44620 Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 

1Collectively referred to in the guidance as 

‘‘banks’’. 

issued under sec. 184 (42 U.S.C. 2234) and 

sec. 189, 68 Stat. 955 (42 U.S.C. 2239). 

Appendix A also issued under sec. 6, Pub. L. 

91–550, 84 Stat. 1473 (42 U.S.C. 2135). 

■ 2. In § 2.309, paragraph (b)(3)(ii) is 

removed; paragraph (b)(3)(iii) is 

redesignated as (b)(3)(ii), and paragraph 

(b)(3)(i) is revised to read as follows: 

§ 2.309 Hearing requests, petitions to 

intervene, requirements for standing, and 

contentions. 

* * * * * 

(b) * * * 

(3) * * * 

(i) The time specified in any notice of 

hearing or notice of proposed action or 

as provided by the presiding officer or 

the Atomic Safety and Licensing Board 

designated to rule on the request and/ 

or petition, which may not be less than 

sixty (60) days from the date of 

publication of the notice in the Federal 

Register; or 

* * * * * 

PART 50—DOMESTIC LICENSING OF 

PRODUCTION AND UTILIZATION 

FACILITIES 

■ 3. The authority citation for part 50 

continues to read as follows: 

Authority: Secs. 102, 103, 104, 161, 182, 

183, 186, 189, 68 Stat. 936, 937, 938, 948, 

953, 954, 955, 956, as amended, sec. 234, 83 

Stat. 444, as amended (42 U.S.C. 2132, 2133, 

2134, 2135, 2201, 2232, 2233, 2236, 2239, 

2282); secs. 201, as amended, 202, 206, 88 

Stat. 1242, as amended, 1244, 1246 (42 U.S.C. 

5841, 5842, 5846); sec. 1704, 112 Stat. 2750 

(44 U.S.C. 3504 note); sec. 651(e), Pub. L. 

109–58, 119 Stat. 806–810 (42 U.S.C. 2014, 

2021, 2021b, 2111). Section 50.7 also issued 

under Pub. L. 95–601, sec. 10, 92 Stat. 2951 

(42 U.S.C. 5841). Section 50.10 also issued 

under secs. 101, 185, 68 Stat. 955, as 

amended (42 U.S.C. 2131, 2235); sec. 102, 

Pub. L. 91–190, 83 Stat. 853 (42 U.S.C. 4332). 

Sections 50.13, 50.54(dd), and 50.103 also 

issued under sec. 108, 68 Stat. 939, as 

amended (42 U.S.C. 2138). 

Sections 50.23, 50.35, 50.55, and 50.56 also 

issued under sec. 185, 68 Stat. 955 (42 U.S.C. 

2235). Sections 50.33a, 50.55a and Appendix 

Q also issued under sec. 102, Pub. L. 91–190, 

83 Stat. 853 (42 U.S.C. 4332). Sections 50.34 

and 50.54 also issued under sec. 204, 88 Stat. 

1245 (42 U.S.C. 5844). Sections 50.58, 50.91, 

and 50.92 also issued under Pub. L. 97–415, 

96 Stat. 2073 (42 U.S.C. 2239). Section 50.78 

also issued under sec. 122, 68 Stat. 939 (42 

U.S.C. 2152). Sections 50.80–50.81 also 

issued under sec. 184, 68 Stat. 954, as 

amended (42 U.S.C. 2234). Appendix F also 

issued under sec. 187, 68 Stat. 955 (42 U.S.C. 

2237). 

§ 50.41 [Amended] 

■ 4. In § 50.41, paragraph (c) is removed 

and reserved. 

■ 5. Section 50.42 is revised to read as 

follows: 

§ 50.42 Additional standard for class 103 

licenses. 

In determining whether a class 103 

license will be issued to an applicant, 

the Commission will, in addition to 

applying the standards set forth in 

§ 50.40, consider whether the proposed 

activities will serve a useful purpose 

proportionate to the quantities of special 

nuclear material or source material to be 

utilized. 

Dated at Rockville, Maryland, this 21st day 

of July, 2008. 

For the Nuclear Regulatory Commission. 

R.W. Borchardt, 

Executive Director for Operations. 

[FR Doc. E8–17436 Filed 7–30–08; 8:45 am] 

BILLING CODE 7590–01–P 

DEPARTMENT OF THE TREASURY 

Office of the Comptroller of the 

Currency 

12 CFR Part 3 

[Docket ID OCC–2008–0009] 

FEDERAL RESERVE SYSTEM 

12 CFR Parts 208 and 225 

[Docket No. OP–1322] 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 325 

DEPARTMENT OF THE TREASURY 

Office of Thrift Supervision 

12 CFR Part 567 

[Docket No. 2008–0008] 

Supervisory Guidance: Supervisory 

Review Process of Capital Adequacy 

(Pillar 2) Related to the Implementation 

of the Basel II Advanced Capital 

Framework 

AGENCIES: Office of the Comptroller of 

the Currency, Treasury (OCC); Board of 

Governors of the Federal Reserve 

System (Board); Federal Deposit 

Insurance Corporation (FDIC); and 

Office of Thrift Supervision, Treasury 

(OTS) (collectively, the agencies). 

ACTION: Final supervisory guidance. 

SUMMARY: The agencies are publishing 

guidance regarding the supervisory 

review process for capital adequacy 

(Pillar 2) provided in the Basel II 

advanced approaches final rule, which 

was published in the Federal Register 

on December 7, 2007 (advanced 

approaches final rule). The supervisory 

review process described in this 

guidance outlines the agencies’

standards for satisfying the qualification 

requirements provided in the advanced 

approaches final rule; addressing the 

limitations of the minimum risk-based 

capital requirements for credit risk and 

operational risk; ensuring that each 

institution has a rigorous process for 

assessing its overall capital adequacy in 

relation to its risk profile and a 

comprehensive strategy for maintaining 

appropriate capital levels; and 

encouraging each institution to improve 

its risk identification and measurement 

techniques. This supervisory guidance 

applies to any bank, savings association, 

or bank holding company 1

implementing the advanced approaches 

final rule. 

DATES: This guidance is effective 

September 2, 2008. Comments on the 

Paperwork Reduction Act portion of this 

document may be submitted on or 

before September 2, 2008. 

ADDRESSES: Comments on the 

Paperwork Reduction Act portion of this 

document should be addressed to: 

OCC: Communications Division, 

Office of the Comptroller of the 

Currency, Public Information Room, 

Mailstop 1–5, Attention: 1557–NEW, 

250 E Street, SW., Washington, DC 

20219. In addition, comments may be 

sent by fax to (202) 874–4448, or by 

electronic mail to 

regs.comments@occ.treas.gov. You may 

personally inspect and photocopy the 

comments at the OCC’s Public 

Information Room, 250 E Street, SW., 

Washington, DC 20219. For security 

reasons, the OCC requires that visitors 

make an appointment to inspect 

comments. You may do so by calling 

(202) 874–5043. Upon arrival, visitors 

will be required to present valid 

government-issued photo identification 

and submit to security screening in 

order to inspect and photocopy 

comments. 

Board: You may submit comments, 

identified by OP–1322, by any of the 

following methods: 

• Agency Web Site: http:// 

www.federalreserve.gov. Follow the 

instructions for submitting comments at 

http://www.federalreserve.gov/. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Fax: (202) 452–3819 or (202) 452–

3102. 

• Mail: Jennifer J. Johnson, Secretary, 

Board of Governors of the Federal 

Reserve System, 20th Street and 


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Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 44621 

2 71 FR 55830. 

3 72 FR 69288. 4 72 FR 9084. 

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 

Streets, NW.) between 9 a.m. and 5 p.m. 

on weekdays. 

FDIC: You may submit comments by 

any of the following methods: 

• Agency Web Site: http:// 

www.fdic.gov/regulations/laws/federal. 

Follow instructions for submitting 

comments on the Agency Web Site. 

• E-mail: Comments@FDIC.gov. 

Include ‘‘Basel II Supervisory 

Guidance’’ in the subject line of the 

message. 

• Mail: Robert E. Feldman, Executive 

Secretary, Attention: Comments, Federal 

Deposit Insurance Corporation, 550 17th 

Street, NW., Washington, DC 20429. 

• Hand Delivery/Courier: 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. 

(EST). 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow the 

instructions for submitting comments. 

• Public Inspection: All comments 

received will be posted without change 

to http://www.fdic.gov/regulations/laws/ 

federal including any personal 

information provided. Comments may 

be inspected and photocopied in the 

FDIC Public Information Center, 3501 

North Fairfax Drive, Room E–1002, 

Arlington, VA 22226, between 9 a.m. 

and 5 p.m. (EST) on business days. 

Paper copies of public comments may 

be ordered from the Public Information 

Center by telephone at (877) 275–3342 

or (703) 562–2200. 

OTS: Information Collection 

Comments, Chief Counsel’s Office, 

Office of Thrift Supervision, 1700 G 

Street, NW., Washington, DC 20552; 

send a facsimile transmission to (202) 

906–6518; or send an e-mail to 

infocollection.comments@ots.treas.gov. 

OTS will post comments and the related 

index on the OTS Internet site at 

http://www.ots.treas.gov. In addition, 

interested persons may inspect the 

comments at the Public Reading Room, 

1700 G Street, NW., by appointment. To 

make an appointment, call (202) 906–

5922, send an e-mail to 

public.info@ots.treas.gov, or send a 

facsimile transmission to (202) 906–

7755. A copy of the comments may also 

be submitted to the OMB desk officer for 

the Agencies: By mail to U.S. Office of 

Management and Budget, 725 17th 

Street, NW., Room 10235, Washington, 

DC 20503 or by facsimile to 202–395–

6974, Attention: Federal Banking 

Agency Desk Officer. 

FOR FURTHER INFORMATION CONTACT: 

OCC: Akhtarur Siddique, Lead Expert, 

Risk Analysis, (202) 874–4665; or Ron 

Shimabukuro, Senior Counsel, 

Legislative and Regulatory Activities 

Division, (202) 874–5090; Office of the 

Comptroller of the Currency, 250 E 

Street, SW., Washington, DC 20219. 

Board: David Palmer, Senior 

Supervisory Financial Analyst, Credit 

Risk Section, (202) 452–2904 or Sabeth 

Siddique, Assistant Director, Credit Risk 

Section, (202) 452–3861; Board of 

Governors of the Federal Reserve 

System, 20th Street and Constitution 

Avenue, NW., Washington, DC 20551. 

For the hearing impaired only, 

Telecommunication Device for the Deaf 

(TDD), (202) 263–4869. 

FDIC: Gloria Ikosi, Senior 

Quantitative Risk Analyst, (202) 898–

3997, or Ryan Sheller, Capital Markets 

Specialist, (202) 898–6614; Capital 

Markets Policy Section, Division of 

Supervision and Consumer Protection; 

or Mark L. Handzlik, Senior Attorney, 

(202) 898–3990, or Michael B. Phillips, 

Counsel, (202) 898–3581, Supervision 

Branch, Legal Division, Federal Deposit 

Insurance Corporation, 550 17th Street, 

NW., Washington, DC 20429. 

OTS: Sonja White, Senior Project 

Manager, (202) 906–7857, Capital 

Policy, or Jonathan Jones, Senior 

Financial Economist, (202) 906–5729, 

Office of Thrift Supervision, 1700 G 

Street, NW., Washington, DC 20552. 

SUPPLEMENTARY INFORMATION: The 

agencies issued a notice of proposed 

rulemaking (NPR) on September 25, 

2006,2 seeking comment on a new riskbased capital adequacy framework that 

requires some and permits other 

qualifying banks to use an internal 

ratings-based (IRB) approach to 

calculate regulatory capital 

requirements for credit risk and certain 

advanced measurement approaches 

(AMA) to calculate regulatory capital 

requirements for operational risk 

(together, the IRB and the AMA are 

referred to as the ‘‘advanced 

approaches’’). On December 7, 2007, the 

agencies published the advanced 

approaches final rule.3 The advanced 

approaches final rule is based largely on 

a series of publications by the Basel 

Committee on Banking Supervision 

(BCBS) that culminated in a 

comprehensive release in June 2006, 

titled, ‘‘International Convergence of 

Capital Measurement and Capital 

Standards: A Revised Framework’’ (New 

Accord). The New Accord presents a 

three-pillar framework for determining 

risk-based capital requirements for 

credit risk, market risk, and operational 

risk (Pillar 1); supervisory review of 

capital adequacy (Pillar 2); and market 

discipline through enhanced public 

disclosure (Pillar 3). 

On February 28, 2007, the agencies 

published in the Federal Register three 

separate documents proposing 

supervisory guidance related to the 

implementation of the advanced 

approaches.4 Two of those documents 

provided guidance for certain aspects of 

Pillar 1, that is, for the IRB systems for 

determining the credit risk of retail and 

wholesale exposures, and other systems 

for equity and securitization exposures, 

and for the AMA for determining 

operational risk. The third document 

proposed guidance for Pillar 2. This 

final guidance document provides 

supervisory guidance only for Pillar 2, 

and it does not provide Pillar 1 

guidance on the systems for determining 

regulatory capital requirements for 

credit risk or for determining regulatory 

capital requirements for operational 

risk. This document does not differ 

significantly from the proposed Pillar 2 

guidance. 

The agencies recognize that a number 

of institutions may need additional 

guidance to implement the advanced 

approaches final rule. Accordingly, 

consistent with the proposed guidance 

for Pillar 2, this guidance document 

highlights certain aspects of existing 

supervisory review that are being 

augmented or clarified to support the 

implementation of the supervisory 

assessment of overall capital adequacy 

under the advanced approaches final 

rule. In making this assessment, the 

agencies will consider, among other 

items, whether each institution (i) has 

satisfied the qualification requirements 

for implementing the advanced 

approaches; (ii) has a rigorous process 

for assessing its overall capital adequacy 

in relation to its risk profile and a 

comprehensive strategy for maintaining 

appropriate capital levels (internal 

capital adequacy assessment process—

ICAAP); and (iii) maintains a 

satisfactory risk management and 

control structure, consistent with its 

capital position and overall risk profile. 

The agencies received ten public 

comments on the proposed guidance 


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44622 Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 

from banking organizations, trade 

associations representing the banking or 

financial services industry, and other 

interested parties. Overall, the 

commenters supported the principlesbased orientation of the guidance. 

However, some commenters 

recommended revisions to certain 

sections of the guidance that they 

viewed as overly prescriptive. One 

commenter expressed concern that the 

guidance appeared to suggest that 

increases in risk should result in greater 

capital, even if an institution already 

maintains a substantial capital buffer. 

To address this concern, the agencies 

have revised the guidance to clarify that 

an increase in risk may not necessarily 

require an increase in capital where the 

bank already holds capital at a level 

exceeding what its internal processes 

and supervisors regard as adequate. 

Other commenters expressed concern 

regarding the agencies’ position that 

liquidity risk should be addressed 

within the ICAAP. However, the 

proposed guidance was consistent with 

the agencies’ view of liquidity risk as a 

material risk that can affect capital 

adequacy. The agencies clarified this 

section of the guidance to indicate that, 

within the ICAAP, institutions should 

consider the capital adequacy 

implications of liquidity risk. One 

commenter expressed the concern that 

each bank’s ICAAP measures would be 

compared to (and reconciled with) Pillar 

1 measures and to other institutions’

ICAAP results. The agencies 

acknowledge that there may be limited 

comparability to Pillar 1 measures 

because a bank’s ICAAP under Pillar 2 

should be tailored to its individual risk 

profile, while Pillar 1 measures are 

based on certain common assumptions 

that may not apply to each individual 

bank. Accordingly, there is likely to be 

some limit to the comparisons that can 

be made across institutions. 

Some commenters expressed 

confusion about the stress testing 

requirement in Pillar 1 and stress testing 

discussed in the Pillar 2 guidance. The 

agencies regard stress testing as a 

critical component in the identification 

and measurement of material risks. 

Although there are no prescriptive stress 

testing requirements in Pillar 2, 

institutions should use stress testing or 

similar exercises in their ICAAP to 

consider the consequences of unlikely 

but severe events and outcomes as an 

input to the capital adequacy 

assessment process. 

Finally, one commenter indicated that 

it might not be practical to incorporate 

the ICAAP into bank management’s 

decision-making process. The agencies 

believe that for the ICAAP to be 

meaningful and relevant, it should be 

consistent with the bank’s other risk 

management practices. 

Paperwork Reduction Act 

A. Request for Comment on Proposed 

Information Collection 

In accordance with the requirements 

of the Paperwork Reduction Act of 1995, 

the Agencies may not conduct or 

sponsor, and the respondent is not 

required to respond to, an information 

collection unless it displays a currently 

valid Office of Management and Budget 

(OMB) control number. The Agencies 

are requesting comment on a proposed 

information collection. The Agencies 

are also giving notice that the proposed 

collection of information has been 

submitted to OMB for review and 

approval. 

Comments are invited on: 

(a) Whether the collection of 

information is necessary for the proper 

performance of the Agencies’ functions, 

including whether the information has 

practical utility; 

(b) The accuracy of the estimates of 

the burden of the information 

collection, including the validity of the 

methodology and assumptions used; 

(c) Ways to enhance the quality, 

utility, and clarity of the information to 

be collected; 

(d) Ways to minimize the burden of 

the information collection on 

respondents, including through the use 

of automated collection techniques or 

other forms of information technology; 

and 

(e) Estimates of capital or start up 

costs and costs of operation, 

maintenance, and purchase of services 

to provide information. 

B. Proposed Information Collection 

Title of Information Collection: Basel 

II Interagency Supervisory Guidance for 

the Supervisory Review Process (Pillar 

2). 

Frequency of Response: Eventgenerated. 

Affected Public: 

OCC: National banks. 

Board: State member banks and bank 

holding companies. 

FDIC: Insured state nonmember banks 

and certain subsidiaries of these 

entities. 

OTS: Savings associations and certain 

of their subsidiaries. 

Abstract: The notice sets forth a 

supervisory guidance document for 

implementing the supervisory review 

process (Pillar 2). The guidance was 

issued for 60 days of comment on 

February 28, 2007 (72 FR 9084). No 

comments were received on the burden 

estimates provided in that notice. 

The Agencies believe that paragraphs 

37, 41, 43, and 46 impose new 

information collection requirements. 

Section 37 states that banks should state 

clearly the definition of capital used in 

any aspect of ICAAP and document any 

changes in the internal definition of 

capital. Under section 41, banks should 

maintain thorough documentation of 

ICAAP. Section 43 specifies that boards 

of directors should approve the bank’s 

ICAAP, review it on a regular basis, and 

approve any changes. Boards of 

directors are also required under 

Section 46 to periodically review the 

assessment of overall capital adequacy 

and to analyze how measures of internal 

capital adequacy compare with other 

capital measures (such as regulatory or 

accounting). 

The agencies burden estimates for 

these information collection 

requirements are summarized below. 

Note that the estimated number of 

respondents listed below include both 

institutions for which the Basel II riskbased capital requirements are 

mandatory and institutions that may be 

considering opting-in to Basel II (despite 

the lack of any formal commitment by 

most of these latter institutions). 

Estimated Burden: 

OCC 

Number of Respondents: 52. 

Estimated Burden per Respondent: 

140 hours. 

Total Estimated Annual Burden: 

7,280 hours. 

Board 

Number of Respondents: 15. 

Estimated Burden per Respondent: 

420 hours. 

Total Estimated Annual Burden: 

6,300 hours. 

FDIC 

Number of Respondents: 19. 

Estimated Burden per Respondent: 

420 hours. 

Total Estimated Annual Burden: 

7,980 hours. 

OTS 

Number of Respondents: 4. 

Estimated Burden per Respondent: 

420 hours. 

Total Estimated Annual Burden: 

1,680 hours. 

The full text of the guidance follows: 

Supervisory Review Process of Capital 

Adequacy (Pillar 2) Related to the 

Implementation of the Advanced 

Approaches Final Rule 

1. This guidance supplements the 

final rule published jointly by the U.S. 


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Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations 44623 

1The Federal banking agencies are the Board of 

Governors of the Federal Reserve System; the 

Federal Deposit Insurance Corporation; the Office of 

the Comptroller of the Currency; and the Office of 

Thrift Supervision; and are collectively referred to 

as ‘‘the agencies,’’ ‘‘supervisors,’’ or ‘‘regulators’’ in 

this guidance. 

2 72 FR 69288. The advanced approaches rule as 

codified at 12 CFR part 3, Appendix C (national 

banks); 12 CFR part 208, Appendix F (state member 

banks); 12 CFR part 225, Appendix G (bank holding 

companies); 12 CFR part 325 Appendix D (state 

nonmember banks); 12 CFR part 567, Appendix C 

(savings associations). 

3The term ‘‘bank’’ as used in this guidance 

includes banks, savings associations and bank 

holding companies. The terms ‘‘bank holding 

company’’ and ‘‘BHC’’ refer only to bank holding 

companies regulated by the Federal Reserve Board 

and do not include savings and loan holding 

companies regulated by the Office of Thrift 

Supervision. 

4 12 CFR part 3, Appendix B (national banks), 12 

CFR part 208, Appendix E (state member banks), 12 

CFR part 225, Appendix E (bank holding 

companies), 12 CFR part 325, Appendix C (state 

nonmember banks). OTS intends to codify a market 

risk capital rule for savings associations at 12 CFR 

part 567, Appendix D. 

5 If a bank is subject to both the advanced 

approaches rule and the market risk rule, then the 

bank is subject to this guidance. If a bank is subject 

only to the market risk rule, it is not subject to this 

guidance. 

6See 12 CFR part 6 (national banks); 12 CFR part 

208 (state member banks); 12 CFR 325.103 (state 

nonmember banks); 12 CFR part 565 (savings 

associations). In addition, savings associations 

remain subject to the tangible capital requirement 

at 12 CFR 567.2(a)(3) and 567.9. 

7See Part III, section 22(a)(1)–(3) of the advanced 

approaches rule. 

Federal banking agencies1 in the 

Federal Register on December 7, 2007 

(advanced approaches rule).2 The 

advanced approaches rule implements a 

new risk-based capital framework 

encompassing three pillars: 

• Minimum risk-based capital 

requirements (Pillar 1); 

• Supervisory review (Pillar 2); and 

• Market discipline through 

enhanced public disclosures (Pillar 3). 

The minimum risk-based capital 

requirements in Pillar 1 of the advanced 

approaches rule apply to a bank’s 

calculation of minimum risk-based 

capital requirements for credit risk and 

operational risk.3 If the bank is also 

subject to the market risk rule,4 then the 

minimum risk-based capital 

requirements in that rule would apply.5

2. This document addresses the 

process for supervisory review in the 

advanced approaches rule. As described 

in this guidance, supervisory review 

covers three main areas: 

• Comprehensive supervisory review 

of capital adequacy; 

• Compliance with regulatory capital 

requirements; and 

• Internal capital adequacy 

assessment process (ICAAP). 

3. The process of supervisory review 

described in this guidance reflects a 

continuation of the longstanding 

approach employed by the agencies in 

their supervision of banks. However, 

because implementation of the 

advanced approaches rule affects certain 

aspects of supervisory review, this 

guidance highlights areas of existing 

supervisory review that are being 

augmented or more clearly defined to 

support implementation of the 

advanced approaches rule by U.S. 

banks. 

4. The supervisory review process 

described in this document is intended 

to help ensure overall capital adequacy 

by: 

• Confirming a bank’s compliance 

with regulatory capital requirements; 

• Addressing the limitations of 

minimum risk-based capital 

requirements as a measure of a bank’s 

full risk profile—including risks not 

covered or not adequately addressed or 

quantified in Pillar 1; 

• Ensuring that each bank is able to 

assess its own capital adequacy (beyond 

minimum risk-based capital 

requirements) based on its risk profile 

and business model; and 

• Encouraging banks to develop and 

use better techniques to identify and 

measure risk. 

5. This guidance neither supersedes 

nor alters the functioning of the existing 

Prompt Corrective Action 

requirements.6 Similarly, this guidance 

does not affect any other requirements 

for compliance with existing regulations 

and supervisory standards related to 

risk-management practices or other 

areas. The supervisory review process 

described in this guidance supports the 

supervisors’ existing ability to: 

• Require an individual bank to take 

measures to prevent its capital from 

falling below the level needed to 

adequately support its risks; or 

• Otherwise intervene to ensure that 

the bank’s capital levels are adequate. 

Comprehensive Supervisory Review of 

Capital Adequacy 

6. Capital helps protect individual 

banks from insolvency, thereby 

promoting safety and soundness in the 

overall U.S. banking system. Minimum 

risk-based capital requirements 

establish a threshold below which a 

sound bank’s risk-based capital must 

not fall. Risk-based capital ratios permit 

some comparative analysis of capital 

adequacy across banks because they are 

based on certain common assumptions. 

However, supervisors must perform a 

more comprehensive review of capital 

adequacy that considers the risks that 

are specific to each individual bank, 

including those not incorporated in riskbased capital requirements. In short, 

supervisors must ensure that a bank’s 

overall capital does not fall below the 

level required to support its entire risk 

profile. 

7. Supervisors generally expect banks 

to hold capital above their minimum 

risk-based capital levels, commensurate 

with their individual risk profiles, to 

account for all material risks. Going 

forward under the advanced approaches 

rule, supervisors will continue to review 

the overall capital adequacy of any bank 

through a comprehensive evaluation 

that considers all relevant available 

information. In determining the extent 

to which banks should hold capital in 

excess of risk-based capital minimums, 

supervisors will consider: The 

combined implications of a bank’s 

compliance with qualification 

requirements for regulatory capital 

standards; the quality and results of a 

bank’s own process for determining 

whether capital is adequate (the 

ICAAP); and the bank’s riskmanagement processes, control 

structure, and other relevant 

information relating to the bank’s risk 

profile and capital level.7 This review is 

consistent with current supervisory 

practice, under which the agencies 

assess a bank’s overall capital adequacy 

through a comprehensive evaluation of 

all relevant information. 

8. The supervisory review process 

assesses whether a bank has a 

satisfactory process to determine that its 

overall capital is adequate, and that the 

bank maintains adequate capital on an 

ongoing basis, as underlying conditions 

change. For example, changes in a 

bank’s risk profile or in relevant capital 

measures are areas of particular focus 

that are effectively addressed through 

the supervisory review process. 

Generally, a bank should hold more 

capital for material increases in risk that 

are not otherwise mitigated, unless the 

bank already holds capital at a level 

exceeding what its internal processes 

and supervisors would regard as 

adequate. Conversely, a bank may be 

able to reduce overall capital (to a level 

still above regulatory minimums) if the 

supervisory review supports the 

conclusion that the bank’s inherent risk 

has materially declined or that it has 

been appropriately mitigated. 

9. As a result of its comprehensive 

supervisory review, a bank’s primary 

Federal supervisor may take action if it 

is not satisfied that capital is adequate. 

The primary Federal supervisor may 

require the bank to take actions to 

address identified supervisory concerns, 

which may include requiring the bank 

to hold additional capital to bring 


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8Part III, section 22(a) (1) of the advanced 

approaches rule. 9Should the primary Federal supervisor exempt 

a bank from application of the advanced approaches 

rule based upon a written determination that the 

application of the rule is not appropriate in light of 

the bank’s asset size, level of complexity, risk 

profile, or scope of operations, such exemption 

would likewise apply to the advanced approaches 

requirement that the bank have an ICAAP, but 

would not automatically exempt the bank from 

other regulatory requirements or supervisory 

expectations to maintain a satisfactory internal 

process to assess capital adequacy. 

10The term ‘‘economic capital’’ generally refers to 

the capital attributed to cover the economic effects 

of a bank’s risk taking activities. Within the banking 

industry, economic capital takes on a variety of 

definitions and is applied in a number of ways at 

the product, business-line, and consolidated 

institution level. 

capital to levels that the supervisor 

deems commensurate with the bank’s 

risk profile. In addition, the primary 

Federal supervisor may, under its 

enforcement authority, require a bank to 

modify or enhance risk-management 

and internal-control processes, reduce 

its exposure to risk, or take any action 

deemed necessary to address identified 

supervisory concerns. 

Compliance With Regulatory Capital 

Requirements 

10. In order to use the advanced 

approaches rule to calculate minimum 

risk-based capital requirements, a bank 

must meet certain process and systems 

requirements. As part of the supervisory 

review process, the agencies will ensure 

that each bank meets these 

requirements. The advanced approaches 

rule provides an explanation of these 

qualification requirements for any 

systems and processes used. 

11. A bank using the advanced 

approaches rule must comply with the 

rule’s qualification requirements for 

both initial and ongoing qualification. A 

bank that falls out of compliance with 

the qualification requirements would be 

required to establish a plan to return to 

compliance that satisfies its primary 

Federal supervisor. 

12. Supervisors will ensure that each 

bank using the advanced approaches 

rule complies with the qualification 

requirements both at the consolidated 

level and at any subsidiary bank that 

uses the advanced approaches rule. 

Thus, each bank that applies the 

advanced approaches rule must have 

appropriate risk-measurement and riskmanagement processes and systems that 

meet the rule’s qualification 

requirements. 

The ICAAP 

13. The qualification requirements in 

the advanced approaches rule state that 

‘‘a bank must have a rigorous process for 

assessing its overall capital adequacy in 

relation to its risk profile and a 

comprehensive strategy for maintaining 

an appropriate level of capital.’’ 8

Because minimum risk-based capital 

requirements are based on certain 

assumptions and address only a subset 

of risks faced by an individual bank, 

each bank must conduct an internal 

assessment of whether its capital is 

adequate, given its risk profile. A bank 

must conduct this assessment, using the 

ICAAP, in addition to its calculation of 

minimum risk-based capital 

requirements.9 Accordingly, a bank’s 

capital should exceed the level required 

by its minimum risk-based capital 

requirements, and also should be 

adequate according to its own ICAAP. 

14. The fundamental objectives of a 

sound ICAAP are: 

• Identifying and measuring material 

risks; 

• Setting and assessing internal 

capital adequacy goals that relate 

directly to risk; and 

• Ensuring the integrity of internal 

capital adequacy assessments. 

15. Assessing overall capital adequacy 

through the ICAAP requires thorough 

identification of all material risks, 

measurement of those that can be 

reliably quantified, and systematic 

assessment for the limitations of 

minimum risk-based capital 

requirements. The ICAAP should 

address the capital implications arising 

from both on- and off-balance sheet 

positions, as well as from provisions of 

explicit or implicit support. Material 

risks include those that in isolation do 

not appear to be material at first, but 

when combined with other risks could 

lead to material losses. In this manner, 

the ICAAP should contribute broadly to 

the development of better risk 

management within the organization at 

both the individual entity and 

consolidated levels. 

16. Each bank implementing the 

advanced approaches rule should have 

an ICAAP that is appropriate for its 

unique risk characteristics and should 

not rely solely upon the assessment of 

capital adequacy at the parent company 

level. This does not preclude the use of 

a consolidated ICAAP as an important 

input to a subsidiary bank’s own 

ICAAP, provided that each entity’s 

board and senior management ensure 

that the ICAAP is appropriately 

modified to address the unique 

structural and operating characteristics 

and risks of the subsidiary bank. 

17. In general, the ICAAP will likely 

go beyond the assumptions built into 

minimum risk-based capital 

requirements. However, in certain 

instances a bank’s ICAAP—when 

supported by proper justification and 

evidence—may build upon and utilize 

the methods, practices, and results it 

uses to determine minimum risk-based 

capital requirements. For example, in 

developing the ICAAP, a bank may 

choose to use data, ratings, or estimates 

from internal ratings-based approaches 

for credit risk; or a bank may choose to 

use the advanced measurement 

approaches as the basis for its internal 

assessment of operational risk. 

Furthermore, although the ICAAP 

should be a distinct and comprehensive 

process that produces its own capital 

measures, in some cases a bank may be 

able to demonstrate that minimum riskbased capital measures appropriately 

reflect certain aspects of a bank’s risk 

profile and thus are appropriate for use 

in its ICAAP. 

18. The design and operation of any 

systems used to meet the ICAAP 

requirements will likely differ, 

depending on the complexity of each 

bank’s operations and risk profile. Many 

banks employ ‘‘economic capital’’

measures for some elements of risk 

management, such as limit setting, or for 

evaluating performance or determining 

aggregate capital needs.10 In some cases, 

economic capital measures may relate 

directly to a bank’s assessment of capital 

adequacy under the ICAAP; however, in 

other cases, a bank may be using 

economic capital measures that are not 

intended for capital adequacy 

assessments. In the latter case, a bank 

does not necessarily need to change its 

existing process or systems, but it may 

need to build upon or adjust its 

economic capital measures for use in 

the ICAAP and the bank would have to 

demonstrate clearly how it does so. 

Notably, economic capital is not the 

only means to meet the ICAAP 

requirement. Regardless of the specific 

implementation method(s) chosen, the 

bank’s ICAAP should address the three 

ICAAP objectives listed in paragraph 14. 

Identifying and Measuring Material 

Risks 

19. The first objective of the ICAAP is 

to identify all material risks. Risks that 

can be reliably measured and quantified 

should be treated as rigorously as data 

and methods allow. The appropriate 

means and methods to measure and 

quantify those material risks are likely 

to vary across banks. The key point is 

for a bank to be able to identify all 

material risks and measure those that 

can be reliably quantified in order to 

determine how those risks affect the 

bank’s overall capital adequacy. 

20. Some of the risks to which a bank 

may be exposed include credit risk, 


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11Examination policies and procedures from each 

agency provide extensive guidance on the major 

risk categories. A bank’s risk management 

processes, including its ICAAP, should be 

consistent with each corresponding agency’s 

existing body of guidance, as well as with relevant 

interagency guidance. 

12For example, a bank may be engaged in 

businesses for which periodic fluctuations in 

activity levels, combined with relatively high fixed 

costs, have the potential to create unanticipated 

losses that must be supported by adequate capital. 

Additionally, a bank might be involved in strategic 

activities (such as expanding business lines or 

engaging in acquisitions) that introduce significant 

elements of risk and for which additional capital 

would be appropriate. 

13 In many cases, a bank may capture legal risk 

within operational risk. Regardless of whether it is 

classified as its own risk type or included within 

another risk type, a bank should understand the 

impact of legal risk on capital adequacy. 

14Concentrations may include exposures or 

groups of exposures that have the potential to 

produce losses large enough to threaten an 

institution’s health or materially change its risk 

profile. 

market risk, operational risk, interest 

rate risk in the banking book, and 

liquidity risk (as outlined below).11

Other risks, such as reputational risk, 

business or strategic risk, and country 

risk may also be material for a bank and, 

in such cases, should be given equal 

consideration to the more formally 

defined risk types.12 Additionally, if a 

bank employs risk mitigation techniques 

it should understand the risk to be 

mitigated and the potential effects of 

that mitigation (including enforceability 

and effectiveness). 

• Credit risk: A bank should have the 

ability to assess credit risk at the 

portfolio level in addition to the 

exposure or counterparty level. In 

making this assessment, the bank 

should be particularly attentive to 

identifying any credit risk 

concentrations and ensuring that their 

effects are adequately assessed. The 

bank should consider the various types 

of dependence among exposures, and 

the credit risk effects of extreme 

outcomes, stress events, and shocks to 

assumptions about portfolio and 

exposure behavior. The bank also 

should carefully assess concentrations 

in counterparty credit exposures, 

including those that result from trading 

in less liquid markets, and determine 

the effect that these exposures might 

have on capital adequacy. 

• Market risk: A bank should be able 

to identify risks in trading and capital 

markets activities resulting from a 

movement in market prices and rates. 

This determination should consider 

factors such as illiquidity of 

instruments, leverage, concentrated 

positions, one-way markets, non-linear 

or deep out-of-the money option 

positions as well as embedded 

optionality, and the potential for 

significant shifts in correlations or other 

types of dependence structures. 

Assessments that incorporate extreme 

events, idiosyncratic variations, credit 

migrations or changes in credit spreads, 

defaults, and shocks should also be 

tailored to capture key portfolio 

vulnerabilities. 

• Operational risk: A bank should be 

able to assess the potential risks 

resulting from inadequate or failed 

internal processes, people, and systems, 

as well as from events external to the 

bank.13 This assessment should include 

the effects of extreme events and shocks 

relating to operational risk. Extreme 

events could include a substantial or 

sudden increase in failed processes 

across business units or a significant 

incidence of failed internal controls. 

• Interest rate risk in the banking 

book: A bank should incorporate 

interest rate risk in the banking book 

into its assessment of capital adequacy. 

In making this assessment, the bank 

should identify the risks associated with 

changes in interest rates that impact 

both on- and off-balance sheet 

exposures in the banking book from a 

short- and long-term perspective. This 

might include the impact of changes 

due to parallel yield curve shocks, yield 

curve twists, yield curve inversions, 

changes in the adjustment of rates 

earned and paid on different financial 

instruments with otherwise similar 

repricing characteristics (basis risk), and 

other relevant scenarios including some 

that incorporate stress events, extreme 

outcomes, and shocks to assumptions. 

The bank should be able to support any 

assumptions it has made with respect to 

the behavioral characteristics of 

servicing rights, non-maturity deposits, 

positions subject to prepayment risk, 

and other assets and liabilities, 

especially for those exposures 

characterized by embedded optionality. 

• Liquidity risk: A bank should 

incorporate liquidity risk into the 

assessment of its capital adequacy. A 

bank should evaluate whether capital is 

adequate given its own funding 

liquidity profile and given the liquidity 

of the markets in which it operates. This 

assessment should incorporate various 

types of liquidity environments and 

include an evaluation of the potential 

for a material disruption in the sources 

of liquidity typically relied on by the 

bank as a result of bank-specific as well 

as systemic events. A bank should 

consider the capital adequacy 

implications of lacking a welldiversified funding base, relying 

predominantly on wholesale credit 

markets for its funding, or relying 

heavily on volatile funding sources. A 

bank involved in securitization 

activities should consider the capital 

adequacy implications of relying on 

market liquidity to distribute 

warehoused assets, including the 

potential for disruptions that would 

cause a bank to bring certain items onto 

its balance sheet. In its assessment of 

the impact of liquidity risk on capital 

adequacy, the bank should also 

challenge assumptions built into its 

definition of liquid products. 

The risk factors discussed above are 

not an exhaustive list of those affecting 

any given bank. A well-developed 

ICAAP should include an assessment of 

all relevant factors that present a 

material source of risk to capital, and 

should account for concentrations 

within each risk type. 

21. A bank should assess whether its 

capital is sufficient to absorb any losses 

that may arise from activities that 

expose the bank to multiple risks within 

and across business lines or create 

concentrations across risk types.14 A 

bank should recognize that losses could 

arise in several risk dimensions at the 

same time, stemming from the same 

event or a common set of factors. For 

example, a localized natural disaster 

could generate losses from credit, 

market, and operational risks. 

Additionally, the ICAAP should focus 

on any complex activities that give rise 

to multiple risks, and to their 

interaction. These activities can involve 

instruments that may be complex, 

illiquid, or difficult to value. For 

example, securitization activities expose 

a bank to a variety of risks that can 

affect capital adequacy at the same time, 

including credit, market, liquidity, and 

reputational risks; structured products 

can have multiple embedded risks that 

interact in complex ways and can 

present losses in multiple risk areas 

across different business lines at the 

same time. In general, the ICAAP should 

include an assessment of the potential 

effects of convergence of risks within 

and across business lines and their 

combined impact on capital adequacy. 

22. The ICAAP should take into 

consideration the linkage between 

capital adequacy and damage or 

potential damage to a bank’s reputation. 

A bank might incur losses affecting 

capital adequacy because of damage to 

its reputation, or the bank might incur 

losses trying to prevent or mitigate 

damage to its reputation. In assessing 

the linkage between reputational risk 

and capital adequacy, a bank should 

assess risks associated with both onbalance sheet and off-balance sheet 

exposures and activities, as well as risks 

associated with affiliates, subsidiaries, 


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counterparties, clients, or other third 

parties. The assessment should include 

activities for which the bank acts as a 

sponsor or advisor, and cases in which 

the bank provides explicit or implicit 

support. A bank should also assess the 

risk of having to assume the losses of a 

third party to prevent or mitigate 

damage to the bank’s reputation. 

23. The bank’s ICAAP should assess 

risks associated with new products, 

markets and activities. In making this 

assessment, the bank should account for 

any uncertainty in the valuation of new 

products, whether by the bank or a third 

party, which could be more challenging 

if the new products are particularly 

complex or do not have liquid markets. 

The ICAAP should take into 

consideration changing dynamics in 

markets for new products and 

uncertainty as to how new markets 

might respond to stress conditions. The 

ICAAP should also assess the challenges 

presented by new business lines or 

strategic acquisitions in terms of their 

impact on capital adequacy. 

24. All measurements of risk should 

incorporate both quantitative and 

qualitative elements. Generally, a 

quantitative approach should form the 

foundation of a bank’s measurement 

framework. Quantitative approaches 

that focus on most likely outcomes for 

budgeting, forecasting, or performance 

measurement purposes may not be fully 

applicable for assessing capital 

adequacy, which also should take less 

likely outcomes into account. 

25. In some cases, quantitative tools 

can include the use of large historical 

databases. These databases are most 

applicable when they are fully reflective 

of all relevant risk characteristics, 

incorporate appropriate variability, and 

have adequate granularity and history; 

for example, they should include data 

based not just on benign but also more 

stressful economic periods or operating 

environments. When internal data are 

not available or do not reflect a bank’s 

risk profile, a bank may rely on external 

data for risk measurements, but should 

ensure that external data have 

applicability to the bank’s own activities 

and risk profile. 

26. The confidence a bank places in 

the results of its ICAAP should depend 

on the quality and robustness of the 

associated risk assessments. When 

measuring risks, a bank should 

understand that estimation and 

measurement errors are common, and in 

many cases are themselves difficult to 

quantify. In general, the bank’s ICAAP 

should reflect an appropriate level of 

conservatism to account for uncertainty 

in risk identification, risk mitigation or 

control, and risk quantification. In most 

cases, appropriate conservatism will 

result in greater capital needs. 

27. In many cases, risk assessments 

may rely to a significant degree on 

models that use both qualitative and 

quantitative inputs. The use of models 

can enhance the ICAAP, but it can also 

introduce challenges. Specifically, 

models may fail to work as intended or 

expected, or they may be used 

inappropriately for purposes not 

considered in their initial design. These 

concerns apply to models purchased 

from third-party vendors, as well as to 

models that are internally developed. A 

bank using models as part of the ICAAP 

should recognize these possibilities and 

ensure that appropriate controls, such as 

rigorous initial and ongoing validation 

and independent review, are in place to 

mitigate and manage any risks related to 

model use. A bank should apply 

appropriate conservatism to compensate 

for any risks associated with models. 

Additional conservatism may be 

necessary to account for any 

uncertainties in the use of models to 

value on- or off-balance sheet exposures 

or for imperfections and volatility in 

market-based valuations. Additional 

conservatism may be necessary to 

compensate for increased risk, for 

example, when models or applications 

are more complex, or when they have a 

more significant influence on the 

ICAAP’s results. 

28. To gain a fuller understanding of 

the risks beyond more typical 

quantitative measures—such as those 

based on certain parameter behavior or 

distributional assumptions—a bank 

should also rely on other types of 

quantitative exercises. For example, 

stress testing, including scenario 

analysis and sensitivity analysis, is an 

additional quantitative exercise that a 

bank should regularly apply to 

complement more typical quantitative 

measures. A bank may need to rely more 

heavily on such exercises when internal 

or demonstrably relevant external data 

are scarce. These exercises can help 

gauge the consequences of outcomes 

that are unlikely, but would have a 

considerable impact on safety and 

soundness. 

29. In addition to quantitative 

approaches for assessing risk, a bank 

should also employ qualitative 

approaches that incorporate 

management experience and judgment. 

Qualitative measures should be 

employed not only for those cases in 

which scarce data or unproven 

quantitative methods limit a full 

assessment of risk, but also more 

generally to complement even 

sophisticated quantitative estimates 

based on extensive and high-quality 

data. 

30. A bank should be cognizant that 

both quantitative and qualitative 

approaches have their own inherent 

biases and assumptions that affect risk 

assessment. Accordingly, a bank should 

recognize the biases and assumptions 

embedded in, and the limitations of, the 

approaches used. 

31. An effective ICAAP is 

comprehensive, assessing material risks 

across the entire bank. Each bank 

should have systems capable of 

aggregating across risk types. A bank 

should understand the challenges 

presented by risk aggregation and the 

inherent uncertainty in quantitative 

estimates used to aggregate risks 

(including the difficulty in estimating 

concentrations across risk types as 

noted in paragraph 21). For example, a 

bank is encouraged to consider the 

various interdependencies among risk 

types, the different techniques used to 

identify such interdependencies, and 

the channels through which those 

interdependencies might arise—across 

risk types, within the same business 

line, and across different business lines. 

Consistent with paragraph 26, any 

associated uncertainty in aggregating 

capital estimates across risk types and 

business lines should translate into 

greater capital needs. 

32. Management should be systematic 

and rigorous in considering possible 

effects of diversification. Assumptions 

about diversification should be 

identified at each level where 

diversification is recognized, supported 

by analysis and evidence, and remain 

robust over time and under different 

market environments, including 

stressed market conditions. For 

example, a bank calculating the 

dependence structure within or among 

risk types should consider data quality 

and consistency, such as the volatility of 

correlations over time and during 

periods of market stress. In general, a 

bank should consider a wide range of 

possible adverse outcomes that have the 

potential to affect multiple risks at the 

same time and to limit expected 

diversification benefits. Consistent with 

paragraph 26, uncertainty in 

diversification estimates should 

translate into greater capital needs. 

Setting and Assessing Capital Adequacy 

Goals That Relate to Risk 

33. The second objective of the ICAAP 

is to set and assess capital adequacy 

goals in relation to all material risks. 

Under this objective, a bank should 

have a well-defined process to translate 

estimates of risk into an assessment of 

capital adequacy. In practice, capital 


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15The use of stress testing in identifying and 

measuring risk exposures and assessing capital 

adequacy in the ICAAP is not the same as the Pillar 

1 stress testing requirement related to minimum 

risk-based capital requirements and qualification 

requirements (as described in the advanced 

approaches rule). The stress testing encouraged in 

the ICAAP guidance is intended to focus on overall 

capital needs and their possible fluctuations, not 

just fluctuations in minimum risk-based capital 

requirements. However, work conducted to meet 

the stress testing requirement under Pillar 1 may 

have application to or may provide a starting point 

for any stress testing banks decide to conduct as 

part of the ICAAP. 

adequacy goals may be reflected in 

various ways. A bank may choose to 

hold capital in excess of the level 

internal processes would regard as 

adequate for any number of business or 

strategic reasons. Excess capital may 

fluctuate over time. Each bank should 

recognize that minimum risk-based 

capital requirements represent a floor 

below which the bank’s overall capital 

level must not fall, even if bank 

management believes that there is 

justification to maintain less capital. 

34. A bank may establish its risktolerance level to reflect a desired level 

of risk coverage and/or a certain degree 

of creditworthiness, such as an explicit 

solvency standard. Accordingly, 

assessments of risk and capital 

adequacy should reflect the chosen risk 

tolerance of the bank. Because risk 

profiles and choices of risk tolerance 

may differ across banks, capital targets 

may also differ. However, if for internal 

capital adequacy purposes a bank were 

to choose to apply a level of risk 

coverage or a solvency standard that is 

less than that implied by minimum riskbased capital requirements, the bank 

would have to be able to: Identify and 

support the rationale for a lower 

solvency standard; demonstrate clearly 

that its ICAAP adequately addresses 

low-probability, high-severity events; 

and ensure that there is sufficient 

capital to absorb losses associated with 

such extreme events. Regardless of the 

solvency standard used, supervisors 

expect banks to hold capital at a level 

above that established by minimum 

risk-based capital requirements. 

35. A bank should consider external 

conditions and other factors that 

influence its overall capital adequacy, 

including the potential impact of 

contingent exposures and changing 

economic and financial environments. 

The ICAAP should address the potential 

impact of broader market or systemic 

events, which could cause risk to 

increase beyond the bank’s chosen risktolerance level, and have appropriate 

contingency plans for such outcomes. 

Such exercises may include stress 

testing, such as scenario and sensitivity 

analysis; however, in all cases they 

should incorporate both quantitative 

and qualitative methods.15

36. Through the ICAAP, a bank 

should ensure that adequate capital is 

held against all material risks, and that 

capital remains adequate not just at a 

point in time, but over time, to account 

for changes in a bank’s strategic 

direction, evolving economic 

conditions, and volatility in the 

financial environment. A bank should 

be cognizant of the impact of marketdriven valuations on the volatility of 

capital. Moreover, recognizing the 

sensitivity of capital to economic and 

financial cycles should be a critical 

component of a bank’s planning for 

current and future capital needs. For 

example, a bank should consider the 

potential effects of a sudden, sustained 

economic downturn. The level of capital 

deemed adequate by a bank given its 

ICAAP might also be influenced by the 

bank’s intention to hold additional 

capital to mitigate the impact of 

volatility in capital requirements, its 

need to support acquisition plans, or its 

decision to accommodate market 

perceptions of capital adequacy and 

their impact on funding costs. 

37. In analyzing capital adequacy, a 

bank should evaluate the capacity of its 

capital to absorb losses. Because various 

definitions of capital are used within 

the banking industry, each bank should 

state clearly the definition of capital 

used in any aspect of its ICAAP. Since 

components of capital are not 

necessarily alike and have varying 

capacities to absorb losses, a bank 

should be able to demonstrate the 

relationship between its internal capital 

definition and its assessment of capital 

adequacy. If a bank’s definition of 

capital differs from the regulatory 

definition, the bank should reconcile 

such differences and provide an 

analysis to support the inclusion of any 

capital instruments that are not 

recognized under the regulatory 

definition. Although common equity is 

generally the predominant component 

of a bank’s capital structure, a bank may 

be able to support the inclusion of other 

capital instruments in its internal 

definition of capital if it can 

demonstrate a similar capacity to absorb 

losses. The bank should document any 

changes in its internal definition of 

capital, and the reason for those 

changes. 

38. An effective capital plan 

recognizes a bank’s short- and long-term 

capital needs and objectives. 

Accordingly, a bank should evaluate 

whether long-run capital targets are 

consistent with short-run goals, based 

on current and planned changes in risk 

profiles. In developing its capital plan, 

the bank also should recognize that 

accommodating additional capital needs 

can require significant lead time, can be 

costly, or can be quite difficult, 

especially during downturns or other 

times of stress. A bank should have 

contingency plans to address 

unexpected capital needs. 

Ensuring Integrity of Internal Capital 

Adequacy Assessments 

39. A satisfactory ICAAP comprises a 

complete process with proper oversight 

and controls, and not just an ability to 

carry out certain capital calculations. 

The various elements of a bank’s ICAAP 

should complement and reinforce one 

another to achieve the overall objective 

of assessing capital adequacy, taking 

into account the bank’s risk profile. 

40. A bank should maintain adequate 

internal controls to ensure the integrity, 

objectivity, and consistent application 

of the ICAAP. Decisions regarding the 

design and operation of the ICAAP 

should reflect sound risk management, 

and should not be unduly influenced by 

competing business objectives. A bank 

should identify any deficiencies in its 

ICAAP and plan and take remedial 

actions to address the deficiencies in a 

timely manner. The principles 

underlying a bank’s ICAAP should be 

incorporated into policies that are 

reviewed and approved at appropriate 

levels within the organization. 

41. A bank should maintain thorough 

documentation of its ICAAP to ensure 

transparency. At a minimum, this 

should include a description of the 

bank’s overall capital-management 

process, including the committees and 

individuals responsible for the ICAAP; 

the frequency and distribution of 

ICAAP-related reporting; and the 

procedures for the periodic evaluation 

of the appropriateness and adequacy of 

the ICAAP. In addition, where 

applicable, ICAAP documentation 

should demonstrate the bank’s sound 

use of quantitative methods (including 

model selection and limitations) and 

data-selection techniques, as well as 

appropriate maintenance, controls, and 

validation. A bank should document 

and explain the role of third-party and 

vendor products, services and 

information—including methodologies, 

model inputs, systems, data, and 

ratings—and the extent to which they 

are used within the ICAAP. A bank 

should have a process to regularly 

evaluate the performance of third-party 

and vendor products, services and 

information. As part of the ICAAP 

documentation, a bank should 

document the assumptions, methods, 


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data, information, and judgment used in 

its quantitative and qualitative 

approaches. 

42. The ICAAP should be enhanced 

and refined over time, with learning and 

experience (both quantitative and 

qualitative) contributing to its 

improvement. The ICAAP should evolve 

with changes in the risk profile and 

activities of the bank, as well as with 

advances in risk measurement and 

management practices. For example, a 

bank should incorporate in its ICAAP 

the introduction of new products and 

business lines and activities to ensure 

that the bank’s capital plan is 

responsive to changes in the operational 

and/or business environment. 

43. The board of directors and senior 

management have certain 

responsibilities in developing, 

implementing, and overseeing the 

ICAAP. The board should approve the 

ICAAP and its components. The board 

or its appropriately delegated agent 

should review the ICAAP and its 

components on a regular basis, and 

approve any revisions. That review 

should encompass the effectiveness of 

the ICAAP, the appropriateness of risk 

tolerance levels and capital planning, 

and the strength of control 

infrastructures. Senior management 

should continually ensure that the 

ICAAP is functioning effectively and as 

intended, under a formal review policy 

that is explicit and well documented. 

Additionally, a bank’s internal audit 

function should play a key role in 

reviewing the controls and governance 

surrounding the ICAAP on an ongoing 

basis. 

44. Each bank should ensure that the 

components of its ICAAP, including any 

models and their inputs, are subject to 

the bank’s validation policies and 

procedures. Validation should be 

independent of the development, 

implementation, and operation of the 

ICAAP components, or the validation 

process should be subject to an 

independent review of its adequacy and 

effectiveness. Validation is generally 

defined as an ongoing process that 

includes, but is not limited to, the 

collection and review of developmental 

evidence, process verification, 

benchmarking, outcomes analysis, and 

monitoring activities used to confirm 

that processes are operating as designed. 

Validation policies and procedures 

should reflect the bank’s business, 

structure, and sophistication, as well as 

the relative importance of each 

component of the ICAAP. Accordingly, 

a bank is encouraged to consult the 

agencies’ existing guidance on 

validation. 

45. A bank’s ICAAP should be aligned 

with and be a part of the bank’s wider 

internal governance structure and 

overall risk-management processes. The 

ICAAP should not be viewed as simply 

a compliance exercise. Rather, it is a 

dynamic and evolving process that is 

used by a bank to provide internal 

assurance that capital is adequate given 

the bank’s risk profile. Management is 

responsible for ensuring that the ICAAP 

is fully consistent with the overall risk 

management framework of the bank. 

Information derived through the ICAAP 

process should influence decision 

making at both the consolidated and 

individual business-line levels, and be 

used to inform other management 

processes related to risk assessment, 

business planning and forecasting, 

pricing strategies, and performance 

measurement. 

46. As part of the ICAAP, the board 

or its delegated agent, as well as 

appropriate senior management, should 

periodically review the resulting 

assessment of overall capital adequacy. 

This review, which should occur at least 

annually, should include an analysis of 

how measures of internal capital 

adequacy compare with other capital 

measures (such as regulatory, 

accounting-based or marketdetermined). Upon completion of this 

review, the board or its delegated agent 

should determine that, consistent with 

safety and soundness, the bank’s capital 

takes into account all material risks and 

is appropriate for its risk profile. 

However, in the event a capital 

deficiency is uncovered (that is, if 

capital is not consistent with the bank’s 

risk profile or risk tolerance) 

management should consult and adhere 

to formal procedures to correct the 

capital deficiency. 

Dated: July 14, 2008. 

John C. Dugan, 

Comptroller of the Currency. 

By order of the Board of Governors of the 

Federal Reserve System, July 15, 2008. 

Jennifer J. Johnson, 

Secretary of the Board. 

Dated at Washington, DC, the 15th day of 

July, 2008. 

By order of the Federal Deposit Insurance 

Corporation. 

Robert E. Feldman, 

Executive Secretary. 

Dated: July 14, 2008. 

By the Office of Thrift Supervision. 

John M. Reich, 

Director. 

[FR Doc. E8–17555 Filed 7–30–08; 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–2008–0821; Directorate 

Identifier 2008–NE–20–AD; Amendment 39–

15619; AD 2008–16–01] 

RIN 2120–AA64 

Airworthiness Directives; General 

Electric Co. (GE) CF34–8E Series 

Turbofan Engines 

AGENCY: Federal Aviation 

Administration (FAA), Department of 

Transportation (DOT). 

ACTION: Final rule; request for 

comments. 

SUMMARY: The FAA is adopting a new 

airworthiness directive (AD) for GE 

CF34–8E series turbofan engines with 

certain part number (P/N) full authority 

digital engine controls (FADECs) 

installed. This AD requires 

reprogramming the FADEC software 

from version 8Ev5.40 to an FAAapproved software version. This AD 

results from six loss of thrust control 

events from the same software fault 

scenario. We are issuing this AD to 

prevent loss of thrust control and 

controllability of the airplane. 

DATES: This AD becomes effective 

August 15, 2008. 

We must receive any comments on 

this AD by September 29, 2008. 

ADDRESSES: Use one of the following 

addresses to comment on this AD: 

• Federal eRulemaking Portal: Go to 

http://www.regulations.gov and follow 

the instructions for sending your 

comments electronically. 

• Mail: U.S. Docket Management 

Facility, Department of Transportation, 

1200 New Jersey Avenue, SE., West 

Building Ground Floor, Room W12–140, 

Washington, DC 20590–0001. 

• Hand Delivery: Deliver to Mail 

address above between 9 a.m. and 5 

p.m., Monday through Friday, except 

Federal holidays. 

• Fax: (202) 493–2251. 

Contact General Electric Company via 

Lockheed Martin Technology Services, 

10525 Chester Road, Suite C, Cincinnati, 

Ohio 45215; telephone (513) 672–8400; 

fax (513) 672–8422, for the service 

information identified in this AD. 

FOR FURTHER INFORMATION CONTACT: 

Kenneth Steeves, Aerospace Engineer, 

Engine Certification Office, FAA, Engine 

& Propeller Directorate, 12 New England 

Executive Park, Burlington, MA 01803; 

e-mail: kenneth.steeves@faa.gov; 

telephone (781) 238–7765; fax (781) 

238–7199. 


yshivers on PROD1PC62 with RULES