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| **Date:**    | March 22, 2006                                                                                                        |
|--------------|-----------------------------------------------------------------------------------------------------------------------|
| **To:**      | Board of Governors of the Federal                Reserve System                                                      |
| **From:**    | Staff 1                                                                                                          |
| **Subject:** | Notice of Proposed Rulemaking Implementing                New Risk-Based Capital Framework in the United States |

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Printable version (156 KB PDF)

Board approval to issue for public comment a notice of proposed rulemaking (NPR)    implementing a new risk-based capital framework based on the Basel Committee    on Banking Supervision's (BCBS) 2005 revised capital accord. Staff also    requests Board approval to make non-substantive edits to the proposal prior    to its publication to accommodate further interagency discussion. Staff notes    that the other banking agencies (the Office of the Comptroller of the Currency (OCC),    the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift    Supervision (OTS)) are not expected to complete their internal review    and approval procedures for some time. If approved by the Board, the NPR would    be published jointly by the agencies in the Federal Register after    all of the agencies have completed their procedures. In the event that substantive    issues arise during this time, staff would circulate a revised proposal to    the Board for consideration. A draft of the NPR is attached.

In the United States, banks, thrifts and bank holding companies (collectively    referred to herein as banks or institutions) are subject to minimum regulatory    capital requirements that include a minimum leverage ratio requirement, as    well as minimum risk-based ratio requirements.2    The current U.S. risk-based capital requirements are based on an internationally    agreed framework for capital measurement that was developed by the BCBS and    endorsed by the G-10 Governors in 1988.3    This framework is referred to as the Basel Accord or Basel I framework.    The Basel I framework was intended to strengthen capital levels at large,    internationally active banks and foster international consistency through    a common definition of capital and a common methodology for measuring capital    relative to broad categories of risk. The Basel Accord also reduced disincentives    for banks to hold liquid, low-risk assets and factored off-balance sheet exposures    into regulatory capital requirements, representing a significant step forward    for regulatory capital measurement.

Although the 1988 Basel Accord served its intended purposes well, it does    not incorporate innovations in financial products and services and improvements    in risk measurement and management practices developed by large, internationally    active banks since the 1980s. Federal Reserve staff has been working for a    number of years with staffs from the OCC, FDIC, and the OTS, as well as the    member countries on the BCBS, to modify the Basel Accord to recognize new    developments in financial products and advances in risk measurement and management    practices. In this regard, 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 encompasses three pillars: minimum regulatory capital requirements (pillar 1),    supervisory review (pillar 2), and market discipline through enhanced    public disclosure (pillar 3). Under the first pillar, a bank must    calculate risk-based capital requirements for exposure to credit risk and    operational risk. Banks with significant trading activities also must factor    in a measure for exposure to market risk. For both credit risk and operational    risk Basel II provides several methodologies for determining risk-based    capital requirements.

For credit risk there is a standardized approach, essentially a package of    modifications to the Basel I framework, and two internal ratings-based (IRB)    approaches, which use an institution's internal estimates of key risk parameters    in combination with risk-based capital formulas specified by the agencies    to derive capital requirements. The foundation IRB approach employs risk parameters    that are partly provided by supervisors and partly by the institutions. The    advanced IRB approach allows institutions to provide all of the risk parameters. 

For operational risk the New Accord provides three methodologies: the basic    indicator approach, the standardized approach, and the advanced measurement    approaches (AMA). Under the basic indicator and standardized approaches,    capital requirements are fixed percentages of gross income. The AMA permits    a bank to develop its individual approach for measuring and managing operational    risk and determining the associated capital requirement, subject to supervisory    oversight. The advanced IRB approach and the AMA, together, are referred to    as the advanced approaches.

On August 4, 2003, the U.S. federal banking agencies (the Board, the OCC,    the FDIC, and the OTS – collectively, the agencies) issued for public    comment an advance notice of proposed rulemaking (ANPR) (68 FR 45900)    seeking public comment on a preliminary Basel II framework developed    on the basis of a consultative paper issued by the BCBS that same year. The    ANPR only proposed the advanced approaches of Basel II, reflecting the    agencies' belief that Basel II's most advanced risk management and measurement    methodologies are the most appropriate for large, internationally active U.S.    banks. Together, the agencies received approximately 100 public comments    on the ANPR. Commenters generally supported the overall direction of the ANPR    but raised a number of conceptual and technical issues they believed required    additional consideration.4

Since the issuance of the ANPR, the agencies have worked domestically and    with other BCBS member countries to modify the methodologies in the Basel II    framework; these efforts culminated in the New Accord. The New Accord is intended    for use by individual countries as the basis for national consultation and    implementation. In the fall of 2004, the agencies conducted a quantitative    impact study (QIS4) to assess the potential impact of the New Accord    on U.S. institutions. In April 2005, the agencies announced they intended    to further analyze the QIS4 data before issuing an NPR, the next step in the    implementation process. In September 2005, the agencies announced their intention    to move forward with an NPR, subject to additional prudential safeguards.    The September 2005 press release noted the agencies' expectation that    a proposal would be available in the first quarter of 2006. On February 24, 2006,    the agencies released to the public a summary of the QIS4 findings.5

The agencies now are preparing to move ahead with issuance of an NPR that    includes certain prudential safeguards addressing concerns identified in the    QIS4 analysis. These safeguards are described in more detail in the discussion    section of this memorandum. Board staff believes it is important to move forward    with the Basel II implementation process to further industry dialogue on the    proposed framework with the goal of ensuring that the Basel II risk-based    capital regime is appropriate and cost effective for large, sophisticated    U.S. institutions and for U.S. institutions operating on a global basis.

As noted, the other agencies have not yet completed their internal review    procedures and approval processes, and it is not certain how much additional    time will be needed to finish them. One procedural requirement for the OCC    and OTS is review by the Office of Management and Budget (OMB) pursuant    to Executive Order 12866. In general, these agencies must allow for up    to a 90-day OMB review. Comments received during the OMB review process would    be addressed by the agencies prior to publication of the NPR in the Federal Register.    However, because the NPR is lengthy, complex and technical, Board staff believes    it is important for the public to have ample opportunity to review the proposal.    Presenting the draft NPR to the Board for its consideration serves the purpose    of disseminating the proposal to the public prior to its final interagency    clearance and publication in the Federal Register. Further, this    is consistent with the agencies' stated expectation regarding availability    of the proposal. Board staff expects that this opportunity for preliminary    review will assist commenters in their assessment of the proposal and help    to provide sufficient time for interested parties to develop comprehensive    comments. After each agency obtains final approval and the document is issued    in the Federal Register, Board staff expects the NPR will provide    a 120-day formal comment period.

In addition to the attached NPR on credit risk and operational risk (Basel II    NPR), Board staff is working with the other agencies to develop an NPR addressing    risk-based capital requirements for market risk (market risk NPR). The BCBS    issued the market risk amendment to Basel I (MRA) in 1996.6    It was designed to impose a risk-based capital requirement on a bank's exposure    to market risk in trading activities. The Board adopted the MRA in August 1996.    The market risk NPR would take into account modifications to the MRA issued    by the BCBS in July 2005. Board staff expects the market risk NPR will    be ready for the Board's consideration in the upcoming weeks and, if approved    by the Board and the other agencies, Board staff would expect the market risk    NPR to be issued in the Federal Register for public comment at    the same time as the Basel II NPR. 

Board staff also is working with the other agencies to develop a package of    supervisory reporting schedules that would be required for institutions using    the advanced approaches. Part of this reported information would be available    to the public and part would be confidential supervisory information. Board    staff expects the reporting package will be ready for the Board's consideration    in the upcoming weeks and, if approved by the Board and the other agencies,    Board staff would expect the reporting package to be issued in the Federal Register    for public comment at the same time as the Basel II NPR. 

In addition, agency staffs are revising and enhancing the supervisory guidance    related to IRB rating systems for corporate exposures and retail exposures,    and for operational risk. Staff expects that a complete package of supervisory    guidance addressing these areas as well as equity and securitization exposures    would be issued for public comment soon after the issuance of the Basel II    NPR and the other proposals noted above.7

Finally, staff notes that in October 2005 the agencies issued an ANPR    related to possible modifications to the existing risk-based capital rules    (general risk-based capital rules).8    This proposal is referred to as the Basel IA ANPR. The Basel IA    ANPR was intended to solicit comment on ways the general risk-based capital    rules might be enhanced to improve risk- sensitivity and to mitigate potential    competitive disparities between banks applying the Basel II advanced    approaches and those using the general risk-based capital rules. The comment    period on the Basel IA ANPR ended in mid-January 2006. Agency staffs    are currently assessing the comments and considering ways to move forward    with a Basel IA NPR that would put forth a more fully developed risk-based    capital proposal for banks not using the advanced approaches.

To facilitate the public comment process, agency staffs have developed a common    draft regulatory text. Unless specifically indicated in the proposal, the    term "bank" includes banks, savings associations, and bank holding    companies (BHCs). Also, in the proposed rule the term "[AGENCY]"    refers to the primary federal supervisor of the bank applying the rule. The    proposal does not restate the elements of tier 1 and tier 2 capital, which    generally remain the same as under the general risk-based capital rules. Adjustments    to the definitions of tier 1 and tier 2 capital are explained in more detail    below. 

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 adjustments to the numerator. Part III describes the qualification    process and criteria for obtaining supervisory approval to use the advanced    approaches. Parts IV through VII address the calculation of risk-weighted    assets. Part VIII provides public disclosure requirements for banks using    the advanced approaches. This memorandum follows the structure of the Basel II    NPR preamble and identifies the pages in the attached preamble where more    detailed discussion may be found.

The capital adequacy framework in the Basel II NPR is intended to produce    risk-based capital requirements that are more risk-sensitive than the agencies'    general risk-based capital rules, which are based on Basel I.9    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 numerator of the ratios -- the components of regulatory    capital -- also is generally the same. The primary difference between the    proposed rule and the general risk-based capital rules is the methodology    used for calculating the denominator of the ratios -- risk-weighted assets.

Broadly speaking, banks applying the proposed rule would use their internal    risk measurement systems to estimate risk parameters for exposures. The bank    would use specific risk-based capital formulas to transform these risk parameters    into risk-weighted-asset amounts for (1) general credit risk (including    wholesale and retail exposures), (2) securitization exposures, and (3) equity    exposures. Credit risk-weighted assets would be the sum of these three amounts,    multiplied by 1.06.10    Credit risk-weighted assets plus operational risk-weighted assets would be    a bank's total risk-weighted asset amount. Banks using the MRA would continue    to be subject to the MRA and would factor their market risk-equivalent assets    into their total risk-weighted asset amount. A bank's risk-based capital ratio    is calculated by dividing its qualifying capital by its total risk-weighted    assets. 

Banks would be required to assess their overall capital position relative    to total risk and would be subject to supervisory review of their comprehensive    capital adequacy (pillar 2). Banks also would be subject to certain public    disclosure requirements (pillar 3), as well as to supplemental supervisory    reporting requirements as determined by the agencies. All banks using the    advanced approaches would continue to be subject to the applicable tier 1    leverage ratio requirements and each depository institution (DI) would    continue to be subject to the prompt corrective action thresholds.

Under the proposed rule, a bank would classify each of its on- and off-balance    sheet exposures as a wholesale, retail, securitization or equity exposure.    Exposures that do not fit in these categories (and certain non-material portfolios    of exposures) generally would be assigned risk-weighted asset amounts equal    to their carrying value (for on-balance sheet exposures) or notional value    (for off-balance sheet exposures) – in effect, they would be risk-weighted    at 100 percent.

Wholesale exposures would include most credit exposures to companies and governmental    entities. Wholesale exposures would be subcategorized as high volatility commercial    real estate (HVCRE) exposures or non-HVCRE exposures. For each wholesale    exposure, a bank would assign five quantitative risk parameters: probability    of default (PD, which measures the likelihood that an obligor will default    over a one-year horizon); expected loss given default (ELGD, which is    an estimate of the economic loss if a default does occur); loss given default (LGD,    which is an estimate of the economic loss if a default occurs during downturn    economic conditions); exposure at default (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 effective maturity (M, which is measured in    years and reflects the effective remaining maturity of the exposure). 

A bank would be able to factor into its risk parameter estimates the risk    mitigating effects of collateral, eligible credit derivatives, and eligible    guarantees subject to certain criteria and explicit measurement methodologies.    Banks would input the risk parameter estimates for each wholesale exposure    into an IRB risk-based capital formula to determine the risk-based capital    requirement for the exposure. The proposal contains a different IRB risk-based    capital formula for HVCRE and non-HVCRE exposures to reflect different asset    value correlation assumptions for the two subcategories of wholesale exposures.

Retail exposures would include most credit exposures to individuals and to    small businesses that are managed as part of a segment of exposures with similar    risk characteristics, rather than on an individual-exposure basis. A bank    would classify retail exposures into three subcategories – residential mortgage    exposures, qualifying revolving exposures (QREs, such as credit cards),    and other retail exposures. Within these subcategories a bank would group    exposures into segments with homogeneous risk characteristics. The bank would    then assign the risk parameters PD, ELGD, LGD and EAD to each retail segment.    The risk parameter M would not be directly assigned for retail segments, but    the effects of maturity would be reflected through the asset value correlations    used in the retail IRB formulas. 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 each segment.    Again, the proposal contains a different IRB risk-based capital formula for    each of the three subcategories of retail exposures to reflect different asset    value correlation assumptions for the subcategories.

Securitization exposures generally would include all asset-backed and mortgage-backed    securities held by a bank and any other tranched credit exposures of a bank.    The bank would apply one of three general approaches to compute risk-based    capital requirements for securitization exposures, subject to various conditions    and qualifying criteria: the Ratings-Based Approach (RBA), which uses    external ratings to risk-weight exposures; the 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),    which uses a supervisory formula to risk-weight exposures. Securitization    exposures that are in the form of gain-on-sale or credit-enhancing interest-only    strips (CEIOs) and securitzation exposures that do not qualify for the    approaches noted above would be deducted from regulatory capital.11

Equity exposures generally would include securities and instruments that represent    a direct or indirect ownership interest in, and a residual claim on, the assets    and income of a company. Banks would be able to use an internal model approach (IMA)    for determining risk-based capital requirements for equity exposures, subject    to certain qualifying criteria and floors. Alternatively, a bank could use    a simple risk weight approach (SRWA), in which publicly traded equity    exposures generally would be subject to a 300 percent risk weight and    non-publicly traded equity exposures generally would be subject to a 400 percent    risk weight, although equity exposures under a threshold level would be subject    to a 100 percent risk weight. Under both approaches, equity exposures    made to certain entities or pursuant to certain statutory authorities would    be subject to a zero to 100 percent risk weight.

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

The proposal identifies three groups of banks: (1) banks that would be    required to adopt the advanced approaches (core banks); (2) banks    that voluntarily adopt the advanced approaches (opt-in banks); and (3) banks    that do not adopt the advanced approaches (general banks). Under the    proposal, a DI would be a core bank if its consolidated total assets are $250 billion    or more, its consolidated on-balance sheet foreign exposure is $10 billion    or more, or it is a subsidiary of another DI or BHC that uses the advanced    approaches. A BHC would be a core bank if its consolidated total assets (excluding    assets held by an insurance underwriting subsidiary) are $250 billion    or more, its consolidated on-balance sheet foreign exposure is $10 billion    or more, or it has a subsidiary DI that uses the advanced approaches. U.S.    banks that are owned by a foreign banking organization generally would be    subject to the same threshold criteria as U.S. banks owned by U.S. investors. 

The proposed approach for BHCs is different than what the agencies proposed    in the ANPR, which applied the first criterion only to total consolidated    DI assets of a BHC, rather than to the BHC's consolidated total assets (minus    insurance). This proposed change recognizes that BHCs can hold similar assets    within and outside DIs and reduces potential incentives to structure BHC assets    and activities to arbitrage capital regulations. Assets held in an insurance    underwriting subsidiary of a BHC are excluded from the threshold calculation    because Basel II was not designed to address insurance underwriting exposures. 

The proposal recognizes there may be cases where a primary federal supervisor    determines that application of the advanced approaches is not appropriate    for an institution in light of the institution's asset size, level of complexity,    risk profile, or scope of operations. Further, the proposal restates the agencies'    supervisory authority to require a bank to hold an amount of capital greater    than would be required under the proposed rule. 

Under the proposed rule, a bank preparing to implement the advanced approaches    would have to adopt a written implementation plan, approved by its board of    directors, describing in detail how the bank complies, or intends to comply,    with the rule's qualification requirements. The bank would have to establish    and maintain a comprehensive and sound planning and governance process to    oversee implementation efforts described in its plan and demonstrate to its    primary federal supervisor that it meets the qualification requirements for    the advanced approaches. In addition, a bank would have to complete a satisfactory    parallel run, as described below. A core bank would have to adopt an implementation    plan no later than six months after it becomes a core bank. An opt-in bank    would be able to adopt an implementation plan at any time, but it would have    to give written notice to its primary federal supervisor at least twelve months    before it proposes to move to the first transitional floor period, as described    below.

A bank's implementation plan would have to assess its state of readiness relative    to the qualification requirements for the advanced approaches and include    a gap analysis that identifies areas where additional work is needed. The    plan would need to address all consolidated subsidiaries and any proposed    temporary or permanent exclusion of an immaterial business line, portfolio,    or exposure from the advanced approaches. The plan also would have to include    objective, measurable milestones, including delivery dates, and a target date    when the bank expects its advanced approaches to be fully operational. For    core banks, the proposal provides that the plan would have to include a first    transitional floor period start date that is no later than thirty-six months    after the effective date of the final rule or the date the bank becomes a    core bank (although this period could be extended by the bank's primary federal    supervisor). A bank's primary federal supervisor would, through ongoing supervisory    dialogue and review, assess the bank's progress relative to its plan and its    readiness to move to the advanced approaches.

Before moving to the advanced approaches for risk-based capital purposes,    a bank would have to complete a satisfactory parallel run that is at least    four consecutive calendar quarters, and during which the bank's primary    federal supervisor deems the bank's compliance with the qualification requirements    to be satisfactory. Under the proposal, the first opportunity for a bank to    begin a parallel run would be January 1, 2008. During the parallel    run, a bank would remain subject to the general risk-based capital rules for    all applicable regulatory and supervisory purposes, but the bank also would    calculate its capital ratios using the advanced approaches and would report    pertinent information to its primary federal supervisor. In addition to assessing    the bank's readiness to move to the advanced approaches, the agencies would    use this information to further assess the advanced approaches and the extent    to which modifications to the framework might be necessary.

A bank's primary federal supervisor would notify the bank of the date when    it may begin to use the advanced approaches for risk-based capital purposes.    To ensure a smooth transition to the advanced approaches, the proposed rule    would impose temporary floors on the amount by which a bank's risk-based capital    requirements could decline relative to the general risk-based capital rules,    over a period of at least three years. A bank would have to progress    through the three transitional floor periods, each of which must last at least    one year. The bank's primary federal supervisor would advise the bank    when it is able to move to a subsequent floor period or out of the transitional    floor periods altogether. Table A sets forth the proposed transitional    floor periods.

| Transitional floor period | Transitional floor percentage |
|---------------------------|-------------------------------|
| First floor period        | 95 percent                    |
| Second floor period       | 90 percent               |
| Third floor period        | 85 percent                    |

During the transitional floor periods, a bank would calculate its risk-weighted    assets under the general risk-based capital rules and multiply that amount    by the appropriate floor percentage from Table A. This product would    be the bank's "floor-adjusted" risk-weighted assets. The bank would    calculate its tier 1 and total risk-based capital ratios using the general    risk-based capital rules for the numerator values and floor-adjusted risk-weighted    assets for the denominator values. The bank also would calculate its tier 1    and total risk-based capital ratios using the definitions and rules in this    proposal (referred to as the advanced approaches risk-based capital ratios).    In addition, the bank would calculate a tier 1 leverage ratio using tier 1    capital as defined in the proposal for the ratio's numerator and total average    assets as the denominator.

The bank would publicly report all five ratios described above –    two floor-adjusted risk-based capital ratios, two advanced approaches risk-based    capital ratios, and one leverage ratio. A bank would have to meet all applicable    regulatory and supervisory requirements that are linked to tier 1 and    total risk-based capital ratios using the lower of the respective floor-adjusted    risk-based capital ratio and the advanced approaches risk-based capital ratio    for each applicable ratio. Thus, for a DI using the advanced approaches, the    applicable PCA category during the transition period would be determined by    reference to the lower of the two tier 1 and total risk-based capital    ratios. During the transition period, a bank's tier 1 and tier 2    capital for all non-risk-based-capital purposes (such as Regulation W    quantitative limits) would be the bank's tier 1 and tier 2 capital    as calculated under the advanced approaches. Given the same capital elements,    tier 1 and tier 2 capital would typically be lower under the proposed    rule than under the general risk-based capital rules due to certain numerator    adjustments described below.

This proposed transition approach is different from that provided in the New    Accord. Under the New Accord, a bank would have a two-year transition period    and would be able to begin a parallel run in 2007. During the first transition    year (2008 under the New Accord) the dollar amount of a bank's minimum capital    requirement (that is, its effective minimum required capital or EMRC)12    could not be less than 90 percent of EMRC as calculated under Basel I. During    the second transition year (2009 under the New Accord), EMRC could not be    less than 80 percent of EMRC as calculated under Basel I. In some cases, the    Basel II approach could permit an actual decrease in the amount of minimum    required capital in excess of 10 percent or 20 percent, the intended limitations.    Board staff believes the approach in the Basel II NPR provides an easier-to-understand    link between the general risk-based capital rules and the proposed rules and    will facilitate the transition process while ensuring capital requirements    do does not decline precipitously. 

Staff notes that the proposed transition rules would result in a one-year    delay for U.S. banks to begin a parallel run relative to the timeline provided    in the New Accord and would impose a longer and more gradual transition period    with applicable floors relative to the New Accord. Staff believes this prudential    approach is appropriate to ensure the agencies have sufficient opportunity    to assess bank implementation of the framework and its overall impact on regulatory    capital.

Because Basel II uses banks' estimates of certain key risk parameters to determine    risk-based capital requirements, the advanced approaches introduce greater    complexity to the regulatory framework and would require banks using those    approaches to have a high level of sophistication in risk measurement and    management systems. The qualification requirements are written broadly to    accommodate the many ways a bank may design and implement robust internal    credit and operational risk measurement and management systems and to permit    industry practice to evolve. A bank seeking to use the advanced approaches    would have to meet the qualification requirements in the proposed rule (as    supplemented by supervisory guidance) to the satisfaction of its primary federal    supervisor and complete a satisfactory parallel run.

Specifically, a bank's advanced approach systems would have to incorporate    five interdependent components in a framework for evaluating credit and operational    risk and measuring regulatory capital:
    - A risk rating and segmentation system that assigns ratings to individual       wholesale obligors and exposures and assigns individual retail exposures       to segments;
    - A quantification process that translates the risk characteristics of wholesale       obligors and exposures and segments of retail exposures into numerical       risk parameters that are used as inputs to the IRB risk-based capital formulas;
    - An ongoing process that validates the accuracy of the ratings assignments,       segmentations and risk parameters;
    - A data management and maintenance system that supports the advanced approach       systems; and
    - Oversight and control mechanisms that ensure the advanced approach systems       are functioning effectively and producing accurate results.

One of the principal objectives of the proposed framework is to provide appropriate    incentives for banks to enhance techniques for measuring and managing their    risks. The proposed rule would require a bank to have a rigorous process for    assessing its overall capital adequacy in relation to its total risk profile    and a comprehensive strategy for maintaining sufficient capital levels. While    recognizing that not every risk can be measured precisely, the following risks,    at a minimum, would be expected to be factored into a bank's internal capital    assessment process: credit risk, market risk, operational risk, interest rate    risk in the banking book, liquidity risk, concentration risk, reputational    risk and strategic risk. 

The proposed rule also would require that the systems and processes a bank    uses for risk-based capital purposes be sufficiently consistent with its internal    risk management processes and management information reporting system such    that data from the latter processes and systems can be used to verify the    reasonableness of the inputs the bank uses for risk-based capital purposes.    Consistent with pillar 2 of the New Accord and existing U.S. supervisory    expectations and guidance, a bank would have to internally assess its capital    adequacy relative to its overall risk profile. The bank's primary federal    supervisor would evaluate how well the bank is assessing its capital needs    relative to its risks and, if deficiencies are identified, the supervisor    would take necessary action to ensure that appropriate and prudent levels    of capital are maintained.

*Wholesale exposures*

For wholesale exposures, a bank would have to have an internal risk rating    system that indicates the likelihood of default of each individual obligor.    A bank would assign an internal risk rating to each wholesale obligor, which    should reflect the obligor's PD. In making this assignment, the bank would    consider key obligor attributes, both qualitative and quantitative, such as    historic and projected financial performance, trends in key financial performance    ratios, financial contingencies, and an assessment of the quality of the obligor's    management capabilities. The bank would have to assign each legal entity wholesale    obligor to a single risk rating grade. Thus, if a single wholesale exposure    of the bank is in default, all of the bank's wholesale exposures to that obligor    would be treated as defaulted for risk-based capital purposes. In addition,    the proposed rule provides that a bank's internal rating system must have    at least seven discrete grades for non-defaulted obligors and at least one    grade for defaulted obligors. 

Under the proposal, a wholesale obligor would be in default if, for any credit    exposure of the bank to the obligor, the bank has placed the exposure on non-accrual    status, taken a full or partial charge-off or write-down on the exposure due    to the distressed condition of the obligor, or incurred a credit-related loss    of 5 percent or more of the exposure's initial carrying value in connection    with the sale of the exposure or the transfer of the exposure to the held-for-sale,    available-for sale, trading account, or other reporting category. This proposed    definition is different from the proposed definition of default in the ANPR    and in Basel II, which is linked to a bank's determination that a borrower    is unlikely to pay its obligations in full, or that the borrower is more than    90 days past due on principal or interest on any material obligation    to the bank. The Basel II NPR changes were made in response to issues    raised by commenters on the ANPR – commenters encouraged the agencies    to use a definition of default that was closer to that used by bank managers.    The Basel II NPR seeks comment on the revised definition and on what    issues may arise because it is different from the definition of default that    may be used in other national jurisdictions. 

A bank would capture the estimated loss severity upon default of a wholesale    exposure by either directly assigning an ELGD and LGD estimate to the exposure    or by grouping the exposure with other wholesale exposures into loss severity    rating grades (reflecting the bank's estimate of the ELGD or LGD of the exposure).    PD, ELGD, and LGD are discussed in more detail below.

*Retail exposures*

For retail exposures, a bank would assign the risk parameters to segments    of exposures with homogeneous risk characteristics, rather than to individual    exposures. Risk characteristics could include, for example, loan-to-value    ratios, credit scores, loan terms and structure, geographic location, and    collateral type. Retail exposures in each retail subcategory (residential    mortgages, QRE, and other retail) would have to be segmented separately. In    addition, defaulted retail exposures would have to be segmented separately    from non-defaulted retail exposures.

Under the proposal, the definition of default for retail exposures is consistent    with the Federal Financial Institutions Examination Council's (FFIEC)    Uniform Retail Credit Classification and Account Management Policy.13    Thus, revolving retail exposures and residential mortgages would be in default    at 180 days past due and other retail exposures would be in default at    120 days past due. In addition, a retail exposure would be in default    if the bank has taken a full or partial charge-off or write-down of principal    for credit-related reasons. Default on one retail exposure would not require    a bank to treat all other obligations of the same obligor to the bank as defaulted.

*Probability of default (PD)*

As noted above, under the proposal a bank would assign each wholesale exposure    to an internal rating grade and would associate a PD with each rating grade.    PD for a wholesale exposure to a non-defaulted obligor would be the bank's    empirically-based best estimate of the long-run average of one-year default    rates for the rating grade over a mix of economic conditions. 

A bank also must assign a PD to each segment of retail exposures. For retail    exposures, the definition of PD would depend on the materiality of seasoning    effects for the segment. Where seasoning is not a material consideration,    PD would be the bank's empirically-based best estimate of the long-run average    of one-year default rates for the exposures in the segment over a mix of economic    conditions. Where seasoning effects are material, PD would be the bank's empirically-based    best estimate of the annualized cumulative default rate over the expected    remaining life of the exposures over a mix of economic conditions. 

For both wholesale exposures and segments of retail exposures, PD may not    be less than 0.03 percent, except for exposures to, or guaranteed by,    a sovereign entity and certain other organizations such as the Bank for International    Settlements and the International Monetary Fund. PD estimates would be converted    into PDs reflecting economic downturn conditions as part of the IRB risk-based    capital formulas. For wholesale exposures to defaulted obligors and for segments    of defaulted retail exposures, PD would be 100 percent.

*Expected loss given default and loss given default    (ELGD and LGD)*

Under the proposal, a bank would have to assign an ELGD and LGD risk parameter    for each wholesale exposure (or loss severity grade) and each segment of retail    exposures. The LGD of a segment of residential mortgage exposures (unless    principal is guaranteed by the full faith and credit of a sovereign entity)    may not be less than 10 percent. The proposal would define ELGD as the    bank's empirically-based best estimate of the default-weighted average economic    loss per dollar of EAD the bank expects to incur in the event an exposure    defaults within a one-year horizon over a mix of economic conditions. LGD    is the bank's empirically-based best estimate of the economic loss on an exposure,    per dollar of EAD, in the event of default within a one-year horizon    during economic downturn conditions. The LGD of an exposure or segment may    never be less than the ELGD of that exposure or segment. 

The economic loss amount on an exposure would have to capture all material    credit-related losses on the exposure (including accrued but unpaid interest    or fees, losses on the sale of repossessed collateral, direct workout costs,    and an appropriate allocation of indirect workout costs). Economic downturn    conditions for an exposure generally would be those conditions in which the    aggregate default rates for the exposure's entire wholesale or retail subcategory    held by the bank in the exposure's national jurisdiction are significantly    higher than average. 

The proposal provides two methods of generating LGD estimates for wholesale       and retail exposures. First, a bank would be able to use its own estimates       of LGD for a subcategory of exposures if the bank has prior written approval       from its primary federal supervisor. As an alternative to own estimates       of LGD, the proposal provides a supervisory mapping function for converting       ELGD into LGD for risk-based capital purposes. A bank that does not qualify       to use its own estimates of LGD for a subcategory of exposures would instead       compute LGD by applying the mapping function to its internal estimates       of ELGD for such exposures. The proposed mapping function is: LGD = 0.08 + 0.92 × ELGD.       Under this mapping function, for example, an ELGD of 0 percent is       converted to an LGD of 8 percent and an ELGD of 20 percent is       converted to an LGD of 26.4 percent. 

Board staff believes this supervisory mapping function is a necessary component    of the Basel II NPR because it may be difficult for banks currently to    produce internal estimates of LGD that are sufficient for risk-based capital    purposes. LGD data for important portfolios may be sparse and there is limited    industry experience with incorporating downturn conditions into LGD estimates.    Although an explicit mapping function is not set forth in the New Accord,    Board staff believes it is consistent with the BCBS guidance issued in July 2005    that provides national discretion to supervisors to establish conservative    and temporary measures for reflecting downturn LGDs when supervisory LGDs    are not specified.14    The Basel II NPR seeks comment on the proposed mapping function as well    as on other aspects of LGD-related definitions and estimation.

*Exposure at default (EAD)*

Under the proposal, the EAD for the on-balance sheet component of a wholesale    or retail exposure generally would be the bank's carrying value, including    net accrued but unpaid interest and fees (less unrealized gains and plus unrealized    losses for available-for-sale securities). For the off-balance sheet component    of a wholesale or retail exposure that is a loan commitment or line of credit,    EAD generally would be the bank's best estimate of net additions to the outstanding    amount owed the bank, including future additional draws, that are likely to    occur over the remaining life of the exposure assuming it goes into default.    The estimate of net additions would have to reflect what would be expected    during a period of economic downturn conditions. For other types of off-balance    sheet wholesale or retail exposures, such as guarantees, EAD would be the    notional amount of the exposure. EAD for OTC derivative contracts, repo-style    transactions, and eligible margin loans is discussed below in the credit risk    mitigation section. For a segment of retail exposures, EAD would be the sum    of the EADs for each individual exposure in the segment. 

*Effective maturity (M)*

A bank also must calculate the effective maturity (M) for each wholesale    exposure. For wholesale exposures other than repo-style transactions, eligible    margin loans, and OTC derivative contracts subject to a qualifying master    netting agreement, M would be the weighted-average remaining maturity (measured    in years) of the expected contractual cash flows from the exposure, using    the undiscounted amounts of the cash flows as weights. A bank could, at its    option, use the nominal remaining maturity (measured in years) of the    exposure. The M for repo-style transactions, eligible margin loans, and OTC    derivative contracts subject to a qualifying master netting agreement would    be the weighted-average remaining maturity (measured in years) of the    individual transactions subject to the qualifying master netting agreement,    with the weight of each individual transaction equal to the notional amount    of the transaction. 

For most exposures, M would be capped at five years and floored at one year.    For exposures that have an original maturity of less than one year    and are not part of a bank's ongoing financing of the obligor, however, M    would be floored at one day. Examples of transactions that may qualify    for the exemption from the one-year maturity floor include, but are not limited    to, due from other banks, bankers' acceptances, and sovereign exposures.

In all cases, the data a bank uses to estimate risk parameters would have    to be relevant to the bank's actual wholesale and retail exposures and of    sufficient quality to support the determination of risk-based capital requirements    for the exposures. A bank would be expected to use the best available data    for quantifying the risk parameters, including internal data, external data,    or pooled data combining internal and external data elements.

*Operational risk (pages 129 – 139)*

Under the proposal, operational risk would be defined as the risk of loss    from inadequate or failed internal processes, people, and systems or from    external events (including legal risk but excluding strategic and reputational    risk). Operational loss would be defined as a loss resulting from an operational    loss event, including all expenses associated with an operational loss event    except for opportunity costs, foregone revenue, and costs related to risk    management and control enhancements implemented to prevent future operational    losses. An operational loss event would be an event that results in loss and    is associated with internal fraud; external fraud; employment practices and    workplace safety; clients, products, and business practices; damage to physical    assets; business disruption and system failures; or execution, delivery and    process management. A bank would be required to have qualifying operational    risk management processes, data and assessment systems, and quantification    systems to measure operational risk and determine an appropriate risk-based    capital requirement for that risk.

A bank would be required to have an operational risk management function independent    from business line management. The operational risk management function would    be responsible for the design, implementation, and oversight of the bank's    operational risk data and assessment systems, operational risk quantification    systems, and related processes. A bank also would be required to have a process    to identify, measure, monitor, and manage operational risk in bank products,    activities, processes, and systems. This process would have to provide for    the consistent and comprehensive collection of the data needed to estimate    the bank's exposure to operational risk. A bank's operational risk management    processes would be expected to reflect the scope and complexity of its business    lines, as well as its corporate organizational structure.

*Operational risk data and assessment system*

Under the proposal, a bank must have an operational risk data and assessment    system that incorporates on an ongoing basis the following four elements:    (i) internal operational loss event data; (ii) external operational    loss event data; (iii) results of scenario analysis; and (iv) assessments    of the bank's business environment and internal controls. Internal operational    loss event data would include data relating to gross operational loss amounts,    dates, recoveries, and relevant causal information for operational loss events    occurring at the bank. External loss event data would encompass the same general    information for operational loss events at organizations other than the bank.    Scenario analysis would be a systematic process of obtaining expert opinions    to derive reasoned estimates of the likelihood and loss impact of plausible    high severity operational loss events. A business environment and internal    control factor analysis would require a bank to identify and assess the level    and trends in operational risk and related control structures at the bank.

*Operational risk quantification system*

A bank's operational risk quantification system would have to measure operational    risk exposure, using the operational risk data and assessment system, at the    99.9th percentile of the distribution of potential aggregate operational    losses over a one-year horizon. The mean of such a total loss distribution    would be the bank's expected operational loss (EOL). A bank's unexpected operational    loss (UOL) would be the difference between its operational risk exposure and    its EOL. 

A bank may use its internal estimates of dependence among operational losses    within and across business lines and operational loss event types if the bank    can demonstrate to the satisfaction of its primary federal supervisor that    its process for estimating dependence is sound, robust to a variety of scenarios,    and implemented with integrity, and allows for the uncertainty surrounding    the estimates. 

In limited circumstances there may not be sufficient data available for a    bank to generate a credible estimate of its own operational risk exposure    at the 99.9 percent confidence level. In these limited cases, a bank    may use an alternative operational risk quantification system subject to approval    by the bank's primary federal supervisor. The alternative approach would not    be available at the BHC level. The agencies would not approve a bank's proposed    alternative approach that includes an allocation of operational risk capital    requirements that includes non-DI entities or the benefits of diversification    across entities.

*Data management and maintenance (pages 139 – 140)*

A bank would be required to have data management and maintenance systems that    adequately support all aspects of the bank's advanced IRB systems for wholesale    and retail credit risk, operational risk-related systems, and other systems    permitted under the proposed rules (such as the IAA for ABCP programs and    the IMA for equity exposures). The bank's data management and maintenance    systems would have to ensure the timely and accurate reporting of risk-based    capital requirements. The bank would have to retain sufficient data elements    to permit monitoring, validation and refinement of the bank's advanced systems.

*Control and oversight mechanisms and documentation (pages 140 – 147)*

Under the proposal, bank senior management would be responsible for ensuring    that all components of systems used under the advanced approaches function    effectively and are in compliance with the qualification requirements of the    advanced approaches. A bank's board of directors (or designated committee)    would have to evaluate at least annually the effectiveness of, and approve,    the bank's advanced systems. To support these responsibilities, a bank must    have effective controls and oversight to ensure ongoing compliance with the    qualification requirements and maintenance of the integrity, reliability and    accuracy of the bank's advanced systems. The oversight process should be sufficiently    independent of the advanced systems development, implementation, and operation.

*Validation*

A bank would have to independently validate its advanced systems on an ongoing    basis. Validation would include three broad components: (i) evaluation    of the conceptual soundness of the advanced systems; (ii) ongoing monitoring    that includes process verification and comparison of the bank's internal estimates    with relevant internal and external data sources or results using other estimation    techniques (for example, benchmarking); and (iii) outcomes analysis that    includes comparisons of actual outcomes to the bank's internal estimates by    backtesting and other methods.

*Internal audit*

A bank would have to have an internal audit function independent of business    line management that assesses at least annually the effectiveness of the controls    supporting the bank's advanced systems. Internal audit would have to review    the validation process including validation procedures, responsibilities,    results, timelines, and responsiveness to findings. Further, internal audit    would have to evaluate the depth, scope, and quality of the risk management    system review process.

*Stress testing*

Under the proposal, a bank would have to periodically stress test its advanced    systems. Stress testing analysis provides one way of understanding how economic    cycles might affect risk-based capital requirements, including migration across    rating grades or segments. Banks would have to periodically stress test their    advanced systems and manage their regulatory capital position so that they    remain at least adequately capitalized during all phases of the economic cycle,    including during an economic downturn. The scope of the stress testing would    have to be broad and include all material portfolios.

*Documentation*

Finally, a bank would be required to document all material aspects of its    advanced systems, including, but not limited to, its internal risk rating    and segmentation systems, risk parameter quantification systems, model design,    assumptions, and validation results. Documentation would be expected to support    the requirements for quantification, validation, and control and oversight    mechanisms, as well as the bank's broader risk management and reporting needs.    Banks would have to document all material assumptions underpinning their analytical    framework and would have to support any subsequent changes to those assumptions.

Banks would be required to meet the qualification requirements on an ongoing    basis. In addition, banks would be expected to improve their systems as they    improve data collection and as industry practice evolves. To facilitate supervisory    oversight of such system changes, a bank would have to notify its primary    federal supervisor when it makes material changes to its advanced approach    systems or modeling assumptions. If a bank falls out of compliance with the    qualification requirements for the advanced approaches, the bank would have    to establish an acceptable remedial plan and would have to disclose publicly    its areas of non-compliance.

Under the proposal, a bank's total qualifying capital would be the sum of    its tier 1 capital elements and tier 2 capital elements, subject    to various limits and restrictions, minus certain deductions. The tier 1    and tier 2 capital elements generally remain the same as they are currently    in the general risk-based capital rules.

A bank would continue to deduct from tier 1 capital goodwill, other intangible    assets, and deferred tax assets to the same extent that those are currently    deducted under the general risk-based capital rules. Qualifying intangible    assets and deferred tax assets that meet the conditions and limits in the    general risk-based capital rules would not have to be deducted from tier 1    capital. In addition, a bank would not have to deduct from tier 1 capital    certain percentages of the adjusted carrying value of its nonfinancial equity    investments as it does under the general risk-based capital rules. Instead,    the bank's equity exposures would be subject to the equity treatment in the    proposed rule.

Under the general risk-based capital rules, a bank generally may include in    tier 2 capital its allowance for loan and lease losses (ALLL) up    to 1.25 percent of risk-weighted assets. Under the proposal, the ALLL    is treated differently. The proposal includes a methodology for adjusting    risk-based capital requirements based on a comparison of the bank's eligible    credit reserves to its expected credit losses (ECL). Eligible credit    reserves are defined as all general allowances, including the ALLL, that have    been established through a charge against earnings to absorb credit losses    associated with on- and off-balance sheet wholesale and retail exposures.    If the bank has a shortfall of eligible credit reserves compared to ECL, the    bank would deduct 50 percent of the shortfall from tier 1 capital    and 50 percent from tier 2 capital. If eligible credit reserves    exceed ECL, the excess portion of eligible credit reserves may be included    in tier 2 capital up to 0.6 percent of credit risk-weighted assets.

The agencies' ANPR on Basel II would have required a bank to hold capital    against its measured amount of unexpected credit loss (UCL) plus ECL.    Many commenters on the ANPR objected to this treatment arguing that capital    should cover UCL only and reserves typically cover ECL. In October 2003,    the BCBS announced its decision to remove ECL from the capital calculation    in the New Accord. The treatment described above for ECL and eligible credit    reserves reflects this shift to a UCL-only approach. It is intended to maintain    appropriate incentives to reserve prudently, while ensuring that capital and    reserves together are sufficient to support both ECL and UCL. The 0.6 percent    limit on the inclusion of excess reserves in tier 2 capital is approximately    as restrictive as the existing cap on the inclusion of the ALLL in the general    risk-based capital rules. 

A bank also would have to deduct from tier 1 capital any gains-on-sale    and certain other high risk securitization exposures. Certain other low-rated    or unrated securitization exposures would be deducted from tier 1 and    tier 2 capital (50 percent from each category). In addition, under    the proposal, a bank would deduct its exposures on certain unsettled and failed    capital markets transactions 50 percent from tier 1 and 50 percent    from tier 2 capital.

For BHCs with consolidated insurance underwriting subsidiaries that are functionally    regulated, the BHC would consolidate the assets of that subsidiary for the    purpose of determining risk-weighted assets, but would deduct from regulatory    capital an amount equal to the insurance underwriting subsidiary's minimum    regulatory capital requirement as determined by its functional regulator.    This approach is different from the New Accord, which broadly endorses a deconsolidation    and deduction approach for insurance underwriting subsidiaries. Board staff    believes a full deconsolidation and deduction approach may not fully capture    the credit, market and operational risk in insurance underwriting subsidiaries    at the BHC level and, thus, has proposed the alternative approach outlined    above.

Under the proposal, a bank would have to group its exposures into four general    categories: wholesale, retail, securitization, and equity. 

*Wholesale exposures (pages 159 – 162)*

Wholesale exposures include credit exposures to a company, individual, sovereign    or governmental entity. As noted, wholesale exposures would be further identified    as HVCRE or non-HVCRE exposures. An HVCRE exposure would be defined as a credit    facility that finances the acquisition, development, or construction of real    property, excluding facilities used to finance (i) one-to-four family    residential property or (ii) commercial real estate projects meeting    certain LTV specifications and capital contribution conditions.

The New Accord identifies five subclasses of specialized lending for which    the primary source of repayment of the obligation is the income generated    by the financed assets, rather than the independent capacity of a broader    commercial enterprise. The subclasses are project finance, object finance,    commodities finance, income-producing real estate, and HVCRE. The New Accord    also provides a methodology (the supervisory slotting approach) for banks    that cannot estimate PD for these exposure types. Board staff believes that    sophisticated banks that would apply the advanced approaches in the United    States should be able to estimate all risk parameters for specialized lending    exposures and, therefore, the proposal does not include a separate treatment    for these exposures beyond the different IRB risk-based capital formula for    HVCRE.

In contrast to the New Accord, the proposal also does not include an adjustment    that would result in a lower risk weight for a loan to a small or medium-size    enterprise that has the same risk parameter values as a loan to a larger firm.    Board staff is not aware of compelling evidence that smaller firms with the    same PD and LGD as a larger firm present less systematic risk. As mentioned    above and discussed below in more detail, some small business loans may be    treated as retail exposures. The Basel II NPR seeks comment specifically on    the treatment of small business exposures.

*Retail exposures (pages 162 – 164)*

Retail exposures generally include exposures to an individual or small business    that are managed as part of a segment of similar exposures -- that is, not    on an individual exposure basis. The Basel II NPR would provide for the    following subcategories of retail exposures: (1) residential mortgage    exposures; (2) QREs; and (3) other retail exposures. Residential    mortgage exposures would include any exposure that is primarily secured by    a first or subsequent lien on a one-to-four family property (including term    loans and revolving home equity lines of credit). An exposure primarily secured    by a first or subsequent lien on residential property that is not one-to-four    family (that is, multifamily) also could be included as a residential mortgage    exposure as long as the exposure has both an original and outstanding balance    of no more than $1 million.

QREs would include exposures to individuals that are revolving, unsecured,    and unconditionally cancelable by the bank; have a maximum exposure amount    of up to $100,000; and are managed as part of a segment of exposures with    homogeneous risk characteristics. This category would include most credit    card exposures to individuals and overdraft lines on individual checking accounts.

Other retail would include exposures to individuals for non-business purposes    that are not in the other two retail subcategories and are managed as part    of a segment of similar exposures. This would include, for example, personal    term loans, margin loans, auto loans and leases, credit card accounts above    $100,000, and student loans. Also included in this subcategory would be exposures    for business purposes up to a single borrower threshold of $1 million    if the exposures are managed as part of a segment of similar exposures.

*Securitization exposures (pages 164 – 167)*

Securitization exposures would include on-balance sheet and off-balance sheet    credit exposures that arise from a traditional or synthetic securitization.    A securitization transaction generally is one in which: (i) all or a    portion of the credit risk on one or more underlying exposures is transferred    to a third party; (ii) the credit risk associated with the underlying    exposures has been separated into at least two tranches reflecting different    levels of seniority; (iii) performance of the securitization exposure    depends on the performance of the underlying exposures; and (iv) all    or substantially all of the underlying exposures are financial assets. Securitization    exposures could take the form of, among other things, asset-backed and mortgage-backed    securities, loans, lines of credit, liquidity facilities, financial standby    letters of credit, credit derivatives and guarantees, servicing assets, servicer    cash advance facilities, reserve accounts, credit-enhancing representations    and warranties, and CEIOs.15    Exposures resulting from the tranching of the risks of nonfinancial assets    (such as project or object finance) generally would be treated under the wholesale    rules, rather than the securitization rules.

*Equity exposures (pages 167 – 168)*

Equity exposures generally would include a security or instrument that represents    a direct or indirect ownership interest in, and residual claim on, the assets    and income of a company; a security or instrument that is mandatorily convertible    into an equity exposure; an option or warrant that is exercisable for an equity    exposure; and any other security or instrument (other than a securitization    exposure) to the extent that its return is based on the performance of an    equity exposure.

The first step in the risk-weighting process is for a bank to determine which    of its exposures falls into each of the categories described above. The second    step involves assigning the wholesale exposures to obligor rating grades and    loss severity grades and assigning retail exposures to segments. During the    third step, the quantification phase, the bank would assign the risk parameters    (PD, ELGD, LGD, EAD, and, where applicable, M) to the wholesale exposures    and retail segments. The quantification phase would include obtaining historical    reference data, estimating risk parameters for the reference data, mapping    the historical reference data to the bank's current exposures, and assigning    the risk parameters to those exposures.

After assigning the risk parameters, the bank would calculate the dollar risk-based    capital requirement for each wholesale exposure and retail segment. The bank    would insert the risk parameters into the appropriate IRB risk-based capital    formula as specified in Table B and then would multiply the output of    the formula (K) by the EAD of the exposure or segment.16

*

Return to text

For defaulted exposures, the capital requirement generally    would be 8 percent multiplied by the EAD of the exposure or segment.    For defaulted wholesale exposures, however, if the capital requirement for    the exposure immediately before default is greater than 8 percent, the    requirement prior to default generally would apply.

Under the proposal a bank would be able to recognize the risk-mitigating effects    of both financial collateral and nonfinancial collateral, as well as guarantees    and credit derivatives, for risk-based capital purposes. The bank must have    operational procedures and risk management processes that ensure that all    documentation used in collateralizing or guaranteeing a transaction is legal,    valid, binding, and enforceable under applicable law in the relevant jurisdictions.    Although CRM techniques may reduce or transfer credit risk, they simultaneously    may increase other risks such as operational, liquidity, and market risks.    Accordingly, banks would have to have robust procedures and processes to control    risks, and to monitor the implications of using CRM techniques for the bank's    overall credit risk profile.

In general, a bank would recognize collateral that secures a wholesale exposure    as part of the ELGD and LGD estimation process and collateral that secures    a retail exposure as part of the PD, ELGD, and LGD estimation process. The    bank would have to consider the relation (that is, correlation) between the    obligor and collateral, as well as any currency and/or maturity mismatch between    the hedged exposure and the collateral. Further, the bank would have to take    into account the time and cost needed to realize the liquidation proceeds    and the potential for a decline in the collateral value over this time period.    The bank would need to have in place systems for promptly requesting and receiving    additional collateral for transactions whose terms require maintenance of    collateral values at specified thresholds. In some limited circumstances,    discussed below, a bank may reflect the risk-mitigating effects of financial    collateral through an adjustment to the exposure's EAD.

Under the proposal, a bank may use one of three EAD methodologies – a    collateral haircut approach, a simple VaR methodology, or an internal models    methodology – instead of an ELGD/LGD estimation methodology to recognize    the benefits of financial collateral in mitigating the counterparty credit    risk associated with repo-style transactions, eligible margin loans, collateralized    OTC derivative contracts, and groups of such transactions with a single counterparty    subject to a qualifying master netting agreement (netting set). The simple    VaR methodology is available only for single product netting sets of repo-style    transactions and eligible margin loans. The internal models methodology also    would be available for determining EAD for OTC derivatives whether or not    they are collateralized.

Financial collateral generally would be defined as cash on deposit with the    bank, gold bullion, certain highly-rated long-term debt securities, investment    grade short-term debt instruments, publicly-traded equity securities, publicly-traded    convertible bonds, and certain mutual fund shares.

*Collateral haircut approach*

Under the collateral haircut approach, a bank would set EAD equal to the sum    of three quantities: (i) the value of the exposure less the value of    the collateral; (ii) the net position in a given security multiplied    by the market price volatility haircut appropriate to that security; and (iii) the    net position of both cash and securities in each currency that is different    from the settlement currency, multiplied by a haircut appropriate to each    currency mismatch. To determine the appropriate haircuts, a bank could use    standard supervisory haircuts or its own estimates of haircuts. Use of own    estimates would be subject to prior written approval of the bank's primary    federal supervisor and would need to reflect certain minimum qualitative and    quantitative standards.

*Models approaches*

With prior written supervisory approval, a bank would be able to use the simple    VaR methodology for repo-style transactions and eligible margin loans that    are subject to a single product qualifying master netting agreement. Under    the simple VaR methodology a bank's EAD for the transactions would be equal    to the value of the exposures minus the value of the collateral plus a VaR-based    estimate of the potential future exposure (PFE), that is, the maximum    exposure expected to occur on a future date with high level of confidence.    The VaR model would have to meet certain estimation and holding period requirements    and would be subject to regular backtesting.

The internal models methodology would be available for OTC derivative contracts,    eligible margin loans, and repo-style transactions. This methodology would    require an internal risk model that captures counterparty credit risk and    estimates EAD at the level of a netting set. The internal models methodology    makes use of variables identified as expected exposure (EE) and expected    positive exposure (EPE). EE is the probability-weighted average exposure    to a counterparty estimated to exist at any specified future date. EPE is    the time-weighted average of individual expected exposures estimated for a    given forecasting horizon (proposed to be one year). Under the proposal, a    bank would adjust its EPE calculation to address the concern that EPE may    not capture risk arising from the replacement of existing short-term positions    over the one-year horizon (rollover risk) or may underestimate the exposures    arising from eligible margin loans, repo-style transactions, and OTC derivatives    with short-term maturities. This adjusted EPE is called effective EPE. EAD    would be calculated as a multiple of effective EPE. The internal models methodology    also includes an adjustment factor for maturity and permits the recognition    of collateral agreements subject to various conditions.

*Current exposure methodology*

A bank also would be able to use the current exposure methodology to determine    EAD for OTC derivative contracts. The current exposure methodology for a single    OTC derivative contract is similar to the methodology in the general risk-based    capital rules, where the EAD is equal to the sum of the bank's current credit    exposure and an estimate of the bank's PFE on the derivative contract. The    current credit exposure would be the greater of the mark-to-market value of    the derivative contract or zero. PFE is determined by multiplying the notional    amount of a contract by a credit conversion factor (CCF). The methodology    for OTC derivative contracts subject to master netting agreements also is    generally the same as the treatment in the general risk-based capital rules.    Banks would continue to calculate net current exposure and adjust the gross    PFE using a formula that includes the net-to-gross current exposure ratio.    The CCFs used to determine PFE are the same as those in the general risk-based    capital rules except for certain credit derivative contracts and floating/floating    basis swaps.

Under the proposal, a bank may use either a PD substitution or an LGD adjustment    approach to recognize the risk-mitigating effects of an eligible guarantee    or eligible credit derivative on a wholesale exposure, and in certain cases    may use a prescribed double default treatment. Eligible guarantees must be    in writing, unconditional, non-cancelable by the protection provider, legally    enforceable against the protection provider, and must give the beneficiary    a direct claim against the protection provider. Eligible credit derivatives    must be in the form of a credit default swap, nth-to-default swap, or total    return swap and must meet a variety of additional requirements. Under both    the PD substitution and LGD adjustment approaches, the protection amount would    be the effective notional amount of the guarantee or credit derivative reduced    by applicable haircuts for maturity mismatch, lack of restructuring coverage,    and currency mismatch.

*PD substitution and LGD adjustment approaches*

Under the PD substitution approach, if the protection amount is greater than    or equal to the EAD of the hedged exposure, a bank would substitute for the    PD associated with the rating grade of the obligor the PD associated with    the rating grade of the protection provider. If the protection amount is less    than the EAD of the hedged exposure, the bank would treat the hedged exposure    as two separate exposures – protected and unprotected. 

Under the LGD adjustment approach, if the protection amount is greater than    or equal to the EAD of the hedged exposure, the bank's risk-based capital    requirement for the hedged exposure would be the greater of (i) the risk-based    capital requirement for the exposure as calculated under the proposal with    the ELGD and LGD adjusted by the bank to reflect the guarantee or credit derivative,    and (ii) the risk-based capital requirement for a comparable direct exposure    to the protection provider. If the protection amount is less than the EAD    of the hedged exposure, the bank would treat the hedged exposure as two separate    exposures – protected and unprotected.

*Double default treatment*

The proposed rule also contains a separate risk-based capital methodology    for hedged exposures eligible for double default treatment. This treatment    is intended to recognize that the PD substitution approach and LGD adjustment    approach do not fully reflect the risk-mitigating benefits of certain types    of guarantees and credit derivatives because the resulting risk-based capital    requirement does not consider the joint probability of default of the obligor    and the protection provider.

To be eligible for double default treatment, a hedged exposure must be fully    covered, or covered on a pro rata basis, by an uncollateralized single-reference-obligor    credit derivative or guarantee provided by an eligible double default guarantor.    An eligible double default guarantor would be a creditworthy, regulated financial    firm whose normal business includes the provision of credit protection and    the management of a diversified portfolio of credit risk. In addition, before    applying double default treatment, a bank would have to determine that there    is not excessive correlation between the creditworthiness of the protection    provider and the obligor of the hedged exposure. The bank's process for making    this determination would be subject to supervisory approval.

The risk-based capital requirement for a hedged exposure subject to double    default treatment would be calculated by multiplying the risk-based capital    requirement for the hedged exposure (as if it were unhedged) by an adjustment    factor that considers the PD of the protection provider. Thus, the PDs of    both obligor and protection provider are factored into the risk-based capital    requirement.

The proposed rule does not specify a methodology for taking guarantees and    credit derivatives into account in the segmentation of retail exposures. Likewise,    the proposal does not explicitly limit the extent to which a bank may reflect    guarantees and credit derivatives in the estimation of PD, ELGD, and LGD of    retail segments, except by the application of the overall floors on PD and    LGD assignments noted above. The proposal recognizes, however, that the agencies    have concerns that this approach may provide banks with substantial discretion    to incorporate double default and double recovery effects in the segmentation    process and would be inconsistent with the treatment for wholesale exposures. 

The proposal outlines two possible approaches for addressing this concern.    The first approach would specifically identify certain guarantees as eligible    retail guarantees and permit a bank to adjust its ELGD and LGD (but not PD)    to reflect the credit protection from such guarantees. The other approach    would allow for recognition of a broader range of retail-related guarantees,    but would subject the bank's risk-based capital requirement for a segment    of guaranteed retail exposures to a floor (for example, between 2 percent    and 6 percent on a retail segment).

The proposed rule sets forth the risk-based capital requirements for unsettled    and failed securities, foreign exchange, and commodities transactions. It    has different treatments for delivery-versus-payment (DvP) and payment-versus-payment (PvP)    transactions with a normal settlement period, and non-DvP/non-PvP transactions    with a normal settlement period. DvP transactions are those in which the buyer    must make payment only if the seller has made delivery of the securities or    commodities and vice versa. A PvP transaction is a foreign exchange transaction    in which one party must make a final transfer of currencies only if the other    party has made a final transfer of currencies. A normal settlement period    is one that is equal to or less than the market standard for the underlying    instrument and equal to or less than five business days.

For DvP or PvP transactions with a normal settlement period, if the bank's    counterparty has not made payment or delivery within five business days after    the settlement date, the bank would determine its capital charge by multiplying    the positive current market value of the transaction by a risk weight that    reflects the number of days the settlement is past due. For non-DvP/non-PvP    transactions with a normal settlement period, a bank would have to hold risk-based    capital if the bank has made a delivery to its counterparty, but has not received    its corresponding deliverables by the end of the same business day. Until    five business days after the deliverable is due, the risk-based capital requirement    is determined by treating the current market value of the deliverable as a    wholesale exposure. Thereafter, the current market value of the deliverable    would be deducted from capital.

There are three proposed general approaches for determining the risk-based    capital requirement for a securitization exposure: a Ratings-Based Approach (RBA),    an Internal Assessment Approach (IAA), and a Supervisory Formula Approach (SFA).    Under the proposal, a bank would apply the following hierarchy. First, as    noted above, a bank would make deductions from tier 1 and tier 2    capital for gains-on sale and CEIOs. Second, if an exposure has an external    rating from a nationally recognized statistical rating organization (NRSRO)    or has an inferred rating (that is, the exposure is senior to another securitization    exposure in the transaction that has an external rating from an NRSRO) it    generally would be subject to the RBA. 

If a securitization exposure does not qualify for the RBA but is an exposure    to an ABCP program – such as a credit enhancement or liquidity facility    – the bank would apply the IAA or the SFA. As a general matter, a bank    may use the IAA if it has an internal risk rating system for exposures to    ABCP programs that has been approved by its primary federal supervisor. A    bank may use the SFA for exposures not subject to the RBA or IAA if it can    calculate a set of risk factors relating to the securitization, including    the risk-based capital requirement for the underlying exposures as if they    were held directly by the bank. 

If a securitization exposure is not a gain-on-sale or CEIO, does not qualify    for the RBA, and is not an exposure to an ABCP program, the bank may apply    the SFA if it is able to calculate the SFA risk factors for the securitization.    If the bank cannot calculate the SFA risk factors, the bank would have to    deduct the securitization exposure from tier 1 and tier 2 capital.

A number of commenters criticized the complexity of the ANPR's treatment of    securitization exposures and the different treatments accorded to originating    banks versus investing banks. In response to these comments, the Basel II    NPR (like the New Accord) does not generally distinguish between originating    and investing banks. The Basel II NPR also provides that if a bank provides    support to a securitization exposure in excess of the bank's predetermined    contractual obligation, it would have to hold regulatory capital against all    of the underlying exposures associated with the securitization as if the exposures    had not been securitized and would deduct from tier 1 capital any gain-on-sale    resulting from the securitization. The bank also would have to publicly disclose    that it has provided such implicit support and the regulatory impact to the    bank of providing such support.

Under the RBA, a bank would determine the risk-weighted asset amount for a    securitization exposure by multiplying the amount of the exposure by a supervisory-assigned    risk weight that depends primarily on the external or inferred rating of the    exposure. An originating bank would have to use the RBA if its retained securitization    exposure has at least two external ratings or an inferred rating based on    at least two external ratings; an investing bank must use the RBA if its securitization    exposure has one or more external or inferred ratings. The two-rating requirement    for originating banks is the only material difference between the treatment    of originating banks and investing banks under the proposed securitization    framework. Although this two-rating requirement is not included in the New    Accord, it is generally consistent with the treatment of originating and investing    banks in the general risk-based capital rules. Board staff believes that the    market discipline evidenced by a third party purchasing a securitization exposure    obviates the need for a second rating for an investing bank.

Under the RBA, the risk-based capital requirement per dollar of securitization       exposure would depend on four factors: (i) the applicable external       or inferred rating of the exposure; (ii) whether the rating reflects       a long-term or short-term assessment of the exposure's credit risk; (iii) whether       the exposure is a senior exposure (that is, has a first priority claim       on the cash flows of the underlying exposures); and (iv) a measure       of the effective number of underlying exposures in the securitization pool.       The assigned risk weights under the RBA range from 7 percent (for       certain AAA-rated exposures) to 650 percent (for exposures rated BB−).

The proposal would also require a bank to deduct from regulatory capital any    securitization exposure with an external or inferred rating two or more categories    below investment grade for long-term ratings or below investment grade for    short-term ratings.

The proposed rule would permit a bank to compute its risk-based capital requirement    for a securitization exposure to an ABCP program using the bank's internal    assessment of the credit quality of the securitization exposure. The bank's    internal assessment process and the ABCP program must meet certain qualification    requirements in the proposed rule, and the securitization exposure must initially    be internally rated at least equivalent to investment grade. The bank's primary    federal supervisor would have to determine, in writing, that a bank meets    the qualification requirements. If a bank uses the IAA for any securitization    exposure to an ABCP program it would have to use the IAA for all exposures    that qualify for the IAA approach. Under the IAA, the bank would map its internal    credit assessment to an NRSRO and apply the appropriate risk weights under    the RBA. This approach is similar to an approach already available to qualifying    banks under the general risk-based capital rules for credit enhancements to    ABCP programs.

A bank's capital requirement under the SFA depends on a number of inputs,    including the amount of the underlying exposures; the securitization's effective    number of underlying exposures; the risk-based capital requirement of the    underlying exposures as if they were held directly on the bank's balance sheet;    the amount of the securitization exposure; and the relative seniority level    of the securitization exposure. A bank may only use the SFA if it can calculate    each of these inputs on an ongoing basis. Thus, if a bank cannot compute the    risk-based capital requirement on the underlying exposures, the bank may not    use the SFA. Consistent with the RBA, the SFA imposes a 56 basis point    minimum risk-based capital requirement (8 percent of the minimum 7 percent    risk weight) per dollar of securitization exposure.

Under the proposed rule, an early amortization provision is defined as a provision    that, when triggered, causes investors in the securitization to be repaid    before the stated maturity of the securitization exposures, unless the provision    is solely triggered by events not related to the performance of the underlying    exposures or the originating bank (such as material changes in tax laws or    regulations). An originating bank would have to hold risk-based capital against    the sum of its interest and the investors' interest arising from a revolving    securitization that contains an early amortization provision. The investors'    interest would include both the drawn and undrawn lines of the underlying    exposures that are allocated to the investers in the securitization. 

The risk-weighted asset amount with respect to the investors' interest would    be the product of the following four quantities: (1) the EAD associated    with the investors' interest; (2) an appropriate CCF; (3) the risk-based    capital requirement on the underlying exposures; and (4) 12.5. The CCFs    vary depending on whether the amortization is controlled or non-controlled    and whether the underlying exposures are revolving retail credit facilities    that are uncommitted (for example, credit cards) or other revolving facilities    (such as a corporate credit facility). Controlled early amortization provisions    would be those meeting a set of criteria generally related to the repayment    schedule and amortization period. To calculate the appropriate CCF the bank    would compare the three-month average excess spread for the securitization    to the point at which the bank is required to trap excess spread under the    securitization transaction. The bank would divide the three-month average    excess spread level by the excess spread trapping point and apply an assigned    CCF.

Under the proposed rule, a bank would have the option to use either a simple    risk-weight approach (SRWA) or in internal models approach (IMA)    for equity exposures that are not exposures to an investment fund.

Under the SRWA, a bank would generally assign a 300 percent risk weight    to publicly traded equity exposures and a 400 percent risk weight to    non-publicly traded equity exposures. Certain equity exposures to sovereigns,    multilateral institutions, and public sector entities would have a risk weight    of 0 or 20 percent, and certain community development equity investments,    hedged equity exposures, and non-significant equity investments up to certain    limits would be eligible for a 100 percent risk weight.

Alternatively, a bank that meets certain minimum quantitative and qualitative    requirements on an ongoing basis and obtains written approval from its primary    federal supervisor would be able to use the IMA to determine its risk-based    capital requirements for modeled equity exposures. A bank would be able to    apply the IMA to only its publicly traded equity exposures or to both its    publicly traded and non-publicly traded equity exposures. However, if the    bank applies the IMA to its publicly traded exposures, it must apply the IMA    to all such exposures and if the bank applies the IMA to both its publicly    traded and non-publicly traded equity exposures, it must use the IMA for all    such exposures. The risk-weighted asset amounts of modeled equity exposures    would be subject to the following floors: 200 percent for publicly traded    equity exposures and 300 percent for non-publicly traded equity exposures. 

The proposal includes three approaches for equity exposures to investment    funds, each of which is a variation of a look-through approach. 

As noted above, the proposal includes the AMA for operational risk. Operational    risk exposure is the 99.9th percentile of the distribution    of potential aggregate operational losses as generated by the bank's operational    risk quantification system over a one-year horizon. In general, a bank's risk-based    capital requirement for operational risk would be the sum of its expected    operational loss (EOL) and unexpected operational loss (UOL). A bank    would be able to base its risk-based capital requirement for operational risk    on UOL alone if the bank can demonstrate to its primary federal supervisor    that it has offset EOL with eligible operational risk offsets. Generally,    eligible operational risk offsets would be amounts generated by internal business    practices to absorb highly predictable and reasonably stable operational losses,    including reserves calculated in a manner consistent with GAAP, and available    to cover EOL with a high degree of certainty over a one-year horizon. A bank    also could take into account the effects of risk mitigants such as insurance,    subject to supervisory approval. A bank would have to estimate its operational    risk exposure both with and without such mitigants. The possible reduction    in a bank's risk-based capital requirements for operational risk due to risk    mitigants may not exceed 20 percent of the bank's risk-based capital    requirement for operational risk. 

Pillar 3 of the New Accord, market discipline, complements the risk-based    capital requirements and the supervisory review process by encouraging market    discipline through enhanced public disclosure. The 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. Some of    the disclosure requirements will be new disclosures for banks. Nonetheless,    staff believes that a number of the disclosures are already required by or    are consistent with existing GAAP, SEC disclosure requirements, or regulatory    reporting requirements. 

The public disclosure requirements would apply to the top-tier legal entity    that is a core or opt-in bank within a consolidated group. In general, a DI    that is a subsidiary of a BHC or another DI would not be subject to the public    disclosure requirements except that every DI would have to disclose its total    and tier 1 risk-based capital ratios and their components, similar to current    requirements. Each bank that is subject to the disclosure requirements would    be expected to have a formal disclosure policy that addresses the institution's    approach for determining the disclosures it makes. Quantitative disclosures    would be required quarterly and qualitative disclosures would be required    annually. Significant changes would have to be reported in the interim. 

The public disclosure requirements are comprised of 11 tables that provide    the following information. Scope of application includes a description of    the level of 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. Capital structure disclosures provide    information on various components of regulatory capital. Capital adequacy    disclosures provide information about how a bank assesses the adequacy of    its capital and require the bank to disclose minimum capital requirements    and ratios. Credit risk disclosures provide information on the different types    and concentrations of credit risk and the techniques the bank uses to measure,    monitor, and mitigate those risks. In addition, disclosures cover securitization,    operational risk, equities and interest rate risk in non-trading activities.

For the past several years, staff has been engaged in ongoing dialogue with    the industry and other interested parties on developments related to Basel II.    Staff believes that it is important to receive further input from the public    and the banking industry on the U.S. proposed implementation of Basel II.    Thus, staff recommends that the Board approve the issuance of the attached    NPR for publication in the Federal Register after all agencies    have finished their internal approval procedures.

 
    - Attachment

 

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    -  Rich Spillenkothen, Roger Cole, Steve Roberts,       Norah Barger, Barbara Bouchard, Anna Lee Hewko, Division       of Banking Supervision and Regulation; David Jones, Erik Heitfield,       Division of Research and Statistics; Mark Van Der Weide,       Legal Division.   Return to text
    -  The Board's capital rules may be found at 12 CFR       Part 208, Appendices A, B and E (for state member banks)       and 12 CFR part 225, Appendices A, D and E (for bank       holding companies).   Return to text
    -  The BCBS is a committee of banking supervisory       authorities that 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
    -  A number of commenters opposed certain aspects       of the ANPR, such as a capital requirement based on expected loss plus       unexpected loss and a pillar 1 operational risk capital requirement.   Return to text
    -  The interagency press releases and BCBS documents       referred to may be found on or through the Federal Reserve's public website       at  www.federalreserve.gov .       The draft NPR includes a brief discussion of QIS4 results on pages 79       through 83 of the attachment. That discussion is not repeated in this       memorandum.   Return to text
    -  61 FR 47358, September 6, 1996.       The MRA generally would apply to banks that use the Basel II rules       and to some that do not. Banks that are subject to the MRA and do not implement       the Basel II rules would continue to be subject to the MRA, subject       to any modifications that may be adopted.   Return to text
    -  Draft supervisory guidance related to corporate       exposures and operational risk was issued for public comment on August 4, 2003       (68 FR 45949). Draft supervisory guidance on retail exposures       was issued for public comment on October 27, 2004 (69 FR 62748).   Return to text
    -  70 FR 61068 (October 20, 2005).   Return to text
    -  An overview of the proposal's conceptual foundations       is provided on pages 60 through 72 of the draft Basel II       NPR attachment.   Return to text
    -  The New Accord identifies the 1.06 multiplier       as the current best estimate of a scaling factor that broadly maintains       the aggregate amount of risk-based capital under Basel II, relative       to Basel I. The Basel II NPR includes the multiplier as a placeholder,       pending review and overall calibration of the framework during the transition       period.   Return to text
    -  Gain-on-sale refers to an increase in equity       capital that arises at the inception of a securitization. A CEIO is an       asset that represents the contractual right to receive interest payments       from a securitization and exposes the holder to credit risk that exceeds       its pro rata claim on the underlying exposures.   Return to text
    -  EMRC is the dollar amount of the elements of       tier 1 and tier 2 capital (excluding reserves) that a bank must       hold to meet an 8.0 percent risk-based capital ratio.   Return to text
    -  FFIEC, "Uniform Retail Credit Classification       and Account Management Policy," 65 FR 36903 (June 12, 2000).   Return to text
    -  BCBS, Guidance on Paragraph 468 of the Framework       Document, July 2005.   Return to text
    -  Mortgage-backed pass-through securities guaranteed       by Fannie Mae or Freddie Mac would be securitization exposures.   Return to text
    -  The New Accord calls for the use of LGD (reflecting       downturn scenarios) in calculating ECL, one variable in the IRB formulas.       The proposed rule would use ELGD rather than LGD in this calculation as       agency staffs believe it better reflects the bank's expectations of the       amount of loss in the event of default, that is, ECL.   Return to text

Basel II Capital AccordNotice of Proposed Rulemaking (NPR) and Supporting Board Documents

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