
consider th e effect of b oth rising and
declining m arket interest rates? If both,
sho uld th e risk w eights be different to
reflect th e asym m etrical changes in the
m arket values of certain instru m en ts to
the various rate changes, or sh o u ld they
be the sam e in the interest of sim plicity?
g. Currently, the results u n d e r either
proposed alternative ind icate rate
changes th at are about 100 basis points
using a quarterly tim e horizon an d 200
basis points using an n u a l volatilities. In
the interest of sim plicity, w o u ld the use
of a parallel 100 or 200 basis p o in t shift
be preferred to the proposed no m inal or
proportional change m ethodology?
W ould sim ply providing th e interest
rate scenario a n d requiring b ank s to
evaluate th e effect of the rate change on
their net econom ic value suffice?
c. W hich aspects of an internal m odel
sho uld exam iners review to determ ine
w h eth er the m odel is adequate?
d. S hould the assum p tion s required
for the supervisory m odel also be
im posed on internal m odels w h e n these
are used u n d e r A lternative O ne
(M inim um Capital S tandard approach)?
To w hat degree sh o u ld resu lts of
internal a n d supervisory m easures b e
allow ed to diverge because of different
assum p tio ns regarding n on -m atu rity
deposits, p repaym ents, or o th er factors?
What com petitive inequ ities m ight
result if large differences are allow ed?
e. S h o u ld som e in stitu tio n s be
required to u se m ore so ph isticated
internal m odels to calculate IRR
exposure if an explicit capital charge for
IRR is established? If so, w h at ty p e or
scope o f activities sh o u ld trigger such a
requirem ent?
5. Use o f O TS M odel
The Office of Thrift S upervision
(OTS) has ado pted an alternative
m etho d for m easuring th e IRR exposures
of savings associations w h ich differs
from that proposed by th e Banking
A gencies (see 57 FR 40524, S eptem ber
3,1992). U n d er th e O TS m ethod,
savings associations report w eighted
average coup on an d w eigh ted m atu rity
inform ation for various classes of assets,
liabilities a n d off-balance-sheet
instrum ents. For certain in stru m en ts,
m ortgage-related in stru m en ts in
particular, th e am o un t of inform ation
reported is significantly m ore d etailed
than that proposed by th e Banking
Agencies.
The reported inform ation is u se d in
the OTS M arket V alue M odel to
estim ate th e change in a savings
association’s m arket v alue u n d e r
various interest rate scenarios. T h e OTS
m odel uses tw o valuation
m ethodologies: (1) A static d isc o u n te d
cash flow analysis sim ilar to that
proposed by the Banking A gencies, an d
4. Use o f Interna l M odels
(2) an option-based pricing m od el (also
T he Banking Agencies propose to
know n as an o p tioivad ju sted spread or
m ake greater u se of a b a n k ’s ow n m odel, OAS methodology) for valu in g certain
if the m odel is deem ed ad equate by
assets, such as mortgages an d mortgageexam iners. The Banking A gencies seek
related in strum ents, th at c o n tain
com m ent on the following issues:
em bed ded options.
a. Is it appropriate to sub stitu te the
T he Banking A gencies request
results of internal m odels for a standard
com m ent on th e follow ing issues:
supervisory calculation w h en assessing
a. S ho uld com m ercial b anks w ith
capital adequacy?
portfolios that are sim ilar to thrifts or
b. If internal m odels are used, to w hat those that are highly susceptible to IRR
extent sho uld the Banking A gencies
be required to use th e OTS (or sim ilar)
provide g uidance to the in d u stry on
m odel a n d reporting requirem ents to
these m odels (e.g., acceptable
m easure IRR in lieu of th e p ro po sed
m ethodologies or m odeling param eters)? supervisory model?
b. If so, w hat criteria sh o u ld the
B anking A gencies use to determ ine
w h ich com m ercial bank s sh o u ld be
subject to the OTS (or sim ilar) m odel?
c. If a bank w ere required to use the
OTS (or sim ilar) m odel, sh o u ld that
bank still be allow ed to report the
results of an adequate in tern al m odel as
prop osed by th e Banking Agencies?
A lternatively, sh o u ld th e requ irem en t to
use the OTS (or sim ilar) m od el rule out
any reporting of the internal m odel?
d. F or b ank s that m ay be requ ired to
use the OTS (or sim ilar) m odel, does the
OTS reporting format im pose significant
reporting b urdens? W hat m odifications
cou ld be m ade to redu ce th e b u rd e n if
th e B anking Agencies d ecid e to use the
basic app ro ach of the OTS m odel?
6. R eporting R equirem ents
T he Banking Agencies propose to
recom m en d to th e FFIEC a new
reporting schedu le to provide
inform ation better suited to determ ining
th e interest rate exposure of those
institu tio n s that do no t m eet the
exem ption criteria.
a. Does the reporting format currently
u n d e r consideration, illustrated by
S ched ule 1, im pose significant reporting
b u rd en s on no n-exem pted institutions?
W hat m odifications could be m ade to
redu ce th e burden?
T he Banking Agencies are also
con sidering im plem enting a separate
reporting sch edu le on w h ich banks
cou ld report IRR exposures as m easured
by th e ir ow n m odels.
b. If the Banking A gencies rely on a
b a n k ’s in tern al m odel for assessing its
IRR, sh o u ld the bank be requ ired to
report th e results of that m od el each
quarter?
c. S ho uld som e or all of the
inform ation about the internal m o del be
treated as confidential?
d. Is th e inform ation requested on
S ched ule 2 appropriate?
7. T hreshold Level
T he Banking A gencies propose to use
a thresh old level to d eterm in e w h eth e r
a bank m ay be taking high levels of
interest rate risk and, thus, n eed
ad d itio n al capital for IRR. As proposed,
a bank w o u ld be v iew ed as having a
high level of exposure if its m easured
exposure indicates a decline in th e
econom ic value of the in stitu tio n that
exceeds 1.0 percent of total assets.
a. Is this thresh old app rop riate?
b. T he thresh old level is b ased, in
part, on th e im precision of th e
supervisory m odel. W hen m ore accurate
internal system s are used, and
especially if greater flexibility is
perm itted regarding th e treatm ent of
Federal Register / Vol. 58, No. 176 / Tuesday, September 14. 1993 / Proposed Rules
non-maturity deposits, should a lower
threshold also be used?
8. E xem ption T est
The Banking A gencies have proposed
a screening test that would exempt
banks from any additional reporting
requirements.
a. Are the exem ption criteria
reasonable?
b. Does the test adequately safeguard
against exem pting banks that pose
significant risks to the deposit insurance
fund due to IRR?
c. Since previously exempted banks
may need to be prepared to report the
data if they no longer meet the
exemption criteria, does the exemption
test significantly reduce record-keeping
costs?
d. Is the reporting burden sufficiently
onerous to warrant the reporting
exemption?
9. Use o f IRR M easure
The Banking A gencies are considering
two approaches for using the proposed
measurement system when evaluating
capital adequacy. Under the Minimum
Capital Standard approach, the
measurement system would be the
primary determinant in evaluating the
need for capital for IRR. The Risk
Assessment approach would use the
measurement system as just one factor
in determining the need for additional
capital.
a. Comments are requested on the
merits of each of these approaches.
b. Under the Minimum Capital
Standard approach, the Banking
Agencies are proposing that the capital
requirement for IRR be implemented by
increasing a bank’s risk-weighted assets
by an amount equal to 12.5 times the
excess measured exposure, where 12.5
represents the reciprocal of the B
percent m inim um risk-based capital
ratio. An alternative technique would be
to directly deduct the amount of excess
measured exposure from Tier 1 or total
capital. The Banking Agencies seek
comments on whether the proposed
method or the alternative technique is
more appropriate to use in calculating
capital under the Minimum Capital
Standard approach.
10. C apital A sse ssm en t
In determining a bank’s capital needs
for IRR, the Banking A gencies seek
comment on the follow ing issues:
a. To what extent should examiners
have flexibility w hen evaluating an
institution’s measured IRR exposure for
capital purposes?
b. What consideration should be given
to the quality of a bank’s risk
management process when evaluating
the bank’s IRR? How should this
consideration be incorporated into an
assessment of capital adequacy?
1 J. R eporting fo r M u lti-bank H olding
C om panies
The proposal states that data w ill be
collected and risk measured for
individual banks.
a. In addition to reviewing individual
bank positions, to what extent should
the Banking Agencies also consider
consolidated positions of the parent
holding company or, alternatively, the
aggregate position of only its affiliated
banks?
b. What is the extent of the reporting
burden associated with reporting
individual bank positions?
12. Leverage S ta n d a rd
When announcing regulations to
implement section 38 of FDICIA in
September. 1992, the federal banking
agencies stated that they intend to lower
or elim inate the leverage capital
component from the risk-based capital
standard after that standard has been
revised to take into account interest rate
risk and after experience has been
gained with the (modified) standard.
Does either the Minimum Capital
Standard approach or the Risk
Assessment approach provide an
adequate basis for reconsidering the
need for the leverage standard? Would
the basis for removing that standard be
stronger under one approach than the
other?
R egulatory F lex ib ility A ct S tatem ent
Each agency has concluded after
reviewing the proposed regulations that
the regulations, if adopted, w ill not
impose a significant econom ic hardship
on small institutions. The proposal does
not necessitate the developm ent of
sophisticated recordkeeping or reporting
systems by sm all institutions nor w ill
small institutions need to seek out the
expertise of specialized accountants,
lawyers, or managers in order to com ply
with the regulation. Each agency
therefore hereby certifies pursuant to
section 605b of the Regulatory
Flexibility Act (5 U.S.C. 605b) that the
proposal, if adopted, w ill not have a
significant econom ic impact on a
substantial number of small entities
within the meaning of the Regulatory
Flexibility Act (5 U.S.C. 601 et seq.).
E xecutive O rder 12291
The Comptroller of the Currency has
preliminarily determined that proposed
regulation may be a “major rule" within
the meaning of Executive Order 12291.
Accordingly, the OCC has prepared a
Preliminary Regulatory Impact Analysis.
48225
The objectives o f the proposed
regulation are to ensure that banks: (1)
Hold capital consistent with the level of
IRR in their portfolios so as to reduce
the incidence o f bank failures and
claims upon the Bank Insurance Fund
(BIF); (2) effectively measure and
monitor their IRR exposures; and (3)
consider both interest rate and credit
risks in making investment and lending
decisions. This proposed rule
im plem ents section 305(b)(l)(A)(i) of
FDICIA and is consistent with those
requirements.
A number o f benefits can be expected
to accrue from the proposed regulation.
These include: (1) Either an increase in
bank capital or a reduction in IRR for
those banks with high levels of IRR; (2)
a reduction in the incentive for banks to
substitute IRR for credit risk; and (3) an
increase in the awareness among banks
of the need to measure and manage IRR.
A number of costs can be expected to
accrue from the proposed regulation.
These include: (1) Direct com pliance
costs; (2) supervisory costs; and (3) costs
associated with the impact of the rule
on bank behavior.
The Regulatory Impact Analysis is
based on preliminary and limited data
that make it difficult to estimate the
impact o f this rule. T h is difficulty arises
from the lack of sufficient data to
accurately estimate which banks may be
found to have high IRR exposures under
the proposal, the amount of capital
those banks may need, and the
com plexities of trying to estimate how
banks may change their behavior in
response to the proposed rule.
The OCC seeks to issue a final rule
that w ill meet its objectives at the least
possible net cost to the economy. The
OCC invites com menters to provide any
data they may have on the costs and
benefits of this proposal with regard to
the management of IRR at banking
organizations, the impact on bank
capital levels and on the pricing,
selection and offering of products and
investm ents by banks, and on direct
costs that banks may incur as the result
of the proposed rule.
Copies of the Preliminary Regulatory
Impact A nalysis may be obtained by
writing to the follow ing address: IRR
Impact Statement, Mail Stop 9-16,
Communications D ivision, Office of the
Comptroller of the Currency, 250 E
Street SW., Washington, DC 20219.
List o f Subjects
12 CFR Part 3
Administrative practice and
procedure, Capital risk, National banks.
Reporting and recordkeeping
requirements.
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Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
12 CFR Part 208
Accounting, Agriculture, Banks,
Banking, Confidential business
information, Currency, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 325
Bank deposit insurance. Banks,
Banking, Capital adequacy, Reporting
and recordkeeping requirements,
Savings associations, State nonmember
banks.
total capital to risk-weighted assets specified
in section 4(b)(1) of this appendix A.
*
*
*
*
*
3.
A new appendix B is added to part
3 after appendix A to read as follows:
Appendix B—Interest Rate Risk
Component
change in market interest rates under the
specified interest rate scenarios.
(7) Nonmaturity deposits mean demand
deposit accounts (DDAs), money market
deposit accounts (MMDAs), savings
accounts, and negotiable order of withdrawal
accounts (NOWs).
(8) Notional principal amount means the
total dollar amount upon which a contract is
based.
(9) Supervisory threshold means 1% of a
bank’s total assets.
(c) Applicability and exemption for
institutions with low risk. (1) All national
banks are subject to the requirements of this
appendix B and must calculate their excess
measured exposure as required by the
supervisory model or by an internal measure,
pursuant to sections 4 or 9 of this appendix
B, unless:
(1) The total notional principal amount of
the bank’s off-balance sheet interest rate
contracts is less than 10% of total assets, and
(ii) 15% of the sum of fixed- and floatingrate loans and securities that mature or
reprice beyond 5 years is less than 30% of
total capital.
(2) Notwithstanding paragraph (c)(1) of this
section, the OCC may require a bank to meet
the requirements of this appendix B if
compliance is necessary to ensure the capital
adequacy of the bank.
Section 1. Purpose, Definitions, and
Applicability o f Guidelines
(a) Purpose. This appendix B explains
precisely how the interest rate risk exposure
of a bank is to be measured for the purpose
COMTROLLER OF THE CURRENCY
of determining compliance with the capital
adequacy requirements.
A u th o rity a n d Issu an ce
(b) Definitions. For the purpose of this
appendix B, the following definitions apply:
For the reasons set out in the joint
(1) Excess measured exposure means the
preamble, part 3 of chapter I of title 12
dollar amount of measured exposure to
of the Code of Federal Regulations is
interest rate risk in excess of the supervisory
proposed to be amended as set forth
threshold. This amount represents the
below.
amount of interest rate risk against which the
bank must maintain capital.
PART 3—MINIMUM CAPITAL RATIOS;
(2) Interest rate scenarios means the
specified changes in market interest rates
ISSUANCE OF DIRECTIVES
used in calculating a bank’s measured
1. The authority citation for part 3
exposure.
(3) Measured exposure means the
continues to reads as follows:
estimated dollar decline in the net economic
A u th o rity : 12 U.S.C. 93a, 161,1818,
value of the bank in response to a potential
1828(n), 1828 note, 1831n note, 3907 and
change in market interest rates under the
3909.
specified interest rate scenarios, as
Section 2. Capital Requirement for Interest
determined pursuant to either the
Alternative One (Minimum Capital
Rate Risk
supervisory measure or the bank’s internal
Standard Approach) for Appendix A
measure. When the supervisory measure is
A bank shall maintain capital for interest
and B to Part 3—Risk-Based Capital
used to calculate the bank's measured
rate risk in an amount equal to the bank's
Guidelines
exposure, pursuant to section 4 of this
excess measured exposure. The amount of
appendix B, a bank’s measured exposure is
capital required for interest rate risk is in
2. In appendix A, section 4 is
derived by calculating the bank’s net riskaddition to the amount of capital required by
am ended by revising paragraph (b)(1),
weighted position.
appendix A of this part 3. Compliance shall
(4) Mortgage derivative products means
redesignating paragraphs (b)(2) and
be determined as specified in section 4(b)(2)
interest-only and principal-only stripped
(b)(3) as paragraphs (b)(3) and (b)(4),
of Appendix A.
mortgage-backed securities (IOs and POs),
respectively, and by adding a new
Section 3. Specified Interest Rate Scenarios
tranches of collateralized mortgage
paragraph (b)(2) to read as follows:
obligations (CMOs) and real estate mortgage
For the purpose of calculating a bank’s
investment conduits (REMlCs). CMO and
measured exposure, under either the
Section 4. Implementation, Transition Rules,
REMIC residual securities, and other
supervisory measure or an internal measure,
and Target Ratios
instruments having the same characteristics
the bank shall use both a rising and falling
*
*
*
*
*
as these securities.
interest rate scenario based on an
(b)(1) Each national bank must maintain a
(5) Net economic value o f the bank means
instantaneous uniform 200 basis point
minimum ratio of total capital (after
the net present value of its assets minus the
parallel change in market interest rates at all
deductions) to risk-weighted assets (adjusted
net present value of its liabilities plus the net maturities. The interest rate scenarios, with
for interest rate risk) of 8.0%.
present value of its off-balance-sheet
the accompanying risk weights, are provided
(b)(2) If a bank is required to maintain
instruments.
in Table 1 of section 7 of this appendix B.
additional capital for interest rate risk
(6) Net risk-weighted position means the
exposure, as determined in accordance with
sum of all risk-weighted positions of a bank’s The OCC may modify the specified interest
rate scenarios as appropriate considering
appendix B to part 3, risk-weighted assets
assets, liabilities and off-balance sheet items.
must be increased by an amount equal to 12.5 For the purposes of the supervisory measure, historical and current interest rate levels,
interest rate volatilities and other relevant
times the dollar amount of the additional
this number represents the amount by which
market and supervisory considerations.
capital requirement for interest rate risk,
the net economic value of the bank is
before determining the minimum ratio of
estimated to change in response to a potential BILLING CODE 4810-33-M; 6210-01-M ; 6714-01-M
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Declining Rate Scenario)
DRAFT
Table 3
REPORTING INSTITUTION: Sample Bank
Date: 12/31/92
$ Thousands
L INTEREST-SENSITIVE ASSETS
1. ARM s, FRM s, asset-backed securities, consumer loans
(•) Up to 3 months
( b )3 to 12 months
(c)
1 to 3 years
(d) 3 to 5 y e n
(e) 5 to 10 y e n
( 0 10 to 20 y e n
(g) Greater than 2 0 y e n
2. Z o o o r low coupon securities
(a) Up to 3 months
( b )3 to 12 m onths
(c)
1 to 3 y e n
(d) 3 to 5 y e n
( c ) 5 to 10 y e n
(f) 10 to 2 0 y e n
(g) G reater than 20 y e n
3. "All other* securities, loans, A trading aooount
(a) Up to 3 months
(b) 3 to 12 months
(c) 1 to 3 y e n
(d) 3 to 5 y e n
( e ) S to 10 y e n
(f)
10 to 20 y e n
(g) G reater than 20 y e n
4. H igh-risk mortgage securities
(a) Self-reporting
(b) R isk w eighting
5. Total Interest-Sensitive A ssets
E ALL OTHER ASSETS
HL TOTAL ASSETS
IV. INTEREST-SENSITIVE LIABILITIES
1. Non-m aturity deposits, tim e deposits and *sll other*
(a) Up to 3 months
( b )3 to 12 months
(c)
1 to 3 y e n
(4) 3 to 5 y e n
(e ) S to 10 y e n
( 0 10 to 20 y e n
(g) G reater th a t 20 y e n
2 Total Interest-Sensitive L iabilities
V. NOMNTEREST-SENSTTTVE LIABILITIES
VL TOTAL LIABILITIES
VIL EQUITY CAPITAL
Vffi. OFF-BALANCB-SHEET POSITIONS
1. Interest rate oontracts
(a) Up to 3 months
(b ) 3 to 12 months
(c) 1 to 3 y e n
(d) 3 to 5 y e n
( e ) 5 to 10 y e n
( 0 1 0 to 20 y e n
(g) G reater than 20 y e n
2. M ortgage m l other amortizing contracts
(a) Up to 3 months
(b )3 to 12 months
(c) 1 to 3 y e n
(d) 3 to 5 y e n
( e ) 5 to 10 y e n
(f)
1 0 to 2 0 y e n
(g) Greater than 20 y e n
3. Total Off-Balance-Sheet Poaitions
15.344.31
217%
Net Risk Weighted Position
Net Position^ Assets
BILLING CODE
K 1 0-4 1 -C ; C 714-01-C
48227
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Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Section 4. Supervisory Measure
(a) Use o f supervisory measure. Except as
provided by section 9 of this appendix B, a
bank’s measured exposure to interest rate risk
must be calculated pursuant to the
supervisory measure as specified by sections
5 through 8 of this appendix B.
(b) Overview o f interest rate risk
calculation. The calculation of a bank’s
measured exposure generally requires the
following steps:'
(1) The bank’s assets, liabilities, and offbalance sheet contracts must be assigned to
the appropriate balance sheet categories
based on the instrument’s cash flow
characteristics.
(2) Within each balance sheet category,
each asset, liability or off-balance sheet
contract must be assigned to the appropriate
time bank generally based on each
instrument’s remaining maturity or next
repricing date.
(3) Balances within each time band are
multiplied by the appropriate risk weight to
produce a risk-weighted position for each
interest rate scenario.
(4) All risk-weighted positions are summed
to produce a net risk-weighted position for
each interest rate scenario which is the basis
for determining the bank’s measured
exposure to interest rate risk.
Section 5. Balance Sheet Categories
All assets, liabilities, and off-balance sheet
positions must be assigned to one of the
following interest rate risk balance-sheet
categories, as appropriate:
(a) Adjustable-rate assets. Adjustable-rate
mortgage loans and adjustable-rate mortgage
securities.
(b) Amortizing fixed-rate loans and
securities. Fixed-rate mortgage securities, and
asset-backed securities, fixed-rate mortgage
loans, consumer loans and other instruments
that involve scheduled periodic amortization
of principal, except for mortgage derivative
products.
(c) High-risk mortgage securities. Any
mortgage derivative product that at the time
of purchase or at any subsequent date:
(1) Has an expected weighted average life
greater than 10 years: or
(2) Has an expected weighted average life
that:
(i) Extends by more than 4 years, assuming
an immediate and sustained parallel shift in
the yield curve of plus 300 basis points; or
(ii) Shortens by more than 6 years,
assuming an immediate and sustained
1The calculations for the rising and falling
interest rate scenarios are illustrated in Table 2 and
Table 3, respectively.
arallel shift in the yield curve of minus 300
asis points; or
(3) Has a change in price of greater than
17%. assuming an immediate and sustained
parallel shift in the yield curve of plus or
minus 300 basis points.
(d) Zero- or low-coupon assets. Securities
with either no periodic interest payments or
stated coupons of 2% or lower.
(e) Trading account items. Trading account
assets and related off-balance sheet
instruments.
(f) All other assets. All other interestsensitive instruments, which are assumed to
involve scheduled periodic payments of
interest and the payment of principal at
maturity and all mortgage derivative
products that are not high-risk mortgage
securities.
(g) Liabilities. All deposits and all
nondeposit liabilities whose values are
sensitive to movements in interest rates.
(h) Off-balance sheet items. Interest-rate
contracts including swaps, forwards, options,
and futures and mortgage-related fixed-rate
commitments and other off-balance sheet
derivative instruments whose value depends
on the value of an underlying asset or index
with amortizing characteristics
Section 6. Time Bands
fa) Assignment o f item balances. The
balance of each asset, liability, and offbalance sheet item within each balance sheet
category, as specified in section 5 of this
appendix B, must be assigned to one of the
following time bands according to the
remaining maturity of next repricing date of
the asset, liability, or off-balance sheet item:
(1) Less than or equal to 3 months;
(2) Greater than 3 months and less than or
equal to 12 months;
(3) Greater than 1 year and less than or
equal to 3 years;
(4) Greater than 3 years and less than or
equal to 5 years;
(5) Greater than 5 years and less than or
equal to 10 years;
(6) Greater than 10 years and less than or
equal to 20 years;
(7) Greater than 20 years.
(b) Remaining maturity and repricing date.
(1) General. Except for certain mortgage
derivative products and nonmaturity
deposits, and the remaining maturity of an
asset, liability, or off-balance sheet item
generally is determined by the remaining
time before maturity, or the next actual or
potential repricing date, associated with the
outstanding principal or notional principal
amount as specified by contract or
agreement.
(2) Remaining maturity and repricing date
for mortgage derivative products, (i) For
mortgage derivative products, other than for
high-risk mortgage securities, the current
expected average life must be used instead of
the remaining time before maturity or the
next actual or potential repricing date. For
high-risk mortgage securities, a bank's own
estimate of the change in market value under
the specified interest rate scenario is to be
used. However, if this information is not
available from the bank, the OCC will
determine the appropriate treatment for
maturity and repricing.
(ii) The current expected average life of a
mortgage derivative product is to be
determined by the management of the bank.
All underlying assumptions, such as
prepayment assumptions, used in
determining the current expected average life
of these instruments must be reasonable and
will be subject to OCC review.
(3) Remaining maturity and repricing date
for nonmaturity deposits. Notwithstanding
paragraph (b)(1) of this section, the remaining
maturity and repricing date for nonmaturity
deposits is determined by the management of
the bank based on its own assumptions and
experience, subject to the following
conditions:
(i) The remaining maturity and repricing
date for DDAs and MMDAs may not exceed
3 years, with a maximum of 40% of these
balances in the "greater than 1 year but less
than or equal to 3 years” time band;
(ii) The remaining maturity and repricing
date for savings and NOW account balances
may not exceed 5 years, with a maximum of
40% of the total of these balances in the
“greater than 3 years but less than or equal
to 5 years” time band; and
(iii) All assumptions used by the bank in
determining the remaining maturity and
repricing date for nonmaturity deposits must
be reasonable and are subject to review by
the OCC.
Section 7. Risk Weights
The risk weights estimate the sensitivity of
the present value of each asset, liability, and
off-balance sheet item within each balance
sheet category and time band under a rising
and falling interest rate scenario. These risk
weights are provided in Table 1. The riskweighted positions for all assets, liabilities,
and off-balance sheet items must be
calculated by multiplying all assets,
liabilities, and off-balance sheet items as
specified according to balance sheet category
and time band, by the corresponding risk
weight as illustrated in Table 2 (rising
interest rate scenario) and Table 3 (falling
interest rate scenario).
BILLING CODE 4810-33-M ; 8210-01-M ; C714-41-M
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Risk Weights
Table 1
Scenario 1
Amortizing Instruments
Timeband
Scenario 2
200 Basis Point Rise
% Change in
Present Value
(Risk Weights)
200 Basis Point Decline
*/• Change in
Present Value
(Risk Weights)
-0.10%
-0.50%
-1.60%
-3.00%
-5.30%
-8.80%
-9.20%
0.10%
0.60%
1.70%
3.10%
3.40%
5.90%
3.60%
-0.25%
-1.20%
-3.50%
-6.40%
-10.20%
-14.90%
-17.60%
0.25%
1.20%
3.70%
7.00%
11.70%
19.00%
24.60%
0.25%
1.20%
3.70%
6.90%
11.60%
18.70%
24.00%
-0.25%
-1.20%
-3.90%
-7.50%
-13.50%
-24.50%
-36.00%
-0.25%
-1.20%
-3 70%
-7.40%
-13.30%
-24.90%
-38.00%
0.25%
1.20%
3.90%
8.00%
15.60%
33.50%
61.90%
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
All Other Instruments
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Liabilities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Zero or Low Coupon Sec urities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
48229
48230
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Rising Rate Scenario)
DRAFT
Table 2
REPORTING INSTITUTION: Sample Bank
Date: 12/31/92
$ Thousands
L INTEREST-SENSITIVE ASSETS
1. ARM s, FRM s, asset-backed securities, consum er k m i
(a) U p to 3 months
(b) 3 to 12 m onths
(c) 1 to 3 years
(d) 3 to 5 years
( e ) 3 to 10 y ean
( 0 10 to 20 y ean
(g) G reater than 20 y ean
2. Zero or low coupon securities
(a) Up to 3 months
(b) 3 to 12 months
(c) 1 to 3 y ean
(d) 3 to 5 y ean
( e ) S to 10 y ean
( 0 10 to 20 y ean
(g) Greater than 20 y ean
3. "All other* securities, loans, & trading account
(a) U p to 3 months
(b) 3 to 12 months
(c) 1 to 3 y e a n
(d) 3 to 5 y ean
(e ) 5 to lO y ean
(J) 10 to 20 years
(g) G reater than 20 y ean
4. H igh-risk mortgage securities
(a) Self-reporting
(b) R isk weighting
5. Total Interest-Sensitive A ssets
JL ALL OTHER ASSETS
m TOTAL ASSETS
J£L
TO A
TL
15.500
$4,950
$4,050
$4,166
$6,620
$6,454
$101430
$1,000
$1,000
$1,000
$0
$0
$0
$0
$26,672
$28,432
$31,136
$19,728
$10564
$8,837
$9,462
$2,000
$1,000
$183,000
C)
B
Risk
W
tight*
IQR W
isk eighted
Position
<A)x(B)
-010% .... ..
-0 50%
•160%
-300%
-5.30%
-8 80%
....
-920%
-0.25%
-1.20%
-3.70%
-7 4C
S
-13.30%
-2«.90%
-38.00%
JDL
Total Risk
W
eighted Position
JK
H
(125)
(i65\
(%
\2S\
C351*
$
a56^.
f$9601
. i!3>
. «12>
. «37V
....... _JQ- ■
10
J
O
. S
C
.... _.
. 067*
-025% . ___
r$34n
-1.20%
-350%
_ _ csio9ci
_
a iisn
-640%
-10.20% .......
-1490% . . .'.SLU
.
Tl
-1760%
'V&-s
-3800%
$160
C
$380)
C
$9,190}
C .19 1
$9 0
$3,000
$186,000
IV. INTEREST-SENSITIVE LIABILITIES
1. Non-m aturity deposits, tim e deposits and "all other"
(a) U p to 3 m onths
(b) 3 to 12 months
(c) 1 to 3 y ean
(d) 3 to 5 y e a n
(e) 5 to lO y ean
( 0 10 to 2 0 y ean
(g) G reater than 20 y ean
2. Total Interest-Sensitive L iabilities
V. NO NINTEREST-SENSm VE L IA B U JnES
VL TOTAL LIABILITIES
VIL EQUITY CAPITAL
$21083
$74582
$5L
321
$17,090
$64
S
O
$0
$166,140
$860
$167,000
$19,001
0.25%
1.20%
3.70%
. 6.90%
11.60%
18.70%
2400%
$58
$895
$1399
$1,179
*7
$0
50
. $4035.
_____$4,038
•
•
K03?_
Vm . OFF-BALANCE-SHEET POSITIONS
1. Interest rate contracts
(a) Up to 3 months
(b) 3 to 12 m onths
(c) 1 to 3 y ean
(d) 3 to 5 y e a n
(e) 5 to 10 y ean
CO 10 to 20 y ean
(g) Greater than 20 y ean
2. M ortgage and other am ortizing contracts
(a) Up to 3 m onths
(b) 3 to 12 m onths
(c) 1 to 3 y ean
(d) 3 to 5 y ean
(e) 5 to 10 y ean
( 0 1 0 to 20 y ean
(g) Greater than 20 y ean
3. Total O ff-Balance-Sheet Positions
N et R ide W eighted Position
N et Position/ A ssets
BILLING CODE 4 81 fr-43 -C ; M 1 0 -0 1 -C ; 6 7 1 4 -0 1 -C
C$4.981-86»
-2.68%
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Section S. Calculation o f Excess Measured
Exposure
(a) Calculation o f net risk-weighted
position. The net risk^weighted position must
be calculated for both the rising interest rate
scenario and the felling interest rate scenario.
The net risk-weighted position for the rising
interest rate scenario is calculated by
summing the risk-weighted positions for all
assets, liabilities, and off-balance sheet items,
as derived in Table 2 of this appendix B. The
net risk-weighted position for the falling
interest rate scenario is calculated by
summing the risk-weighted positions for all
assets, liabilities, and off-balance sheet items,
as derived in Table 3 of this appendix B. In
mathematical terms the calculation for the
net risk-weighted position is (Assets x Risk
Weights) + (Liabilities x Risk Weights) + (OffBalance-Sheet Positions x Risk Weight) * Net
Risk-Weighted Position.9
(b) Calculation o f measured exposure to
Interest rates. The bank's net risk-weighted
positions under the rising interest rate
scenario and the felling interest rate scenario
represent the bank's measured exposures to
interest rate risk. If the bank's net riskweighed position is positive under both of
the interest rate scenarios, then the bank's
measured exposure is set to zero. If the
bank's net risk-weighted position is negative
under one or both of the interest rate
scenarios, then the bank's measured exposure
is equal to the larger decline in the net
economic value of the bank under the two
interest rate scenarios.
(c) Calculation o f excess measured
exposure. The bank's excess measured
exposure is the positive difference of the
absolute dollar amount of the measured
exposure minus the dollar amount of the
supervisory threshold. In mathematical terms
the calculation for a bank’s excess measured
exposure is Measured Exposure—(Total
Assets x .0 1 ). If the amount of the
supervisory threshold is greater than the
measured exposure, then the excess
measured exposure is zero.
Section 9. Internal Measure
The OCC may permit or require a bank to
use an internal measure developed or
acquired by the bank to determine its
measured exposure instead of the
supervisory measure where the OCC deems
that such internal measure Is acceptable.
(a) Acceptable internal measure. Factors
that the OCC will consider in determining
whether to permit a bank to use an internal
measure include:
(1) Whether the assumptions and structure
of the supervisory measure accurately reflect
the bank's assets, liabilities, and off-balance
sheet positions, and whether the internal
measure provides a more precise
measurement of the changes in the net
economic value of the bank than the
supervisory measure;
(2) Whether the internal measure makes
use of generally accepted techniques in
estimating measured exposure;
(3) Whether the internal measure is
appropriate to the nature and scope of the
activities of the bank; and
(4) Whether the internal measure provides
an adequate indication of the exposure of the
institution to interest rate risk in all material
respects.
(b) Required use o f internal measure. The
OCC may require a bank for the purposes of
compliance with the requirements of this
appendix B to use an existing internal
measure where the OCC determines that:
(1) The supervisory measure does not
adequately characterize the interest rate risk
of the bank’s positions; and
(2) The use of the supervisory measure
would materially misrepresent the bank’s
actual interest rate risk exposure.
(c) Interest Rate Scenario. Where a bank is
either permitted or required to use an
internal measure, the internal measure must
incorporate the same interest rate scenarios
used by the supervisory measure as specified
in section 3 in this appendix B.
Section 10. Implementation
The requirements of this appendix B are
applicable to all national banks after
Elecember 31,1994.
48231
ALTERNATIVE ONE {MINIMUM
CAPITAL STANDARD APPROACH)
FOR APPENDIX A TO PART 2 0 8 CAPITAL ADEQUACY GUIDELINES
FOR STATE MEMBER BANKS: RISKBASED MEASURE
2. Section III o f appendix A to part
208 is amended by revising the first
undesignated paragraph o f paragraph A,
and by adding new paragraph F. to read
as follows:
Appendix A to Part 208—Capital
Adequacy Guidelines (or State Member
Banks: Risk-Based Measure
*
*
»
•
•
ni. * • *
A .* * *
Assets and credit-equivalent amounts of offbalance-sheet Items of state member banks
are assigned to one of several broad risk
categories, according to the obligor, or, if
ALTERNATIVE TWO (RISK ASSESSMENT
relevant, the guarantor or the nature of the
APPROACH) FOR PART 3—RISK-BASED
collateral. The aggregate dollar value of the
CAPITAL GUIDELINES
amount in each category is then multiplied
4.
In § 3.10, peragrapb (d) is amended by the risk weight associated with that
category. In addition, a credit equivalent
by removing the phrase "interest rate
amount of each bank's excess measured
risk,’'; paragraphs (e), (f), (g). (h), and (i)
are redesignated as paragraphs as (i), (g), exposure to interest rate risk is calculated.
The weighted values from each of the risk
(h), (i), and (i), respectively; and new
categories and the credit equivalent amount
paragraph (e) is added to read as
for interest T a te risk are added together, and
follows:
this sum is the bank's total weighted-risk
assets that comprise the denominator of the
$3.10 Applicability.
risk-based capital ratio. Attachment 1
•
•
•
*
*
provides a sample calculation.
•
•
•
•
•
(e) A bank w ith significant interest
rate risk exposure;
F. Interest Rate Risk
*
*
*
*
*
Credit equivalent amounts for Interest rate
This signature page relates to the Joint risk are calculated by multiplying a bank's
N otice of Proposed Rulemaking titled
excess measured exposure to Interest rate risk
Risk-Based Capital Standards: Interest
by 12.5.
Rate Risk, Office of the Comptroller of
1. Definitions
the Currency, Department of the
(i) Excess measured exposure means the
Treasury, Docket Number 9 3 -1 1 .
dollar amount of measured exposure to
Office of the Comptroller of the Currency.
interest rate risk in excess of the supervisory
Dated: September 2,1993.
threshold.
Eugene A. Ludwig,
(ii) Measured exposure means the
estimated dollar decline in the net economic
Comptroller o f the Currency.
value of the bank under the specified interest
FEDERAL RESERVE SYSTEM
rate scenario, as determined pursuant to
either a supervisory measure or, where the
Authority and Issuance
Board deems appropriate, the bank's internal
For the reasons set out in the joint
measure of interest rate exposure. When the
supervisory measure is used to calculate the
preamble, part 208 o f chapter II of title
bank’s measured exposure pursuant to
12 o f the Code o f Federal Regulations is
paragraph (2)(i), a bank's measured exposure
proposed to be amended as set forth
is derived by calculating the bank’s net riskbelow.
weighted position, as described in part LA.
of attachment VIII.
PART 208-MEMBERSHIP OF STATE
(iii) Net economic value o f a bank means
BANKING INSTITUTIONS IN THE
the net present value of its assets minus the
FEDERAL RESERVE SYSTEM
net present value of its liabilities p h u the net
1.
The authority citation for part 208 present value of its off-balance-sheet
instruments.
continues to read as follows:
(lv) Net risk-weighted position means the
sum of all risk-weighted positions of a bank’s
Authority: 12 U.S.C. 36 ,248(a), 248(c),
assets, liabilities and off-balance-sheet items.
321-338, 461, 481-486. 601, 611,1814,
For purposes of the supervisory measure, this
1823(j), 3105, 3310, 3331-3351, and 3906number represents the amount by which the
3909; 15 U.S.C. 78b, 781(b), 781(g), 781(i),
net economic value of the bank is estimated
78o—
4(c)(5), 78q, 78q-l, and 78w.
48232
Federal Register / Vol. 58, No. 176 / Tuesday, September 14. 1993 / Proposed Rules
to change in response to a potential change
in market interest rates under the specified
interest rate scenarios.
' [v)Supervisory threshold means the
equivalent of 1 percent of the bank's total
assets.
2. Exemption for Banks With Low FtisK
(i) In general. Except as provided in
paragraph 2.(i), a state member bank's excess
measured exposure shall be calculated
pursuant to this section unless:
a. The total notional principal amount of
the bank’s off-balance-sheet interest rate
contracts is less than 10% of total assets; and
b. 15 percent of the sum of fixed- and
floating-rate loans and securities that mature
or reprice beyond 5 years is less than 30
percent of total capital;
(ii) Discretion o f the Board. The Board may
require the calculation of a bank’s excess
measured exposure if the Board determines
that such calculation is necessary to assess
the capital adequacy of the bank.
3. Measured Exposure
(i) Supervisory measure. Except as
provided in paragraph 3.(ii), a bank's
measured exposure to interest rate risk shall
be calculated pursuant to the supervisory
measure set forth in attachment VIII to this
appendix.
(ii) Use o f Internal Measure. During each
examination, or at the request of a bank, the
Board will examine any internal measure of
interest rate risk. If the bank’s internal
measure is acceptable to the Board in its sole
discretion, then the bank's measure may be
used in place of the supervisory model in
determining the bank’s excess measured
exposure.
(iii) Acceptable internal measure. In
determining whether a bank’s internal
measure of exposure to interest rate risk is
acceptable, the Board will consider:
a. Whether the assumptions and structure
of the supervisory measure accurately reflect
the bank's assets, liabilities, and off-balancesheet positions, and whether the internal
measure provides a more precise
measurement of the change in economic
value of the bank;
b. Whether the internal measure makes use
of generally accepted techniques in
estimating measured exposure;
c. Whether the internal measure is
appropriate to the nature and scope of the
bank’s activities; and
d. Whether the internal measure provides
an adequate indication of the exposure of the
bank to interest rate risk in all material
respects.
(iv) Requirement to use internal measure.
The Board may require that a bank use its
existing internal measure for the purposes of
this section if the Board determines that the
internal measure represents the bank’s
positions more accurately than the
supervisory model.
(v) Interest rate scenario. Measured
exposure will be estimated for a specified
change in the level of market interest rates,
as provided in attachment VIII. This change
will be a uniform increase of 2 percentage
points (200 basis points) in market interest
rates at all maturities.
3. Attachment I to A ppendix A to part
208 is revised as follows:
Attachment I—Sample Calculation of
Risk-Based Capital Ratio for State
Member Banks
Example of a bank with $6,000 in total
capital and the following assets and offbalance-sheet items.
Balance sheet asse*<=:
$5,000
Cash ...... ..................................
U.S. Treasuries.......................
20,000
Balances at domestic banks ..
5,000
Loans secured by first liens
on 1- to 4- family residen
tial properties .....................
5,000
Loans to private corporations
65,000
Total Balance-Sheet Assets ...
Off-balance-sheet items:
Standby letters of credit
(SLCs) backing general-obligation debt issues of U.S.
municipalities (GOs) .........
Long-term legally binding
commitments to private
corporations ........................
100,000
10,000
20,000
Total
Off-Balance-Sheet
Items ................................
30,000
Interest Rate Risk (IRR):
Excess measured exposure to
IRR........................................
2.000
This bank’s total capital to total assets
(leverage) ratio would be: ($6,000/
$100,0001=6.00%
To compute the bank's risk-weighted assets—
1. Compute the credit-equivalent amount of each off-balance-sheet (OBS) item.
Credit OBS
Item
Conversion
factor
Face value
SLCs backing municipal GOs .............................
Long-term commitments to private corporations
1.00
$10,000
$20,000
0.50
Equivalent
amount
$ 10,000
$ 10,000
2. Compute the credit-equivalent amount of excess measured exposure to IRR.
Credit
Conversion
factor
Excess measured exposure
$2,000
......................................................................................................................................................
*
12.5
Equivalent
amount
$25,000
3.
Multiply each balance-sheet asset and the credit equivalent amount of each OBS item and excess measured
exposure to IRR
by the appropriate risk weight.
Credit
Item
0% category:
C a sh ............................ ................................................................................
U.S. Treasuries...........................................................................................
Face value
Conversion
factor
Equivalent
amount
$5,000
20,000
25.000
20% category:
Balances at domestic b an k s......................................................................
Credit-equivalent amounts of SLCs backing GOs of U S. municipalities
5,000
10.000
15,000
50% category:
Loans secured by first liens on 1- to 4-family residential properties..........
0.20
3,000
5,000
0.50
2,500
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
48233
Credit
tletn
Face value
100% category:
Loans to private corporations ____ ________ _______ __________________ _____
Credit-equivalent amounts of long-term commitments to private corporations.... - .....
Credit-equivalent amount of excess measured exposure to IRR ................ ................
Conversion
factor
Equivalent
amount
65.000
10.000
25,000
100,000
1.00
Total Risk-Weighted A sse ts_____________________ _____ __ _____________
-
100.000
105,500
This bank's ratio of total capital to weighted-risk assets (risk-based capital ratio) would be: (6,000/S105,500)=5.69%.
Alternative Two (Risk Assessment
Approach) for Appendix A to Part
208—Capital Adequacy Guidelines For
State Member Banks: Risk-Based
Measure
A. Measured Exposure to Interest Rotes
A bank’s measured exposure to interest
rate risk is derived by calculating the bank’s
net risk-weighted position under two interest
rate scenarios, a rise in interest rates and a
fall in interest rates. If the bank's net riskweighted position is positive under both
4. The sixth undesignated paragraph scenarios, then the bank's measured exposure
of section I o f appendix A to part 208
would be equal to zero. If the bank’s net riskweighted position is negative under one or
is amended by adding the words “and
interest rate risk, considering the bank’s both of the scenarios, then the bank's
measured exposure would be equal to the
measured excess exposure to interest
larger decline in the net economic value of
rate risk (as determined pursuant to
the bank under the two scenarios.
attachment VIII) and other relevant
B. Calculation o f Net Risk-Weighted Position
factors” to the end of the first sentence.
A bank's net risk-weighted position is
2. A ppendix A to part 208 is amended calculated by multiplying its assets,
by adding Attachment VIII as follows:
liabilities, and off-balance-sheet positions by
Attachment VIII—Regulation H, Appendix A the appropriate risk weight for each scenario.
The sum of the weighted values represents
the net risk-weighted position or the dollar
Measurement o f Interest Bate Risk for State
amount by which the bank’s net economic
Member Banks
value is estimated to change in response to
I. Supervisory Measure
each scenario.
The calculation is: (Assets Risk Weights) (Liabilities Risk Weights) + (Off-BalanceSheet Positions Risk Weight) = Net Risk
Weighted Position. The resulting number is
expressed as a percent of total assets and is
the primary quantitative measure that would
be used to evaluate a bank’s measured
exposure to IRR.
1. Risk Weights. For use in supervisory
calculation of a bank’s interest rate risk,
reported asset, liability and off-balance-sheet
positions will be multiplied by
corresponding risk weights. The risk-weights
estimate the sensitivity of the present value
of each position to the specified interest rate
scenario. The supervisory risk weights apply
general assumptions regarding coupon rates
and other characteristics of the underlying
assets, liabilities, and off-balance-sheet
instruments. Table 1 shows the risk weights
developed for a 200 basis point parallel rise
and fall in interest rates.
BILLING COOC 4810-33-M;
48234
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Risk Weights
Table 1
Scenario 1
Amortizing Instruments
Tim eband
Scenario 2
200 Basis Point Rise
*/• Change in
Present Value
(Risk W eiehts)
200 Basis Point Decline
% Change in
Present Value
(Risk W eiehts)
-0.10%
-0.50%
-1.60%
-3.00%
-5.30%
-8.80%
-9.20%
0.10%
0.60%
1.70%
3.10%
3.40%
5.90%
3.60%
-0.25%
-120%
-3.50%
-6.40%
-10.20%
-14.90%
-17.60%
025%
1.20%
3.70%
7.00%
11.70%
19.00%
24.60%
0.25%
1.20%
3.70%
6.90%
11.60%
18.70%
24.00%
-0.25%
-120%
-3.90%
-7.50%
-13.50%
-24.50%
-36.00%
-025%
-120%
-3.70%
-7.40%
-13.30%
-24.90%
-38.00%
0.25%
1.20%
3.90%
8.00%
15.60%
33.50%
61.90%
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
All Other Instruments
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Liabilities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Zero or Low Coupon Sec urities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
BILLING CODE 4 8 1 0 -M -C ; 1 1 1 0 -0 1 -C ; * 7 1 4 -0 1 -C
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
2. Reported Assets, Liabilities, and OffBalance-Sheet Positions. Assets, liabilities,
and off-balance-sheet positions will be
reported within the appropriate category and
time band based on their remaining maturity,
next repricing, average life, or other means as
directed below.
C. Summary o f Asset, Liability, and OffBalance-Sheet Categories
t. Adjustable-Rate Assets. Adjustable-rate
mortgage loans and adjustable-rate mortgage
securities.
2. Amortizing Fixed-rate Loans and
Securities. Fixed-rate mortgage securities,
and asset-backed securities; fixed-rate
mortgage loans, consumer loans and other
instruments that involve scheduled periodic
amortization of principal.
3. Zero- or Low-Coupon Assets. Securities
with either no periodic interest payments or
stated coupons of 2 percent or lower.
4. Trading Account Items. Trading account
assets and related off-balance-sheet positions.
5. High-risk Mortgage Security. Mortgage
derivative products that, at the time of
purchase or at any subsequent time, that;
(a) Have an expected weighted average life
greater than 10.0 years; or
(b) Have an expected weighted average life
that;
(i) Extends by more than 4.0 years,
assuming an immediate and sustained
parallel shift in the yield curve of plus 300
basis points; or
(ii) Shortens by more than 6.0 years,
assuming an immediate and sustained
parallel shift in the yield curve of minus 300
basis points; or
(c) Has a change in price of greater than 17
percent, assuming an immediate sustained
shift in the yield tnirve of plus or minus 300
basis points'.
6. A ll Other Assets. All other interestsensitive instruments, which are assumed to
involve scheduled periodic payments of
interest and the payment of principal at
maturity.
48235
and repricing of "high-risk” mortgage
derivative products may be estimated by
bank management. Otherwise, maturity and
repricing of such products will be assumed
to be in the "Greater Than 20 Years” time
band.
(b) Mortgage Derivative Products Defined.
Mortgage derivative products are defined as
interest-only and principal-only stripped
mortgage-backed securities (lOs and POs),
tranches or collateralized mortgage
obligations (CMOs) and real estate mortgage
D. Summary o f Time Intervals for Maturity
investment conduits (REMlCs), CMO and
and Repricing
REMIC residual securities and other
Assets, liabilities and off-balance-sheet
instruments having the same characteristics
items are assigned (in part or in total) to one
as these securities.
of seven maturity ranges:
3.
Maturity and Repricing for Nonmaturity
• Up to 3 Months,
Deposits—(a) Management determination o f
• 3 to 12 Months,
repricing and maturity. Repricing and
• 1 to 3 Years,
maturity for nonmaturity deposits is
• 3 to 5 Years,
determined by bank management based on its
• 5 to 10 Years,
own assumptions and experience, subject to
• 10 to 20 Years,
the following constraints:
• Greater than 20 years.
(i) Repricing and maturity for DDAs and
MMDAs may not exceed three years, with a
E. Summary o f Maturity and Repricing
maximum of 40% of these balances in the
1. Maturity and Repricing—In General.
"1-3 year” time band; and
Except for mortgage derivative products and
(ii) Repricing and maturity for savings and
nonmaturity deposits, the remaining maturity NOW account balances may not exceed five
of an asset, liability, or off-balance-sheet item years, with a maximum of 40% of the total
is determined by the remaining time before
of these balances in the "3-5 year” time
maturity, or next actual or potential repricing band.
date, associated with the outstanding
(b) Nonmaturity deposits. Nonmaturity
principal or notional balances as specified by deposits are defined as demand deposit
contract or agreement.
accounts (DDAs), money market deposit
2. Maturity and Repricing for Mortgage
accounts (MMDAs), savings accounts, and
Derivative Products—(a) Use o f Expected
negotiable order of withdrawal accounts
Average Life. Maturity and repricing for
(NOWs).
mortgage derivative products other than
F. Example o f the Interest Rate Risk Measure
high-risk mortgage securities will be defined
as their current expected average life as
Table 2 is an interest rate risk worksheet
determined by bank management.^ Maturity
that illustrates the method of which a bank’s
Net Risk-Weighted Position is calculated.
7. Liabilities. All deposits and all non
deposit liabilities whose values are sensitive
to movements in interest rates.
8. Off-Balance-Sheet Items. (1) Interest rate
contracts, including swaps, forwards,
options, and futures; (2) mortgage related
fixed-rate commitments and other offbalance-sheet derivative instruments whose
value depends on the value of an underlying
asset or index with amortizing
characteristics.
* All underlying assumption) used in calculating
BH.UMO CODE 4*1«-33-M ; U W -01-M ; (7 U -4 1 -M
the average llte of these instruments must be
reasonable and-available for examiner review. For
selected by examiners, the examiners may use these
example, if an institution's prepayment
assumptions differ significantly from the median
median prepayment assumptions in determining
prepayment assumptions of several major dealers as the appropriate average life of the instrument.
48236
Federal Register / Vol. 58, No. 176 7 Tuesday, September 14, 1993 t Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Rising Rate Scenario)
DRAFT
Table 2
REPORTING INSTITUTION: Sample Bank
Date: 12/31/92
1 INTERESTSENSmVS ASSETS
KM
W(IgUU
w ,| ,t|(.
C)
D
TOTAL
1-ARM.RMt*
W 'dthtod PoaWon
‘
$5,500
$4-950
14.050
$4,166
$6.6X3
I t 454
110.430
(d )3 » 3 y « »
(e> S t» U > y aa»
(0 I0lo20ytat»
( t ) G am er d i e 20 y e a a
( a > l* t o 3 a
(b )3 t,
(c)
1b j y m
C<l)3to S y tm t
(«) JtD lO psatt
( 0 10to20years
(g) Greater d m 2 0 yean
3. *AP otfaw* w oiM tiL l o t t . A aid in g a
W U p toJaM n tta
(b) 3 lo 12 months
-025%
-1JD%
-3.70%
. -7.40%
n->3J0%
-2490%
-3100%
124672
Kt.431 1 ' ’ ‘
I3U 36
*19.721
$10,564
W.ST7
$9.<«
< c ),I» > 3 y » o
(Altoiyma
(c )J « » » yean
( 0 lO to 2 0y aa n
(b) Q m ier d a n 20 yean
OS)
rus>
($65)
:s ;:5 .
-010%
-0 50%
-t.« %
-3.00%
-S.30%
-#10%
-920%
11.000
11.000
nooo
to
to
to
to
( c ) lk ljo n
-0,25%
-1.20%
-3 50%
-6,40%
-10.20%
-1490%
-tT.60%
I
1
fO
RkfcWaifklW
PosMloa
fA3»(Bl
$ T h o u san d s
($56tt
($9601
■J.
,
.
. ....
'
03)
s ::.
a37V
to
•
■ :-yS-:' ■
sc
JC
'■ .r, ,
, - . . w > . ..
$0
‘ ’’ <
::
(1671
:
„>^ v
($341)
. .•rr
" ■
($1.0901
(11.2631
(51-C
T7T1
fjl.317)
.T
4.
(* )S d f-s
toUi+wa+M*
5 . Total frtfrrra Sm tiriat A f t *
12.000 ■
11.000 h
3IMOOO
13000
UKJW0
E ALL OTHER ASSETS
m. TOTAL ASSETS
1160
($380)
($9,190)
..
C$9,190)
:
i'WS
. .
.
‘
................. ’
’
' • ' iiiSii
IV. IMTEHEST-SBNSniVE UABimiBS
1- K on-m tunty dryoahi. Um edqwsrtj vad'aU Mho*
(b )3 to I2Bonth>
(c )
1 k> 3 years
(d) 3 to 5 y o n
(e)> t» t0 y a e a >
® l0 t o 2 0 y e a »
2. Total btcreat-Scositive Liabilities
V. NONINTEREST-SENSITIVE LIABILITIES
VL TOTAL UABILmBS
V H EQUITY CAPITAL
VIIL OFF-BALANCE-SHEET POSmONS
1 .h ta o t n ie f lo r tn c t i
(») Up to 3 m onths
(b) 3 to 12 month*
(c) 1 to 3 yean
(d ) 3 to 5 y ean
(e) 5 to 10 ye**
( 0 1 0 to 2 0 y c m
(g) Chester than 20 year*
Mortgage and other ano d izin g contract*
( ■) Up to 3 months
( b )3 to 12 months
(c)
t to 3 y e a n
« ) 3 to 5 y c s n
(e )S to lO y ean
( 0 1 0 to 2 0 y e a n
(y) Greater than 20 y ean
3. T otal O ff-Balance-Sheet Positions
N et R isk W eighitd Position
N et PoartksV A ssets
BILUN O CODE
«2K M >1-C ; « 7 1 4 -« 1 -C
.
?V
»
teOrwlff rtwTOyi
2.
- ■
323.083
174 U2
1M 321
$17,090
$64
0 )U p to 3 m c e a b .
to
$166,140
1860
$167,000
J19.W!
0.25%
1J0S
im
690%
II6 0 S
$5*
$895
$1,899
$1,17?
l*TO*
JO
so
$4,038
2400%
.
r
'
'
$4,038
'
$4,038
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
n . Internal Measure
A state member bank's internal measure for
interest rate risk will be evaluated and, if the
measure is used in assessing the bank’9
measured exposure, calculated according to
the following interest rate scenario:
Maturity
Scenario
annual hori
zon (basis
points)
0-3 M onths...............................
3-12 Months.............................
1-3 Y ea rs.................................
3 -5 Y e a rs.................................
5-10 Y ea rs...............................
10-20 Y ea rs.............................
Over 20 Y ea rs..........................
200
200
200
200
200
200
200
T his signature page relates to the Joint
N otice of Proposed Rulemaking title
Risk-Based Capital Standards: Interest
Rate Risk, Office of the Comptroller of
the Currency, Department of the
Treasury, Docket Number R -0802.
By Order of the Board of Governors of the
Federal Reserve System.
Dated: August 27,1993.
William Wiles,
Secretary o f the Board.
FEDERAL DEPOSIT INSURANCE
CORPORATION
Authority and Issuance
For reasons set out in the joint
preamble, part 325 o f chapter III o f title
12 o f the Code o f Federal Regulations is
proposed to be amended as set forth
below .
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, 3907, 3909; Public
Law 102-233,105 Stat. 1761,1789,1790 (12
U.S.C 1831n note): Public Law 102-242,105
Stat. 2236, 2386 (12 U.S.C 1828 note).
ALTERNATIVE ONE (MINIMUM CAPITAL
STANDARD APPROACH) FOR APPENDIX A
TO SUBPART A OF PART 32&—
THE
STATEMENT OF POLICY ON RISK-BASED
CAPITAL
2. Section II o f appendix A to subpart
A o f part 325 is amended by revising the
first undesignated paragraph under
paragraph A and by adding a new
paragraph F. to read as follows:
Appendix A to Subpart A of Part 3 2 5 Statem ent o t Policy on Risk-Based Capital
A. * * *
Under the risk-based capital framework, a
bank's balance sheet assets and credit
equivalent amounts of off-balance-sheet
items are assigned to one of four broad risk
categories according to the obligor or, if
relevant, the guarantor or the nature of the
collateral. The aggregate dollar amount in
each category i9 then multiplied by the risk
weight assigned to that category. In addition,
a risk-weighted asset amount of a bank’s
excess measured exposure to interest rate risk
(as determined pursuant to paragraph H.F. of
this appendix) is calculated. The resulting
weighted values from each of the four risk
weight categories and the risk-weighted asset
amount for interest rate risk are added
together and this sum is the risk-weighted
assets total that, as adjusted,'* comprises the
denominator of the risk-based capital ratio.
*
•
•
•
•
F. Bisk Weighted Asset Am ount for
Excessive Interest Pate Bisk Exposure. If a
bank is required to maintain additional
capital for excessive interest rate risk
exposure, as determined in accordance with
appendix C to subpart A of part 325, the
dollar amount of this additional capital
requirement for interest rate risk should be
multiplied by 12.5. The resulting amount
should be included in the denominator for
risk-weighted assets. For example, if the
capital required for excessive interest rate
risk under appendix C is $100,000, the
amount to be included in risk-weighted
assets for this interest rate risk exposure will
be $1,250,000. Thus, consistent with the 8
percent minimum total risk-based capital
ratio that banks are required to maintain
under this risk-based capital policy
statement, if $100,000 in additional capital is
required to be maintained for interest rate
risk pursuant to appendix C, this amount will
equal 8 percent of the $1,250,000 additional
amount to be included in risk-weighted
assets.
48237
overall ability to monitor and control
financial and operating risks, including the
risk presented by concentrations of credit
and nontraditional activities. In addition to
evaluating capital ratios, an overall
assessment of capital adequacy must take
account of each of these other factors,
including, in particular, the level and
severity of problem and adversely classified
assets as well as a bank's excess measured
exposure to interest rate risk. For this reason,
the final supervisory judgment on a bank’s
capital adequacy may differ significantly
from the conclusions that might be drawn
solely from the absolute level of the bank's
risk-based capital ratio.
4. Subpart A o f part 325 is revised by
adding a new appendix C to read as
follows:
Appendix C to Subpart A of Part 3 2 5 Measurement of and the Assessment
of Capital Requirements for Interest
Rate Risk
This appendix sets forth a system for
measuring IRR and determining if additional
capital may be required inorder to take
adequate account of a bank’s interest rate
risk.
I. Definitions
A. Excess Measured Exposure means the
dollar amount of measured exposure to
interest rate risk in excess of the supervisory
threshold.
B. Measured Exposure means the estimated
dollar decline in the net economic value of
a bank under the specified interest rate
scenario(s) as determined pursuant to either
a supervisory measure or, where the FDIC
ALTERNATIVE TWO (RISK ASSESSMENT
deems appropriate, the bank's internal
APPROACH) FOR APPENDIX A TO
measure of Interest rate risk exposure. When
SUBPART A OF PART 325—THE
the supervisory measure is used to calculate
STATEMENT OF POLICY ON RISK-BASED
the bank's measured exposure pursuant to
CAPITAL
3. The fifth undesignated paragraph o f section III of this appendix, a bank's
appendix A to subpart A o f part 325 (the measured exposure is derived by calculating
the bank's net risk-weighted position.
FTHC’s Statement o f Policy on RiskC Alet Economic Value o f a Bank means
Based Capital) is revised to read as
the net present value of its assets minus the
follows:
net present value of its liabilities plus the net
present value of its off-balance-sheet
Appendix A to Subpart A of Part 325— instruments.
Statement of Policy on Risk-Based
D. Net Bisk-Weighted Position means the
sum of all risk-weighted values of the bank’s
Capital
assets, liabilities and off-balance-sheet
•
•
*
*
*
positions. For purposes of the supervisory
The risk-based capital ratio focuses
measure, this number represents the amount
principally on broad categories of credit risk; by which the bank's net economic value is
however, the ratio does not take account of
estimated to change in response to the
many other factors that can affect a bank’s
interest rate scenario(s). This number may be
financial condition. These factors include
expressed as a percentage of total assets or in
overall interest rate risk exposure; liquidity,
dollar amounts.
funding and market risks; the quality and
E Supervisory Threshold means the
level of earnings; investment, loan portfolio,
equivalent of 1 percent of the bank's total
and other concentrations of credit risk;
assets.
certain risks arising from nontraditional
II. Applicability
activities; the quality of loans and
investments; the effectiveness of loan and
A. Exemption Test for Banks with Low Bisk
investment policies; and management's
t. General Buie. Except as provided in
paragraph A. 2. a bank's excess measured
" Any asset deducted from a bank's capital
exposure will be calculated pursuant to this
accounts when computing the numerator of the
appendix unless:
risk-based capital ratio will also be excluded from
(a) The total notional principle amount of
risk-weighted assets when calculating the
denominator for the ratio.
the bank’s off-balance-sheet interest rate
48238
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
contracts is less than 10 percent of total
assets; and
(b) IS percent of the sum of fixed- and
floating-rate loans and securities that mature
or reprice beyond 5 years is less than 30
percent of total capital.
2. Discretion o f the FDIC. The FDIC may
require the calculation of a bank's excess
measured exposure if the FWC determines,
based on an overall assessment of the bank's
financial condition, that such calculation is
necessary to assess the capital adequacy of
the bank.
III. Supervisory Measure
A. Measured Exposure to Interest Fates
A bank's measured exposure to interest
rate risk must be calculated pursuant to the
supervisory measure as specified in section
III.G and III.D. of this appendix G
B.Calculation o f Net Risk-Weighted Position
A bank's net risk-weighted position is
calculated by multiplying its assets,
liabilities, and off-balance-sheet positions by
the appropriate risk w eight1 for each
specified rate scenario. The sum of the
’ Risk weights estimate the sensitivity of the
present value o f assets, liabilities and off-balancesheet position* to the specified interest rate
scenario(s). The supervisory risk weights apply
general assumptions regarding coupon rates and
other characteristics of the underlying assets,
liabilities and off-balance-sheet instruments. Table
1 shows the risk weights developed for a (ZOO basis
point] parallel rise and fell in interest rates.
weighted values represents the net riskweighted position or the dollar amount by
which the bank’s net economic value is
estimated to change in response to each
scenario.
The calculation is as follows:
(Assests x Risk Weights) - (Liabilities x Risk
Weights) + (Off-Balance-Sheet Positions
x Risk Weight) = Net Risk Weighted
Position
The resulting number is expressed in
dollars and may be divided by total assets
and expressed as a percent of total assets. It
is the primary quantitative measure that
would be used to evaluate a bank's measured
exposure to interest rate risk.
BILLING CODE 4810-&-M; 6210-01-M; 4714-01-M
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Risk Weights
Table 1
Scenario 1
Amortizing Instruments
Timeband
Scenario 2
200 Basis Point Rise
*/• Change in
Present Value
(Risk Weiehts)
200 Basis Point Decline
% Change in
Present Value
(Risk W eiehts)
-0.10%
-0.50%
-1.60%
-3.00%
-5.30%
-8.80%
-9.20%
0.10%
0.60%
1.70%
3.10%
3.40%
5.90%
3.60%
-0.25%
-1.20%
-3.50%
-6.40%
-10.20%
-14.90%
-17.60%
0-25%
120%
3.70%
7.00%
11.70%
19.00%
24.60%
025%
120%
3.70%
6.90%
11.60%
18.70%
24.00%
-025%
-120%
-3.90%
-7.50%
-13.50%
-24.50%
-36.00%
-025%
-120%
-3.70%
-7.40%
-13.30%
-24.90%
-38.00%
025%
120%
3.90%
8.00%
15.60%
33.50%
61.90%
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
All Other Instruments
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Liabilities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
Zero or Low Coupon Securities
0-3 months
3-12 months
1-3 Years
3-5 Years
5-10 Years
10-20 Years
Over 20 Years
BILLING CODE 4810-33-0, *210-04-0; 67*4-01-0
..
48239
48240
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
C. Calculation o f Measured Exposure
If the net risk-weighted position is positive
under the specified interest rate scenario(s),
the measured exposure would be equal to
zero. If the net risk-weighted position is
negative under the specified interest rate
scenariofs), the measured exposure would be
equal'to the larger decline in the net
economic value of the bank.
D. Calculation o f Excess Measured Exposure
1. The dollar amount of the supervisory
threshold would be subtracted from the
absolute dollar amount of the measured
exposure. The positive difference would
equal the excess measured exposure.
Measured Exposure-{.OlTotal
Assets )=Excess Measured Exposure
2. If the amount of the supervisory
threshold were greater than the measured
exposure, the excess measured exposure
would be zero.
E. Interest Fate Scenario
Measured exposure will be estimated for a
uniform increase and decrease of 2
percentage points (200 basis points) in
market interest rates at all maturities.
IV. Reporting Requirements
Assets, liabilities and off-balance-sheet
positions will be reported within the
appropriate category and time band based
upon their remaining maturities, nearest
repricing dates, average life or other means
as directed below.
A. Summary o f Assets, Liabilities and OffBalance-Sheet Categories
1. Adjustable-Fate Assets. Adjustable-rate
mortgage loans and adjustable-rate mortgage
securities.
2. Fixed-Fate Assets. Fixed-rate mortgage
securities and asset-backed securities; fixedrate mortgage loans, consumer loans and
other instruments that have scheduled
periodic amortization of principal.
3. Zero- or Low-Coupon Assets. Securities
with either no periodic interest payments or
with stated coupons of 2 percent or lower.
4. Trading Account Assets. Trading
account assets and related off-balance-sheet
instruments.
5. High-Fisk Mortgage Securities. Mortgage
derivative products that, at the time of
purchase or at any subsequent time:
(a) Have an expected weighted average life
greater than 10.0 years; or
(b) Have an expected weighted average life
that:
(i) Extends by more than 4.0 years,
assuming an immediate and sustained
parallel shift in the yield curve of plus 300
basis points; or
(ii) Shortens by more than 6.0 years,
assuming an immediate and sustained
parallel shift in the yield curve of minus 300
basis points; or
(c) Has a change in price of greater than 17
percent, assuming an immediate sustained
parallel shift in the yield curve of plus or
minus 300 basis points.
6. All Other Assets. All other interestsensitive instruments, which have scheduled
periodic payments of interest and the
payment of principal at maturity.
7. Liabilities. All deposits and all non
deposit liabilities whose values are sensitive
to movements in interest rates.
8. Off-Balance-Sheet Positions, (a) Interestrate contracts including swaps, forwards,
options, and futures.
(b) Mortgage-related fixed-rate
commitments and other off-balance-sheet
derivative instruments whose value depends
on the value of an underlying asset or index
with amortizing characteristics.
B. Summary o f Time Bands for Maturity and
Fepricing
Assets, liabilities and off-balance-sheet
items are assigned (in part or in total) to one
of seven maturity ranges:
• Up to 3 months,
• 3 to 12 months.
• 1 to 3 years,
• 3 to 5 years,
• 5 to 10 years,
• 10 to 20 years,
• Greater than 20 years.
C. Summary o f Maturity and Fepricing
Instructions
1. Maturity and Fepricing for Assets,
Liabilities and Off-Balance-Sheet Positions.
Remaining time before maturity, or next
actual or potential repricing date, associated
with outstanding principal or notional
balances as specified in a contract or
agreement with the exception of:
(a) Maturity and Fepricing for Mortgage
Derivative Products. Mortgage derivative
products are defined as stripped mortgagebacked securities, tranches of collateralized
mortgage obligations (CMOs) and real estate
mortgage investment conduits (REMICs),
CMO andREMIC residual securities and
other instruments having the same
characteristics as these securities.
For mortgage derivative products, other
than those which may be deemed as a “highrisk mortgage security” by the FDIC, current
average life will be reported in lieu of
maturity or repricing dates in the “All Other
Securities” category.* The carrying value of
“high-risk mortgage securities” will be
reported in the “High-Risk Mortgage
Securities” category. ' If not, maturity and
repricing of high-risk mortgage securities will
be as if the entire balance were a zero or low
coupon instrument in the longest time band.
(b) Maturity and Fepricing for NonMaturity Deposits.
(i) Non-maturity deposits are defined as
Demand Deposits Accounts (DDAs), Money
Market Deposit Accounts (MMDAs), savings
accounts, and Negotiable Order of
Withdrawal accounts (NOWs).
(ii) Management determination o f repricing
and maturity. Repricing and maturity for
non-maturity deposits are determined by
bank management based on its own
assumptions and experience, subject to the
following constraints:
(1) Repricing and maturity for Demand
Deposit Accounts (DDAs) and Money Market
Deposit Accounts (MMDAs) may not exceed
three years, with a maximum of 40 percent
of these balances in the "1-3 year” time
band; and
(2) Repricing and maturity for savings and
Negotiable Order of Withdrawal (NOW)
account balances may not exceed five years,
with a maximum of 40 percent of the total
of these balances in the “3-5 year” time
band.
(iii) Maturity and Fepricing for OffBalance-Sheet Positions. Off-balance-sheet
positions with option characteristics (e.g,
options, caps, floors) are reported separately
from those representing firm commitments
(e.g., swaps, futures, and forward-rate
agreements). Mortgage-related fixed rate
commitments and other off-balance-sheet
derivative instruments whose value depends
on the value of an underlying asset or index
with amortizing characteristics are reported
separately.
D. Example o f the Interest Fate Fisk Measure
Tables 2 and 3 are interest rate risk
worksheets that illustrate the method by
which a bank's Net Risk-Weighted Position is
calculated.
BILLING C O M 4 81 0-33-4*; 6 2 1 0-0 1-M ; 8 7 1 4-0 1-M
reasonable and available for examiner review. For
example, if an institution's prepayment
assumptions differ significantly from the median
prepayment assumptions of several major dealers as
selected by examiners, the examiners may use these
median prepayment assumptions in determining
the appropriate average life of the instrument.
J The interest rate sensitivity of high-risk
mortgage securities purchased after February 10,
1992 must be reported in the memorandum items.
2
All underlying assumptions used in calculating The interest rate sensitivity of "high-risk mortgage
the average life of these instruments must be
securities” purchased prior to February 10,1992
can be reported as a memorandum item.
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Rising Rate Scenario)
DRAFT
Table 2
REPORTING INSTmmON. Sample Bank
Date: 12/31/92
$ Thousands
i
JB1
INTEREST-SENSITIVE ASSETS
1. ARM s, FRM s, asset-backed se o v itk a , consumer loans
(a) Up to 3 m onths
(b) 3 to 12 m onths
(c) I lo 3 year*
(d) 3 »o 5 years
<e)5 to *0 years
(f) K> to 20 years
(g> Greater than 2 0 years
2. Z ero or low coupon securities
(a) Up to 3 m onths
( b )3 lo 12 m onths
(c)
1 to 3 years
(d) 3 to 5 years
(e) 5 to 10 years
( 0 10 to 20 years
(g) Greater than 2 0 years
3. *AU other* securities, loam , A trading account
(a) U p to 3 m onths
(b )3 to 12 m onths
(c) 1 to 3 years
(d )3 to 5 y c s re
5 to 10 years
(e)
CO lO to 20 years
(g) Greater than 2 0 years
4. H igh-risk mortgage securities
(s) Self-reporting
(b ) Risk weighting
TOTAL
,>
.
* V ■
-'
1.0
550
1.5
490
1.5
400
...... ...HW
S.2
660
*45
4
103
140
S.0
I00
1.0
100
1.0
100
1
0
1
0
1
0
1
0
m .7
^2
1M 3
2 2
I U3
3 6
1971
1.2
106
154
W I7
.3
1.6
942
Rs
ik
Wihs
egt
4.O
IK
•.0
03 %
-6 %
10
-. %
30
0
-.**
5
4MH ...........
•2 %
90
EL ALL OTHER ASSETS
EL TOTAL ASSETS
(e) 1 to 3 years
< d )3 to 5 y c srs
(e) 5 to 10 years
( 0 K > to20yesrs
( l ) Greater than 2 0 y a a n
1 Total faserest-Sem rtw a Liafca&»a%
V. NONINTEREST-SENSITIVE UAB2LRIES
V I TOTAL LIABILITIES
VIL EQUITY CAPITAL
mor*
1452
7.1
1131
5.2
1700
1.9
14
6
»
1
0
1
M&M0 *
16
10
16.0
1700
. JiL«L
. -Si
SW
(16 T
9O
'
on
-r» >
i2
07 S K l l W
31
J
O
s
o
%
c
so
07
6)
IM l
ti
riji
j.W,
g 2Q
:
m.0n
7
<{>*
*.»
(1S5
J.6)
50 . .
10
081
30
0.91
910
-2 %
05
-. %
10
2
. -. %
35
0
-.0
64%
-0 0
12%
-H9% ........
0
-7 0
16 %
IV. INTEREST-SENSnTVE LXABHJTIES
1. Non-m aturity deposits, tune sk p o u ts s n d “a ll other"
(a) U p to 3 Baootha
(b) 3 to 12 s m th a
v''-•'. ;
. ■ .V
- /
.
05
21
, '
< » ••. :
*S ■
O J
I2}
42%
15
•2 %
10
- 7%
30
•4 %
70
-33%
1.0
•49 %
2 .0
•10 %
3.0
1.0
200
•1 0
30%
1.0
100
x
;
:
11.0 -;
1300 ■ ‘
*•
w•
..
-1.0
300
**.
{§
_ ..
■ ..
..
5. Total Interest-Scautnpe A ssets
lEL
TMIRM
W i M tP«oi
t u x om*
Rkdhn
bWttt
P Mn
h
flJ)
AlB
'
li
■< .''m::
. ■ ,
.....
«910
.9>
\
. * x ■
.
SJ
5
.
ws S O ■-. y.,
.>.
S.9 :
.W i
l.»
ii
..7
.1
.5
3
..
t
o
H 0I
.3
*
■
' ■ ».
w:
-y
,M OM
5S »
<3
. - * :. .••
r:
.■
.■
'•
05
2%
10
2*
10
7*
40
9*
I.Q
S4 %
i
«
2.
4WV
____
Vm . OFF-BALANCE-SHEET PO Sm O W S
1. fafenat m s contracts
0 )U p to 3 ta o n th a
(b) 3 to 12 m onths
(c) I to 3 yean
fd) > so 5 yesrs
(e)5 to K )y em a
10 to 2 0 years
(g> Greater than 20jw m a
1 M ortgage and other m m m ttk * eonlmcaa
(s) U p to 3 m onths
(b )
3 to 12 m onths
( c jl to ly a s n
s/
'
« ) 3 to 5 y e * *
< e )5 to lO ysass
C O K H a20yesr»
(g)
Greater #isn20yBM S
1 T otal Q g-P stsnas Tha i P e r t —
W t Uc s fa fab
a Jf W q r* orw
NuNMAssak
.
snjnL id
48241
48242
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 199a / Proposed Rules
Interest Rate Risk Worksheet (200 Basis Point Declining Rate Scenario)
DRAFT
Table 3
REPORTING INSTITUTION: Sample Bank
Date: 12/31/92
S Thousands
L IhTTEREST-SENSmVE ASSETS
1. ARMs. FRMs, asset-backed securities, consumer loam
(s) U p to 3 n orth s
(b) 3 to 12 n orths
(c) I to 3 years
(d)3toS y tsn
(e )3
to lO y ean
0 ) 10 to 20 years
(g) Greater than 2 0 y e sn
2. Zero o r low coupon securities
(a) U p to 3 n o rth s
0>) 3 to 12 n o rth s
(c) 1 to 3 y s s n
(d) 3 to 5 y esn
(e) 3 to lO yean
0 ) 10 to 20 y esn
(g) O nstsr than 20 yean
3. *AU other* s e c u r ity loans, A trading account
(a) Up to 3 months
(b) 3 to 12 months
(c) 1 to 3 years
(d) 3 to 3 y esn
( e ) 3 to lO yean
( 0 1 0 to 2 0 yesn
(g) Greater than 20 yean
4. H igh-risk mortgage s e a s id e s
(•) Setf-reparon*
(b) Risk vmghting
5. T a d IntoTSI-Sgm tjT Assets
C
a ALL OTHER ASSETS
m . TOTAL ASSETS
IV INTEREST-SENSITIVE LIABILITIES
1. N astratority depocas, tim deposits m d *tU other*
( ■) Up to 3 aoatfes
(b) 3 la 12
(c ) lto 3 y a n
(d )3
to S y c si
(e) 5 to 10 ytan
(0 I 0 to 3 0 ]« n
( |) Orator tbm 20 y esn
X Tats] h i— I lis a itiw LkbdiOM
V. NOM NTEREST-SENSmVE LIABILITIES
V I TOTAL UABILXnES
V II EQUITY CAPITAL
VUL OFF-BALANCE-SHEET POSITIONS
1. M e n u M s e o n tn d s
(s) Up to 3 n o n e*
(b)3to 12M ia
(e) I to 3 ) ■ (
(d) 3 to J ym n
14.000
1300
A4.QS0Y
fM50Y
(e )S to lO y e v t
( 0 I 0 to 2 0 y a «
so
(g) O rator dan 20 y o n
K
P
10
0 25%
1 20%
3.70%
7.00%
1170%
_ 19.00%
24.60%
____ ________
... .
ill
.M l
(I1XD
.
nm
IP
_________
_
_____ ifh
.. _ . s c
2. M ortpgs snd otbta raortizinc oor.tnctt
(t) U^ to 3 norths
(b) 3 to 12 Banda
(c) 1 t o S y o n
11.000
10
(SLOOOft
(0 10to20yen
10
10 ^
10
(lJ Orator d an 3 0 ym n
|Q
(4 )to S jm n
( s ) 3 t o lO yw n
3. Total O ff-n iln a That t a i l m
N et R iA Wcifhtod P ositun
N st PoaOMM/ Am i s
MLUNO CO M U 1 M K ; U 1 M 1 -C ; *714-41-0
•
0.10% ___________ ... . - i i
10
060%
____ 170% ________
.
__ 3,10% _____ ____
.
JO
J .W
3,90%
3 60%
-
_______ . _____
..........._ IQ..
10
<1111)
■! ■; ■ . - . •
•
:.:V' V
:'
.
.
•
mm
t5.344.31
1 I7 H
Federal Register / Vol. 58, No. 176 / Tuesday, September 14, 1993 / Proposed Rules
V. Use of Internal Measures
A. Supervisory Measure
Except as provided in paragraph B, a
bank's measured exposure to interest rate risk
will be calculated pursuant to the
supervisory measure set forth in section HI of
this appendix.
B. Use o f Internal Measure
During an examination or at the request of
a bank, the FDIC will evaluate any internal
measure of interest rate risk exposure. If the
bank’s internal measure is acceptable to the
FDIC, in its sole discretion, then the bank’s
measure may be used in place of the
supervisory model in determining the bank’s
excess measured exposure.
C. Acceptable Internal Measure
In determining whether a bank’s internal
measure of exposure to interest rate risk is
acceptable, the FDIC will consider:
1. Whether the assumptions and structure
of the supervisory measure accurately reflect
the actual positions, and whether the internal
measure provides a more precise
measurement of the change in economic
value of the bank;
2. Whether the internal measure makes use
of generally accepted techniques in
estimating measured exposure;
3. Whether the internal measure is
appropriate to the nature and scope of the
bank's activities; and
4. Whether the internal measure provides
an adequate indication of the exposure of the
bank to interest rate risk in all material
respects.
D. Requirement To Use Internal Measure
The FDIC may require that a bank use an
existing internal measure for purposes of
determining interest rate risk exposure if:
1. The supervisory measure does not
adequately characterize the interest rate risk
of the bank’s positions; or
2. Use of the supervisory measure would
materially misrepresent the bank’s actual
interest rate risk exposure.
The excess measured exposure determined
by the internal measure would then be
utilized to determine the risk-based capital
requirement.
48243
E. Reporting Requirements
In addition to completing the reporting
requirements associated with the supervisory
measure, a bank utilizing the internal
measure would also report the interest rate .
sensitivity of its assets, liabilities and offbalance-sheet positions, as determined by its
internal measure, on a separate reporting
schedule.
F. Interest Rate Scenario/s)
The interest rate scenario(s) specified for
the supervisory model (as set forth in section
II1.E. of this appendix) should also be utilized
in conjunction with a bank’s internal
measure.
By order of the Board of Directors.
Dated at Washington, DC, this 9th day of
June, 1993.
Federal Deposit Insurance Corporation.
Hoyle L. Robinson,
Executive Secretary.
|FR Doc, 93-22149 Filed 9-13-93; 8:45 am)
BILUNG CODE 4S10-33-M , 8210-01-M , 6714-01-M
@FedFRASER