[Federal Register Volume 70, Number 202 (Thursday, October 20, 2005)]
[Proposed Rules]
[Pages 61068-61078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-20858]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 05-16]
RIN 1557-AC95

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1238]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC96

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. 2005-40]
RIN 1550-AB98


Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance: Domestic Capital Modifications

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Joint advance notice of proposed rulemaking (ANPR).

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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of 
Governors of the Federal Reserve System (Board), Federal Deposit 
Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) 
(collectively, ``the Agencies'') are considering various revisions to 
the existing risk-based capital framework that would enhance its risk 
sensitivity. These changes would apply to banks, bank holding 
companies, and savings associations (``banking organizations''). The 
Agencies are soliciting comment on possible modifications to their 
risk-based capital standards that would facilitate the development of 
fuller and more comprehensive proposals

[[Page 61069]]

applicable to a range of activities and exposures.
    This ANPR discusses various modifications that would increase the 
number of risk-weight categories, permit greater use of external 
ratings as an indicator of credit risk for externally-rated exposures, 
expand the types of guarantees and collateral that may be recognized, 
and modify the risk weights associated with residential mortgages. This 
ANPR also discusses approaches that would change the credit conversion 
factor for certain types of commitments, assign a risk-based capital 
charge to certain securitizations with early-amortization provisions, 
and assign a higher risk weight to loans that are 90 days or more past 
due or in nonaccrual status and to certain commercial real estate 
exposures. The Agencies are also considering modifying the risk weights 
on certain other retail and commercial exposures.

DATES: Comments on this joint advance notice of proposed rulemaking 
must be received by January 18, 2006.

ADDRESSES: Comments should be directed to:
    OCC: You should include OCC and Docket Number 05-16 in your 
comment. You may submit comments by any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> OCC Web Site: http://www.occ.treas.gov. Click on ``Contact 
the OCC,'' scroll down and click on ``Comments on Proposed 
Regulations.''
    <bullet> E-mail address: <a href="/cdn-cgi/l/email-protection#7e0c1b190d501d1113131b100a0d3e111d1d500a0c1b1f0d50191108"><span class="__cf_email__" data-cfemail="fa889f9d89d4999597979f948e89ba959999d48e889f9b89d49d958c">[email protected]</span></a>.
    <bullet> Fax: (202) 874-4448.
    <bullet> Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 1-5, Washington, DC 20219.
    <bullet> Hand Delivery/Courier: 250 E Street, SW., Attn: Public 
Information Room, Mail Stop 1-5, Washington, DC 20219.
    Instructions: All submissions received must include the agency name 
(OCC) and docket number or Regulatory Information Number (RIN) for this 
notice of proposed rulemaking. In general, OCC will enter all comments 
received into the docket without change, including any business or 
personal information that you provide. You may review comments and 
other related materials by any of the following methods:
    <bullet> Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC's Public Information Room, 250 E 
Street, SW., Washington, DC. You can make an appointment to inspect 
comments by calling (202) 874-5043.
    <bullet> Viewing Comments Electronically: You may request e-mail or 
CD-ROM copies of comments that the OCC has received by contacting the 
OCC's Public Information Room at <a href="/cdn-cgi/l/email-protection#9be9fefce8b5f8f4f6f6fef5efe8dbf4f8f8b5efe9fefae8b5fcf4ed"><span class="__cf_email__" data-cfemail="f280979581dc919d9f9f979c8681b29d9191dc8680979381dc959d84">[email protected]</span></a>.
    <bullet> Docket: You may also request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. R-1238, by 
any of the following methods:
    <bullet> Agency Web Site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#cdbfa8aabee3aea2a0a0a8a3b9be8daba8a9a8bfaca1bfa8bea8bfbba8e3aaa2bb"><span class="__cf_email__" data-cfemail="13617674603d707c7e7e767d6760537576777661727f617660766165763d747c65">[email protected]</span></a>. Include docket 
number in the subject line of the message.
    <bullet> FAX: (202) 452-3819 or (202) 452-3102.
    <bullet> Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit by any of the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street, NW., Washington, DC 20429.
    <bullet> Hand Delivery/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7 a.m. and 5 p.m.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#ee8d8183838b809a9daea8aaa7adc0898198"><span class="__cf_email__" data-cfemail="3b585456565e554f487b7d7f7278155c544d">[email protected]</span></a>.
    <bullet> Public Inspection: Comments may be inspected and 
photocopied in the FDIC Public Information Center, Room 100, 801 17th 
Street, NW., Washington, DC, between 9 a.m. and 4:30 p.m. on business 
days.
    Instructions: Submissions received must include the Agency name and 
title for this notice. Comments received will be posted without change 
to http://www.FDIC.gov/regulations/laws/federal/propose.html, including 
any personal information provided.
    OTS: You may submit comments, identified by No. 2005-40, by any of 
the following methods:
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail address: <a href="/cdn-cgi/l/email-protection#c6b4a3a1b5e8a5a9ababa3a8b2b586a9b2b5e8b2b4a3a7b5e8a1a9b0"><span class="__cf_email__" data-cfemail="54263133277a373b3939313a2027143b20277a20263135277a333b22">[email protected]</span></a>. Please 
include No. 2005-40 in the subject line of the message and include your 
name and telephone number in the message.
    <bullet> Fax: (202) 906-6518.
    <bullet> Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: No. 2005-40.
    <bullet> Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: No. 2005-40.
    Instructions: All submissions received must include the Agency name 
and docket number or Regulatory Information Number (RIN) for this 
rulemaking. All comments received will be posted without change to the 
OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any personal information 
provided.
    Docket: For access to the docket to read background documents or 
comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1. In addition, you may inspect comments 
at the Public Reading Room, 1700 G Street, NW., by appointment. To make 
an appointment for access, call (202) 906-5922, send an e-mail to 
<a href="/cdn-cgi/l/email-protection#59653879312b3c3f64" http: public.info">public.info</a>@ots.treas.gov">public.info@ots.treas.gov</a>, or send a facsimile transmission to (202) 
906-7755. (Prior notice identifying the materials you will be 
requesting will assist us in serving you.) We schedule appointments on 
business days between 10 a.m. and 4 p.m. In most cases, appointments 
will be available the next business day following the date we receive a 
request.

FOR FURTHER INFORMATION CONTACT:
    OCC: Nancy Hunt, Risk Expert, Capital Policy Division, (202) 874-
4923, Laura Goldman, Counsel, or Ron Shimabukuro, Special Counsel, 
Legislative and Regulatory Activities Division, (202) 874-5090, Office 
of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 
20219.

[[Page 61070]]

    Board: Thomas R. Boemio, Senior Project Manager, Policy, (202) 452-
2982, Barbara Bouchard, Deputy Associate Director, (202) 452-3072, 
Jodie Goff, Senior Financial Analyst, (202) 452-2818, Division of 
Banking Supervision and Regulation, or Mark E. Van Der Weide, Senior 
Counsel, (202) 452-2263, Legal Division. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: Jason C. Cave, Chief, Policy Section, Capital Markets Branch, 
(202) 898-3548, Bobby R. Bean, Senior Quantitative Risk Analyst, 
Capital Markets Branch, (202) 898-3575, Division of Supervision and 
Consumer Protection; or Michael B. Phillips, Counsel, (202) 898-3581, 
Supervision and Legislation Branch, Legal Division, Federal Deposit 
Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
    OTS: Teresa Scott, Senior Project Manager, Supervision Policy (202) 
906-6478, or Karen Osterloh, Special Counsel, Regulation and 
Legislation Division, Chief Counsel's Office, (202) 906-6639, Office of 
Thrift Supervision, 1700 G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    In 1989 the Agencies implemented a risk-based capital framework for 
U.S. banking organizations \1\ based on the ``International Convergence 
of Capital Measurement and Capital Standards'' (``Basel I'' or ``1988 
Accord'') as published by the Basel Committee on Banking Supervision 
(``Basel Committee'').\2\ Basel I addressed certain weaknesses in the 
various regulatory capital regimes that were in force in most of the 
world's major banking jurisdictions. The Basel I framework established 
a uniform regulatory capital system that was more sensitive to banking 
organizations' risk profiles than the regulatory capital to total 
assets ratio that was previously used in the United States, assessed 
regulatory capital against off-balance sheet items, minimized 
disincentives for banking organizations to hold low-risk assets, and 
encouraged institutions to strengthen their capital positions.
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    \1\ See 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 
225, appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 
CFR part 567 (OTS). The risk-based capital rules generally do not 
apply to bank holding companies with less than $150 million in 
assets. On September 8, 2005, the Board issued a proposal that 
generally would raise this exclusion amount to $500 million. (See 70 
FR 53320.) The comment period will end on November 11, 2005.
    \2\ The Basel Committee on Banking Supervision was established 
in 1974 by central banks and authorities with bank supervisory 
responsibilities. Current member countries are Belgium, Canada, 
France, Germany, Italy, Japan, Luxembourg, the Netherlands, Spain, 
Sweden, Switzerland, the United Kingdom, and the United States.
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    The Agencies' existing risk-based capital framework generally 
assigns each credit exposure to one of five broad categories of credit 
risk, which allows for only limited distinctions in credit risk for 
most exposures. The Agencies and the industry generally agree that the 
existing risk-based capital framework should be modified to better 
reflect the risks present in many banking organizations without 
imposing undue regulatory burden.
    Since the implementation of the Basel I framework, the Agencies 
have made numerous revisions to their risk-based capital rules in 
response to changes in financial market practices and accounting 
standards. Over time, these revisions typically have increased the 
degree of risk sensitivity of the Agencies' risk-based capital rules. 
In recent years, however, the Agencies have limited modifications to 
the risk-based capital framework at the domestic level and focused on 
the international efforts to revise the Basel I framework. In June 
2004, the Basel Committee introduced a new capital adequacy framework 
for large, internationally-active banking organizations, 
``International Convergence of Capital Measurement and Capital 
Standards: A Revised Framework'' (Basel II).\3\ The Basel Committee's 
goal was to develop a more risk sensitive capital adequacy framework 
for internationally-active banking organizations that generally rely on 
sophisticated risk management and measurement systems. Basel II is 
designed to create incentives for these organizations to improve their 
risk measurement and management processes and to better align minimum 
capital requirements with the risks underlying activities conducted by 
these banking organizations.
    In August 2003, the Agencies issued an Advance Notice of Proposed 
Rulemaking (``Basel II ANPR''), which explained how the Agencies might 
implement the Basel II approach in the United States.\4\ As part of the 
Basel II implementation process, the Agencies have been working to 
develop a notice of proposed rulemaking (NPR) that provides the 
industry with a more definitive proposal for implementing Basel II in 
the United States (``Basel II NPR'').
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    \3\ The complete text for Basel II is available on the Bank for 
International Settlements Web site at http://www.bis.org.
    \4\ As stated in its preamble, the Basel II ANPR was based on a 
consultation document entitled ``The New Basel Capital Accord'' that 
was published by the Basel Committee on April 29, 2003 for public 
comment. The Basel II ANPR anticipated the issuance of a final 
revised accord. The ANPR identified the United States banking 
organizations that would be subject to this new capital regime 
(``Basel II banks'') as those: (1) with total banking assets in 
excess of $250 billion or on-balance sheet foreign exposures in 
excess of $10 billion, and (2) that choose to voluntarily apply 
Basel II. See 68 FR 45900 (Aug. 4, 2003). For credit risk, Basel II 
includes three approaches for regulatory capital: standardized, 
foundation internal ratings-based, and the advanced internal 
ratings-based. For operational risk, Basel II also includes three 
methodologies: basic indicator, standardized, and advanced 
measurement. The Basel II ANPR focused only on the advanced internal 
ratings-based and the advanced measurement approaches.
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    The complexity and cost associated with implementing the Basel II 
framework effectively limit its application to those banking 
organizations that are able to take advantage of the economies of scale 
necessary to absorb these expenses. The implementation of Basel II 
would create a bifurcated regulatory capital framework in the United 
States, which may result in regulatory capital charges that differ for 
similar products offered by both large and small banking organizations.
    In comments responding to the Basel II ANPR, Congressional 
testimony, and other industry communications, several banking 
organizations, trade associations, and others raised concerns about the 
competitive effects of a bifurcated regulatory framework on community 
and regional banking organizations. Among other broad concerns, these 
commenters asserted that implementing the Basel II capital regime in 
the United States would result in lower capital requirements for some 
banking organizations with respect to certain types of credit 
exposures. Community and regional banking organizations claimed that 
this would put them at a competitive disadvantage.
    As part of the ongoing analysis of regulatory capital requirements, 
the Agencies believe that it is important to update their risk-based 
capital standards to enhance the risk-sensitivity of the capital 
charges, to reflect changes in accounting standards and financial 
markets, and to address competitive equity questions that, ultimately, 
may be raised by U.S. implementation of the Basel II framework. 
Accordingly, the Agencies are considering a number of revisions to 
their Basel I-based regulations.
    To assist in quantifying the potential effects of Basel II, the 
Agencies conducted a quantitative impact study during late 2004 and 
early 2005 (QIS 4). QIS 4 was a comprehensive effort completed by 26 of 
the largest banking

[[Page 61071]]

organizations using their own internal estimates of the key risk 
parameters driving the capital requirements under the Basel II 
framework. The preliminary results of QIS 4, which were released 
earlier this spring,\5\ prompted concerns with respect to the (1) 
reduced levels of regulatory capital that would be required at 
individual banking organizations operating under the Basel II-based 
rules, and (2) dispersion of results among organizations and portfolio 
types. Because of these concerns, the issuance of a Basel II NPR was 
postponed while the Agencies undertook additional analytical work.\6\
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    \5\ See Testimony before the Subcommittee on Financial 
Institutions and Consumer Credit and the Subcommittee on Domestic 
and International Monetary Policy, Trade and Technology of the 
Committee on Financial Services, United States House of 
Representatives, May 11, 2005. The testimony is available at http://financialservices.house.gov/hearings.asp?formmode-detail&hearing-383. The specific numbers from the QIS 4 survey are currently under 
review.
    \6\ See interagency press release dated April 29, 2005.
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    The Agencies understand the desire of banking organizations to 
compare the proposed revisions to the existing Basel I-based capital 
regime with the Basel II proposal. However, the ability to definitively 
compare this ANPR with a Basel II NPR is limited due to the delay in 
the issuance of the Basel II NPR and to the number of options suggested 
in this ANPR. The Agencies intend to publish the pending Basel II NPR 
and an NPR addressing the Basel I-based rules in similar time frames, 
which will ultimately enable commenters to compare the proposals.
    The existing risk-based capital requirements focus primarily on 
credit risk and generally do not impose explicit capital charges for 
operational or interest rate risk, which are covered implicitly by the 
framework. The risk-based capital charges suggested in this ANPR 
continue to implicitly cover aspects of these risks. Moreover, the 
Agencies are not proposing revisions to the existing leverage capital 
requirements (i.e., Tier 1 capital to total assets).\7\
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    \7\ See 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B 
and 12 CFR part 225, appendix D (Board); 12 CFR 325.3 (FDIC); 12 CFR 
567.8 (OTS).
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II. Domestic Capital Framework Revisions

    In considering revisions to their domestic risk-based capital rules 
the Agencies were guided by five broad principles. A revised framework 
must: (1) Promote safe and sound banking practices and a prudent level 
of regulatory capital, (2) maintain a balance between risk sensitivity 
and operational feasibility, (3) avoid undue regulatory burden, (4) 
create appropriate incentives for banking organizations, and (5) 
mitigate material distortions in the amount of regulatory risk-based 
capital requirements for large and small institutions. The changes 
under consideration are broadly consistent with the concepts used in 
developing Basel II, but are tailored to the structure and activities 
of banking organizations operating primarily in the United States.
    In this ANPR, the Agencies are considering:
    <bullet> Increasing the number of risk-weight categories to which 
credit exposures may be assigned;
    <bullet> Expanding the use of external credit ratings as an 
indicator of credit risk for externally-rated exposures;
    <bullet> Expanding the range of collateral and guarantors that may 
qualify an exposure for a lower risk weight;
    <bullet> Using loan-to-value ratios, credit assessments, and other 
broad measures of credit risk for assigning risk weights to residential 
mortgages;
    <bullet> Modifying the credit conversion factor for various 
commitments, including those with an original maturity of under one 
year;
    <bullet> Requiring that certain loans 90 days or more past due or 
in a non-accrual status be assigned to a higher risk-weight category;
    <bullet> Modifying the risk-based capital requirements for certain 
commercial real estate exposures;
    <bullet> Increasing the risk sensitivity of capital requirements 
for other types of retail, multifamily, small business, and commercial 
exposures; and
    <bullet> Assessing a risk-based capital charge to reflect the risks 
in securitizations backed by revolving retail exposures with early 
amortization provisions.
    The Agencies welcome comments on all aspects of their risk-based 
capital framework that might require further review and possible 
modification, as well as suggestions for reducing the burden of these 
rules. The Agencies believe that a banking organization should be able 
to implement any changes outlined in this ANPR using data that are 
currently available as part of the organization's credit approval and 
portfolio management processes. As a result, this approach should 
minimize potential regulatory burden associated with any revisions to 
the existing risk-based capital rules. Commenters are particularly 
requested to address whether any of the proposed changes would require 
data that are not currently available as part of the organization's 
existing credit approval and portfolio management systems.
    As required under section 2222 of the Economic Growth and 
Regulatory Paperwork Reduction Act of 1996 (EGRPRA), the Agencies are 
requesting comments on any outdated, unnecessary, or unduly burdensome 
requirements in their regulatory capital rules. The Agencies 
specifically request comment on the extent to which any of these 
capital rules may adversely affect competition and whether: (1) 
Statutory changes are necessary to eliminate specific burdensome 
requirements in these capital rules; (2) any of these capital rules 
contain requirements that are unnecessary to serve the purposes of the 
statute that they implement; (3) the compliance cost associated with 
reporting, recordkeeping, and disclosure requirements in these capital 
rules is justified; and (4) any of these capital rules are unclear.

A. Increase the Number of Risk-Weight Categories

    The Agencies' risk-based capital framework currently has five risk-
weight categories: zero, 20, 50, 100, and 200 percent. This limited 
number of risk-weight categories limits differentiation of credit 
quality among the individual exposures. Thus, the Agencies are 
considering alternatives that would better associate credit risk with 
an underlying exposure. One approach would be to increase the number of 
risk-weight categories to which on-balance sheet assets and credit 
equivalent amounts of off-balance sheet exposures may be assigned.
    For illustrative purposes, this ANPR suggests adding four new risk-
weight categories: 35, 75, 150, and 350 percent. Increasing the number 
of basic risk-weight categories from five to nine would permit banking 
organizations to redistribute exposures into additional categories of 
risk-weights. Like the changes in Basel II, the revisions suggested in 
this ANPR, such as increasing the number of risk-weight categories, 
should improve the risk sensitivity of the Agencies' regulatory capital 
rules. However, the increase in risk-weight categories is not expected 
to generate the same capital requirement for a given exposure as the 
pending Basel II proposal. The proposed categories would remain 
relatively broad measures of credit risk, which should minimize 
regulatory burden.
    The Agencies seek comment on whether (1) increasing the number of 
risk-weight categories would allow supervisors to more closely align 
capital requirements with risk; (2) the additional risk-weight 
categories suggested above would be appropriate; (3) the risk-based 
capital framework

[[Page 61072]]

should include more risk-weight categories than those proposed, such as 
a lower risk weight for the highest quality assets with very low 
historical default rates; and (4) an increased number of risk-weight 
categories would cause unnecessary burden on banking organizations.

B. Use of External Credit Ratings

    In November 2001, the Agencies revised their risk-based capital 
standards to permit banking organizations to rely on external credit 
ratings that are publicly issued by Nationally Recognized Statistical 
Rating Organizations (NRSROs) \8\ to assign risk weights to certain 
recourse obligations, direct credit substitutes, residual interests, 
and asset- and mortgage-backed securities.\9\ For example, subject to 
the requirements of the rule, mortgage-backed securities with a long-
term rating of AAA or AA \10\ may be assigned to the 20 percent risk-
weight category, and mortgage-backed securities with a long-term rating 
of BB may be assigned to the 200 percent risk-weight category. The rule 
did not apply this ratings-based approach to corporate debt and other 
types of exposures, even if they have an NRSRO rating.
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    \8\ A NRSRO is an entity recognized by the Division of Market 
Regulation of the Securities and Exchange Commission (SEC) as a 
nationally recognized statistical rating organization for various 
purposes, including the SEC's uniform net capital requirements for 
brokers and dealers.
    \9\ Final Rule to Amend the Regulatory Capital Treatment of 
Recourse Arrangements, Direct Credit Substitutes, Residual Interests 
in Asset Securitizations, and Asset-Backed and Mortgage-Backed 
Securities (Recourse Final Rule), 66 FR 59614 (November 29, 2001).
    \10\ The rating designations (e.g., ``AAA,'' ``BBB'', and 
``A1'') used in this ANPR are illustrative only and do not indicate 
any preference for, or endorsement of, any particular rating agency 
designation system.
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    To enhance the risk sensitivity of the risk-based capital 
framework, the Agencies are considering a broader use of NRSRO credit 
ratings to determine the risk-based capital charge for most NRSRO-rated 
exposures. If an exposure has multiple NRSRO ratings and these ratings 
differ, the credit exposure could be assigned to the risk weight 
applicable to the lowest NRSRO rating.
    The Agencies currently are considering assigning risk weights to 
the rating categories in a manner similar to that presented in Tables 1 
and 2.\11\
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    \11\ As more fully discussed in Section C of this ANPR, the 
Agencies are also considering using these tables to risk weight an 
exposure that is collateralized by debt that has an external rating 
issued by a NRSRO or that is guaranteed by an entity whose senior 
long-term debt has an external credit rating assigned by an NRSRO.
[GRAPHIC] [TIFF OMITTED] TP20OC05.002

[GRAPHIC] [TIFF OMITTED] TP20OC05.003

    While the Agencies are considering greater use of external ratings 
for determining capital requirements for a broad range of exposures, 
the Agencies are not planning to revise the risk weights for all rated 
exposures. For example, the Agencies are considering retaining the zero 
percent risk weight for short- and long-term U.S. government and agency 
exposures that are backed by the full faith and credit of the U.S. 
government and the 20 percent risk weight for U.S. government-sponsored 
entities.
    The Agencies recognize that for certain exposures, the existing 
rules might serve as a better indicator of risk than the ratings-based 
approach as presented. The Recourse Final Rule introduced capital 
charges on sub-investment quality and unrated exposures that adequately 
reflect the risks associated with these exposures, which the Agencies 
intend to retain in their present form. Similarly, for exposures such 
as federal funds sold and other short-term inter-bank lending 
arrangements, the existing capital rules provide for a reasonable 
indicator of risk and thus would not be proposed to be changed. The 
Agencies also intend to retain the current treatment for municipal 
obligations. The Agencies

[[Page 61073]]

recognize that other examples exist where the existing capital rules 
might serve as an appropriate indicator of risk, and request comment 
and suggestions on ways to accommodate these situations.
    The Agencies would retain the ability to override the use of 
certain ratings or the ratings on certain exposures, either on a case-
by-case basis or through broader supervisory policy, if necessary, to 
address the risk that a particular exposure poses. Furthermore, while 
banking organizations would be permitted to use external ratings to 
assign risk weights, this would not release an organization from its 
responsibility to comply with safety and soundness standards regarding 
prudent underwriting, account management, and collection policies and 
practices.
    The Agencies solicit comment on (1) whether the risk-weight 
categories for NRSRO ratings are appropriately risk sensitive, (2) the 
amount of any additional burden that this approach might generate, 
especially for community banking organizations, in comparison with the 
benefit that such organizations would derive, (3) the use of other 
methodologies that might be reasonably employed to assign risk weights 
for rated exposures, and (4) methodologies that might be used to assign 
risk weights to unrated exposures.

C. Expand Recognized Financial Collateral and Guarantors

i. Recognized Financial Collateral
    The Agencies' risk-based capital framework permits lower risk 
weights for exposures protected by certain types of eligible financial 
collateral. Generally, the only forms of collateral that the Agencies' 
existing rules recognize are cash on deposit at the banking 
organization; securities issued or guaranteed by central governments of 
the OECD countries, U.S. government agencies, and U.S. government-
sponsored enterprises; and securities issued by multilateral lending 
institutions or regional development banks.\12\ If an exposure is 
partially secured, the portion of the exposure that is covered by 
collateral generally may receive the risk weight associated with the 
collateral, and the portion of the exposure that is not covered by the 
collateral is assigned to the risk-weight category applicable to the 
obligor or the guarantor.
---------------------------------------------------------------------------

    \12\ The Agencies' rules, however, differ somewhat as is 
described in the Agencies' joint report to Congress. See ``Joint 
Report: Differences in Accounting and Capital Standards among the 
Federal Banking Agencies'', 57 FR 15379 (March 25, 2005). The 
Agencies intend to eliminate these differences in their respective 
risk-based capital regulations relating to collateralized exposures. 
This approach would result in consistent rules governing 
collateralized transactions in all material respects among the 
Agencies.
---------------------------------------------------------------------------

    The banking industry has commented that the Agencies should 
recognize the risk mitigation provided by a broader array of collateral 
types for purposes of determining a banking organization's risk-based 
capital requirements. The Agencies believe that recognizing additional 
risk mitigation techniques would increase the risk sensitivity of their 
risk-based capital standards in a manner generally consistent with 
market practice and would provide greater incentives for better credit 
risk management practices.
    The Agencies are considering expanding the list of recognized 
collateral to include short- or long-term debt securities (for example, 
corporate and asset- and mortgage-backed securities) that are 
externally-rated at least investment grade by an NRSRO, or issued or 
guaranteed by a sovereign central government that is externally-rated 
at least investment grade by an NRSRO. The NRSRO-rated debt securities 
would be assigned to the risk-weight category appropriate to the 
external credit rating as discussed in section II.B of this ANPR. For 
example, the portion of an exposure collateralized by a AAA- or AA-
rated corporate security could be assigned to the 20 percent risk-
weight category. Similarly, portions of exposures collateralized by 
financial collateral would be assigned to risk-weight categories based 
on the external rating of that collateral.
    To use this expanded list of collateral, banking organizations 
would be required to have collateral management systems that can track 
collateral and readily determine the value of the collateral that the 
banking organization would be able to realize. The Agencies are seeking 
comments on whether this approach for expanding the scope of eligible 
collateral improves risk sensitivity without being overly burdensome.
ii. Eligible Guarantors
    Under the Agencies' risk-based capital framework there is only 
limited recognition of guarantees provided by independent third 
parties. Specifically, the risk-based capital standards assign lower 
risk weights to exposures that are guaranteed by the central government 
of an OECD country, U.S. government agencies, U.S. government-sponsored 
enterprises, municipalities, public sector entities in OECD countries, 
multilateral lending institutions and regional development banks, 
depository institutions incorporated in OECD countries, qualifying 
securities firms, short-term exposures of depository institutions 
incorporated in non-OECD countries, and local currency exposures of 
central governments of non-OECD countries.
    The Agencies seek comment on expanding the scope of recognized 
guarantors to include any entity whose long-term senior debt has been 
assigned an external credit rating of at least investment grade by an 
NRSRO. The applicable risk weight for the guaranteed exposure could be 
based on the risk weights in Tables 1 and 2. This approach would 
eliminate the distinction between OECD and non-OECD countries. The 
Agencies are also seeking comments on using a ratings-based approach 
for determining the risk weight applicable to a recognized guarantor 
and, more specifically, limiting the external rating for a recognized 
guarantor to investment grade or above.

D. One-to-Four Family Mortgages: First and Second Liens

    Under the existing rules, most one-to-four family mortgages that 
are first liens are generally eligible for a 50 percent risk weight. 
Industry participants have, for some time, asserted that this 50 
percent risk weight imposes an excessive risk-based capital requirement 
for many of these exposures. The Agencies observe that this ``one size 
fits all'' approach to risk-based capital may not assess suitable 
levels of capital for either low-or high-risk mortgage loans. 
Therefore, to align risk-based capital requirements more closely with 
risk, the Agencies are considering possible options for changing their 
risk-based capital requirements for first lien one-to-four family 
residential mortgages.
    Several industry participants have suggested that capital 
requirements for first lien one-to-four family mortgages could be based 
on collateral through the use of the loan-to-value ratio (LTV). The 
following table illustrates one approach for using LTV ratios to 
determine risk-based capital requirements:

[[Page 61074]]

[GRAPHIC] [TIFF OMITTED] TP20OC05.004

    Basing risk weights on LTVs in a manner similar to that illustrated 
above is intended to improve the risk sensitivity of the existing risk-
based capital framework. The Agencies believe that the use of LTV 
ratios to measure risk sensitivity would not increase regulatory burden 
for banking organizations since this data is readily available and is 
often utilized in the loan approval process and in managing mortgage 
portfolios.
    Banking organizations would determine the LTV of a mortgage loan 
after consideration of loan-level private mortgage insurance (PMI) 
provided by an insurer with an NRSRO-issued long-term debt rating of 
single A or higher. However, the Agencies currently do not recognize 
portfolio or pool-level PMI for purposes of determining the LTV of an 
individual mortgage. Furthermore, the Agencies note that reliance on 
even a highly-rated PMI insurance provider has some measure of 
counterparty credit risk and that PMI contract provisions vary, which 
provides banking organizations with a range of alternatives for 
mitigating credit risk. Arrangements that require a banking 
organization to absorb any amount of loss before the PMI provider would 
not be recognized under this approach. In addition, the Agencies are 
concerned that a blanket acceptance of PMI might overstate its ability 
to effectively mitigate risk especially on higher risk loans and novel 
products. Accordingly, to address concerns about PMI, the Agencies 
could place risk-weight floors on mortgages that are subject to PMI.
    The Agencies seek comment on (1) the use of LTV to determine risk 
weights for first lien one-to-four family residential mortgages, (2) 
whether LTVs should be updated periodically, (3) whether loan-level or 
portfolio PMI should be used to reduce LTV ratios for the purposes of 
determining capital requirements, (4) alternative approaches that are 
sensitive to the counterparty credit risk associated with PMI, and (5) 
risk-weight floors for certain mortgages subject to PMI, especially 
higher-risk loans and novel products.
    The Agencies are also considering alternative methods for assessing 
capital based on the evaluation of credit risk for borrowers of first 
lien one-to-four family mortgages. For example, credit assessments, 
such as credit scores, might be combined with LTV ratios to determine 
risk-based capital requirements. Under this scenario, different ranges 
of LTV ratios could be paired with specified ranges of credit 
assessments. Based on the resulting risk assessments, the Agencies 
could assign mortgage loans to specific risk-weight categories. Table 4 
illustrates one approach for pairing LTV ratios with a borrower's 
credit assessment. As the table indicates, risk decreases as the LTV 
decreases and the borrower's credit assessment increases, which results 
in a decrease in capital requirements. Mortgages with low LTVs that are 
written to borrowers with higher creditworthiness might receive lower 
risk weights than reflected in Table 3; conversely, mortgages with high 
LTVs written to borrowers with lower creditworthiness might receive 
higher risk weights.
[GRAPHIC] [TIFF OMITTED] TP20OC05.005

    Another parameter that could be combined with LTV ratios to 
determine capital requirements might be a capacity measure such as a 
debt-to-income ratio. The Agencies seek comment on (1) the use of an 
assessment mechanism based

[[Page 61075]]

on LTV ratios in combination with credit assessments, debt-to-income 
ratios, or other relevant measures of credit quality, (2) the impact of 
the use of credit scores on the availability of credit or prices for 
lower income borrowers, and (3) whether LTVs and other measures of 
creditworthiness should be updated annually or quarterly and how these 
parameters might be updated to accurately reflect the changing risk of 
a mortgage loan as it matures and as property values and borrower's 
credit assessments fluctuate.
    The Agencies are interested in any specific comments and available 
data on non-traditional mortgage products (e.g., interest-only 
mortgages). In particular, the Agencies are reviewing the recent rapid 
growth in mortgages that permit negative amortization, do not amortize 
at all, or have an LTV greater than 100 percent. The Agencies seek 
comment on whether these products should be treated in the same matrix 
as traditional mortgages or whether such products pose unique and 
perhaps greater risks that warrant a higher risk-based capital 
requirement.
    If a banking organization holds both a first and a second lien, 
including a home equity line of credit (HELOC), and no other party 
holds an intervening lien, the Agencies' existing capital rules permit 
these loans to be combined to determine the LTV and the appropriate 
risk weight as if it were a first lien mortgage. The Agencies intend to 
continue to permit this approach for determining LTVs.
    For stand-alone second lien mortgages and HELOCs, where the 
institution holds a second lien mortgage but does not hold the first 
lien mortgage and the LTV at origination (original LTV) for the 
combined loans does not exceed 90 percent, the Agencies are considering 
retaining the current 100 percent risk weight. For second liens, where 
the original LTV of the combined liens exceeds 90 percent, the Agencies 
believe that a risk weight higher than 100 percent would be appropriate 
in recognition of the credit risk associated with these exposures. The 
Agencies seek comment regarding this approach.

E. Multifamily Residential Mortgages

    Under the Agencies' existing rules, multifamily (i.e., properties 
with more than four units) residential mortgages are generally risk-
weighted at 100 percent. Certain seasoned multifamily residential loans 
may, however, qualify for a risk weight of 50 percent.\13\ The Agencies 
seek comment and request any available data that might demonstrate that 
all multifamily loans or specific types of multifamily loans that meet 
certain criteria, for example, small size, history of performance, or 
low loan-to-value ratio, should be eligible for a lower risk weight 
than is currently permitted in the Agencies' rules.
---------------------------------------------------------------------------

    \13\ To qualify, these loans must meet requirements for 
amortization schedules, minimum maturity, LTV, and other 
requirements. See 12 CFR part 3, appendix A, Sec.  3(a)(3)(v)(OCC); 
12 CFR parts 208 and 225, appendix A, Sec.  III.C.3 (Board); 12 CFR 
part 325, appendix A, Sec.  II.C (category 3-50 percent risk weight) 
(FDIC); 12 CFR 567.1 (definition of qualifying multifamily mortgage 
loan) (OTS).
---------------------------------------------------------------------------

F. Other Retail Exposures

    Banking organizations also hold many other types of retail 
exposures, such as consumer loans, credit cards, and automobile loans. 
The Agencies are considering modifying the risk-based capital rules for 
these other retail exposures and are seeking information on 
alternatives for structuring a risk-sensitive approach based on well-
known and relevant risk drivers as the basis for the capital 
requirement. One approach that would increase the credit risk 
sensitivity of the risk-based capital requirements for other retail 
exposures would be to use a credit assessment, such as the borrower's 
credit score or ability to service debt.
    The Agencies request comment on any methods that would accomplish 
their goal of increasing risk sensitivity without creating undue 
burden, and, more specifically, on what risk drivers (for example, LTV, 
credit assessments, and/or collateral) and risk weights would be 
appropriate for these types of loans. The Agencies further request 
comment on the impact of the use of any recommended risk drivers on the 
availability of credit or prices for lower-income borrowers.

G. Short-Term Commitments

    Under the Agencies' risk-based capital standards, short-term 
commitments (with the exception of short-term liquidity facilities 
providing liquidity support to asset-backed commercial paper (ABCP) 
programs) \14\ are converted to an on-balance sheet credit equivalent 
amount using the zero percent credit conversion factor (CCF). As a 
result, banking organizations that extend short-term commitments do not 
hold any risk-based capital against the credit risk inherent in these 
exposures. By contrast, commitments with an original maturity of 
greater than one year are generally converted to an on-balance sheet 
credit equivalent amount using the 50 percent CCF.
---------------------------------------------------------------------------

    \14\ Unused portions of short-term ABCP liquidity facilities are 
assigned a 10 percent credit conversion factor. See 69 FR 44908 
(July 28, 2004).
---------------------------------------------------------------------------

    The Agencies are considering amending their risk-based capital 
requirements for commitments with an original maturity of one year or 
less (i.e., short-term commitments). Even though commitments with an 
original maturity of one year or less expose banking organizations to a 
lower degree of credit risk than longer-term commitments, some credit 
risk exists. The Agencies are considering whether this credit risk 
should be reflected in the risk-based capital requirement. Thus, the 
Agencies are considering applying a 10 percent CCF on certain short-
term commitments. The resulting credit equivalent amount would then be 
risk-weighted according to the underlying assets or the obligor, after 
considering any collateral, guarantees, or external credit ratings.
    Commitments that are unconditionally cancelable at any time, in 
accordance with applicable law, by a banking organization without prior 
notice, or that effectively provide for automatic cancellation due to 
deterioration in a borrower's credit assessment would continue to be 
eligible for a zero percent CCF. \15\
---------------------------------------------------------------------------

    \15\ For example, the CCF for unconditionally cancelable 
commitments related to unused portions of retail credit card lines 
would remain at zero percent. 12 CFR part 3, appendix A, Sec.  
3(b)(4)(iii) (OCC); 12 CFR parts 208 and 225, appendix A, Sec.  
III.D.5 (Board) 12 CFR part 325, appendix A, Sec.  II.D.5 (FDIC); 12 
CFR 567.6(a)(2)(v)(C) (OTS).
---------------------------------------------------------------------------

    The Agencies solicit comment on the approach for short-term 
commitments as discussed above. Further, the Agencies seek comment on 
an alternative approach that would apply a single CCF (for example, 20 
percent) to all commitments, both short-term and long-term.

H. Loans 90 Days or More Past Due or in Nonaccrual

    Under the existing risk-based capital rules, loans generally are 
risk-weighted at 100 percent unless the credit risk is mitigated by an 
acceptable guarantee or collateral. When exposures (for example, loans, 
leases, debt securities, and other assets) reach 90 days or more past 
due or are in nonaccrual status, there is a high probability that the 
financial institution will incur a loss. To address this potentially 
higher risk of loss, the Agencies are considering assigning exposures 
that are 90 days or more past due and those in nonaccrual status to a 
higher risk-weight category. However, the amount of the exposure to be 
assigned to the higher risk-weight category may be reduced by any 
reserves directly allocated to cover

[[Page 61076]]

potential losses on that exposure. The Agencies seek comments on all 
aspects of this potential change in treatment.

I. Commercial Real Estate (CRE) Exposures

    The Agencies may revise the capital requirements for certain 
commercial real estate exposures such as acquisition, development and 
construction (ADC) loans based on longstanding supervisory concerns 
with many of these loans. The Agencies are considering assigning 
certain ADC loans to a higher than 100 percent risk weight. However, 
the Agencies recognize that a ``one size fits all'' approach to ADC 
lending might not be risk sensitive, and could discourage banking 
organizations from making ADC loans backed by substantial borrower 
equity. Therefore, the Agencies are considering exempting ADC loans 
from the higher risk weight if the ADC exposure meets the Interagency 
Real Estate Lending Standards regulations \16\ and the project is 
supported by a substantial amount of borrower equity for the duration 
of the facility (e.g., 15 percent of the completion value in cash and 
liquid assets). Under this approach, ADC loans satisfying these 
standards would continue to be assigned to the 100 percent risk-weight 
category.
---------------------------------------------------------------------------

    \16\ See 12 CFR part 34, subpart D (OCC); 12 CFR part 208, 
subpart E, appendix C (Board); 12 CFR part 365 (FDIC); 12 CFR 
560.100-101 (OTS).
---------------------------------------------------------------------------

    The Agencies seek recommendations on improvements to these 
standards that would result in prudent capital requirements for ADC 
loans while not creating undue burden for banking organizations making 
such loans. The Agencies also seek comments on alternative ways to make 
risk weights for commercial real estate loans more risk sensitive. To 
that end, they request comments on what types of risk drivers, like LTV 
ratios or credit assessments, could be used to differentiate among the 
credit qualities of commercial real estate loans, and how the risk 
drivers could be used to determine risk weights.

J. Small Business Loans

    Under the Agencies' risk-based capital rules, a small business loan 
is generally assigned to the 100 percent risk-weight category unless 
the credit risk is mitigated by an acceptable guarantee or collateral. 
Banking institutions and other industry participants have criticized 
the lack of risk sensitivity in the risk-based capital charges for 
these exposures. To improve the risk sensitivity of their capital 
rules, the Agencies are considering a lower risk weight for certain 
business loans under $1 million on a consolidated basis to a single 
borrower.
    Under one alternative, to be eligible for a lower risk weight, the 
small business loan would have to meet certain requirements: full 
amortization over a period of seven years or less, performance 
according to the contractual provisions of the loan agreement, and full 
protection by collateral. The banking organization would also have to 
originate the loan according to its underwriting policies (or purchase 
a loan that has been underwritten in a manner consistent with the 
banking organization's underwriting policies), which would have to 
include an acceptable assessment of the collateral and the borrower's 
financial condition and ability to repay the debt. The Agencies believe 
that under these circumstances the risk weight of a small business loan 
could be lowered to, for example, 75 percent. The Agencies seek comment 
on whether this relatively simple change would improve the risk 
sensitivity without unduly increasing complexity and burden.
    Another alternative would be to assess risk-based capital based on 
a credit assessment of the business' principals and their ability to 
service the debt. This alternative could be applied in those cases 
where the business principals personally guarantee the loan.
    The Agencies seek comment on any alternative approaches for 
improving risk sensitivity of the risk-based capital treatment for 
small business loans, including the use of credit assessments, LTVs, 
collateral, guarantees, or other methods for stratifying credit risk.

K. Early Amortization

    Currently, there is no risk-based capital charge against risks 
associated with early amortization of securitizations of revolving 
credits (e.g., credit cards). When assets are securitized, the extent 
to which the selling or sponsoring entity transfers the risks 
associated with the assets depends on the structure of the 
securitization and the nature of the underlying assets. The early 
amortization provision in securitizations of revolving retail credit 
facilities increases the likelihood that investors will be repaid 
before being subject to any risk of significant credit losses.
    Early amortization provisions raise several distinct concerns about 
the risks to seller banking organizations: (1) The subordination of the 
seller's interest in the securitized assets during early amortization 
to the payment allocation formula, (2) potential liquidity problems for 
selling organizations, and (3) incentives for the seller to provide 
implicit support to the securitization transaction--credit enhancement 
beyond any pre-existing contractual obligations--to prevent early 
amortization. The Agencies have proposed the imposition of a capital 
charge on securitizations of revolving credit exposures with early 
amortization provisions in prior rulemakings. On March 8, 2000, the 
Agencies published a proposed rule on recourse and direct credit 
substitutes (Proposed Recourse Rule).\17\ In that proposal, the 
Agencies proposed to apply a fixed conversion factor of 20 percent to 
the amount of assets under management in all revolving securitizations 
that contained early amortization features in recognition of the risks 
associated with these structures.\18\ The preamble to the Recourse 
Final Rule,\19\ reiterated the concerns with early amortization, 
indicating that the risks associated with securitization, including 
those posed by an early amortization feature, are not fully captured in 
the Agencies' capital rules. While the Agencies did not impose an early 
amortization capital charge in the Recourse Final Rule, they indicated 
that they would undertake a comprehensive assessment of the risks 
imposed by early amortization.\20\
---------------------------------------------------------------------------

    \17\ 65 FR 12320 (March 8, 2000).
    \18\ Id. at 12330-31.
    \19\ 66 FR 59614, 59619 (November 29, 2001).
    \20\ In October 2003, the Agencies issued another proposed rule 
that included a risk-based capital charge for early amortization. 
See 68 FR 56568j, 56571-73 (October 1, 2003). This proposal was 
based upon the Basel Committee's third consultative paper issued 
April 2003. When the Agencies finalized other unrelated aspects of 
this proposed rule in July 2004, they did not implement the early 
amortization proposal. The Agencies determined that the change was 
inappropriate because the capital treatment of retail credit, 
including securitizations of revolving credit, was subject to change 
as the Basel framework proceeded through the United States 
rulemaking process. The Agencies, however, indicated that they would 
revisit the domestic implementation of this issue in the future. 69 
FR 44908, 44912-13 (July 28, 2004).
---------------------------------------------------------------------------

    The Agencies acknowledge that early amortization events are 
infrequent. Nonetheless, an increasing number of securitizations have 
been forced to unwind and repay investors earlier than planned. 
Accordingly, the Agencies are considering assessing risk-based capital 
against securitizations of personal and business credit card accounts. 
The Agencies are also considering the appropriateness of applying an 
early amortization capital charge to securitizations of revolving 
credit exposures other than credit cards, and request comment on this 
issue.
    One option would be to assess a flat conversion factor, (e.g., 10 
percent)

[[Page 61077]]

against off-balance sheet receivables in securitizations with early 
amortization provisions. Another approach that would potentially be 
more risk-sensitive would be to assess capital against these types of 
securitizations based on key indicators of risk, such as excess spread 
levels. Virtually all securitizations of revolving retail credit 
facilities that include early amortization provisions rely on excess 
spread as an early amortization trigger. Early amortization generally 
commences once excess spread falls below zero for a given period of 
time.
    Such a capital charge would be assessed against the off-balance 
sheet investors' interest and would be imposed only in the event that 
the excess spread has declined to a predetermined level. The capital 
requirement would assess increasing amounts of risk-based capital as 
the level of excess spread approaches the early amortization trigger 
(typically, a three-month average excess spread of zero). Therefore, as 
the probability of an early amortization event increases, the capital 
charge against the off-balance sheet portion of the securitization also 
would increase.
    The Agencies are considering comparing the three-month average 
excess spread against the point at which the securitization trust would 
be required by the securitization documents to trap excess spread in a 
spread or reserve account as a basis for a capital charge. Where a 
transaction does not require excess spread to be trapped, the trapping 
point would be 4.5 percentage points. In order to determine the 
appropriate conversion factor, a bank would divide the level of excess 
spread by the spread trapping point.
[GRAPHIC] [TIFF OMITTED] TP20OC05.006

    The Agencies seek comment on whether to adopt either alternative 
treatment of securitizations of revolving credit facilities containing 
early amortization mechanisms and whether either treatment 
satisfactorily addresses the potential risks such transactions pose to 
originators. The Agencies also seek comment on whether other early 
amortization triggers exist that might have to be factored into such an 
approach, e.g., level of delinquencies, and whether there are other 
approaches, treatments, or factors that the Agencies should consider.

III. Application of the Proposed Revisions

    The Agencies are aware that some banking organizations may prefer 
to remain under the existing risk-based capital framework without 
revision. The Agencies are considering the possibility of permitting 
some banking organizations to elect to continue to use the existing 
risk-based capital framework, or portions thereof, for determining 
minimum risk-based capital requirements so long as that approach 
remains consistent with safety and soundness. The Agencies seek comment 
on whether there is an asset size threshold below which banking 
organizations should be allowed to apply the existing risk-based 
capital framework without revision.
    The Agencies are also considering allowing banking organizations to 
choose among alternative approaches for some of the modifications to 
the existing capital rules that may be proposed. For example, a banking 
organization might be permitted to risk-weight all prudently 
underwritten mortgages at 50 percent if that organization chose to 
forgo the option of using potentially lower risk weights for its 
residential mortgages based on LTV or some other approach that may be 
proposed. The Agencies seek comment on the merits of this type of 
approach.
    Finally, the Agencies note that, under Basel II, banking 
organizations are subject to a transitional capital floor (that is, a 
limit on the amount by which risk-based capital could decline). In the 
pending Basel II NPR, the Agencies expect to seek comment on how the 
capital floor should be defined and implemented. To the extent that 
revisions result from this ANPR process, the Agencies seek commenters' 
views on whether the revisions should be incorporated into the 
definition of the Basel II capital floor.

IV. Reporting Requirements

    The Agencies believe that risk-based capital levels for most banks 
should be readily determined from data supplied in the quarterly Call 
and Thrift Financial Report filings. Accordingly, modifications to the 
Call and Thrift Financial Reports will be necessary to track the 
agreed-upon risk factors used in determining risk-based capital 
requirements. For example, banking organizations would be expected to 
segment residential mortgages into ranges based on the LTV ratio if 
that factor were used in determining a loan's capital charge. 
Externally-rated exposures could be segmented by the rating assigned by 
the NRSRO. Additionally, all organizations would need to provide more 
detail on guaranteed and collateralized exposures.
    The Agencies seek comment on the various alternatives available to 
balance the need for enhanced reporting and greater transparency of the 
risk-based capital calculation, with the possible burdens associated 
with such an effort.

V. Regulatory Analysis

    Federal agencies are required to consider the costs, benefits, or 
other effects of their regulations for various purposes described by 
statute or executive order. This section asks for comment and 
information to assist OCC and OTS in their analysis under Executive 
Order 12866.\21\ Executive Order 12866 requires preparation of an 
analysis for agency actions that are ``significant regulatory 
actions.'' ``Significant regulatory actions'' include, among other 
things, regulations that ``have an annual effect on the economy of $100 
million or more or adversely affect in a material way the economy, a

[[Page 61078]]

sector of the economy, productivity, competition, jobs, the 
environment, public health or safety, or state, local, or tribal 
governments or communities. * * * '' \22\ Regulatory actions that 
satisfy one or more of these criteria are called ``economically 
significant regulatory actions.''
---------------------------------------------------------------------------

    \21\ E.O. 12866 applies to OCC and OTS, but not the Board or the 
FDIC.
    \22\ Executive Order 12866 (September 30, 1993), 58 FR 51735 
(October 4, 1993), as amended by Executive Order 13258, 67 FR 9385. 
For the complete text of the definition of ``significant regulatory 
action,'' see E.O. 12866 at Sec.  3(f). A ``regulatory action'' is 
``any substantive action by an agency (normally published in the 
Federal Register) that promulgates or is expected to lead to the 
promulgation of a final rule or regulation, including notices of 
inquiry, advance notices of proposed rulemaking, and notices of 
proposed rulemaking.'' E.O. 12866 at Sec.  3(e).
---------------------------------------------------------------------------

    If OCC or OTS determines that the rules implementing the domestic 
capital modifications comprise an ``economically significant regulatory 
action,'' then the agency making that determination would be required 
to prepare and submit to the Office of Management and Budget's (OMB) 
Office of Information and Regulatory Affairs (OIRA) an economic 
analysis. The economic analysis must include:
    <bullet> A description of the need for the rules and an explanation 
of how they will meet the need;
    <bullet> An assessment of the benefits anticipated from the rules 
(for example, the promotion of the efficient functioning of the economy 
and private markets) together with, to the extent feasible, a 
quantification of those benefits;
    <bullet> An assessment of the costs anticipated from the rules (for 
example, the direct cost both to the government in administering the 
regulation and to businesses and others in complying with the 
regulation, and any adverse effects on the efficient functioning of the 
economy, private markets (including productivity, employment, and 
competitiveness)), together with, to the extent feasible, a 
quantification of those costs; and
    <bullet> An assessment of the costs and benefits of potentially 
effective and reasonably feasible alternatives to the planned 
regulation (including improving the current regulation and reasonably 
viable nonregulatory actions), and an explanation why the planned 
regulatory action is preferable to the identified potential 
alternatives.\23\
---------------------------------------------------------------------------

    \23\ The components of the economic analysis are set forth in 
E.O. 12866 Sec.  6(a)(3)(C)(i)-(iii). For a description of the 
methodology that OMB recommends for preparing an economic analysis, 
see Office of Management and Budget Circular A-4, ``Regulatory 
Analysis'' (September 17, 2003). This publication is available on 
OMB's Web site at http://www.whitehouse.gov/omb/circulars/a004/a-4.pdf.
---------------------------------------------------------------------------

    For purposes of determining whether this rulemaking would 
constitute an ``economically significant regulatory action,'' as 
defined by E.O. 12866, and to assist any economic analysis that E.O. 
12866 may require, OCC and OTS encourage commenters to provide 
information about:
    <bullet> The direct and indirect costs of compliance with the 
revisions described in this ANPR;
    <bullet> The effects of these revisions on regulatory capital 
requirements;
    <bullet> The effects of these revisions on competition among banks; 
and
    <bullet> The economic benefits of the revisions, such as the 
economic benefits of a potentially more efficient allocation of capital 
that might result from revisions to the current risk-based capital 
requirements.
    OCC and OTS also encourage comment on any alternatives to the 
revisions described in this ANPR that the Agencies should consider. 
Specifically, commenters are encouraged to provide information 
addressing the direct and indirect costs of compliance with the 
alternative, the effects of the alternative on regulatory capital 
requirements, the effects of the alternative on competition, and the 
economic benefits from the alternative.
    Quantitative information would be the most useful to the Agencies. 
However, commenters may also provide estimates of costs, benefits, or 
other effects, or any other information they believe would be useful to 
the Agencies in making the determination. In addition, commenters are 
asked to identify or estimate start-up, or non-recurring, costs 
separately from costs or effects they believe would be ongoing.

    Dated: October 6, 2005.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 12, 2005.
Jennifer J. Johnson,
Secretary of the Board.
    Dated at Washington, DC, this 6th day of October, 2005.

    By order of the Board of Directors, Federal Deposit Insurance 
Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: October 6, 2005.

    By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. 05-20858 Filed 10-19-05; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P, 6720-01-P


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