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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

On August 4, 2003, the agencies issued an advance notice of proposed rulemaking (ANPR)    (68 FR 45900) that sought public comment on a new risk-based regulatory    capital framework based on the Basel Committee on Banking Supervision (BCBS)2    April 2003 consultative paper entitled "The New Basel Capital Accord" (Proposed    New Accord). The Proposed New Accord set forth a "three pillar"    framework encompassing risk-based capital requirements for credit risk, market    risk, and operational risk (Pillar 1); supervisory review of capital    adequacy (Pillar 2); and market discipline through enhanced public    disclosures (Pillar 3). The Proposed New Accord incorporated several    methodologies for determining a bank's risk-based capital requirements for    credit, market, and operational risk.3

The ANPR sought comment on selected regulatory capital approaches contained    in the Proposed New Accord that the agencies believe are appropriate for large,    internationally active U.S. banks. These approaches include the internal ratings-based (IRB)    approach for credit risk and the advanced measurement approaches (AMA)    for operational risk (together, the advanced approaches). The IRB framework    uses risk parameters determined by a bank's internal systems in the calculation    of the bank's credit risk capital requirements. The AMA relies on a bank's    internal estimates of its operational risks to generate an operational risk    capital requirement for the bank. The ANPR included a number of questions    highlighting various issues for the industry's consideration. The agencies    received approximately 100 public comments on the ANPR from banks, trade associations,    supervisory authorities, and other interested parties. These comments addressed    the agencies' specific questions as well as a range of other issues. Commenters    generally encouraged further development of the framework, and most supported    the overall direction of the ANPR. Commenters did, however, raise a number    of conceptual and technical issues that they believed required additional    consideration. 

Since the issuance of the ANPR, the agencies have worked domestically and    with other BCBS member countries to modify the methodologies in the Proposed    New Accord to reflect comments received during the international consultation    process and the U.S. ANPR comment process. In June 2004, the BCBS issued    a document entitled "International Convergence of Capital Measurement    and Capital Standards: A Revised Framework" (New Accord or Basel II).    The New Accord recognizes developments in financial products, incorporates    advances in risk measurement and management practices, and assesses capital    requirements that are generally more sensitive to risk. It is intended for    use by individual countries as the basis for national consultation and implementation.    Accordingly, the agencies are issuing this proposed rule to implement the    New Accord for banks in the United States.

The framework outlined in this proposal (IRB framework) is intended to produce    risk-based capital requirements that are more risk-sensitive than the existing    risk-based capital rules of the agencies (general risk-based capital rules).    The proposed framework seeks to build on improvements to risk assessment approaches    that a number of large banks have adopted over the last decade. In particular,    the proposed framework requires banks to assign risk parameters to exposures    and provides specific risk-based capital formulas that would be used to transform    these risk parameters into risk-based capital requirements. 

The proposed framework is based on the "value-at-risk" (VaR)    approach to measuring credit risk and operational risk. VaR modeling techniques    for measuring risk have been the subject of economic research and are used    by large banks. The proposed framework has benefited significantly from comments    on the ANPR, as well as consultations organized in conjunction with the BCBS's    development of the New Accord. Because bank risk measurement practices are    both continually evolving and subject to model and other errors, the proposed    framework should be viewed less as an effort to produce a statistically precise    measurement of risk, and more as an effort to improve the risk sensitivity    of the risk-based capital requirements for banks. 

The proposed framework's conceptual foundation is based on the view that risk    can be quantified through the assessment of specific characteristics of the    probability distribution of potential losses over a given time horizon. This    approach assumes that a suitable estimate of that probability distribution,    or at least of the specific characteristics to be measured, can be produced.    Figure 1 illustrates some of the key concepts associated with the proposed    framework. The figure shows a probability distribution of potential losses    associated with some time horizon (for example, one year). It could reflect,    for example, credit losses, operational losses, or other types of losses.

The area under the curve to the right of a particular loss amount is the probability    of experiencing losses exceeding this amount within a given time horizon.    The figure also shows the statistical mean of the loss distribution, which    is equivalent to the amount of loss that is "expected" over the    time horizon. The concept of "expected loss" (EL) is distinguished    from that of "unexpected loss" (UL), which represents potential    losses over and above the expected loss amount. A given level of unexpected    loss can be defined by reference to a particular percentile threshold of the    probability distribution. In the figure, for example, the 99.9th percentile    is shown. Unexpected losses, measured at the 99.9th percentile    level, are equal to the value of the loss distribution corresponding to the    99.9th percentile, less the amount of expected losses. This    is shown graphically at the bottom of the figure.

The particular percentile level chosen for the measurement of unexpected losses    is referred to as the "confidence level" or the "soundness    standard" associated with the measurement. If capital is available to    cover losses up to and including this percentile level, then the bank will    remain solvent in the face of actual losses of that magnitude. Typically,    the choice of confidence level or soundness standard reflects a very high    percentile level, so that there is a very low estimated probability that actual    losses would exceed the unexpected loss amount associated with that confidence    level or soundness standard.

Assessing risk and assigning regulatory capital requirements by reference    to a specific percentile of a probability distribution of potential losses    is commonly referred to as a VaR approach. Such an approach was adopted by    the FDIC, Board, and OCC for assessing a bank's risk-based capital requirements    for market risk in 1996 (market risk amendment or MRA). Under the MRA,    a bank's own internal models are used to estimate the 99th percentile    of the bank's market risk loss distribution over a ten-business-day horizon.    The bank's market risk capital requirement is based on this VaR estimate,    generally multiplied by a factor of three. The agencies implemented this multiplication    factor to provide a prudential buffer for market volatility and modeling error. 

The conceptual foundation of this proposal's approach to credit risk capital    requirements is similar to the MRA's approach to market risk capital requirements,    in the sense that each is VaR-oriented. That is, the proposed framework bases    minimum credit risk capital requirements largely on estimated statistical    measures of credit risk. Nevertheless, there are important differences between    this proposal and the MRA. The MRA approach for assessing market risk capital    requirements currently employs a nominal confidence level of 99.0 percent    and a ten-business-day horizon, but otherwise provides banks with substantial    modeling flexibility in determining their market risk loss distribution and    capital requirements. In contrast, the IRB framework for assessing credit    risk capital requirements is based on a 99.9 percent nominal confidence level,    a one-year horizon, and a supervisory model of credit losses embodying particular    assumptions about the underlying drivers of portfolio credit risk, including    loss correlations among different asset types.4

The IRB framework is broadly similar to the credit VaR approaches used by    many banks as the basis for their internal assessment of the economic capital    necessary to cover credit risk. It is common for a bank's internal credit    risk models to consider a one-year loss horizon, and to focus on a high loss    threshold confidence level. As with the internal credit VaR models used by    banks, the output of the risk-based capital formulas in the IRB framework    is an estimate of the amount of credit losses above expected credit losses (ECL)    over a one-year horizon that would only be exceeded a small percentage of    the time. The agencies believe that a one-year horizon is appropriate because    it balances the fact that banking book positions likely could not be easily    or rapidly exited with the possibility that in many cases a bank can cover    credit losses by raising additional capital should the underlying credit problems    manifest themselves gradually. The nominal confidence level of the IRB risk-based    capital formulas (99.9 percent) means that if all the assumptions in    the IRB supervisory model for credit risk were correct for a bank, there would    be less than a 0.1 percent probability that credit losses at the bank    in any year would exceed the IRB risk-based capital requirement.5

As noted above, the supervisory model of credit risk underlying the IRB framework    embodies specific assumptions about the economic drivers of portfolio credit    risk at banks. As with any modeling approach, these assumptions represent    simplifications of very complex real-world phenomena and, at best, are only    an approximation of the actual credit risks at any bank. To the extent these    assumptions (described in greater detail below) do not characterize a given    bank precisely, the actual confidence level implied by the IRB risk-based    capital formulas may exceed or fall short of the framework's nominal 99.9 percent confidence level. 

In combination with other supervisory assumptions and parameters underlying    this proposal, the IRB framework's 99.9 percent nominal confidence level    reflects a judgmental pooling of available information, including supervisory    experience. The framework underlying this proposal reflects a desire on the    part of the agencies to achieve (i) relative risk-based capital requirements    across different assets that are broadly consistent with maintaining at least    an investment grade rating (for example, at least BBB) on the liabilities    funding those assets, even in periods of economic adversity; and (ii) for    the U.S. banking system as a whole, aggregate minimum regulatory capital requirements    that are not a material reduction from the aggregate minimum regulatory capital    requirements under the general risk-based capital rules.

A number of important explicit generalizing assumptions and specific parameters    are built into the IRB framework to make the framework applicable to a range    of banks and to obtain tractable information for calculating risk-based capital    requirements. Chief among the assumptions embodied in the IRB framework are:    (i) assumptions that a bank's credit portfolio is infinitely granular;    (ii) assumptions that loan defaults at a bank are driven by a single,    systematic risk factor; (iii) assumptions that systematic and non-systematic    risk factors are log-normal random variables; and (iv) assumptions regarding    correlations among credit losses on various types of assets. 

The specific risk-based capital formulas in this proposed rule require the    bank to estimate certain risk parameters for its wholesale and retail exposures,    which the bank may do using a variety of techniques. These risk parameters    are probability of default (PD), expected loss given default (ELGD),    loss given default (LGD), exposure at default (EAD), and, for wholesale    exposures, effective remaining maturity (M). The risk-based capital formulas    into which the estimated risk parameters are inserted are simpler than the    economic capital methodologies typically employed by banks (which often require    complex computer simulations). In particular, an important property of the    IRB risk-based capital formulas is portfolio invariance. That is, the risk-based    capital requirement for a particular exposure generally does not depend on    the other exposures held by the bank. Like the general risk-based capital    rules, the total credit risk capital requirement for a bank's wholesale and    retail exposures is the sum of the credit risk capital requirements on individual    wholesale exposures and retail exposures.

The IRB risk-based capital formulas contain supervisory asset value correlation (AVC)    factors, which have a significant impact on the capital requirements generated    by the formulas. The AVC assigned to a given portfolio of exposures is an    estimate of the degree to which any unanticipated changes in the financial    conditions of the underlying obligors of the exposures are correlated (that    is, would likely move up and down together). High correlation of exposures    in a period of economic downturn conditions is an area of supervisory concern.    For a portfolio of exposures having the same risk parameters, a larger AVC    implies less diversification within the portfolio, greater overall systematic    risk, and, hence, a higher risk-based capital requirement.6    For example, a 15 percent AVC for a portfolio of residential mortgage    exposures would result in a lower risk-based capital requirement than a 20 percent    AVC and a higher risk-based capital requirement than a 10 percent AVC. 

The AVCs that appear in the IRB risk-based capital formulas for wholesale    exposures decline with increasing PD; that is, the IRB risk-based capital    formulas generally imply that a group of low-PD wholesale exposures are more    correlated than a group of high-PD wholesale exposures. Thus, under the proposed    rule, a low-PD wholesale exposure would have a higher relative risk-based    capital requirement than that implied by its PD were the AVC in the IRB risk-based    capital formulas for wholesale exposures fixed rather than a function of PD.    This inverse relationship between PD and AVC for wholesale exposures is broadly    consistent with empirical research undertaken by G10 supervisors and moderates    the sensitivity of IRB risk-based capital requirements for wholesale exposures    to the economic cycle. Question 1: The agencies seek comment on and    empirical analysis of the appropriateness of the proposed rule's AVCs for    wholesale exposures in general and for various types of wholesale exposures    (for example, commercial real estate exposures).

The AVCs included in the IRB risk-based capital formulas for retail exposures    also reflect a combination of supervisory judgment and empirical evidence.7    However, the historical data available for estimating these correlations was    more limited than was the case with wholesale exposures, particularly for    non-mortgage retail exposures. As a result, supervisory judgment played a    greater role. Moreover, the flat 15 percent AVC for residential mortgage    exposures is based largely on empirical analysis of traditional long-term,    fixed-rate mortgages. Question 2: The agencies seek comment on and    empirical analysis of the appropriateness and risk sensitivity of the proposed    rule's AVC for residential mortgage exposures – not only for long-term,    fixed-rate mortgages, but also for adjustable-rate mortgages, home equity    lines of credit, and other mortgage products – and for other retail portfolios.

Another important conceptual element of the IRB framework concerns the treatment    of EL. The ANPR generally would have required banks to hold capital against    the measured amount of UL plus EL over a one-year horizon, except in the limited    instance of credit card exposures where future margin income (FMI) was    allowed to offset EL. The ANPR treatment also would have maintained the existing    definition of regulatory capital, which includes the allowance for loan and    lease losses (ALLL) in tier 2 capital up to a limit equal to 1.25 percent    of risk-weighted assets. The ANPR requested comment on the proposed treatment    of EL. Many commenters on the ANPR objected to this treatment on conceptual    grounds, arguing that capital is not the appropriate mechanism for covering    EL. In response to this feedback, the agencies sought and obtained changes    to the BCBS's proposals in this area. 

The agencies supported the BCBS's proposal, announced in October 2003,    to remove ECL (as defined below) from the risk-weighted assets calculation.    This NPR, consistent with the New Accord, removes ECL from the risk-weighted    assets calculation but requires a bank to compare its ECL to its eligible    credit reserves (as defined below). If a bank's ECL exceeds its eligible credit    reserves, the bank must deduct the excess ECL amount 50 percent from    tier 1 capital and 50 percent from tier 2 capital. If a bank's    eligible credit reserves exceed its ECL, the bank would be able to include    the excess eligible credit reserves amount in tier 2 capital, up to 0.6 percent    of the bank's credit risk-weighted assets. This treatment is intended to maintain    a capital incentive to reserve prudently and seeks to ensure that ECL over    a one-year horizon is covered either by reserves or capital. This treatment    also recognizes that prudent reserving that considers probable losses over    the life of a loan may result in a bank holding reserves in excess of ECL    measured with a one-year horizon. The BCBS calibrated the proposed 0.6 percent    limit on inclusion of excess reserves in tier 2 capital to be approximately    as restrictive as the existing cap on the inclusion of ALLL under the general    risk-based capital rules, based on data obtained in the BCBS's Third Quantitative    Impact Study (QIS-3).8Question 3: The agencies seek comment and supporting    data on the appropriateness of this limit.

The agencies are aware that certain banks believe that FMI should be eligible    to cover ECL for the purposes of such a calculation, while other banks have    asserted that, for certain business lines, prudential reserving practices    do not involve setting reserves at levels consistent with ECL over a horizon    as long as one year. The agencies nevertheless believe that the proposed approach    is appropriate because banks should receive risk-based capital benefits only    for the most highly reliable ECL offsets. 

The combined impact of these changes in the treatment of ECL and reserves    will depend on the reserving practices of individual banks. Nevertheless,    if other factors are equal, the removal of ECL from the calculation of risk-weighted    assets will result in a lower amount of risk-weighted assets than the proposals    in the ANPR. However, the impact on risk-based capital ratios should be partially    offset by related changes to the numerators of the risk-based capital ratios    – specifically, (i) the ALLL will be allowed in tier 2 capital    up to certain limits only to the extent that it and certain other reserves    exceed ECL, and (ii) if ECL exceeds reserves, the reserve shortfall must    be deducted 50 percent from tier 1 capital and 50 percent from    tier 2 capital. 

Using data from QIS-3, the BCBS conducted an analysis of the risk-based capital    requirements that would be generated under the New Accord, taking into account    the aggregate effect of ECL-related changes to both the numerator and the    denominator of the risk-based capital ratios. The BCBS concluded that to offset    these changes relative to the credit risk-based capital requirements of the    Proposed New Accord, it might be necessary under the New Accord to apply a    "scaling factor" (multiplier) to credit risk-weighted assets. The    BCBS, in the New Accord, indicated that the best estimate of the scaling factor    using QIS-3 data adjusted for the EL-UL decisions was 1.06. The BCBS noted    that a final determination of any scaling factor would be reconsidered prior    to full implementation of the new framework. The agencies are proposing a    multiplier of 1.06 at this time, consistent with the New Accord. 

The agencies note that a 1.06 multiplier should be viewed as a placeholder.    The BCBS is expected to revisit the determination of a scaling factor based    on the results of the latest international QIS (QIS-5, which was not    conducted in the United States).9    The agencies will consider the BCBS's determination, as well as other factors    including the most recent QIS conducted in the United States (QIS-4,    which is described below),10    in determining a multiplier for the final rule. As the agencies gain more    experience with the proposed advanced approaches, the agencies will revisit    the scaling factor along with other calibration issues identified during the    parallel run and transitional floor periods (described below) and make changes    to the rule as necessary. While a scaling factor is one way to ensure that    regulatory capital is maintained at a certain level, particularly in the short-    to medium-term, the agencies also may address calibration issues through modifications    to the underlying IRB risk-based capital formulas.

The proposed rule also includes the AMA for determining risk-based capital    requirements for operational risk. Under the proposed rule, operational risk    is defined as the risk of loss resulting from inadequate or failed internal    processes, people, and systems or from external events. This definition of    operational risk includes legal risk - which is the risk of loss (including    litigation costs, settlements, and regulatory fines) resulting from the failure    of the bank to comply with laws, regulations, prudent ethical standards, and    contractual obligations in any aspect of the bank's business - but excludes    strategic and reputational risks. 

Under the AMA, a bank would use its internal operational risk management systems    and processes to assess its exposure to operational risk. Given the complexities    involved in measuring operational risk, the AMA provides banks with substantial    flexibility and, therefore, does not require a bank to use specific methodologies    or distributional assumptions. Nevertheless, a bank using the AMA must demonstrate    to the satisfaction of its primary Federal supervisor that its systems for    managing and measuring operational risk meet established standards, including    producing an estimate of operational risk exposure that meets a one-year,    99.9th percentile soundness standard. A bank's estimate of operational    risk exposure includes both expected operational loss (EOL) and unexpected    operational loss (UOL) and forms the basis of the bank's risk-based capital    requirement for operational risk.

The AMA allows a bank to base its risk-based capital requirement for operational    risk on UOL alone if the bank can demonstrate to the satisfaction of its primary    Federal supervisor that the bank has eligible operational risk offsets, such    as certain operational risk reserves, that equal or exceed the bank's EOL.    To the extent that eligible operational risk offsets are less than EOL, the    bank's risk-based capital requirement for operational risk must incorporate    the shortfall.

The proposed rule maintains the general risk-based capital rules' minimum    tier 1 risk-based capital ratio of 4.0 percent and total risk-based    capital ratio of 8.0 percent. The components of tier 1 and total    capital are also generally the same, with a few adjustments described in more    detail below. The primary difference between the general risk-based capital    rules and the proposed rule is the methodologies used for calculating risk-weighted    assets. Banks applying the proposed rule generally would use their internal    risk measurement systems to calculate the inputs for determining the risk-weighted    asset amounts for (i) general credit risk (including wholesale and retail    exposures); (ii) securitization exposures; (iii) equity exposures;    and (iv) operational risk. In certain cases, however, external ratings    or supervisory risk weights would be used to determine risk-weighted asset    amounts. Each of these areas is discussed below. 

Banks using the proposed rule also would be subject to supervisory review    of their capital adequacy (Pillar 2) and certain public disclosure requirements    to foster transparency and market discipline (Pillar 3). In addition,    each bank using the advanced approaches would continue to be subject to the    tier 1 leverage ratio requirement, and each depository institution (DI)    (as defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813))    using the advanced approaches would continue to be subject to the prompt corrective    action (PCA) thresholds. Those banks subject to the MRA also would continue    to be subject to the MRA.

Under the proposed rule, a bank must identify whether each of its on- and    off-balance sheet exposures is a wholesale, retail, securitization, or equity    exposure. Assets that are not defined by any exposure category (and certain    immaterial portfolios of exposures) generally would be assigned risk-weighted    asset amounts equal to their carrying value (for on-balance sheet exposures)    or notional amount (for off-balance sheet exposures).

Wholesale exposures under the proposed rule include most credit exposures    to companies and governmental entities. For each wholesale exposure, a bank    would assign five quantitative risk parameters: PD (which is stated as a percentage    and measures the likelihood that an obligor will default over a one-year horizon);    ELGD (which is stated as a percentage and is an estimate of the economic loss    rate if a default occurs); LGD (which is stated as a percentage and is an    estimate of the economic loss rate if a default occurs during economic downturn    conditions); EAD (which is measured in dollars and is an estimate of the amount    that would be owed to the bank at the time of default); and M (which is measured    in years and reflects the effective remaining maturity of the exposure). Banks    would be able to factor into their risk parameter estimates the risk mitigating    impact of collateral, credit derivatives, and guarantees that meet certain    criteria. Banks would input the risk parameters for each wholesale exposure    into an IRB risk-based capital formula to determine the risk-based capital    requirement for the exposure.

Retail exposures under the proposed rule include most credit exposures to    individuals and small businesses that are managed as part of a segment of    exposures with similar risk characteristics, not on an individual-exposure    basis. A bank would classify each of its retail exposures into one of three    retail subcategories – residential mortgage exposures, qualifying revolving    exposures (QREs) (for example, credit cards and overdraft lines), and    other retail exposures. Within these three subcategories, the bank would group    exposures into segments with similar risk characteristics. The bank would    then assign the risk parameters PD, ELGD, LGD, and EAD to each retail segment.    The bank would be able to take into account the risk mitigating impact of    collateral and guarantees in the segmentation process and in the assignment    of risk parameters to retail segments. Like wholesale exposures, the risk    parameters for each retail segment would be used as inputs into an IRB risk-based    capital formula to determine the risk-based capital requirement for the segment.    Question 4: The agencies seek comment on the use of a segment-based    approach rather than an exposure-by-exposure approach for retail exposures.

For securitization exposures, the bank would apply one of three general approaches,    subject to various conditions and qualifying criteria: the Ratings-Based Approach (RBA),    which uses external ratings to risk-weight exposures; an Internal Assessment    Approach (IAA), which uses internal ratings to risk-weight exposures    to asset-backed commercial paper programs (ABCP programs); or the Supervisory    Formula Approach (SFA). Securitization exposures in the form of gain-on-sale    or credit-enhancing interest-only strips (CEIOs)11    and securitization exposures that do not qualify for the RBA, the IAA, or    the SFA would be deducted from regulatory capital.

Banks would be able to use an internal models approach (IMA) for determining    risk-based capital requirements for equity exposures, subject to certain qualifying    criteria and floors. If a bank does not have a qualifying internal model for    equity exposures, or chooses not to use such a model, the bank must apply    a simple risk weight approach (SRWA) in which publicly traded equity    exposures would have a 300 percent risk weight and non-publicly traded    equity exposures would have a 400 percent risk weight. Under both the    IMA and the SRWA, equity exposures to certain entities or made pursuant to    certain statutory authorities would be subject to a 0 to 100 percent    risk weight. 

Banks would have to develop qualifying AMA systems to determine risk-based    capital requirements for operational risk. Under the AMA, a bank would use    its own methodology to identify operational loss events, measure its exposure    to operational risk, and assess a risk-based capital requirement for operational    risk.

Under the proposed rule, a bank would calculate its risk-based capital ratios    by first converting any dollar risk-based capital requirements for exposures    produced by the IRB risk-based capital formulas into risk-weighted asset amounts    by multiplying the capital requirements by 12.5 (the inverse of the overall    8.0 percent risk-based capital requirement). After determining the risk-weighted    asset amounts for credit risk and operational risk, a bank would sum these    amounts and then subtract any allocated transfer risk reserves and excess    eligible credit reserves not included in tier 2 capital (defined below)    to determine total risk-weighted assets. The bank would then calculate its    risk-based capital ratios by dividing its tier 1 capital and total qualifying    capital by the total risk-weighted assets amount.

The proposed rule contains specific public disclosure requirements to provide    important information to market participants on the capital structure, risk    exposures, risk assessment processes, and, hence, the capital adequacy of    a bank. The public disclosure requirements would apply only to the DI or bank    holding company representing the top consolidated level of the banking group    that is subject to the advanced approaches. In addition, the agencies are    also publishing today proposals to require certain disclosures from subsidiary    DIs in the banking group through the supervisory reporting process. The agencies    believe that the reporting of key risk parameter estimates for each DI applying    the advanced approaches will provide the primary Federal supervisor of the    DI and other relevant supervisors with important data for assessing the reasonableness    and accuracy of the institution's calculation of its risk-based capital requirements    under this proposal and the adequacy of the institution's capital in relation    to its risks. Some of the proposed supervisory reports would be publicly available    (for example, on the Call Report or Thrift Financial Report), and others would    be confidential disclosures to the agencies to augment the supervisory process.

The agencies are considering implementing a comprehensive regulatory framework    for the advanced approaches in which each agency would have an advanced approaches    regulation or appendix that sets forth (i) the elements of tier 1    and tier 2 capital and associated adjustments to the risk-based capital    ratio numerator, (ii) the qualification requirements for using the advanced    approaches, and (iii) the details of the advanced approaches. For proposal    purposes, the agencies are issuing a single proposed regulatory text for comment.    Unless otherwise indicated, the term "bank" in the regulatory text    includes banks, savings associations, and bank holding companies (BHCs). The term "[AGENCY]"    in the regulatory text refers to the primary Federal supervisor of the bank    applying the rule. Areas where the regulatory text would differ by agency    – for example, provisions that would only apply to savings associations    or to BHCs – are generally indicated in appropriate places.

In this proposed rule, the agencies are not restating the elements of tier 1    and tier 2 capital, which would generally remain the same as under the    general risk-based capital rules. Adjustments to the risk-based capital ratio    numerators specific to banks applying the advanced approaches are in part II    of the proposed rule and explained in greater detail in section IV of    this preamble. The OCC, Board, and FDIC also are proposing to incorporate    their existing market risk rules by cross-reference and are proposing modifications    to the market risk rules in a separate NPR issued concurrently.12    The OTS is proposing its own market risk rule, including the proposed modifications,    as a part of that separate NPR. In addition, the agencies may need to make    additional conforming amendments to certain of their regulations that use    tier 1 or total qualifying capital or the risk-based capital ratios for    various purposes.

The proposed rule is structured in eight broad parts. Part I identifies    criteria for determining which banks are subject to the rule, provides key    definitions, and sets forth the minimum risk-based capital ratios. Part II    describes the adjustments to the numerator of the risk-based capital ratios    for banks using the advanced approaches. Part III describes the qualification    process and provides qualification requirements for obtaining supervisory    approval for use of the advanced approaches. This part incorporates critical    elements of supervisory oversight of capital adequacy (Pillar 2). 

Parts IV through VII address the calculation of risk-weighted assets.    Part IV provides the risk-weighted assets calculation methodologies for    wholesale and retail exposures; on-balance sheet assets that do not meet the    regulatory definition of a wholesale, retail, securitization, or equity exposure;    and certain immaterial portfolios of credit exposures. This part also describes    the risk-based capital treatment for over-the-counter (OTC) derivative    contracts, repo-style transactions, and eligible margin loans. In addition,    this part describes the methodology for reflecting eligible credit risk mitigation    techniques in risk-weighted assets for wholesale and retail exposures. Furthermore,    this part sets forth the risk-based capital requirements for failed and unsettled    securities, commodities, and foreign exchange transactions.

Part V identifies operating criteria for recognizing risk transference in    the securitization context and outlines the approaches for calculating risk-weighted    assets for securitization exposures. Part VI describes the approaches    for calculating risk-weighted assets for equity exposures. Part VII describes    the calculation of risk-weighted assets for operational risk. Finally, Part VIII    provides public disclosure requirements for banks employing the advanced approaches    (Pillar 3). 

The structure of the preamble generally follows the structure of the proposed    regulatory text. Definitions, however, are discussed in the portions of the    preamble where they are most relevant.

After the BCBS published the New Accord, the agencies conducted the additional    quantitative impact study referenced above, QIS-4, in the fall and winter    of 2004-2005, to better understand the potential impact of the proposed framework    on the risk-based capital requirements for individual U.S. banks and U.S.    banks as a whole. The results showed a substantial dollar-weighted average    decline and variation in risk-based capital requirements across the 26 participating    U.S. banks and their portfolios.13    In an April 2005 press release,14    the agencies expressed their concern about the magnitude of the drop in QIS-4    risk-based capital requirements and the dispersion of those requirements and    decided to undertake further analysis. 

The QIS-4 analysis indicated a dollar-weighted average reduction of 15.5 percent    in risk-based capital requirements at participating banks when moving from    the current Basel I-based framework to a Basel II-based framework.15    Table A provides a numerical summary of the QIS-4 results, in total and    by portfolio, aggregated across all QIS-4 participants.16    The first column shows changes in dollar-weighted average minimum required    capital (MRC) both by portfolio and overall, as well as in dollar-weighted    average overall effective MRC. Column 2 shows the relative contribution    of each portfolio to the overall dollar-weighted average decline of 12.5 percent    in MRC, representing both the increase/decrease and relative size of each    portfolio. The table also shows (column 3) that risk-based capital requirements    declined by more than 26 percent in half the banks in the study. Most    portfolios showed double-digit declines in risk-based capital requirements    for over half the banks, with the exception of credit cards. It should be    noted that column 3 gives every participating bank equal weight. Column 4    shows the analogous weighted median change, using total exposures as weights.

| Portfolio                         | Column 1:         % Change         in Portfolio         MRC | Column 2:         % Point         Contrib. to         MRC         Change | Column 3:         Median %         Change in         Port. MRC | Column 4:         Weighted         Median %         Change in         Port. MRC | Column 5:         Share of         Basel I         MRC | Column 6:         Share of         Basel II         MRC* |
|-----------------------------------|---------------------------------------------------------------------|-----------------------------------------------------------------------------------|------------------------------------------------------------------------|------------------------------------------------------------------------------------------|---------------------------------------------------------------------|-----------------------------------------------------------------------|
| Wholesale          Credit        | (24.6%)                                                             | (10.9%)                                                                           | (24.5%)                                                                | (21.6%)                                                                                  | 44.3%                                                               | 38.2%                                                                 |
| Corporate, Bank, Sovereign        | (21.9%)                                                             | (7.4%)                                                                            | (29.7%)                                                                | (13.5%)                                                                                  | 33.9%                                                               | 30.3%                                                                 |
| Small Business                    | (26.6%)                                                             | (1.2%)                                                                            | (27.1%)                                                                | (24.8%)                                                                                  | 4.6%                                                                | 3.9%                                                                  |
| High Volatility CRE               | (33.4%)                                                             | (0.6%)                                                                            | (23.2%)                                                                | (42.4%)                                                                                  | 1.8%                                                                | 1.3%                                                                  |
| Income Producing RE               | (41.4%)                                                             | (1.7%)                                                                            | (52.5%)                                                                | (52.4%)                                                                                  | 4.0%                                                                | 2.7%                                                                  |
| Retail          Credit           | (25.6%)                                                             | (7.8%)                                                                            | (49.8%)                                                                | (28.7%)                                                                                  | 30.6%                                                               | 26.0%                                                                 |
| Home Equity (HELOC)               | (74.3%)                                                             | (4.6%)                                                                            | (78.6%)                                                                | (76.8%)                                                                                  | 6.1%                                                                | 1.8%                                                                  |
| Residential Mortgage              | (61.4%)                                                             | (6.8%)                                                                            | (72.7%)                                                                | (64.4%)                                                                                  | 11.1%                                                               | 4.9%                                                                  |
| Credit Card (QRE)                 | 66.0%                                                               | 4.0%                                                                              | 62.8%                                                                  | 72.2%                                                                                    | 6.1%                                                                | 11.6%                                                                 |
| Other Consumer                    | (6.5%)                                                              | (0.4%)                                                                            | (35.2%)                                                                | (18.3%)                                                                                  | 6.0%                                                                | 6.4%                                                                  |
| Retail Business Exposures         | (5.8%)                                                              | (0.1%)                                                                            | (29.2%)                                                                | 11.6%                                                                                    | 1.2%                                                                | 1.3%                                                                  |
| Equity                            | 6.6%                                                                | 0.1%                                                                              | (24.4%)                                                                | 9.6%                                                                                     | 1.3%                                                                | 1.6%                                                                  |
| Other          assets            | (11.7%)                                                             | (1.2%)                                                                            | (3.2%)                                                                 | (11.6%)                                                                                  | 10.0%                                                               | 10.1%                                                                 |
| Securitization                    | (17.9%)                                                             | (1.4%)                                                                            | (39.7%)                                                                | (45.8%)                                                                                  | 8.1%                                                                | 7.6%                                                                  |
| Operational          Risk        | N/A                                                                 | 9.2%                                                                              | N/A                                                                    | N/A                                                                                      | 0.0%                                                                | 10.5%                                                                 |
| Trading          Book            | 0.0%                                                                | 0.0%                                                                              | 0.0%                                                                   | N/A                                                                                      | 5.2%                                                                | 5.9%                                                                  |
| Change          in MRC           | (12.5%)                                                             | (12.5%)                                                                           | (23.8%)                                                                | (17.1%)                                                                                  | 100.0%                                                              | 100.0%                                                                |
| Change          in Effective MRC | (15.5%)                                                             | N/A                                                                               | (26.3%)                                                                | (21.7%)                                                                                  | N/A                                                                 | N/A                                                                   |

*  QIS-4    interpretation of Basel II framework as articulated in QIS-4 instructions.  Return to table   Notes to the table: The first two columns of the table show the *dollar-weighted*    average percentage change in MRC by portfolio and the percentage point contribution    of each portfolio to the overall average percentage change (of 12.5%).    The third column shows the *unweighted* median percentage change in MRC    by portfolio. The fourth column shows the *weighted* median percentage    change in MRC by portfolio, weighting by total exposures at the portfolio    level. The next two columns show the share each portfolio contributes to MRC,    under the current framework (column 5) and the QIS-4 interpretation of    Basel II as defined in the QIS-4 instructions (column 6). Entries    in parentheses denote negative numbers. There are no percentage change numbers    for operational risk because it is not separated out as a specific risk-based    capital requirement under Basel I.

QIS-4 results (not shown in Table A) also suggested that tier 1    risk-based capital requirements under a Basel II-based framework would    be lower for many banks than they are under the general risk-based capital    rules, in part reflecting the move to a UL-only risk-based capital requirement.    Tier 1 risk-based capital requirements declined by 22 percent in    the aggregate. The unweighted median indicates that half of the participating    banks reported reductions in tier 1 risk-based capital requirements of    over 31 percent. The MRC calculations do not take into account the impact    of the tier 1 leverage ratio requirement. Were such results produced    under a fully implemented Basel II-based risk-based capital regime, the    existing tier 1 leverage ratio requirement could be a more important    constraint than it is currently. 

Evidence from some of the follow-up analysis also illustrated that similar    loan products at different banks may have resulted in very different risk-based    capital requirements. Analysis determined that this dispersion in capital    requirements not only reflected differences in actual risk or portfolio composition,    but also reflected differences in the banks' estimated risk parameters for    similar exposures. 

Although concerns with dispersion might be remedied to some degree with refinements    to internal bank risk measurement and management systems and through the rulemaking    process, the agencies also note that some of the dispersion encountered in    the QIS-4 exercise is a reflection of the flexibility in methods to quantify    the risk parameters that may be allowed under implementation of the proposed    framework.

The agencies intend to conduct other analyses of the impact of the Basel II    framework during both the parallel run and transitional floor periods. These    analyses will look at both the impact of the Basel II framework and the preparedness    of banks to compute risk-based capital requirements in a manner consistent    with the Basel II framework.

The ANPR stated: "The Agencies do not expect the implementation of the    New Accord to result in a significant decrease in aggregate capital requirements    for the U.S. banking system. Individual banking organizations may, however,    face increases or decreases in their minimum risk-based capital requirements    because the New Accord is more risk sensitive than the 1988 Accord and the    Agencies' existing risk-based capital rules (general risk-based capital rules)."17    The ANPR was in this respect consistent with statements made by the BCBS in    its series of Basel II consultative papers and its final text of the    New Accord, in which the BCBS stated as an objective broad maintenance of    the overall level of risk-based capital requirements while allowing some incentives    for banks to adopt the advanced approaches.

The agencies remain committed to these objectives. Were the QIS-4 results    just described produced under an up-and-running risk-based capital regime,    the risk-based capital requirements generated under the framework would not    meet the objectives described in the ANPR, and thus would be considered unacceptable.

When considering QIS-4 results and their implications, it is important to    recognize that banking organizations participated in QIS-4 on a best-efforts    basis. The agencies had not qualified any of the participants to use the Basel II    framework and had not conducted any formal supervisory review of their progress    toward meeting the Basel II qualification requirements. In addition,    the risk measurement and management systems of the QIS-4 participants, as    indicated by the QIS-4 exercise, did not yet meet the Basel II qualification    requirements outlined in this proposed rule. 

As banks work with their supervisors to refine their risk measurement and    management systems, it will become easier to determine the actual quantitative    impact of the advanced approaches. The agencies have decided, therefore, not    to recalibrate the framework at the present time based on QIS-4 results, but    to await further experience with more fully developed bank risk measurement    and management systems. 

If there is a material reduction in aggregate minimum regulatory capital requirements    upon implementation of Basel II-based rules, the agencies will propose    regulatory changes or adjustments during the transitional floor periods. In    this context, materiality will depend on a number of factors, including the    size, source, and nature of any reduction; the risk profiles of banks authorized    to use Basel II-based rules; and other considerations relevant to the    maintenance of a safe and sound banking system. In any event, the agencies    will view a 10 percent or greater decline in aggregate minimum required    risk-based capital (without reference to the effects of the transitional floors    described in a later section of this preamble), compared to minimum required    risk-based capital as determined under the existing rules, as a material reduction    warranting modifications to the supervisory risk functions or other aspects    of this framework.

The agencies are, in short, identifying a numerical benchmark for evaluating    and responding to capital outcomes during the parallel run and transitional    floor periods that do not comport with the overall capital objectives outlined    in the ANPR. At the end of the transitional floor periods, the agencies would    re-evaluate the consistency of the framework, as (possibly) revised during    the transitional floor periods, with the capital goals outlined in the ANPR    and with the maintenance of broad competitive parity between banks adopting    the framework and other banks, and would be prepared to make further changes    to the framework if warranted. Question 5: The agencies seek comment on    this approach to ensuring that overall capital objectives are achieved.

The agencies also noted above that tier 1 capital requirements reported in    QIS-4 declined substantially more than did total capital requirements. The    agencies have long placed special emphasis on the importance of tier 1 capital    in maintaining bank safety and soundness because of its ability to absorb    losses on a going concern basis. The agencies will continue to monitor the    trend in tier 1 capital requirements during the parallel run and transitional    floor periods and will take appropriate action if reductions in tier 1 capital    requirements are inconsistent with the agencies' overall capital goals.

Similar to the attention the agencies will give to overall risk-based capital    requirements for the U.S. banking system, the agencies will carefully consider    during the transitional floor periods whether dispersion in risk-based capital    results across banks and portfolios appropriately reflects differences in    risk. A conclusion by the agencies that dispersion in risk-based capital requirements    does not appropriately reflect differences in risk could be another possible    basis for proposing regulatory adjustments or refinements during the transitional    floor periods.

It should also be noted that given the bifurcated regulatory capital framework    that would result from the adoption of this rule, issues related to overall    capital may be inextricably linked to the competitive issues discussed elsewhere    in this document. The agencies indicated in the ANPR that if the competitive    effects of differential capital requirements were deemed significant, "the    Agencies would need to consider potential ways to address those effects while    continuing to seek the objectives of the current proposal. Alternatives could    potentially include modifications to the proposed approaches, as well as fundamentally    different approaches."18    In this regard, the agencies view the parallel run and transitional floor    periods as a trial of the new framework under controlled conditions. While    the agencies hope and expect that regulatory changes proposed during those    years would be in the nature of adjustments made within the framework described    in this proposed rule, more fundamental changes cannot be ruled out if warranted    based on future experience or comments received on this proposal.

The agencies reiterate that, especially in light of the QIS-4 results, retention    of the tier 1 leverage ratio and other existing prudential safeguards (for    example, PCA) is critical for the preservation of a safe and sound regulatory    capital framework. In particular, the leverage ratio is a straightforward    and tangible measure of solvency and serves as a needed complement to the    risk-sensitive Basel II framework based on internal bank inputs.

A fundamental objective of the New Accord is to strengthen the soundness and    stability of the international banking system while maintaining sufficient    consistency in capital adequacy regulation to ensure that the New Accord will    not be a significant source of competitive inequity among internationally    active banks. The agencies support this objective and believe that it is crucial    to promote continual advancement of the risk measurement and management practices    of large and internationally active banks. For this reason, the agencies propose    to implement only the advanced approaches of the New Accord because these    approaches utilize the most sophisticated and risk-sensitive risk measurement    and management techniques.

While all banks should work to enhance their risk management practices, the    advanced approaches and the systems required to support their use may not    be appropriate for many banks from a cost-benefit point of view. For these    banks, the agencies believe that, with some modifications, the general risk-based    capital rules are a reasonable alternative. As discussed in section E.2.    above, this proposal's bifurcated approach to risk-based capital requirements    raises difficult issues and inextricably links competitive considerations    with overall capital issues. One such issue relates to concerns about competitive    inequities between U.S. banks operating under different regulatory capital    regimes. The ANPR cited this concern, and a number of commenters expressed    their belief that in some portfolios competitive inequities would be worsened    under the proposed bifurcated framework. These commenters expressed the concern    that the Proposed New Accord might place community banks operating under the    general risk-based capital rules at a competitive disadvantage to banks applying    the advanced approaches because the IRB framework would likely result in lower    risk-based capital requirements on some types of exposures, such as residential    mortgage exposures, other retail exposures, and small business loans.

Some commenters asserted that the application of lower risk-based capital    requirements under the Proposed New Accord would create a competitive disadvantage    for banks operating under the general risk-based capital rules, which in turn    may adversely affect their asset quality and cost of capital. Other commenters    suggested that if the advanced approaches in the Proposed New Accord are implemented,    the agencies should consider revising their general risk-based capital rules    to enhance risk sensitivity and to mitigate potential competitive inequities    associated with the bifurcated system.

The agencies recognize that the industry has concerns with the potential competitive    inequities associated with a bifurcated risk-based capital framework. The    agencies reaffirm their intention, expressed in the ANPR, to address competitive    issues while continuing to pursue the objectives of the current proposal.    In addition to the QIS-4 analysis discussed above, the agencies have also    researched discrete topics to further understand where competitive pressures    might arise. As part of their effort to develop a bifurcated risk-based capital    framework that minimizes competitive inequities and is not disruptive to the    banking sector, the agencies issued an Advance Notice of Proposed Rulemaking    (Basel IA ANPR) considering various modifications to the general risk-based    capital rules to improve risk sensitivity and to reduce potential competitive    disparities between Basel II banks and non-Basel II banks.19    The comment period for the Basel IA ANPR ended on January 18, 2006,    and the agencies intend to consider all comments and issue for public comment    a more fully developed risk-based capital proposal for non-Basel II banks.    The comment period for the non-Basel II proposal is expected to overlap    that of this proposal, allowing commenters to analyze the effects of the two    proposals concurrently.

In addition, some commenters expressed concern about competitive inequities    arising from differences in implementation and application of the New Accord    by supervisory authorities in different countries. In particular, some commenters    expressed concern about the different implementation timetables of various    jurisdictions, and differences in the scope of application in various jurisdictions    or in the range of approaches that different jurisdictions will allow. The    BCBS has established an Accord Implementation Group, comprised of supervisors    from member countries, whose primary objectives are to work through implementation    issues, maintain a constructive dialogue about implementation processes, and    harmonize approaches as much as possible within the range of national discretion    embedded in the New Accord.

While supervisory judgment will play a critical role in the evaluation of    risk measurement and management practices at individual banks, supervisors    are committed to developing protocols and information-sharing arrangements    that should minimize burdens on banks operating in multiple countries and    ensure that supervisory authorities are implementing the New Accord as consistently    as possible. The New Accord identifies numerous areas where national discretion    is encouraged. This design was intended to enable national supervisors to    implement the methodology, or combination of methodologies, most appropriate    for banks in their jurisdictions. Disparate implementation decisions are expected,    particularly during the transition years. Over time, the agencies expect that    industry and supervisory practices likely will converge in many areas, thus    mitigating differences across countries. Competitive considerations, both    internationally and domestically, will be monitored and discussed by the agencies    on an ongoing basis. With regard to implementation timing concerns, the agencies    believe that the transitional arrangements described in section III.A.    of this preamble below provide a prudent and reasonable framework for moving    to the advanced approaches. Where international implementation differences    affect an individual bank, the agencies expect to work with the bank and appropriate    national supervisory authorities for the bank to ensure that implementation    proceeds as smoothly as possible. Question 6: The agencies seek comment    on all potential competitive aspects of this proposal and on any specific    aspects of the proposal that might raise competitive concerns for any bank    or group of banks.

 

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    -  The BCBS is a committee of banking supervisory       authorities, which was established by the central bank governors of the       G-10 countries in 1975. It consists of senior representatives of bank supervisory       authorities and central banks from Belgium, Canada, France, Germany, Italy,       Japan, Luxembourg, the Netherlands, Spain, Sweden, Switzerland, the United Kingdom,       and the United States.   Return to text
    -  The BCBS developed the Proposed New Accord to       modernize its first capital Accord, which was endorsed by the G-10 governors       in 1988 and implemented by the agencies in the United States in 1989.       The BCBS's 1988 Accord is described in a document entitled "International       Convergence of Capital Measurement and Capital Standards." This document       and other documents issued by the BCBS are available through the Bank for       International Settlements website at  www.bis.org .       The agencies' implementing regulations are available at 12 CFR part 3,       Appendices A and B (national banks); 12 CFR part 208,       Appendices A and E (state member banks); 12 CFR part 225,       Appendices A and E (bank holding companies); 12 CFR part 325,       Appendices A and C (state nonmember banks); and 12 CFR       part 567 (savings associations).   Return to text
    -  The theoretical underpinnings for the supervisory       model of credit risk underlying this proposal are provided in Michael Gordy,       "A Risk-Factor Model Foundation for Ratings-Based Bank Capital Rules,"        Journal of Financial Intermediation , July 2003. The IRB formulas       are derived as an application of these results to a single-factor CreditMetrics-style       model. For mathematical details on this model, see Michael Gordy,       "A Comparative Anatomy of Credit Risk Models,"  Journal of       Banking and Finance , January 2000, or H.U. Koyluogu and A. Hickman,       "Reconcilable Differences,"  Risk , October 1998. For       a less technical overview of the IRB formulas, see the BCBS's "An       Explanatory Note on the Basel II Risk Weight Functions," July 2005       (Explanatory Note). The document can be found on the Bank for International       Settlements website at  www.bis.org .   Return to text
    -  Banks' internal economic capital models typically       focus on measures of equity capital, whereas the total regulatory capital       measure underlying this proposal includes not only equity capital, but       also certain debt and hybrid instruments, such as subordinated debt. Thus,       the 99.9 percent nominal confidence level embodied in the IRB framework       is not directly comparable to the nominal solvency standards underpinning       banks' economic capital models.   Return to text
    -  See  Explanatory Note.   Return to text
    -  See  Explanatory Note, section 5.3.   Return to text
    -  BCBS, "QIS 3: Third Quantitative Impact Study,"       May 2003.   Return to text
    -  See  http://www.bis.org/bcbs/qis/qis5.htm .   Return to text
    -  See  "Summary Findings of the Fourth       Quantitative Impact Study," February 24, 2006.   Return to text
    -  A CEIO is an on-balance sheet asset that (i) represents       the contractual right to receive some or all of the interest and no more       than a minimal amount of principal due on the underlying exposures of a       securitization and (ii) exposes the holder to credit risk directly       or indirectly associated with the underlying exposures that exceeds its       pro rata claim on the underlying exposures whether through subordination       provisions or other credit-enhancement techniques.   Return to text
    -  See elsewhere in today's issue of the  Federal Register .   Return to text
    -  Since neither an NPR and associated supervisory       guidance nor final regulations implementing a Basel II-based framework       had been issued in the United States at the time of data collection,       all QIS-4 results relating to the U.S. implementation of Basel II       are based on the description of the framework contained in the QIS-4 instructions.       These instructions differed from the framework issued by the BCBS in June 2004       in several respects. For example, the QIS-4 articulation of the Basel II       framework does not include the 1.06 scaling factor. The QIS-4 instructions       are available at  http://www.ffiec.gov/qis4/ .   Return to text
    -  See  "Banking Agencies to Perform       Additional Analysis Before Issuing Notice of Proposed Rulemaking Related       to Basel II," Apr. 29, 2005.   Return to text
    -  The Basel II framework on which QIS-4 is       based uses a UL-only approach (even though EL requirements were included       in QIS-4). But the current Basel I risk-based capital requirements       use a UL+EL approach. Therefore, in order to compare the Basel II       results from QIS-4 with the current Basel I requirements, the EL requirements       from QIS-4 had to be added to the UL capital requirements from QIS-4.   Return to text
    -  In the table, "Minimum required capital" (MRC)       refers to the total risk-based capital requirement before incorporating       the impact of reserves. "Effective MRC" is equal to MRC adjusted       for the impact of reserves. As noted above, under the Basel II framework,       a shortfall in reserves generally increases the total risk-based capital       requirement and a surplus in reserves generally reduces the total risk-based       capital requirement, though not with equal impact.   Return to text
    -  68 FR 45900, 45902 (Aug. 4, 2003).   Return to text
    -  68 FR 45900, 45905 (August 4, 2003).   Return to text
    -  See  70 FR 61068 (Oct. 20, 2005).   Return to text

Basel II Capital AccordNotice of Proposed Rulemaking (NPR)

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