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FEDERAL RESERVE BANK
OF NEW YORK
[
Circular No. 10736
November 2, 1994
”1
RISK-BASED CAPITAL GUIDELINES
Joint Proposal to Amend the Risk-Based Capital Guidelines
Comments Invited by Decem ber 13
To A l l S t a t e M e m b e r B a n k s a n d B a n k H o l d i n g C o m p a n i e s
in th e S e c o n d F e d e r a l R e s e r v e D i s t r i c t , a n d O t h e r s C o n c e r n e d :
The Board of Governors of the Federal Reserve System and the Office of the Comptroller of
the Currency have issued a joint Federal Register notice to amend their respective risk-based capital
guidelines in order to modify the definition of the OECD-based group of countries so as to exclude
from that group any country that has rescheduled its external sovereign debt within the previous
five years. Countries included in the group are eligible for lower risk weights in determining their
credit risk.
Printed on the following pages is the text of the joint notice, which has been reprinted from
the Federal Register o f October 14. Comments thereon should be submitted by December 13, 1994,
and may be sent to the appropriate agency, as specified in the notice, or to our Banking Studies
Department.
W
il l ia m
J. M
c
D
o no ug h
President.
,
52100
Proposed Rules
Federal Register
V ol. 59, N o. 198
Friday, O ctob er 14 , 1994
OCC: Written comments should be
submitted to Docket No. 94-16,
Communications Division, Ninth Floor,
Office of the Comptroller of the
Currency, 250 E. Street, Washington,
D.C., 20219, Attention: Karen Carter.
Comments will be available for
inspection and photocopying at that
address.
DEPARTMENT OF THE TREASURY
FRB: Comments should refer to
Docket No. R-0849 and may be mailed
Office of the Comptroller of the
to William W. Wiles, Secretary, Board of
Currency
Governors of the Federal Reserve
System, 20th Street and Constitution
12CFR Part 3
Avenue, N.W., Washington, D.C. 20551.
[D ocket No. 9 4 -1 6 ]
Comments may also be delivered to
Room B-2222 of the Eccles Building
RIN 1 5 5 7-A B 1 4
between 8:45 a.m. and 5:15 p.m.
FEDERAL RESERVE SYSTEM
weekdays, or to the guard station in the
Eccles Building courtyard on 20th
12 CFR Parts 208 and 225
Street, N.W. (between Constitution
Avenue and C Street) at any time.
[Regulations H and Y; Docket No. R -0849]
Comments may be inspected in Room
MP-500 of the Martin Building between
Capital; Capital Adequacy Guidelines
9:00 a.m. and 5:00 p.m. weekdays,
AGENCIES: The Office of the Comptroller
except as provided in 12 CFR 261.8 of
of the Currency (OCC), Department of
the Board’s Rules regarding availability
the Treasury and the Board of Governors of information.
of
the Federal Reserve System (FRB).
Notice of proposed rulemaking.
ACTION:
The OCC and FRB (the
agencies) are proposing to amend their
respective risk-based capital guidelines
to modify the definition of the OECDbased group of countries. Claims on the
governments and banks of this group
generally receive lower risk weights
than corresponding claims on the
governments and banks of non-OECDbased countries. The agencies are
proposing this amendment on the basis
of an announcement, made on July 15,
1994, by the Basle Committee on
Banking Supervision (Basle Committee)
that, subject to national consultation,
the Basle Committee plans to introduce
a change to the Basle Accord in 1995.
The effect of the proposed modification
would be to exclude from the OECDbased group of countries which are
eligible for the lower risk weights any
country that has rescheduled its
external sovereign debt within the
previous five years.
DATES: Comments must be received on
or before December 13,1994.
ADDRESSES: Interested parties are
invited to submit written comments to
any or all of the agencies. Each agency
will share the comments that it receives
with the other agencies.
SUMMARY:
FOR FURTHER INFORMATION CONTACT:
OCC: Geoffrey White, Senior
International Economic Advisor,
International Banking and Finance
Division, (202) 874—4730; Ronald
Shimabukuro, Senior Attorney, Bank
Operations and Assets Division, (202)
874-4460; or Roger Tufts, Senior
Economic Advisor, Office of the Chief
National bank Examiner, (202) 8745070.
FRB: Roger Cole, Deputy Associate
Director (202/452-2618), Norah Barger,
Manager (202/452-2402), Robert
Motyka, Supervisory Financial Analyst
(202/452-3621), Division of Banking
Supervision and Regulation; or Greg
Baer, Managing Senior Counsel (202/
452-3236), Legal Division. For the
hearing impaired only,
Telecommunication Device for the Deaf,
Dorothea Thompson (202)/452-3544).
SUPPLEMENTARY INFORMATION:
I. Background
In 1988 the central bank governors of
the G-10 countries endorsed
international capital standards (the
Basle Accord)1*establishing a risk-based
1T h e B a sle A cco rd w a s p ro p o se d by th e B a sle
C o m m ittee, w h ic h c o m p r ise s re p r ese n ta tiv es o f th e
cen tra l b a n k s a n d su p e r v iso r y a u th o r itie s from th e
G - 1 0 c o u n tr ie s (B elg iu m . C anada, F ra n ce, G erm an y,
framework for measuring the capital
adequacy of internationally-active
banks. Under the framework, riskweighted assets are calculated by
assigning assets and off-balance-sheet
items to broad categories based
primarily on their credit risk, that is, the
risk that a banking organization will
incur a loss due to an obligor or
counterparty default on a transaction.
Risk weights range from zero percent,
for assets with minimal credit risk (such
as U.S. Treasury securities), to 100
percent, which is the risk weight that
applies to most private sector claims,
including all commercial loans.
While the Basle Accord primarily
focuses on credit risk, it also
incorporates country transfer risk
considerations.2 In addressing transfer
risk, the Basle Committee members
examined several methods for assigning
obligations of foreign countries to the
various risk categories. Ultimately, the
Basle Committee decided to use a
defined group of countries considered to
be of high credit standing as the basis
for differentiating claims on foreign
governments and banks. For this
purpose, the Basle Committee
determined this group as the full
members of the Organization for
Economic Cooperation and
Development (OECD), as well as
countries that have concluded special
lending arrangements with the
International Monetary Fund (IMF)
associated with the IMF’s General
Arrangements to Borrow.3 These
Italy. Japan, the Netherlands, Sweden, S w itzerla n d ,
the United Kingdom, and the United States) and
Luxembourg.
In 1 9 8 9 th e B o a rd a d o p te d risk -b a sed ca p ita l
g u id e lin e s im p le m e n tin g th e B a sle A cco rd for state
m em b er b a n k s a n d b a n k h o ld in g c o m p a n ie s.
2 T ransfer risk g e n e r a lly refers to th e p o s s ib ility
that an a s se t c a n n o t b e se r v ic e d in th e cu rr en cy o f
p a y m en t b e c a u s e o f a lack of, or restrain ts o n , th e
a v a ila b ility o f n e e d e d foreign ex c h a n g e in th e
co u n try o f th e o b lig o r .
3 T h e OECD is a n in ter n a tio n a l o rg a n iz a tio n o f
c o u n trie s w h ic h are co m m itte d to m a rk et-o rien ted
e c o n o m ic p o lic ie s , in c lu d in g th e p ro m o tio n o f
p rivate en te r p r ise a n d free m arket prices: liberal
trade p o lic ie s ; a n d th e a b se n c e o f ex c h a n g e
co n tro ls. F u ll m em b ers o f th e OECD at th e tim e the
B a sle A cco rd w a s en d o rsed in c lu d e d A ustra lia .
A u stria , B e lg iu m , C anad a, D enm ark, F in la n d ,
France, G erm a n y , G reece, Icela n d , Ireland , Italy,
Japan, L u x em b o u rg , th e N eth erla n d s, N e w Z ea la n d .
N o rw a y , P o rtu g a l, S p a in , S w e d e n . S w itz e r la n d .
T u rk ey, th e U n ite d K in g d o m , a n d th e U n ited States.
In M ay 1 9 9 4 , M e x ic o w a s a cc ep te d a s a fu ll m em b er
o f th e OECD. In a d d itio n , S a u d i A rabia has
c o n c lu d e d s p e c ia l le n d in g a rrangem ents a sso c ia ted
w ith th e I n te rn a tio n a l M on etary F u n d ’s G eneral
A rra n g em en ts to B orrow .
¥
A
/Cl 3 ^
Federal R egister / VoL 59, No. 198 / Friday, October 14, 1S94 / Proposed R ides
countries ere referred to as the OECDbased group o f countries 4*and
encompass most of the major industrial
countries, including all members of the
G—10 and the European Union.
Under both the Basle Accord and the
agencies’ guidelines, claims on the
governments -and banks o f the OECDbased group of countries generally
receive lower risk weights than
corresponding claims on the
governments and banks of non-OECD
countries. Specifically, the ^ e n d e s ’
guidelines provide for the following
treatment:
• Direct claims on, and the portions
of claims that are directly and
unconditionally .guaranteed by, OECDbased central governments (including
central banks) are assigned to the zero
percent risk weight category. Claims on
central governments outside the OECDbased group are assigned to the zero
percent risk weight category7only if such
claims are denominated in the national
currency and funded by liabilities in the
same currency,
« Claims .conditionally guaranteed by
OECD-based central governments and
claims collateralized by securities
issued or guaranteed by OECD-based
central governments generally are
assigned to the 2 0 percent risk weight
category. The same types of claim s on
non-OECD countries are assigned to the
100 percent risk category.
• Long-term claims on OECD banks
are assigned to the 20 percent riskweight category. Long-term claims on
non-OECD banks are assigned to the 100
percent risk category. fShort-term claims
on all banks, whether they are members
of the OECD-hased group of countries -or
not, are assigned a 20 percent risk
weight.)
• General obligation bonds that are
obligations of states or other political
subdivisions of the OECD-based group
of countries are assigned to the 20
percent risk category. Revenue bonds of
such political subdivisions are assigned
to the 50 percent risk category. Both
general obligation and revenue bonds of
political subdivisions o f non-OECD
countries are assigned to the 100
percent risk category.
Recently, the OECD has taken steps to
expand its membership. In light o f these
steps, the Basle Committee was urged to
clarify an ambiguity in the Basle Accord
as to whether the OECD members
eligible far the lower risk weights
4PRB regukticuxs defin e t h b group n s d ie “OECDbased group o f countries.'’ OGC regulations define
a membor o f th is group as an “OECD-based
country.” W hile th e choice o f w ords i s slightly
different, the-definitions are ■effectively the sam e,
and the us* o f a ith w defin ition in th is pream ble
shou ld be taken to .refer toh oth .
include only those members that were
in the OECD when the Basie Accord was
endorsed in 1988 or all members,
regardless of entry date into the OECD.
The Basle Committee also reviewed the
overall appropriateness of the criteria
the Basle Accord uses to determine
whether claims on a foreign government
or bank qualify for placement in a lower
risk category. A s part of this review, the
Basle Committee reassessed whether
membership in the OECD (or the
conclusion of special lending
arrangements with the IMF) would, by
itself, be sufficient to ensure that only
countries with relatively low transfer
risk would continue to he eligible for
lower risk weight treatment
On July 15,1994, the Basle Committee
made an announcement that clarified
that the reference in the Basle Accord to
OECD members applies to all current
members of the organization. The
announcement also skated that it is the
Basle Committee’s intention, subject to
national consultation, to record a
change to the Basle Accord in 1995 that
would modify the definition of the
OECD-based group of countries far riskbased capital purposes. The change, i f
adopted, would exclude from lower risk
weight treatment any country within the
OECD-based group o f countries that has
rescheduled its external sovereign debt
within the previous five years. The
Basle Committee announcement was
endorsed by the G -l 0 Governors.
II. The Agencies’ Proposal
In view of the Basle Committee’s
announcement, the agencies are
proposing to amend then respective
risk-based capital guidelines to modify
the definition o f the OECD-based group
of countries. Under the proposal, the
OECD-based group of countries would
continue to include countries that are
currently full members of the OECD,
regardless of entry date, as w ell as
countries that have concluded special
lending arrangements w ith the IMF
associated with the Fund’s General
Arrangements to Borrow, but w ould
exclude any country within this group
that has rescheduled its external
sovereign deht within the previous five
years. The effect o f the proposed
modification would be to clarify that
membership in the OECD-based group
of countries must coincide with
relatively low transfer risk in order for
a country to be eligible for differentiated
capital treatment.
For purposes o f this proposal, an
event of rescheduling of external
sovereign debt generally would include
renegotiations of terms arising from the
country’s inability or unwillingness to
meet its external debt service
52101
obligations. Renegotiations of debt in
the normal course of business generally
does not indicate transfer risk of the
kind that would preclude an OECDbased country from qualifying for lower
risk weight treatment. One example of
such a routine renegotiation would be a
renegotiation to allow the borrower to
take advantage of a change in market
conditions, such as a decline in interest
rates.
The agencies invite comment cm all
aspects of this proposal.
III. RegrrlatoTy Flexibility Act
The agencies hereby certify that
adoption o f this proposal would have a
significant economic impact on a
substantial number of small business
entities (in this case, small banking
organizations), in accord with the spirit
and purposes of the Regulatory
Flexibility Act {5 U..S.C. 601 et seq.). In
addition, because the risk-based capital
standards generally do not apply to
bank holding companies with
consolidated assets of less than $150
million, this proposal w ill not affect
such companies. Accordingly, no
regulatory flexibility analysis is
required.
IV. Paperwork Reduction Act
The agenoies have determined that
adoption of the proposed amendments
would not increase the regulatory
paperwork burden -of banking
organizations pursuant to the provisions
of the Paperwork Reduction Act (44
U.S.C. 3501 et seq.).
Executive Order 12866
The OCC has determined that this
proposed rule is not a significant
regulatory action, as that term is defined
by Executive Order 12866.
List of Subjects
12 CFR P a rt 3
Administrative practice and
procedure, Capital, National banks.
Reporting and recordkeeping
requirements, Risk.
12 CFR P art 2 0 8
Accounting, Agriculture, Banks,
banking, Capital adequacy, Confidential
business information, Currency, Federal
Reserve System, Reporting and
recordkeeping requirements, Securities,
State member banks.
12 CFR P art 2 2 5
Administrative practice and
procedure, Banks, banking, Capital
adequacy, Federal Reserve System,
Holding companies, Reporting and
recordkeeping requirements, Securities.
52102
Federal Register / Vol. 59, No. 198 / Friday, October 14, 1994 / Proposed Rules
Authority and Issuance
O ffice o f the Com ptroller of the Currency
12 CFR Chapter I
For the reasons set out in the joint
preamble, title 12, chapter I, part 3 of
the Code of Federal Regulations is
proposed to be amended as set forth
below.
PART 3—MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES
1. The authority citation for Part 3 is
revised to read as follows:
Authority: 12 U.S.C. 93a, 161,1818,
1828(n), 1828 note, 1831n note, 3907 and
3909.
2. In section 1 of appendix A to part
3, paragraph (c)(16) is revised to read as
follows:
Appendix A to Part 3—Risk-Based Capital
Guidelines
S ection 1. Purpose, A p p lic a b ility o f
G uidelines, a n d D efinitions.
*
*
*
*
III. * * *
B. * * *
^ * * * 22 * * *
22 The OECD-based group of countries
comprises all full members of the
Organization for Economic Cooperation and
Development (OECD), as w ell as countries
that have concluded special lending
arrangements with the International
Monetary Fund (IMF) associated with the
IMF’s General Arrangements to Borrow, but
excludes any country that has rescheduled its
external sovereign debt within the previous
five years. The OECD includes the following
countries: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany,
Greece, Iceland, Ireland, Italy, Japan,
Luxembourg, Mexico, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom,
and the United States. Saudi Arabia has
concluded special lending arrangements with
the IMF associated with the IMF’s General
Arrangements to Borrow.
*
*
*
*
*
*
(c) \ * *
(16) OECD-based cou n try means a member
of the grouping of countries that are full
members of the Organization of Economic
Cooperation and Development, plus
countries that have concluded special
lending arrangements with the International
Monetary Fund (IMF) associated with the
IMF’s General Arrangements to Borrow, but
excludes any country that has rescheduled its
external sovereign debt within the previous
five years. These countries are hereinafter
referred to as “OECD countries”.
*
*
*
*
*
Dated: October 4,1994
Eugene A. Ludwig,
C om ptroller o f the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint
preamble, the Board proposes to amend
12 CFR parts 208 and 225 as set forth
below:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
1. The authority citation for part 208
is revised to read as follows:
Authority: 12 U.S.C. 36, 248 (a) and (c),
321-338a, 3 7 ld ,461, 481-486, 601, 611,
1814, 1823(j), 1828(o), 18310, 1 8 3 1 p -l, 3105,
3310, 3331-3351, and 3906-3909; 15 U.S.C.
78b, 781(b), 781(g), 78l(i), 78o-4(c)(5), 78q,
78q—1 and 78w; 31 U.S.C. 5318.
2. Appendix A to part 208 is amended
by revising footnote 22 in section III.B.l.
to read as follows:
Appendix A to Part 208—Capital Adequacy
Guidelines for State Member Banks: RiskBased Measure
*
*
*
*
*
PART 225— BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
1. The authority citation for part 225
continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13),
1818,1831i, 1843(c)(8), 1844(b), 1972(1),
3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. Appendix A to part 225 is amended
by revising footnote 25 in section III.B.l.
to read as follows:
Appendix A To Part 225— Capital Adequacy
Guidelines for Bank Holding Companies:
Risk-Based Measure
*
*
*
*
*
III. * * *
B. * * *
1***25***
25 The OECD-based group of countries
comprises all full members of the
Organization for Economic Cooperation and
Development (OECD), as w ell as countries
that have concluded special lending
arrangements with the International
Monetary Fund (IMF) associated with the
IMF’s General Arrangements to Borrow, but
excludes any country that has rescheduled its
external sovereign debt within the previous
five years. The OECD includes the following
countries: Australia, Austria, Belgium,
Canada, Denmark, Finland, France, Germany,
Greece, Iceland, Ireland, Italy, Japan,
Luxembourg,. Mexico, Netherlands, New
Zealand, Norway, Portugal, Spain, Sweden,
Switzerland, Turkey, the United Kingdom,
and the United States. Saudi Arabia has
concluded special lending arrangements with
the IMF associated with the IMF’s General
Arrangements to Borrow.
*
*
*
*
*
By the order of the Board of Governors of
the Federal Reserve System, October 6,1994.
Jennifer J. Johnson,
D e p u ty Secretary o f the Board.
[FR Doc. 94-25299 Filed 10-13-94; 8:45 am)
BILUNG COOES:
4810-33-P; 8210-01-P
@FedFRASER