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Preamble

Table of Contents
          - Introduction 
          - Scope 
          - Qualification 
          - Calculation of Tier 1 Capital and Total Qualifying Capital 
          - Calculation of Risk-Weighted Assets 
          - Operational Risk 
          - Disclosure 

List of Acronyms

Regulatory Flexibility Act Analysis

Paperwork Reduction Act

Plain Language

OCC Executive Order 12866

OTS Executive Order 12866 Determination

OCC Unfunded Mandates Reform Act of 1995 Determination

OTS Unfunded Mandates Reform Act of 1995 Determination

Proposed Regulatory Text

Table of Contents
        - Part I
        - General Provisions
        - Part II
        - Qualifying Capital
        - Part III
        - Qualification
        - Part IV
        - Risk-Weighted Assets for General Credit Risk
        - Part V 
        - Risk-Weighted Assets for Securitization Exposures
        - Part VI
        - Risk-Weighted Assets for Equity Exposures
        - Part VII
        - Risk-Weighted Assets for Operational Risk
        - Part VIII
        - Disclosure

List of Subjects

Authority and Issuance

OCC

Federal Reserve

FDIC

OTS

OCC

Federal Reserve

FDIC

OTS

Billing Codes

The agencies have long supported meaningful public disclosure by banks       with the objective of improving market discipline. The agencies recognize       the importance of market discipline in encouraging sound risk management       practices and fostering financial stability.

Pillar 3 of the New Accord, market discipline, complements the minimum       capital requirements and the supervisory review process by encouraging       market discipline through enhanced and meaningful public disclosure. These       proposed public disclosure requirements are intended to allow market participants       to assess key information about an institution's risk profile and its associated       level of capital. 

The agencies view public disclosure as an important complement to the advanced       approaches to calculating minimum regulatory risk-based capital requirements,       which will be heavily based on internal systems and methodologies. With       enhanced transparency of the advanced approaches, investors can better       evaluate a bank's capital structure, risk exposures, and capital adequacy.       With sufficient and relevant information, market participants can better       evaluate a bank's risk management performance, earnings potential and financial       strength.

Improvements in public disclosures come not only from regulatory standards,       but also through efforts by bank management to improve communications to       public shareholders and other market participants. In this regard, improvements       to risk management processes and internal reporting systems provide opportunities       to significantly improve public disclosures over time. Accordingly, the       agencies strongly encourage the management of each bank to regularly review       its public disclosures and enhance these disclosures, where appropriate,       to clearly identify all significant risk exposures – whether on- or       off-balance sheet – and their effects on the bank's financial condition       and performance, cash flow, and earnings potential. 

Some commenters to the ANPR indicated that the proposed disclosures were       burdensome, excessive, and overly prescriptive. Other commenters believed       that the information provided in the disclosures would not be comparable       across banks because each bank will use distinct internal methodologies       to generate the disclosures. These commenters also expressed concern that       some disclosures could be misinterpreted or misunderstood by the public.

The agencies believe, however, the required disclosures would enable market       participants to gain key insights regarding a bank's capital structure,       risk exposures, risk assessment processes, and ultimately, the capital       adequacy of the institution. Some of the proposed disclosure requirements       will be new disclosures for banks. Nonetheless, the agencies believe that       a significant amount of the proposed disclosure requirements are already       required by or consistent with existing GAAP, SEC disclosure requirements,       or regulatory reporting requirements for banks.

The public disclosure requirements would apply to the top-tier legal entity       that is a core or opt-in bank within a consolidated banking group (that       is, the top-tier BHC or DI that is a core or opt-in bank). In general,       DIs that are a subsidiary of a BHC or another DI would not be subject to       the disclosure requirements82       except that every DI must disclose total and tier 1 capital ratios       and their components, similar to current requirements. If a DI is not a       subsidiary of a BHC or another DI that must make the full set of disclosures,       the DI must make these disclosures.

The risks to which a bank is exposed and the techniques that it uses to       identify, measure, monitor, and control those risks are important factors       that market participants consider in their assessment of the institution.       Accordingly, each bank that is subject to the disclosure requirements must       have a formal disclosure policy approved by the board of directors that       addresses the institution's approach for determining the disclosures it       should make. The policy should address the associated internal controls       and disclosure controls and procedures. The board of directors and senior       management would be expected to ensure that appropriate verification of       the disclosures takes place and that effective internal controls and disclosure       controls and procedures are maintained. 

A bank should decide which disclosures are relevant for it based on the       materiality concept. Information would be regarded as material if its omission       or misstatement could change or influence the assessment or decision of       a user relying on that information for the purpose of making investment       decisions.

To the extent applicable, a bank would be able to fulfill its disclosure       requirements under this proposed rule by relying on disclosures made in       accordance with accounting standards or SEC mandates that are very similar       to the disclosure requirements in this proposed rule. In these situations,       a bank would explain material differences between the accounting or other       disclosure and the disclosures required under this proposed rule.

Consistent with longstanding requirements in the United States for robust       quarterly disclosures in financial and regulatory reports, and considering       the potential for rapid changes in risk profiles, the agencies would require       that quantitative disclosures be made quarterly. However, qualitative disclosures       that provide a general summary of a bank's risk management objectives and       policies, reporting system, and definitions may be disclosed annually,       provided any significant changes to these are disclosed in the interim.       The disclosures must be timely, that is, must be made no later than the       reporting deadlines for regulatory reports (for example, FR Y-9C) and financial       reports (for example, SEC Forms 10-Q and 10-K). When these deadlines differ,       the later deadline would be used. 

In some cases, management may determine that a significant change has occurred,       such that the most recent reported amounts do not reflect the bank's capital       adequacy and risk profile. In those cases, banks should disclose the general       nature of these changes and briefly describe how they are likely to affect       public disclosures going forward. These interim disclosures should be made       as soon as practicable after the determination that a significant change       has occurred.

The disclosures would have to be publicly available (for example, included       on a public website) for each of the last three years (that is, twelve       quarters) or such shorter time period since the bank entered its first       floor period. Except as discussed below, management would have some discretion       to determine the appropriate medium and location of the disclosures required       by this proposed rule. Furthermore, banks would have flexibility in formatting       their public disclosures, that is, the agencies are not specifying a fixed       format for these disclosures. 

Management would be encouraged to provide all of the required disclosures       in one place on the entity's public website. The public website address       would be reported in a regulatory report (for example, the FR Y-9C).83

Disclosure of tier 1 and total capital ratios must be provided in       the footnotes to the year-end audited financial statements.84       Accordingly, these disclosures must be tested by external auditors as part       of the financial statement audit. Disclosures that are not included in       the footnotes to the audited financial statements would not be required       to be subject to external audit reports for financial statements or internal       control reports from management and the external auditor. However, due       to the importance of reliable disclosures, the agencies would require the       chief financial officer to certify that the disclosures required by the       proposed rule are appropriate and that the board of directors and senior       management are responsible for establishing and maintaining an effective       internal control structure over financial reporting, including the information       required by this proposed rule.

The agencies believe that the proposed requirements strike an appropriate       balance between the need for meaningful disclosure and the protection of       proprietary and confidential information.85       Accordingly, the agencies believe that banks would be able to provide all       of these disclosures without revealing proprietary and confidential information.       However, in rare cases, disclosure of certain items of information required       in the proposed rule may prejudice seriously the position of a bank by       making public information that is either proprietary or confidential in       nature. In such cases, a reporting bank may request confidential treatment       for the information if the bank believes that disclosure of specific commercial       or financial information in the report would likely result in substantial       harm to its competitive position, or that disclosure of the submitted information       would result in unwarranted invasion of personal privacy. 

Question 61: The agencies seek commenters' views on all of the elements       proposed to be captured through the public disclosure requirements. In       particular, the agencies seek comment on the extent to which the proposed       disclosures balance providing market participants with sufficient information       to appropriately assess the capital strength of individual institutions,       fostering comparability from bank to bank, and reducing burden on the banks       that are reporting the information. 

The public disclosure requirements are comprised of 11 tables that provide       important information to market participants on the scope of application,       capital, risk exposures, risk assessment processes, and, hence, the capital       adequacy of the institution. Again, the agencies note that the substantive       content of the tables is the focus of the disclosure requirements, not       the tables themselves. The table numbers below refer to the table numbers       in the proposed rule.

Table 11.1 disclosures, Scope of Application, include a description of       the level in the organization to which the disclosures apply and an outline       of any differences in consolidation for accounting and regulatory capital       purposes, as well as a description of any restrictions on the transfer       of funds and capital within the organization. These disclosures provide       the basic context underlying regulatory capital calculations. 

Table 11.2 disclosures, Capital Structure, provide information on various       components of regulatory capital available to absorb losses and allow for       an evaluation of the quality of the capital available to absorb losses       within the bank.

Table 11.3 disclosures, Capital Adequacy, provide information about how       a bank assesses the adequacy of its capital and require that the bank disclose       its minimum capital requirements for significant risk areas and portfolios.       The table also requires disclosure of the regulatory capital ratios of       the consolidated group and each DI subsidiary. Such disclosures provide       insight into the overall adequacy of capital based on the risk profile       of the organization.

Tables 11.4, 11.5, and 11.7 disclosures, Credit Risk, provide market       participants with insight into different types and concentrations of credit       risk to which the bank is exposed and the techniques the bank uses to measure,       monitor, and mitigate those risks. These disclosures are intended to enable       market participants to assess the credit risk exposures under the IRB framework,       without revealing proprietary information or duplicating the supervisor's       fundamental review of the bank's IRB framework. Table 11.6 provides       the disclosure requirements related to credit exposures from derivatives.       This table was added as a supplement to the public disclosures initially       in the New Accord as a result of the BCBS's additional efforts to address       certain exposures arising from trading activities. See the July 2005 BCBS       publication entitled "The Application of Basel II to Trading       Activities and the Treatment of Double Default Effects."

Table 11.8 disclosures, Securitization, provide information to market participants       on the amount of credit risk transferred and retained by the organization       through securitization transactions and the types of products securitized       by the organization. These disclosures provide users a better understanding       of how securitization transactions impact the credit risk of the bank.

Table 11.9 disclosures, Operational Risk, provide insight into the bank's       application of the AMA for operational risk and what internal and external       factors are considered in determining the amount of capital allocated to       operational risk. 

Table 11.10 disclosures, Equities, provide market participants with an       understanding of the types of equity securities held by the bank and how       they are valued. The table also provides information on the capital allocated       to different equity products and the amount of unrealized gains and losses.    

Table 11.11 disclosures, Interest Rate Risk in Non-Trading Activities,       provide information about the potential risk of loss that may result from       changes in interest rates and how the bank measures such risk.

In addition to the public disclosures that would be required by the consolidated       banking organization subject to the advanced approaches, the agencies would       require certain additional regulatory reporting from BHCs, their subsidiary       DIs, and DIs applying the advanced approaches that are not subsidiaries       of BHCs. The agencies believe that the reporting of key risk parameter       estimates by each DI applying the advanced approaches will provide the       primary Federal supervisor and other relevant supervisors with data important       for assessing the reasonableness and accuracy of the institution's calculation       of its minimum capital requirements under this rule and the adequacy of       the institution's capital in relation to its risks. This information would       be collected through regulatory reports. The agencies believe that requiring       certain common reporting across banks will facilitate comparable application       of the proposed rules. 

In this regard, the agencies published for comment elsewhere in today's Federal Register       a package of proposed reporting schedules.       The package includes a summary schedule with aggregate data that would       be available to the general public. It also includes supporting schedules       that would be viewed as confidential supervisory information. These schedules       are broken out by exposure category and would collect risk parameter and       other pertinent data in a systematic manner. The agencies also are exploring       ways to obtain information that would improve supervisors' understanding       of the causes behind changes in risk-based capital requirements. For example,       certain data would help explain whether movements are attributable to changes       in key risk parameters or other factors. Under the proposed rule, banks       would begin reporting this information during their parallel run on a confidential       basis. The agencies will share this information with each other for calibration       and other analytical purposes. Question 62: Comments on regulatory       reporting issues may be submitted in response to this NPR as well as through       the regulatory reporting request for comment noted above.

 

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    -  The bank regulatory reports and Thrift Financial          Reports will be revised to collect some additional Basel II-related          information, as described below in the regulatory reporting section.   Return to text
    -  Alternatively, banks would be permitted to          provide the disclosures in more than one place, as some of them may          be included in public financial reports (for example, in Management's          Discussion and Analysis included in SEC filings) or other regulatory          reports (for example, FR Y-9C Reports). The agencies would require          such banks to provide a summary table on their public website that specifically          indicates where all the disclosures may be found (for example, regulatory          report schedules, pages numbers in annual reports).   Return to text
    -  These ratios are required to be disclosed          in the footnotes to the audited financial statements pursuant to existing          GAAP requirements in Chapter 17 of the "AICPA Audit and Accounting          Guide for Depository and Lending Institutions: Banks, Savings institutions,          Credit unions, Finance companies and Mortgage companies."   Return to text
    -  Proprietary information encompasses information          that, if shared with competitors, would render a bank's investment in          these products/systems less valuable, and, hence, could undermine its          competitive position. Information about customers is often confidential,          in that it is provided under the terms of a legal agreement or counterparty          relationship.   Return to text

Basel II Capital AccordNotice of Proposed Rulemaking (NPR)

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