Federal Deposit Insurance Corporation
550 17th Street NW, Washington, DC 20429-9990
Financial Institution Letter
FIL-24-2012
June 18, 2012
REGULATORY CAPITAL RULES
Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule
Summary: The federal bank regulatory agencies (the agencies) have jointly issued the attached Notice of Proposed
Rulemaking (proposed rule) that would amend the advanced approaches risk-based capital rules (advanced
approaches rules) to incorporate revisions to the Basel capital framework published by the Basel Committee on
Banking Supervision (BCBS), and would remove references to credit ratings, consistent with section 939A of the Dodd-
Frank Act. It also would propose to apply the market risk capital rules to state savings associations.
Statement of Applicability to Institutions Under $1 Billion in Total Assets: This Financial Institution Letter is
generally not applicable to banks with total assets less than $1 billion. The market risk rules would, however, apply to
those institutions with trading assets and liabilities that exceed 10 percent of total assets.
Distribution:
FDIC-Supervised Banks (Commercial and
Savings
Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer
Related Topics:
Risk-Based Capital Rules
12 CFR Part 325
Basel III
Attachment:
Regulatory Capital Rules: Advanced
Approaches Risk-Based Capital Rules;
Market Risk Capital Rules - PDF (PDF Help)
Contact:
Bobby Bean, Associate Director, Capital
Markets Branch, at bbean@fdic.gov or (202)
898-6705
Ryan Billingsley, Senior Policy Analyst,
at rbillingsley@fdic.gov or (202) 898-3797
Karl Reitz, Senior Policy Analyst,
at kreitz@fdic.gov or (202) 898-6775
Note:
FDIC Financial Institution Letters (FILs) may
be accessed from the FDIC's Web site at
www.fdic.gov/news/news/financial/2012/inde
x.html.
To receive FILs electronically, please visit
http://www.fdic.gov/about/
subscriptions/fil.html.
Paper copies may be obtained through the
FDIC's Public Information Center, 3501
Fairfax Drive, E-1002, Arlington, VA 22226
(1-877-275-3342 or 703-562-2200).
Highlights:
The proposed rule:
Introduces a credit valuation adjustment (CVA) capital requirement to
address a potential increase in CVA due to changes in counterparty
credit spreads.
Includes a revised treatment for transactions with central
counterparties (CCP) whereby transactions conducted through a
qualifying CCP would receive a more favorable capital treatment
relative to those transactions conducted through a CCP.
Removes the ratings-based and the internal assessment approaches
from the securitization hierarchy and substitutes in their place a
simplified supervisory formula approach (SSFA).
Enhances requirements for the calculation of counterparty credit risk
including additional requirements for the use of stressed inputs and
enhanced stress testing analyses in the internal models methodology.
Incorporates an increase in asset value correlation factor used to
determine the capital requirement for certain wholesale exposure.
Revise the market risk rules to apply it to state federal savings
associations.Inactive
550 17th Street NW, Washington, DC 20429-9990
Financial Institution Letter
FIL-24-2012
June 18, 2012
REGULATORY CAPITAL RULES
Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule
Summary: The federal bank regulatory agencies (the agencies) have jointly issued the attached Notice of Proposed
Rulemaking (proposed rule) that would amend the advanced approaches risk-based capital rules (advanced
approaches rules) to incorporate revisions to the Basel capital framework published by the Basel Committee on
Banking Supervision (BCBS), and would remove references to credit ratings, consistent with section 939A of the Dodd-
Frank Act. It also would propose to apply the market risk capital rules to state savings associations.
Statement of Applicability to Institutions Under $1 Billion in Total Assets: This Financial Institution Letter is
generally not applicable to banks with total assets less than $1 billion. The market risk rules would, however, apply to
those institutions with trading assets and liabilities that exceed 10 percent of total assets.
Distribution:
FDIC-Supervised Banks (Commercial and
Savings
Suggested Routing:
Chief Executive Officer
Chief Financial Officer
Chief Risk Officer
Related Topics:
Risk-Based Capital Rules
12 CFR Part 325
Basel III
Attachment:
Regulatory Capital Rules: Advanced
Approaches Risk-Based Capital Rules;
Market Risk Capital Rules - PDF (PDF Help)
Contact:
Bobby Bean, Associate Director, Capital
Markets Branch, at bbean@fdic.gov or (202)
898-6705
Ryan Billingsley, Senior Policy Analyst,
at rbillingsley@fdic.gov or (202) 898-3797
Karl Reitz, Senior Policy Analyst,
at kreitz@fdic.gov or (202) 898-6775
Note:
FDIC Financial Institution Letters (FILs) may
be accessed from the FDIC's Web site at
www.fdic.gov/news/news/financial/2012/inde
x.html.
To receive FILs electronically, please visit
http://www.fdic.gov/about/
subscriptions/fil.html.
Paper copies may be obtained through the
FDIC's Public Information Center, 3501
Fairfax Drive, E-1002, Arlington, VA 22226
(1-877-275-3342 or 703-562-2200).
Highlights:
The proposed rule:
Introduces a credit valuation adjustment (CVA) capital requirement to
address a potential increase in CVA due to changes in counterparty
credit spreads.
Includes a revised treatment for transactions with central
counterparties (CCP) whereby transactions conducted through a
qualifying CCP would receive a more favorable capital treatment
relative to those transactions conducted through a CCP.
Removes the ratings-based and the internal assessment approaches
from the securitization hierarchy and substitutes in their place a
simplified supervisory formula approach (SSFA).
Enhances requirements for the calculation of counterparty credit risk
including additional requirements for the use of stressed inputs and
enhanced stress testing analyses in the internal models methodology.
Incorporates an increase in asset value correlation factor used to
determine the capital requirement for certain wholesale exposure.
Revise the market risk rules to apply it to state federal savings
associations.Inactive
Financial Institution Letters
FIL-24-2012
June 18, 2012
Key Aspects of the Proposed Rule on Regulatory Capital Rules: Standardized Approach for Risk-Weighted
Assets; Market Discipline and Disclosure Requirements
Overview
To address weaknesses in the existing capital framework that were manifest during the recent financial crisis, the BCBS
introduced a series of revisions to the advanced approaches risk-based capital framework in Enhancements to the Basel
II framework (BCBS enhancements) and Basel III: A global regulatory framework for more resilient banks and banking
systems (Basel III). In this proposed rule, the agencies are proposing to implement the BCBS enhancements, as
discussed below, in a manner that is consistent with the requirements of section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
The proposed rule would revise the agencies' advanced approaches rules to improve and strengthen modeling standards,
the treatment of counterparty credit risk and securitization exposures, as well as disclosure requirements. However,
consistent with section 939A of the Dodd-Frank Act, the proposed rule would not include the BCBS enhancements to the
ratings-based approach for securitization exposures because it relies on the use of credit ratings.
Summary of the Proposed Rule
Counterparty Credit Risk
Credit Valuation Adjustment (CVA) Capital Requirement
Consistent with Basel III, the proposed rule would require a bank to directly reflect CVA risk through an additional capital
requirement. The CVA capital requirement is designed to address a potential increase in CVA due to changes in
counterparty credit spreads.
Under the proposed rule a bank may use one of two approaches to determine its CVA capital requirement, an advanced
or simple CVA approach. The advanced CVA approach is based on the VaR model used by a bank to calculate specific
risk under the market risk rule. In contrast, the simple CVA approach is based on the use of a supervisory formula and
internally estimated probability-of-default.
Exposures to Central Counterparties
To incentivize the use of central counterparties (CCPs) that satisfy internationally recognized standards for settling and
clearing processes (that is, qualified central counterparties or QCCPs), the proposed rule also proposes a more risk-
sensitive treatment for transactions with CCPs, consistent with Basel III. Under the proposed rule, transactions conducted
through a QCCP would receive a more favorable capital treatment relative to those conducted through a CCP. Similarly,
the proposed rule would establish a capital requirement for a bank's default fund contribution1 to a CCP, with a more
favorable capital treatment for default fund contributions to a QCCP relative to those to a CCP.
Wrong-Way Risk, Margin Period of Risk, and Stressed Inputs
The proposed rule would require a bank's risk-management processes to identify, monitor, and control wrong-way risk
throughout the life of an exposure using stress testing and scenario analyses. In addition, the proposed rule would
improve the internal models methodology (IMM), which is currently used by a bank to determine its capital requirement for
counterparty credit risk under the advanced approaches rules, through additional requirements for the use of stressed
inputs and enhanced stress testing analyses.
With respect to counterparty credit risk more generally, the proposal also would increase the holding period and margin
period of risk that a bank may use to determine its capital requirement for repo-style transactions, over-the-counter
derivatives, and eligible model loans to address liquidity concerns that arose in settling or closing-out collateralized
transactions during the recent crisis.Inactive
FIL-24-2012
June 18, 2012
Key Aspects of the Proposed Rule on Regulatory Capital Rules: Standardized Approach for Risk-Weighted
Assets; Market Discipline and Disclosure Requirements
Overview
To address weaknesses in the existing capital framework that were manifest during the recent financial crisis, the BCBS
introduced a series of revisions to the advanced approaches risk-based capital framework in Enhancements to the Basel
II framework (BCBS enhancements) and Basel III: A global regulatory framework for more resilient banks and banking
systems (Basel III). In this proposed rule, the agencies are proposing to implement the BCBS enhancements, as
discussed below, in a manner that is consistent with the requirements of section 939A of the Dodd-Frank Wall Street
Reform and Consumer Protection Act.
The proposed rule would revise the agencies' advanced approaches rules to improve and strengthen modeling standards,
the treatment of counterparty credit risk and securitization exposures, as well as disclosure requirements. However,
consistent with section 939A of the Dodd-Frank Act, the proposed rule would not include the BCBS enhancements to the
ratings-based approach for securitization exposures because it relies on the use of credit ratings.
Summary of the Proposed Rule
Counterparty Credit Risk
Credit Valuation Adjustment (CVA) Capital Requirement
Consistent with Basel III, the proposed rule would require a bank to directly reflect CVA risk through an additional capital
requirement. The CVA capital requirement is designed to address a potential increase in CVA due to changes in
counterparty credit spreads.
Under the proposed rule a bank may use one of two approaches to determine its CVA capital requirement, an advanced
or simple CVA approach. The advanced CVA approach is based on the VaR model used by a bank to calculate specific
risk under the market risk rule. In contrast, the simple CVA approach is based on the use of a supervisory formula and
internally estimated probability-of-default.
Exposures to Central Counterparties
To incentivize the use of central counterparties (CCPs) that satisfy internationally recognized standards for settling and
clearing processes (that is, qualified central counterparties or QCCPs), the proposed rule also proposes a more risk-
sensitive treatment for transactions with CCPs, consistent with Basel III. Under the proposed rule, transactions conducted
through a QCCP would receive a more favorable capital treatment relative to those conducted through a CCP. Similarly,
the proposed rule would establish a capital requirement for a bank's default fund contribution1 to a CCP, with a more
favorable capital treatment for default fund contributions to a QCCP relative to those to a CCP.
Wrong-Way Risk, Margin Period of Risk, and Stressed Inputs
The proposed rule would require a bank's risk-management processes to identify, monitor, and control wrong-way risk
throughout the life of an exposure using stress testing and scenario analyses. In addition, the proposed rule would
improve the internal models methodology (IMM), which is currently used by a bank to determine its capital requirement for
counterparty credit risk under the advanced approaches rules, through additional requirements for the use of stressed
inputs and enhanced stress testing analyses.
With respect to counterparty credit risk more generally, the proposal also would increase the holding period and margin
period of risk that a bank may use to determine its capital requirement for repo-style transactions, over-the-counter
derivatives, and eligible model loans to address liquidity concerns that arose in settling or closing-out collateralized
transactions during the recent crisis.Inactive