Federal Deposit Insurance Corporation
550 17th Street NW, Washington, DC 20429-9990
Financial Institution Letter
FIL-26-2012
June 18, 2012
RISK-BASED CAPITAL RULES
Final Rule on Risk-Based Capital Standards: Market Risk
Summary: The federal bank regulatory agencies (agencies) have jointly issued the attached final rule modifying the
risk-based capital standards for market risk. The final rule incorporates improvements to the current trading book capital
regime as proposed by the Basel Committee on Banking Supervision in Revisions to the Basel II Market Risk
Framework published in July 2009 and The Application of Basel II to Trading Activities and the Treatment of Double
Default Effects, published in July 2005.
Statement of Applicability to Institutions Under $1 Billion in Total Assets: The final rule applies only to banks
with aggregate trading assets and trading liabilities equal to 10 percent or more of quarter-end total assets, or
aggregate trading assets and liabilities equal to $1 billion or more.
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
Market Risk
Attachment:
Joint Notice of Final Rulemaking, Risk-
Based Capital Standards: Market Risk (PDF
Help)
Contact:
Karl Reitz, Senior Policy Analyst,
at kreitz@fdic.gov or (202) 898-6775
Bobby Bean, Associate Director, Capital
Markets Branch, at bbean@fdic.gov or (202)
898-6705
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 final rule:
Establishes more explicit eligibility criteria than the current market risk
capital rules for positions that receive market risk capital treatment;
sets requirements for prudent valuation, robust stress testing and the
control, oversight and validation mechanisms for models; and requires
banks to have an internal capital adequacy assessment for market
risk.
Introduces a stress-value-at-risk requirement, which better captures
market risk during periods of stress.
Introduces an incremental risk charge, which captures default and
migration risks at a 99.9 percent confidence level over a one-year
horizon.
Introduces a risk-based capital charge for correlation trading
positions.
Removes references to external ratings from the standardized specific
risk capital charges consistent with Section 939A of the Dodd-Frank
Wall Street Reform and Consumer Protection Act.Inactive
550 17th Street NW, Washington, DC 20429-9990
Financial Institution Letter
FIL-26-2012
June 18, 2012
RISK-BASED CAPITAL RULES
Final Rule on Risk-Based Capital Standards: Market Risk
Summary: The federal bank regulatory agencies (agencies) have jointly issued the attached final rule modifying the
risk-based capital standards for market risk. The final rule incorporates improvements to the current trading book capital
regime as proposed by the Basel Committee on Banking Supervision in Revisions to the Basel II Market Risk
Framework published in July 2009 and The Application of Basel II to Trading Activities and the Treatment of Double
Default Effects, published in July 2005.
Statement of Applicability to Institutions Under $1 Billion in Total Assets: The final rule applies only to banks
with aggregate trading assets and trading liabilities equal to 10 percent or more of quarter-end total assets, or
aggregate trading assets and liabilities equal to $1 billion or more.
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
Market Risk
Attachment:
Joint Notice of Final Rulemaking, Risk-
Based Capital Standards: Market Risk (PDF
Help)
Contact:
Karl Reitz, Senior Policy Analyst,
at kreitz@fdic.gov or (202) 898-6775
Bobby Bean, Associate Director, Capital
Markets Branch, at bbean@fdic.gov or (202)
898-6705
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 final rule:
Establishes more explicit eligibility criteria than the current market risk
capital rules for positions that receive market risk capital treatment;
sets requirements for prudent valuation, robust stress testing and the
control, oversight and validation mechanisms for models; and requires
banks to have an internal capital adequacy assessment for market
risk.
Introduces a stress-value-at-risk requirement, which better captures
market risk during periods of stress.
Introduces an incremental risk charge, which captures default and
migration risks at a 99.9 percent confidence level over a one-year
horizon.
Introduces a risk-based capital charge for correlation trading
positions.
Removes references to external ratings from the standardized specific
risk capital charges consistent with Section 939A of the Dodd-Frank
Wall Street Reform and Consumer Protection Act.Inactive
Financial Institution Letters
FIL-26-2012
June 18, 2012
Key Aspects of the Final Rule on Risk-Based Captial Standards:
Market Risk
I. Introduction
The attached interagency final rule sets forth the agencies’ implementation of the Basel Committee on Banking
Supervision (Basel Committee) revisions to the market risk capital framework, as detailed in Revisions to the Basel II
Market Risk and The Application of Basel II to Trading Activities and the Treatment of Double Default Effects, which were
published by the Basel Committee on Banking Supervision (Basel Committee) in July 2009 and July 2005, respectively.
The final rule applies to all banks with worldwide consolidated trading assets and liabilities equal to at least 10 percent of
total assets or $1 billion. Further, under the final rule the agencies have reserved the authority to require any bank to
adopt the rule for safety and soundness purposes.
II. Overview
The final rule modifies the existing risk-based capital requirements for market risk, which are based on the 1996 Basel
Committee Market Risk Amendment (MRA). The agencies’ current market risk capital rule 1 was intended to provide risk-
based capital requirements for banks with material trading assets and liabilities.
The agencies believe the modifications to the market risk capital framework adopted under the final rule are warranted
because of the large trading book losses suffered by banking organizations during the recent economic crisis. For
example, the current rule does not adequately capture the credit risk of trading positions and provides significant arbitrage
opportunities to move such positions between the current general risk-based capital rules and the current market risk
capital rule to lower capital requirements. Accordingly, among other changes, the final rule minimizes regulatory arbitrage
by applying a credit risk capital charge, that is, the incremental risk charge, to trading positions.
The final rule also removes references to credit ratings for calculating standardized specific risk capital charges for certain
assets, consistent with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In
place of credit rating-based approaches, the final rule provides methodologies for determining standardized specific risk
capital charges covered positions, including securitization positions.
III. Minimum Risk-Based Capital Requirements Under the Final Rule
The final rule applies to a bank’s “covered positions,” and specifies how each bank must calculate its capital requirement
for the market risk for these covered positions. The capital requirement for market risk is determined by calculating capital
requirements for general market risk and specific risk. Additionally, the final rule introduces several new capital
requirements, including a stressed-value-at-risk (SVaR) capital requirement, an incremental risk charge, and charges for
correlation trading positions.
Covered Positions. The existing rule does not specify with sufficient clarity which positions are eligible for treatment
under the market risk capital framework as opposed to the credit risk capital framework. As a result of this ambiguity,
banks can arbitrage the capital standards for market and credit risk by calculating capital for a given position under the
framework that resulted in the lowest capital requirement. The final rule addresses this concern by establishing specific
criteria that define which positions can be designated as covered positions. In addition to all foreign exchange and
commodity positions, covered positions include trading assets or liabilities held by the bank for the purpose of short-term
resale or with the intent of benefiting from actual or expected price movements or to lock in arbitrage profits. To further
reduce capital arbitrage opportunities, credit derivatives used to hedge banking book exposures (for example, loans) are
not covered positions. Under the final rule a bank is required to establish clearly defined policies and procedures for
identifying traded positions, factoring in the ability to hedge such positions with reference to a two-way market, and taking
into account liquidity considerations, as well as procedures to ensure prudent valuation of less liquid-traded positions.
Finally, the final rule requires a bank to establish a trading and hedging strategy, approved by senior management, which
articulates the expected holding period of the position and ensures sufficient controls are in place to preclude the use of
capital arbitrage strategies.Inactive
FIL-26-2012
June 18, 2012
Key Aspects of the Final Rule on Risk-Based Captial Standards:
Market Risk
I. Introduction
The attached interagency final rule sets forth the agencies’ implementation of the Basel Committee on Banking
Supervision (Basel Committee) revisions to the market risk capital framework, as detailed in Revisions to the Basel II
Market Risk and The Application of Basel II to Trading Activities and the Treatment of Double Default Effects, which were
published by the Basel Committee on Banking Supervision (Basel Committee) in July 2009 and July 2005, respectively.
The final rule applies to all banks with worldwide consolidated trading assets and liabilities equal to at least 10 percent of
total assets or $1 billion. Further, under the final rule the agencies have reserved the authority to require any bank to
adopt the rule for safety and soundness purposes.
II. Overview
The final rule modifies the existing risk-based capital requirements for market risk, which are based on the 1996 Basel
Committee Market Risk Amendment (MRA). The agencies’ current market risk capital rule 1 was intended to provide risk-
based capital requirements for banks with material trading assets and liabilities.
The agencies believe the modifications to the market risk capital framework adopted under the final rule are warranted
because of the large trading book losses suffered by banking organizations during the recent economic crisis. For
example, the current rule does not adequately capture the credit risk of trading positions and provides significant arbitrage
opportunities to move such positions between the current general risk-based capital rules and the current market risk
capital rule to lower capital requirements. Accordingly, among other changes, the final rule minimizes regulatory arbitrage
by applying a credit risk capital charge, that is, the incremental risk charge, to trading positions.
The final rule also removes references to credit ratings for calculating standardized specific risk capital charges for certain
assets, consistent with section 939A of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In
place of credit rating-based approaches, the final rule provides methodologies for determining standardized specific risk
capital charges covered positions, including securitization positions.
III. Minimum Risk-Based Capital Requirements Under the Final Rule
The final rule applies to a bank’s “covered positions,” and specifies how each bank must calculate its capital requirement
for the market risk for these covered positions. The capital requirement for market risk is determined by calculating capital
requirements for general market risk and specific risk. Additionally, the final rule introduces several new capital
requirements, including a stressed-value-at-risk (SVaR) capital requirement, an incremental risk charge, and charges for
correlation trading positions.
Covered Positions. The existing rule does not specify with sufficient clarity which positions are eligible for treatment
under the market risk capital framework as opposed to the credit risk capital framework. As a result of this ambiguity,
banks can arbitrage the capital standards for market and credit risk by calculating capital for a given position under the
framework that resulted in the lowest capital requirement. The final rule addresses this concern by establishing specific
criteria that define which positions can be designated as covered positions. In addition to all foreign exchange and
commodity positions, covered positions include trading assets or liabilities held by the bank for the purpose of short-term
resale or with the intent of benefiting from actual or expected price movements or to lock in arbitrage profits. To further
reduce capital arbitrage opportunities, credit derivatives used to hedge banking book exposures (for example, loans) are
not covered positions. Under the final rule a bank is required to establish clearly defined policies and procedures for
identifying traded positions, factoring in the ability to hedge such positions with reference to a two-way market, and taking
into account liquidity considerations, as well as procedures to ensure prudent valuation of less liquid-traded positions.
Finally, the final rule requires a bank to establish a trading and hedging strategy, approved by senior management, which
articulates the expected holding period of the position and ensures sufficient controls are in place to preclude the use of
capital arbitrage strategies.Inactive