This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

61068 

Vol. 70, No. 202 

Thursday, October 20, 2005 

DEPARTMENT OF AGRICULTURE 

Agricultural Marketing Service 

7 CFR Part 51 

[Docket Number FV–04–310] 

RIN 0581–AC46 

Revision of Fees for the Fresh Fruit 

and Vegetable Terminal Market 

Inspection Services 

AGENCY: Agricultural Marketing Service, 

USDA. 

ACTION: Proposed rule; reopening and 

extension of comment period. 

SUMMARY: Notice is hereby given that 

the comment period on the proposed 

Revision of Fees for the Fresh Fruit and 

Vegetable Terminal Market Inspection 

Service is reopened and extended. This 

action will allow interested persons 

additional time to prepare and submit 

comments. 

DATES: Comments must be postmarked, 

courier dated, or sent via the internet on 

or before November 3, 2005. 

ADDRESSES: Interested persons are 

invited to submit written comments 

concerning this proposal. Comments 

can be sent to: (1) Department of 

Agriculture, Agricultural Marketing 

Service, Fruit and Vegetable Programs, 

Fresh Products Branch, 1400 

Independence Ave., SW., Room 0640–S, 

Washington, DC 20250–0295, faxed to 

(202) 720–5136; (2) via e-mail to 

FPB.DocketClerk@usda.gov.; or (3) 

Internet: http://www.regulations.gov. All 

comments should make reference to the 

date and page number of this issue of 

the Federal Register and will be made 

available for public inspection in the 

above office during regular business 

hours. 

FOR FURTHER CONTACT INFORMATION: Rita 

Bibbs-Booth, USDA, 1400 Independence 

Ave., SW., Room 0640–S, Washington, 

DC 20250–0295, or call (202) 720–0391. 

SUPPLEMENTARY INFORMATION: A 

proposed rule was published in the 

Federal Register on August 25, 2005 (70 

FR 49882) requesting comments on the 

proposed Revision of Fees for the Fresh 

Fruit and Vegetable Terminal Market 

Inspection Services. Comments on the 

proposed rule were required to be 

received on or before September 26, 

2005. A comment was received from an 

industry association, representing 

independent produce wholesale 

receivers, expressing the need for 

additional time to comment. The 

association requested the comment 

period be extended to allow the 

association an opportunity to meet with 

their members to discuss the impact of 

the proposed fee increase. 

After reviewing the commenter’s 

request, AMS is reopening and 

extending the comment period in order 

to allow sufficient time for interested 

persons, including the association, to 

prepare and submit comments 

Dated: October 14, 2005. 

Kenneth C. Clayton, 

Acting Administrator, Agricultural Marketing 

Service. 

[FR Doc. 05–20961 Filed 10–19–05; 8:45 am] 

BILLING CODE 3410–02–P 

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). 

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 riskbased capital standards that would 

facilitate the development of fuller and 

more comprehensive proposals 

Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 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 externallyrated 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 earlyamortization 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: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• OCC Web Site: http:// 

www.occ.treas.gov. Click on ‘‘Contact 

the OCC,’’ scroll down and click on 

‘‘Comments on Proposed Regulations.’’

• E-mail address: 

regs.comments@occ.treas.gov. 

• Fax: (202) 874–4448. 

• Mail: Office of the Comptroller of 

the Currency, 250 E Street, SW., Mail 

Stop 1–5, Washington, DC 20219. 

• 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: 

• 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. 

• 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 

regs.comments@occ.treas.gov. 

• 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: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/ 

generalinfo/foia/ProposedRegs.cfm. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail: 

regs.comments@federalreserve.gov. 

Include docket number in the subject 

line of the message. 

• FAX: (202) 452–3819 or (202) 452–

3102. 

• 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: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Agency Web site: http:// 

www.FDIC.gov/regulations/laws/ 

federal/propose.html. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments/Legal 

ESS, Federal Deposit Insurance 

Corporation, 550 17th Street, NW., 

Washington, DC 20429. 

• 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. 

• E-mail: comments@FDIC.gov. 

• 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: 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• E-mail address: 

regs.comments@ots.treas.gov. Please 

include No. 2005–40 in the subject line 

of the message and include your name 

and telephone number in the message. 

• Fax: (202) 906–6518. 

• Mail: Regulation Comments, Chief 

Counsel’s Office, Office of Thrift 

Supervision, 1700 G Street, NW., 

Washington, DC 20552, Attention: No. 

2005–40. 

• 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 

public.info@ots.treas.gov, 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. 

61070 Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 

1See 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. 

2The 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. 

3The complete text for Basel II is available on the 

Bank for International Settlements Web site at 

http://www.bis.org. 

4As 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. 

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. 

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 riskbased 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, internationallyactive 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’’). 

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 

Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 61071 

5See 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. 

6See interagency press release dated April 29, 

2005. 

7See 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). 

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

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 riskbased 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

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: 

• Increasing the number of riskweight categories to which credit 

exposures may be assigned; 

• Expanding the use of external credit 

ratings as an indicator of credit risk for 

externally-rated exposures; 

• Expanding the range of collateral 

and guarantors that may qualify an 

exposure for a lower risk weight; 

• Using loan-to-value ratios, credit 

assessments, and other broad measures 

of credit risk for assigning risk weights 

to residential mortgages; 

• Modifying the credit conversion 

factor for various commitments, 

including those with an original 

maturity of under one year; 

• Requiring that certain loans 90 days 

or more past due or in a non-accrual 

status be assigned to a higher riskweight category; 

• Modifying the risk-based capital 

requirements for certain commercial 

real estate exposures; 

• Increasing the risk sensitivity of 

capital requirements for other types of 

retail, multifamily, small business, and 

commercial exposures; and 

• 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 riskbased 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 riskweight 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 riskweight 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 

61072 Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 

8A 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. 

9Final Rule to Amend the Regulatory Capital 

Treatment of Recourse Arrangements, Direct Credit 

Substitutes, Residual Interests in Asset 

Securitizations, and Asset-Backed and MortgageBacked Securities (Recourse Final Rule), 66 FR 

59614 (November 29, 2001). 

10The 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. 

11As 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. 

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 mortgagebacked securities.9 For example, subject 

to the requirements of the rule, 

mortgage-backed securities with a longterm 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 riskweight 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. 

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

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. governmentsponsored 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 subinvestment 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 


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12The 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. 

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. governmentsponsored 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. 

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 externallyrated at least investment grade by an 

NRSRO. The NRSRO-rated debt 

securities would be assigned to the riskweight 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 nonOECD countries. The Agencies are also 

seeking comments on using a ratingsbased 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-tofour 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-tofour 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 riskbased capital requirements: 

61074 Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 

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 longterm 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. 

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 


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Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 61075 

13To qualify, these loans must meet requirements 

for amortization schedules, minimum maturity, 

LTV, and other requirements. See 12 CFR part 3, 

appendix A, § 3(a)(3)(v)(OCC); 12 CFR parts 208 and 

225, appendix A, § III.C.3 (Board); 12 CFR part 325, 

appendix A, § II.C (category 3–50 percent risk 

weight) (FDIC); 12 CFR 567.1 (definition of 

qualifying multifamily mortgage loan) (OTS). 

14Unused portions of short-term ABCP liquidity 

facilities are assigned a 10 percent credit conversion 

factor. See 69 FR 44908 (July 28, 2004). 

15For 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, § 3(b)(4)(iii) 

(OCC); 12 CFR parts 208 and 225, appendix A, 

§ III.D.5 (Board) 12 CFR part 325, appendix A, 

§ II.D.5 (FDIC); 12 CFR 567.6(a)(2)(v)(C) (OTS). 

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-tovalue ratio, should be eligible for a 

lower risk weight than is currently 

permitted in the Agencies’ rules. 

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 risksensitive approach based on wellknown 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 lowerincome 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 onbalance sheet credit equivalent amount 

using the 50 percent CCF. 

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 riskweighted 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

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 longterm. 

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 

61076 Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 

16See 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). 

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). 

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. 

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

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) 

Federal Register / Vol. 70, No. 202 / Thursday, October 20, 2005 / Proposed Rules 61077 

21E.O. 12866 applies to OCC and OTS, but not 

the Board or the FDIC. 

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. 

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 riskweight 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 


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22Executive 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 § 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 § 3(e). 

23The components of the economic analysis are 

set forth in E.O. 12866 § 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/a4.pdf. 

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.’’

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: 

• A description of the need for the 

rules and an explanation of how they 

will meet the need; 

• 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; 

• 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 

• 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

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: 

• The direct and indirect costs of 

compliance with the revisions described 

in this ANPR; 

• The effects of these revisions on 

regulatory capital requirements; 

• The effects of these revisions on 

competition among banks; and 

• 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 nonrecurring, 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 

DEPARTMENT OF TRANSPORTATION 

Federal Aviation Administration 

14 CFR Part 39 

[Docket No. FAA–2005–22739; Directorate 

Identifier 2005–NM–098–AD] 

RIN 2120–AA64 

Airworthiness Directives; Airbus Model 

A300 B4–600, B4–600R, and F4–600R 

Series Airplanes, and Model C4–605R 

Variant F Airplanes (Collectively Called 

A300–600 Series Airplanes); and Model 

A310–200 and A310–300 Series 

Airplanes 

AGENCY: Federal Aviation 

Administration (FAA), Department of 

Transportation (DOT). 

ACTION: Notice of proposed rulemaking 

(NPRM). 

SUMMARY: The FAA proposes to adopt a 

new airworthiness directive (AD) for 

certain A300–600, A310–200, and 

A310–300 series airplanes. This 

proposed AD would require modifying 

the forward outflow valve of the 

pressure regulation subsystem. This 

proposed AD results from a report of 

accidents resulting in injuries occurring 

on in-service airplanes when 

crewmembers forcibly initiated opening 

of passenger/crew doors against residual 

pressure, causing the doors to rapidly 

open. In these accidents, the buildup of 

residual pressure in the cabin was 

caused by the blockage of the outflow 

valve by an insulation blanket. We are 

proposing this AD to prevent an 

insulation blanket or other debris from 

being ingested into and jamming the 

forward outflow valve of the pressure 

regulation subsystem, which could lead 

to the inability to control cabin 

pressurization and adversely affect 

continued safe flight of the airplane. 

DATES: We must receive comments on 

this proposed AD by November 21, 

2005. 

ADDRESSES: Use one of the following 

addresses to submit comments on this 

proposed AD. 

• DOT Docket Web site: Go to 

http://dms.dot.gov and follow the 

instructions for sending your comments 

electronically. 

• Government-wide rulemaking Web 

site: Go to http://www.regulations.gov 

and follow the instructions for sending 

your comments electronically. 

• Mail: Docket Management Facility, 

U.S. Department of Transportation, 400 

Seventh Street SW., Nassif Building, 

room PL–401, Washington, DC 20590. 

• Fax: (202) 493–2251.