[Federal Register Volume 75, Number 164 (Wednesday, August 25, 2010)]
[Proposed Rules]
[Pages 52283-52290]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-21051]


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Proposed Rules
                                                Federal Register
________________________________________________________________________

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.

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Federal Register / Vol. 75, No. 164 / Wednesday, August 25, 2010 / 
Proposed Rules

[[Page 52283]]



DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID: OCC-2010-0016]
RIN 1557-AD35

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1391]
RIN 7100-AD53

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD62

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket ID: OTS-2010-0027]
RIN 1550-AC43


Advance Notice of Proposed Rulemaking Regarding Alternatives to 
the Use of Credit Ratings in the Risk-Based Capital Guidelines of the 
Federal Banking Agencies

AGENCIES: Office of the Comptroller of the Currency (OCC); Board of 
Governors of the Federal Reserve System (Board); Federal Deposit 
Insurance Corporation (FDIC); Office of Thrift Supervision (OTS).

ACTION: Joint Advance Notice of Proposed Rulemaking.

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SUMMARY: The regulations of the Office of the Comptroller of the 
Currency (OCC), Board of Governors of the Federal Reserve System (FRB), 
Federal Deposit Insurance Corporation (FDIC), and Office of Thrift 
Supervision (OTS) (collectively, the agencies) include various 
references to and requirements based on the use of credit ratings 
issued by nationally recognized statistical rating organizations 
(NRSROs). Section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act (the Act), enacted on July 21, 2010, requires 
the agencies to review their regulations that require the use of an 
assessment of creditworthiness of a security or money market instrument 
and make reference to, or have requirements regarding, credit ratings. 
The agencies must then modify their regulations to remove any reference 
to, or requirements of reliance on, credit ratings in such regulations 
and substitute in their place other standards of creditworthiness that 
the agencies determine to be appropriate for such regulations.
    This advanced notice of proposed rulemaking (ANPR) describes the 
areas in the agencies' risk-based capital standards and Basel changes 
that could affect those standards that make reference to credit ratings 
and requests comment on potential alternatives to the use of credit 
ratings.

DATES: Comments on this ANPR must be received by October 25, 2010.

ADDRESSES: Comments should be directed to:
    OCC: Because paper mail in the Washington, DC area and at the 
Agencies is subject to delay, commenters are encouraged to submit 
comments by the Federal eRulemaking Portal or e-mail, if possible. 
Please use the title ``Advance Notice of Proposed Rulemaking Regarding 
Alternatives to the Use of Credit Ratings in the Risk-Based Capital 
Guidelines of the Federal Banking Agencies'' to facilitate the 
organization and distribution of the comments. You may submit comments 
by any of the following methods:
    <bullet> Federal eRulemaking Portal--``regulations.gov'': Go to 
http://www.regulations.gov. Select ``Document Type'' of ``Proposed 
Rules,'' and in ``Enter Keyword or ID Box,'' enter Docket ID ``OCC-
2010-0016,'' and click ``Search.'' On ``View By Relevance'' tab at 
bottom of screen, in the ``Agency'' column, locate the [insert type of 
rulemaking action] for OCC, in the ``Action'' column, click on ``Submit 
a Comment'' or ``Open Docket Folder'' to submit or view public comments 
and to view supporting and related materials for this rulemaking 
action.
    <bullet> Click on the ``Help'' tab on the Regulations.gov home page 
to get information on using Regulations.gov, including instructions for 
submitting or viewing public comments, viewing other supporting and 
related materials, and viewing the docket after the close of the 
comment period.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#ccbea9abbfe2afa3a1a1a9a2b8bf8ca3afafe2b8bea9adbfe2aba3ba"><span class="__cf_email__" data-cfemail="50223537237e333f3d3d353e2423103f33337e24223531237e373f26">[email protected]</span></a>.
    <bullet> Mail: Office of the Comptroller of the Currency, 250 E 
Street, SW., Mail Stop 2-3, Washington, DC 20219.
    <bullet> Fax: (202) 874-5274.
    <bullet> Hand Delivery/Courier: 250 E Street, SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket ID OCC-2010-0016'' in your comment. In general, OCC will enter 
all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, e-mail addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this advance notice of proposed rulemaking by any of the following 
methods:
    <bullet> Viewing Comments Electronically: Go to http://www.regulations.gov. Select ``Document Type'' of ``Public 
Submissions,'' and in ``Enter Keyword or ID Box,'' enter Docket ID 
``OCC-2010-0016,'' and click ``Search.'' Comments will be listed under 
``View By Relevance'' tab at bottom of screen. If comments from more 
than one agency are listed, the ``Agency'' column will indicate which 
comments were received by the OCC.
    <bullet> Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street, SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and to submit to security 
screening in

[[Page 52284]]

order to inspect and photocopy comments.
    <bullet> Docket: You may also view or request available background 
documents and project summaries using the methods described above.
    Board: You may submit comments, identified by Docket No. R-1391, by 
any of the following methods:
    <bullet> Agency Web site: http://www.federalreserve.gov. Follow the 
instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.
    <bullet> Federal eRulemaking Portal: http://www.regulations.gov. 
Follow the instructions for submitting comments.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#05776062762b666a6868606b71764563606160776469776076607773602b626a73"><span class="__cf_email__" data-cfemail="abd9ceccd885c8c4c6c6cec5dfd8ebcdcecfced9cac7d9ced8ced9ddce85ccc4dd">[email protected]</span></a>. Include docket 
number in the subject line of the message.
    <bullet> FAX: (202) 452-3819 or (202) 452-3102.
    <bullet> Mail: Jennifer J. Johnson, Secretary, Board of Governors 
of the Federal Reserve System, 20th Street and Constitution Avenue, 
NW., Washington, DC 20551.
    All public comments are available from the Board's Web site at 
http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as 
submitted, unless modified for technical reasons. Accordingly, your 
comments will not be edited to remove any identifying or contact 
information. Public comments may also be viewed electronically or in 
paper form in Room MP-500 of the Board's Martin Building (20th and C 
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
    FDIC: You may submit comments on the ANPR, by any of the following 
methods:
    <bullet> Agency Web site: http://www.FDIC.gov/regulations/laws/federal/notices.html. Follow instructions for submitting comments on 
the Agency Web site.
    <bullet> E-mail: <a href="/cdn-cgi/l/email-protection#f9ba9694949c978d8ab9bfbdb0bad79e968f"><span class="__cf_email__" data-cfemail="1f5c7072727a716b6c5f595b565c31787069">[email protected]</span></a>. Include RIN <greek-i> on the 
subject line of the message.
    <bullet> Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW., 
Washington, DC 20429.
    <bullet> Hand Delivery: Comments may be hand delivered to 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.
    Instructions: All comments received will be posted generally 
without change to http://www.fdic.gov/regulations/laws/federal/propose.html, including any personal information provided.
    OTS: You may submit comments, identified by OTS-2010-0027, by any 
of the following methods:
    <bullet> Federal eRulemaking Portal: ``Regulations.gov'': Go to 
http://www.regulations.gov and follow the instructions for submitting 
comments.
    <bullet> Mail: Regulation Comments, Chief Counsel's Office, Office 
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552, 
Attention: OTS-2010-0027.
    <bullet> Facsimile: (202) 906-6518.
    <bullet> Hand Delivery/Courier: Guard's Desk, East Lobby Entrance, 
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention: 
Regulation Comments, Chief Counsel's Office, Attention: OTS-2010-0027.
    <bullet> Instructions: All submissions received must include the 
agency name and docket number for this rulemaking. All comments 
received will be posted without change, including any personal 
information provided. Comments, including attachments and other 
supporting materials received are part of the public record and subject 
to public disclosure. Do not enclose any information in your comment or 
supporting materials that you consider confidential or inappropriate 
for public disclosure.
    <bullet> Viewing Comments Electronically: Go to http://www.regulations.gov and follow the instructions for reading comments.
    <bullet> Viewing Comments On-Site: You may inspect comments at the 
Public Reading Room, 1700 G Street, NW., by appointment. To make an 
appointment for access, call (202) 906-5922, send an e-mail to 
<a href="/cdn-cgi/l/email-protection#8db1ecade5ffe8ebb0" http: public.info">public.info</a>@ots.treas.gov">public.info@ots.treas.gov</a>, or send a facsimile transmission to (202) 
906-6518. (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: Mark Ginsberg, Risk Expert, Capital Policy Division, (202) 
874-5070; or Carl Kaminski, Senior Attorney, Legislative and Regulatory 
Activities Division, (202) 874-5090, Office of the Comptroller of the 
Currency, 250 E. Street, SW., Washington, DC 20219.
    Board: Thomas Boemio, Senior Project Manager, (202) 452-2982; 
William Treacy, Advisor, (202) 452-3859, Christopher Powell, Financial 
Analyst, (202) 912-4353, Division of Banking Supervision and 
Regulation; or Benjamin McDonough, Counsel, (202) 452-2036, or April 
Snyder, Counsel, (202) 452-3099; Board of Governors of the Federal 
Reserve System, 20th and C Streets, NW., Washington, DC 20551.
    FDIC: Bobby Bean, Chief, (202) 898-6705; Ryan Billingsley, Senior 
Policy Analyst, (202) 898-3797, Policy Section, Division of Supervision 
and Consumer Protection; or Mark Handzlik, Counsel, (202) 898-3990, 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: Sonja White, Director, Capital Policy, (202) 906-7857, Teresa 
A. Scott, Senior Policy Analyst, Capital Policy, (202) 906-6478, or 
Marvin Shaw, Senior Attorney, Regulations and Legislation Division, 
(202) 906-6639, Office of Thrift Supervision, 1700 G Street, NW., 
Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    The agencies' regulations and capital standards include various 
references to and regulatory requirements based on the use of credit 
ratings issued by NRSROs.\1\ Section 939A of the Act requires each 
Federal agency to review ``(1) any regulation issued by such agency 
that requires the use of an assessment of the creditworthiness of a 
security or money market instrument; and (2) any references to or 
requirements in such regulations regarding credit ratings.'' \2\ Each 
Federal agency must then ``modify any such regulations identified by 
the review * * * to remove any reference to or requirement of reliance 
on credit ratings and to substitute in such regulations such standard 
of creditworthiness as each respective agency shall determine as 
appropriate for such regulations.'' In developing substitute standards 
of creditworthiness, an agency ``shall seek to establish, to the extent 
feasible, uniform standards of creditworthiness'' for use by the 
agency, taking into account the entities it regulates that would be 
subject to such standards.\3\
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    \1\ A nationally recognized statistical rating organization 
(NRSRO) is an entity registered with the U.S. Securities and 
Exchange Commission (SEC) as an NRSRO under section 15E of the 
Securities Exchange Act of 1934. See 15 U.S.C. 78o-7, as implemented 
by 17 CFR 240.17g-1. On September 29, 2006, the President signed the 
Credit Rating Agency Reform Act of 2006 (``Reform Act'') (Pub. L. 
109-291) into law. The Reform Act requires a credit rating agency 
that wants to represent itself as an NRSRO to register with the SEC.
    \2\ Public Law 111-203, 124 Stat. 1376, section 939A (July 21, 
2010). Although the agencies have conducted a broad review of their 
risk-based capital regulations to identify all references to credit 
ratings and consider alternatives, the agencies note that section 
939A of the Dodd-Frank Act limits the required review of agency 
regulations to those pertaining to a creditworthiness assessment of 
a security or money market instrument.
    \3\ Id.

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[[Page 52285]]

    Through this advanced notice of proposed rulemaking (ANPR), the 
agencies are seeking to gather information as they begin to work toward 
revising their regulations and capital standards to comply with the 
Act. This ANPR describes the areas in the agencies' general risk-based 
capital rules,\4\ market risk rules,\5\ and advanced approaches rules 
\6\ (collectively, the risk-based capital standards) where the agencies 
rely on credit ratings, as well as the Basel Committee on Banking 
Supervision's (Basel Committee) recent amendments to the Basel 
Accord.\7\ The ANPR requests comment on potential alternatives to the 
use of credit ratings.\8\
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    \4\ See 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 
225, appendix A (Board); 12 CFR part 325, appendix A (FDIC); 12 CFR 
part 567, subpart B (OTS).
    \5\ See 12 CFR part 3, appendix B (OCC); 12 CFR parts 208 and 
225, appendix E (Board); 12 CFR part 325, appendix C (FDIC); OTS 
does not have a market risk rule.
    \6\ See 12 CFR part 3, appendix C (OCC); 12 CFR part 208, 
appendix F and 12 CFR part 225, appendix G (Board); 12 CFR part 325, 
Appendix D (FDIC); 12 CFR part 567, Appendix C (OTS).
    \7\ See ``International Convergence of Capital Measurement and 
Capital Standards, a Revised Framework, Comprehensive Version,'' the 
Basel Committee on Banking Supervision, June 2006. The full text is 
available on the Bank for International Settlement's Web site,  
http://www.bis.org/publ/bcbs128.htm.
    \8\ The OCC is planning to issue a similar advance notice of 
proposed rulemaking addressing alternatives to the use of external 
credit ratings in the regulations of the OCC.
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II. Risk-Based Capital Standards

    In June 2009, the agencies, as part of the international Joint 
Forum Working Group on Risk Assessment and Capital, participated in a 
stocktaking exercise to identify the use of credit ratings in relevant 
statutes, regulations, policies and guidance.\9\ The agencies have 
identified multiple regulations that must be brought into compliance 
with Section 939A of the Act. Included among these regulations are the 
agencies' risk-based capital standards.
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    \9\ See, ``Stocktaking on the use of credit ratings'', The Joint 
Forum. The full text is available on the Bank for International 
Settlement's Web site, http://www.bis.org/publ/joint22.htm.
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    The agencies' risk-based capital standards reference credit ratings 
issued by NRSROs (credit ratings) in four general areas: (1) The 
assignment of risk weights to securitization exposures under the 
general risk-based capital rules and advanced approaches rules; \10\ 
(2) the assignment of risk weights to claims on, or guaranteed by, 
qualifying securities firms under the general risk-based capital rules; 
\11\ (3) the assignment of certain standardized specific risk add-ons 
under the agencies' market risk rule; \12\ and (4) the determination of 
eligibility of certain guarantors and collateral for purposes of the 
credit risk mitigation framework under the advanced approaches 
rules.\13\ In 2008, the agencies issued a notice of proposed rulemaking 
\14\ that sought comment on implementation in the United States of 
certain aspects of the standardized approach in the Basel Accord. The 
Basel standardized approach for credit risk (Basel standardized 
approach) relies extensively on credit ratings to assign risk weights 
to various exposures. (Throughout the rest of this ANPR, references to 
the Basel standardized approach are references to the Basel Accord 
rather than the 2008 proposal.)
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    \10\ See 12 CFR part 3, Appendices A and C (OCC); 12 CFR part 
208, Appendices A and F and 12 CFR part 225, Appendices A and G 
(Board); 12 CFR part 325, Appendix A and 12 CFR part 325 Appendix D 
(FDIC); 12 CFR part 567, subpart B and Appendix C (OTS).
    \11\ See 12 CFR part 3, Appendix A, section 3(a)(2)(xiii) (OCC); 
12 CFR parts 208 and 225, Appendix A, section III.C.2 (Board); 12 
CFR part 325, Appendix A, section II.C. (FDIC); 12 CFR 567.6 (OTS).
    \12\ See 12 CFR part 3, Appendix B, section 5 (OCC); 12 CFR 
parts 208 and 225, Appendix E, section 5 (Board); 12 CFR part 325, 
Appendix C, section 5 (FDIC); OTS does not have a market risk rule.
    \13\ See the definition of ``eligible double default 
guarantor,'' ``eligible securitization guarantor,'' and ``financial 
collateral'' in the agencies advanced approaches rules. 12 CFR part 
3, Appendix C, section 2 (OCC); 12 CFR part 208, Appendix F section 
2 and 12 CFR part 225, Appendix G section 2 (Board); 12 CFR part 
325, Appendix D section 2 (FDIC); 12 CFR part 567, Appendix C, 
section 2 (OTS).
    \14\ 73 FR 43982.
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    In 2009, the Basel Committee published the following documents that 
were designed to strengthen the risk-based capital framework in the 
Basel Accord: Revisions to the Basel II Market Risk Framework 
(Revisions Document); Enhancements to the Basel II Framework 
(Enhancements Document); and Strengthening the Resilience of the 
Banking Sector.\15\ In the Enhancements Document, the Basel Committee 
introduced operational criteria to require banking organizations \16\ 
to undertake independent analyses of the creditworthiness of their 
securitization exposures.\17\ Implementation in the United States of 
the changes to the Basel Accord contained in the Revisions Document 
would be significantly affected by the need for the agencies to comply 
with section 939A of the Act.
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    \15\ See ``Revisions to the Basel II Market Risk Framework'' 
(July 2009, Basel Committee); ``Guidelines for Computing Capital for 
Incremental Risk in the Trading Book'' (July 2005, joint publication 
of the Basel Committee and International Organization for Securities 
Commissioners); ``Enhancements to the Basel II Framework'' (July 
2009, Basel Committee); and ``Strengthening the Resilience of the 
Banking Sector'' (December 2009, Basel Committee).
    \16\ For simplicity, and unless otherwise indicated, this ANPR 
uses the term ``banking organization'' to include banks, savings 
associations, and bank holding companies.
    \17\ These operational criteria would require a bank to have a 
comprehensive understanding of the risk characteristics of its 
individual securitization exposures; be able to access performance 
information on the underlying pools on an on-going basis in a timely 
manner; and have a thorough understanding of all structural features 
of a securitization transaction. Enhancements Document, paragraphs 
565(i)-(iv).
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    The table below provides an overview of where credit ratings are 
referenced and used as the basis for a capital requirement along two 
dimensions of exposure category and capital framework.

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                                                                                                                                           Basel market
                                                                      General risk-       Advanced       Market risk         Basel        risk framework
                         Exposure category                            based capital      approaches         rules         standardized      (revisions
                                                                          rules            rules                            approach        document)
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Sovereign..........................................................  ...............  ...............               X                X                X
Public Sector Entity...............................................  ...............  ...............               X                X                X
Bank...............................................................  ...............  ...............  ...............               X                X
Corporate..........................................................               X   ...............               X                X                X
Securitization.....................................................               X                X                X                X                X
Credit Risk Mitigation.............................................               X                X   ...............               X   ...............
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[[Page 52286]]

III. Request for Comment

    This ANPR seeks comment on standards of creditworthiness other than 
credit ratings that may be used for purposes of the risk-based capital 
standards. The various alternative approaches in this ANPR may present 
challenges of feasibility in varying degrees. The agencies would 
appreciate commenters' views on the feasibility of implementing the 
suggestions for alternative approaches in this ANPR and any 
methodologies that commenters may provide.

a. Creditworthiness Standards

    Section 939A of the Act requires the agencies to establish, to the 
extent feasible, uniform standards of creditworthiness to replace 
references to, or requirements of reliance on, credit ratings for 
purposes of the agencies' regulations. The agencies are therefore 
considering alternative creditworthiness standards, including those 
currently in use in the agencies' regulations, supervisory guidance, 
and market practices. The agencies recognize that any measure of 
creditworthiness will involve a tradeoff among the principles listed 
below. For example, a more refined differentiation of risk might be 
achievable only at the expense of greater implementation burden. In 
evaluating any standard of creditworthiness for purposes of determining 
risk-based capital requirements, the agencies will, to the extent 
practicable and consistent with the other objectives, consider whether 
the standard would:
    <bullet> Appropriately distinguish the credit risk associated with 
a particular exposure within an asset class;
    <bullet> Be sufficiently transparent, unbiased, replicable, and 
defined to allow banking organizations of varying size and complexity 
to arrive at the same assessment of creditworthiness for similar 
exposures and to allow for appropriate supervisory review;
    <bullet> Provide for the timely and accurate measurement of 
negative and positive changes in creditworthiness;
    <bullet> Minimize opportunities for regulatory capital arbitrage;
    <bullet> Be reasonably simple to implement and not add undue burden 
on banking organizations; and
    <bullet> Foster prudent risk management.
    Question 1: The agencies seek comment on the principles that should 
guide the formulation of creditworthiness standards. Do the principles 
provided above capture the appropriate elements of sound 
creditworthiness standards? How could the principles be strengthened?

b. Possible Alternatives to Credit Ratings in the Risk-Based Capital 
Standards

    The agencies' existing risk-based capital standards include a range 
of approaches to differentiating credit risk. At one end of the 
spectrum, the agencies' general risk-based capital rules provide a 
relatively simple approach to measuring and differentiating risk based 
on the use of broad risk buckets. This approach requires all corporate 
exposures, for example, to receive the same risk weight, regardless of 
the variation in risks that exist across corporate exposures. This 
simple approach has limited risk sensitivity. At the other end of the 
spectrum, the agencies' advanced approaches rules require a banking 
organization to make its own assessment of the credit risk of a 
corporate exposure, subject to a number of agency-prescribed standards. 
This assessment is then used as an input into a supervisory formula to 
calculate minimum risk-based capital requirements. Relatively 
consistent assessments of risk across exposure categories and across 
banking organizations could be more difficult to achieve with this 
approach. The agencies' rules also incorporate other methods for 
assessing risk-based capital requirements, including the use of NRSRO 
ratings.
    The agencies are considering a wide range of approaches of varying 
complexity and risk-sensitivity for developing creditworthiness 
standards for the risk-based capital standards. These include 
developing risk weights for exposure categories based on objective 
criteria established by regulators, similar to the current risk-
bucketing approach of the general risk-based capital rules. The 
approaches also include developing broad qualitative and quantitative 
creditworthiness standards that banking organizations could use, 
subject to supervisory oversight, to measure the credit risk associated 
with exposures within a particular exposure category. These general 
approaches present certain advantages and disadvantages. In considering 
these approaches, the agencies will evaluate the extent to which the 
alternatives meet the principles described above.
    Risk Weights Based on Exposure Category: One way to eliminate 
references to credit ratings in the risk-based capital standards would 
be for the agencies to delete all of the sections in their risk-based 
capital regulations that refer to credit ratings and retain the 
remainder of the general risk-based capital rules. Under this approach, 
all non-securitization exposures generally would receive a 100 percent 
risk-weight unless otherwise specified. For example, certain sovereign 
and bank exposures would be assigned a zero percent or a 20 percent 
risk weight, respectively. Alternatively, the agencies could revise the 
risk-weight categories for exposures by considering the type of 
obligor, for example, sovereign, bank, public sector entity (PSE),\18\ 
as well as considering other criteria, such as the characteristics of 
the exposure, which could increase the risk sensitivity of the risk-
based capital requirements by providing a wider range of risk-weight 
categories.
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    \18\ A PSE exposure is an exposure to a state, local authority, 
or other government subdivision below the sovereign entity level.
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    Exposure-Specific Risk Weights: Under this approach, banking 
organizations could assign risk weights to individual exposures using 
specific qualitative and quantitative credit risk measurement standards 
established by the agencies for various exposure categories. Such 
standards would be based on broad creditworthiness metrics. For 
instance, exposures could be assigned a risk weight based on certain 
market-based measures, such as credit spreads; or obligor-specific 
financial data, such as debt-to-equity ratios or other sound 
underwriting criteria. Alternatively, banking organizations could 
assign exposures to one of a limited number of risk weight categories 
based on an assessment of the exposure's probability of default or 
expected loss.
    As part of an exposure-specific approach, the agencies are 
considering whether banking organizations should be permitted to 
contract with third-party service providers to obtain quantitative 
data, such as probabilities of default, as part of their process for 
making creditworthiness determinations and assigning risk weights. 
While this method could increase risk sensitivity, consistent 
application across exposure categories and across banking organizations 
could be more difficult to achieve.
    Alternatively, the agencies could consider an approach for debt 
securities similar to that adopted by the National Association of 
Insurance Commissioners, under which a third party financial assessor 
would inform the agencies' understanding of risks and their ultimate 
determination of the risk-based capital requirement for individual 
securities.\19\ One potential drawback of this approach is excessive 
reliance on a single third-party assessment of risk.
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    \19\ See http://www.naic.org/rmbs/index.htm#background.

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[[Page 52287]]

    Regardless of the approach used, the agencies would establish 
strict quantitative and qualitative criteria to ensure that the 
methodology employed is consistent with safe and sound banking 
practices.
    Question 2: What are the advantages and disadvantages for each of 
these general approaches? What, if any, combination of the approaches 
would appropriately reflect exposure categories and the sophistication 
of individual banking organizations? What other approaches do 
commenters believe would meet the agencies' suggested criteria for a 
creditworthiness standard? If increasing reliance is placed on banking 
organizations to assign risk weights for credit exposures using the 
types of approaches described above, how would the agencies ensure 
consistency of capital treatment for similar exposures? How could the 
use of third-party providers be implemented to ensure quality, 
transparency, and consistency?

c. Exposure-Specific Options for Measuring Creditworthiness

    The broad approaches discussed above could be applied in various 
ways across the agencies risk-based capital rules as well as existing 
exposure categories. While the range of approaches is potentially 
applicable to all exposure categories, the sections below provide a 
more detailed discussion of how the approaches might be implemented by 
exposure categories.
i. Sovereign Exposures
    The agencies' general risk-based capital rules risk weight 
exposures to sovereign entities based on membership in the Organization 
for Economic Cooperation and Development (OECD).\20\ However, under the 
Basel standardized approach, a banking organization would assign a risk 
weight to a sovereign exposure based on the external credit rating of 
the sovereign by a credit rating agency.\21\ The current market risk 
rule and the Basel modified market risk framework also make use of 
ratings for sovereign exposures.
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    \20\ See 12 CFR part 3, Appendix A, section 3(a) (OCC); 12 CFR 
parts 208 and 225, Appendix A, section III.C (Board); 12 CFR part 
325, Appendix A, section II.C. (FDIC); 12 CFR 567.6 (OTS). The OECD-
based group of countries comprises all full members of the OECD, as 
well as countries that have concluded special lending arrangements 
with the International Monetary Fund (IMF) associated with the IMF's 
General Arrangements to Borrow. The list of OECD countries is 
available on the OECD Web site at http://www.oecd.org.
    \21\ Basel Accord, Paragraphs 53-56.
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    There are several alternative methodologies that could be used to 
risk weight sovereign exposures that have different implications for 
risk sensitivity. One option would be to assign risk weights for 
sovereign exposures based on whether the sovereign is a member of an 
organization other than the OECD, such as the G-20 or the Basel 
Committee on Banking Supervision, or whether it participates in the 
International Monetary Fund (IMF) New Arrangements to Borrow. This type 
of approach would be operationally simple, but would not recognize 
differences in creditworthiness among the individual member nations 
within an organization. An additional degree of risk sensitivity could 
be incorporated into this approach by adding additional criteria beyond 
membership in a given organization. For instance, a higher risk weight 
could be assigned to an exposure to a sovereign entity if it had 
restructured its debt within a specified period of time or if its 
creditworthiness deteriorated based on some market indicator (for 
example, credit spreads).
    The agencies could also consider incorporating into standards of 
creditworthiness country risk classifications generated by the OECD, 
the World Bank, or a similar organization. This approach could assign 
risk weights according to the relative credit risk of each risk 
classification or designation. Under such an approach, exposures to 
sovereigns classified as having lower credit risk would receive lower 
risk weights, and exposures classified as higher risk would receive 
higher risk weights.
    A third option would be to differentiate the credit risk of 
sovereign exposures based on certain key financial and economic 
indicators. For example, risk weights could be assigned based on one or 
more ratios such as gross debt per capita, real gross domestic product 
growth rate, or government debt and foreign reserves. Such a treatment 
would require the agencies to select specific ratios and acceptable 
data sources, for example, from the IMF or the OECD.
    Question 3: What are the advantages and disadvantages of these 
alternative methods? How can the agencies ensure consistent and 
transparent implementation? Should the agencies consider other 
international organizations? Which financial and economic indicators 
should the agencies consider? What are the implications or potential 
unintended consequences? Are there other methods for assessing risk-
based capital requirements for sovereign exposures that would meet the 
principles described in section III? Commenters are asked to provide 
quantitative as well as qualitative support and/or analysis for 
proposed alternative methods.
ii. Public Sector Entity (PSE) exposures
    The agencies' general risk-based capital rules assign risk weights 
to PSE exposures based on the repayment source for the exposure (for 
example, whether the exposure is a general obligation, revenue, or 
industrial revenue bond) and membership of the PSE's sovereign 
government in the OECD.\22\ Under the Basel standardized approach, PSE 
exposures would be risk weighted based on the credit rating of the 
exposure or the risk weight of the sovereign.\23\ The current market 
risk rule and the Basel modified market risk framework also make use of 
credit ratings for PSE exposures.
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    \22\ See 12 CFR part 3, Appendix A, section 3(a) (OCC); 12 CFR 
parts 208 and 225, Appendix A, section III.C (Board); 12 CFR part 
325, Appendix A, section II.C (FDIC); 12 CFR 567.6 (OTS).
    \23\ Basel Accord, paragraphs 57-58.
---------------------------------------------------------------------------

    One approach would be to continue to use the general risk-based 
capital rules' treatment of differentiating the risk of PSEs based on 
the type of exposure, the sovereign of incorporation, and by how 
revenues are collected for the PSE exposure.
    Alternatively, the agencies could provide some incremental risk 
sensitivity by differentiating revenue bond issuers by type of service 
or business. As with sovereign exposures, risk weighting could be based 
on several financial and economic measures. For example, the agencies 
could assign risk weights based on one or more ratios, such as a 
relevant debt service obligation to cash flow ratio (for example, debt 
to revenue), and/or debt to market value of certain assets (for 
example, real estate). The agencies also could incorporate credit 
spreads to help differentiate credit risk among PSE exposures. Other 
options include permitting banking organizations to assign risk weights 
to PSE exposures based on the applicable risk weight of the sovereign 
of incorporation, or using data obtained from qualified third parties 
to inform creditworthiness assessments based upon a set of objective 
criteria established by the agencies.
    Question 4: What are the advantages and disadvantages of these 
alternative methods for calculating risk-based capital requirements for 
PSE exposures? How can the agencies ensure consistent and transparent 
implementation? Which services and businesses, or financial and 
economic measures, should the agencies consider? What are the 
implications or potential for

[[Page 52288]]

unintended consequences? Are there other methods for assessing risk-
based capital for PSE exposures in a relatively risk sensitive manner 
that would meet the principles described in section III? Commenters are 
asked to provide quantitative as well as qualitative support and/or 
analysis for proposed alternative methods.
iii. Bank Exposures
    The agencies' general risk-based capital rules generally assign a 
20 percent risk weight to exposures to U.S. depository institutions and 
foreign banks.\24\ Long-term exposures to banks not incorporated in 
OECD countries are assigned a 100 percent risk weight. Under the Basel 
standardized approach, bank exposures would be risk weighted based 
either on the risk weight of the sovereign or the credit rating of the 
exposure.\25\ The market risk rule and the Basel modified market risk 
framework also use ratings for bank exposures.
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    \24\ See 12 CFR part 3, Appendix A, section 3(a)(2);12 CFR parts 
208 and 225, Appendix A, section III.C (Board); 12 CFR part 325, 
Appendix A, section II.C (FDIC); 12 CFR 567.6 (OTS).
    \25\ Basel Accord, paragraphs 60-64.
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    One option for risk weighting bank exposures is to continue to use 
the general risk-based capital treatment, which bases the risk weight 
for bank exposures on whether the sovereign where the bank is 
incorporated is a member of the OECD. Another method for risk weighting 
bank exposures could be based on several financial measures and market 
indicators. For example, the agencies could assign risk weights based 
on one or more ratios such as funding (for example, core deposits to 
total liabilities) and/or credit quality (for example, non-performing 
items to total assets). This method also could be supplemented for 
banks with publicly traded securities with market-based information 
such as a banking organization's unsecured bond spreads over comparable 
Treasury securities.
    Question 5: What are the advantages and disadvantages of these 
alternative methods for calculating risk-based capital requirements for 
bank exposures? How can the agencies ensure consistent and transparent 
implementation? Which financial and market indicators should the 
agencies consider? What are the implications or potential for 
unintended consequences? Are there other methods for assessing risk-
based capital for bank exposures in a relatively risk sensitive manner 
that would meet the principles described in section III? Commenters are 
asked to provide quantitative as well as qualitative support and/or 
analysis for proposed alternative methods.
iv. Corporate Exposures
    Under the agencies' general risk-based capital rules, corporate 
exposures generally \26\ receive a risk weight of 100 percent,\27\ 
whereas under the Basel standardized approach, banking organizations 
would be allowed to use credit ratings to assign risk weights to 
corporate exposures.\28\ The current market risk rule and the Basel 
modified market risk framework also use credit ratings for corporate 
exposures.
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    \26\ Certain claims on, or claims guaranteed by, qualifying 
securities firms may receive a 20 percent risk weight.
    \27\ See 12 CFR part 3, Appendix A, section 3(a) (OCC); 12 CFR 
parts 208 and 225, Appendix A, section III.C (Board); 12 CFR part 
325, Appendix A, section II.C (FDIC); 12 CFR 567.6(a)(1)(iv) (OTS).
    \28\ Basel Accord, paragraphs 66-68.
---------------------------------------------------------------------------

    One option for risk weighting corporate exposures would be to 
continue to use the treatment provided in the general risk-based 
capital rules and require banking organizations to risk weight all 
corporate exposures at 100 percent. Another method would be to 
differentiate the credit risk of corporate exposures based on financial 
and economic measures appropriate to the borrower. For example, the 
agencies could allow banking organizations to assign risk weights based 
on balance sheet or cash flow ratios, such as current assets to current 
liabilities, debt to equity, or some form of debt service to cash flow 
ratio (for example, current interest and maturities to current cash 
flow from operations). Alternatively, some corporate exposures for 
publicly traded firms could be risk weighted on the basis of market-
based measures, such as credit spreads and equity-price implied default 
probability, and measures of capital adequacy and liquidity.
    Finally, the agencies could allow banking organizations to assign 
risk weights based upon a more flexible set of objective criteria that 
the agencies would establish by rule. As a part of their process for 
making creditworthiness determinations and assigning risk weights, 
banking organizations would be allowed to consider external data, 
including credit analyses (but not credit ratings) provided by third 
parties, that met standards established by the agencies.
    Question 6: What are the advantages and disadvantages of these 
alternative methods? What are the implications or potential for 
unintended consequences? If all banking organizations are allowed to 
calculate their own capital requirements for corporate exposures, how 
can the agencies ensure consistent and transparent implementation (for 
example, where there may be material differences in how financial 
statements are typically presented or differences in chosen financial 
ratios)? What different approaches or other financial or market 
criteria would commenters recommend? Are there other methods for 
assessing risk-based capital for corporate exposures in a relatively 
risk sensitive manner that would meet the principles described in 
section III? Commenters are asked to provide quantitative, as well as 
qualitative, support and/or analysis for proposed alternative methods.
v. Securitization Exposures
    Under the agencies' general risk-based capital rules, a banking 
organization may use credit ratings to assign risk weights to certain 
securitization exposures.\29\ Generally, when a banking organization 
cannot, or chooses not to use the ratings-based approach, it must 
either ``gross-up'' the exposure or hold dollar-for-dollar capital 
against the exposure. These latter methods are designed to capture the 
risk of unrated or low rated exposures that typically are subordinate 
in the capital structure of a securitization. Under the advanced 
approaches rules and the Basel standardized approach, a banking 
organization is required to use a ratings-based approach when available 
to assign risk weights to traditional and synthetic securitization 
exposures.\30\ Both the advanced approaches rules and the Basel 
standardized approach also provide alternative approaches for 
determining the capital requirements for exposures that do not qualify 
for the ratings-based approach. The market risk rule and the Basel 
modified market risk framework also use credit ratings for 
securitization exposures.
---------------------------------------------------------------------------

    \29\ See 12 CFR part 3, Appendix A, section 4 (OCC) ; 12 CFR 
parts 208 and 225, Appendix A, section III.B.3 (Board); 12 CFR part 
325, Appendix A, section II.B.5 (FDIC); 12 CFR parts 567, subpart B 
(OTS).
    \30\ Basel Accord, Paragraph 567 (Basel standardized approach) 
and 12 CFR part 3, Appendix C, section 43(b) (OCC); 12 CFR part 208, 
Appendix F section 43(b) and 12 CFR part 225, Appendix G section 
43(b) (Board); 12 CFR part 325, Appendix D, section 43(b) (advanced 
approaches rule) (FDIC); 12 CFR part 567, Appendix C, section 43(b) 
(OTS).
---------------------------------------------------------------------------

    Prior to the implementation of the recourse, direct credit 
substitutes, residual interests and mortgage- and asset-backed 
securities rule in 2001 (recourse rule),\31\ the agencies' general 
risk-based capital rules did not rely on credit ratings to determine 
risk weights for securitization exposures. In addition to establishing 
a risk-weighting framework based on credit ratings, the recourse rule 
established an alternative risk-weighting framework for certain

[[Page 52289]]

securitization exposures (a gross-up treatment reflecting the risk of 
more subordinated tranches of securitizations). The agencies could 
apply the risk-based capital rules in effect prior to the 
implementation of the recourse rule, which would eliminate all 
references to credit ratings. This would result in all securitization 
exposures receiving the same risk weight regardless of the amount of 
subordination in the securitization structure. Alternatively, the 
agencies could:
---------------------------------------------------------------------------

    \31\ 66 FR 59617 (November 29, 2001).
---------------------------------------------------------------------------

    <bullet> Require that banks apply the aforementioned ``gross-up'' 
treatment under which a bank must maintain capital against its 
securitization exposure, as well as against all more senior exposures 
that the bank's exposure supports in the structure. The grossed-up 
exposure would then be assigned to the risk weight appropriate to the 
underlying securitized exposures.
    <bullet> Differentiate the credit risk of the ``grossed-up'' 
securitization exposure based on financial and structural parameters of 
the underlying or reference pool of instruments, as well as the 
exposure itself. For example, risk weights could be assigned based on 
the securitization transaction's overcollateralization ratio, interest 
coverage ratio, or priority in the cash flow waterfall.
    <bullet> Assign the most senior securitization exposure in a 
transaction a risk weight based on the underlying exposure type and the 
aggregate amount of subordination that provides credit enhancement to 
the exposure. For example, the greater the amount of subordination, the 
lower the risk weight to which the senior exposure would be assigned. 
However, this approach would only apply to the senior-most tranche and 
would not distinguish between exposures with significant credit support 
and those where the support had been reduced or eliminated by losses.
    <bullet> Adopt the Basel Committee's approach to calculating 
capital requirements for securitization exposures that is based on the 
level of subordination and the type of underlying exposures in the 
Revisions Document. The approach would use a ``concentration ratio'' to 
set the minimum risk-based capital requirements for securitization 
positions. The concentration ratio is equal to the sum of the notional 
amounts of all the tranches divided by the sum of the notional amounts 
of the tranches junior to or pari passu with the tranche in which the 
position is held including that tranche itself. The capital requirement 
is 8 percent of the weighted-average risk weight that would be applied 
to the underlying securitized exposures multiplied by the concentration 
ratio. If the concentration ratio is 12.5 or higher, the position would 
be deducted from capital. Under this approach, the capital requirement 
would be no less than that which would result from a direct exposure to 
the underlying assets.
    <bullet> Design a risk-weighting approach based on a supervisory 
formula. Building on the capital requirements of the underlying 
exposures, the agencies could recognize multiple sources of risk 
related to securitizations and impose provisions that limit some forms 
of arbitrage. Under the advanced approaches rules, for example, banking 
organizations are allowed to use the supervisory formula approach (SFA) 
to calculate minimum regulatory capital requirements for certain 
securitization exposures.\32\ This approach uses exposure-specific 
inputs, including the capital requirement of the underlying exposures 
as if held directly by the banking organization. The inputs required 
for calculating the capital requirement of the underlying exposures are 
not always available for investing banking organizations. Nevertheless, 
the agencies could develop a simplified version of the SFA that could 
be applied by all banking organizations. Depending upon the parameters 
used in the SFA, this approach could increase risk sensitivity, as well 
as potentially increasing transparency in the securitization market.
---------------------------------------------------------------------------

    \32\ See 12 CFR part 3, Appendix C section 45 (OCC); 12 CFR part 
208, Appendix F section 45 and 12 CFR part 225, Appendix G section 
45 (Board); 12 CFR part 325, Appendix D, section 45 (FDIC); 12 CFR 
part 567, Appendix C, section 45 (OTS).
---------------------------------------------------------------------------

    Question 7: What are the advantages and disadvantages of these 
approaches for calculating risk-based capital requirements for 
securitization exposures? How can the agencies ensure consistent and 
transparent implementation? Which parameters or measures of 
subordination and structure should the agencies consider? What are the 
implications or potential for unintended consequences? How can the 
agencies ensure that an alternative approach meets the criteria for a 
creditworthiness standard? What other approaches or specific financial 
and structural parameters that would be appropriate standards of 
creditworthiness for securitization exposures? Commenters are asked to 
provide quantitative as well as qualitative support and/or analysis for 
proposed alternative methods.
vi. Guarantees and Collateral
    The agencies' general risk-based capital rules generally limit the 
recognition of third-party guarantees to those provided by central 
governments, U.S. government agencies, banks, state and local 
governments of OECD countries, qualifying securities firms, and 
multilateral lending institutions and regional development banks. The 
general risk-based capital rules recognize collateral in the form of 
cash, securities issued or guaranteed by OECD central governments, 
securities issued by U.S. government agencies or U.S. government-
sponsored agencies, and securities issued by multilateral lending 
institutions and regional development banks.\33\
---------------------------------------------------------------------------

    \33\ See 12 CFR part 3, Appendix A (OCC), 12 CFR parts 208 and 
225, Appendix A, section III.B (Board); 12 CFR part 325, Appendix A, 
section II.B.2 (FDIC); 12 CFR 567.6 (OTS).
---------------------------------------------------------------------------

    Under the Basel standardized approach, guarantor eligibility is 
based on the credit rating of the guarantor's unsecured long-term debt 
security without credit enhancement that has a long-term external 
credit rating.\34\ In addition, financial collateral includes, among 
other things, long-term debt securities that have an external credit 
rating of one category below investment grade or higher and short-term 
debt securities that have an external credit rating of at least 
investment grade.\35\
---------------------------------------------------------------------------

    \34\ Basel Accord, paragraph 195.
    \35\ Id. at paragraph 145.
---------------------------------------------------------------------------

    The advanced approaches rules recognize the risk reducing effects 
of financial collateral and guarantees.\36\ Eligible financial 
collateral includes long-term debt securities that have a credit rating 
of one category below investment grade or higher and short-term debt 
securities that have a credit rating of at least investment grade.\37\ 
Guarantors eligible for double default treatment include those entities 
that a banking organization assigns a probability of default equal to 
or lower than the probability of default associated with a long-term 
credit rating in the third-highest investment grade category.\38\
---------------------------------------------------------------------------

    \36\ See 12 CFR part 3, Appendix C, sections 33 and 34 (OCC); 12 
CFR part 208, Appendix F sections 34 and 35 and 12 CFR part 225, 
Appendix G sections 34 and 35 (Board); 12 CFR part 325, Appendix D, 
sections 34 & 35 (FDIC); 12 CFR part 567, Appendix C, sections 34-35 
(OTS).
    \37\ Id.
    \38\ See the definition of ``eligible double-default guarantor'' 
in the agencies' advanced approaches rules. 12 CFR part 3, Appendix 
C, section 2 (OCC); 12 CFR part 208, Appendix F section 2 and 12 CFR 
part 225, Appendix G section 2 (Board); 12 CFR part 325, Appendix D, 
section 2 (FDIC); 12 CFR part 567, Appendix C, section 2 (OTS).
---------------------------------------------------------------------------

    One option would be to expand the use of the recognition of 
collateral and

[[Page 52290]]

guarantees as provided in the general risk-based capital rules, that 
is, by substituting the risk weight appropriate to the guarantor or 
collateral for that of the exposure. This approach would have to be 
modified to exclude mention of external credit ratings for certain 
securities firms. The agencies could also incorporate into the 
recognition of collateral and guarantees some of the creditworthiness 
standards discussed above for sovereign, PSE, bank, and corporate 
exposures.
    Question 8: What are the advantages and disadvantages of the 
alternative approaches? What are the implications or potential for 
unintended consequences? Are there other approaches that would more 
appropriately capture the risk-mitigating effects of collateral and/or 
guarantees without adding undue cost or burden? Commenters are asked to 
provide quantitative as well as qualitative supporting data and/or 
analysis for proposed alternative methods.

d. Burden

    The agencies recognize that any measure of creditworthiness will 
involve a tradeoff among the objectives discussed in this ANPR. As 
previously noted, the agencies recognize that a more refined 
differentiation of creditworthiness may be achievable only at the 
expense of greater implementation burden. The agencies seek comment on 
the costs and burden that various alternative standards might entail. 
In particular, the agencies are interested in whether the development 
of alternatives to the use of credit ratings would involve, in most 
circumstances, cost considerations greater than those under the current 
regulations.
    Question 9: What burden might arise from the implementation of 
alternative methods of measuring creditworthiness at banking 
organizations of varying size and complexity? Commenters are asked to 
provide quantitative as well as qualitative support for their burden 
estimates. In addition to the cost burden, the agencies seek comment on 
the feasibility of implementing various alternatives, particularly for 
community and mid-sized banks.

    Dated: August 9, 2010.
John C. Dugan,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, this 10th day of August 2010.
Robert deV. Frierson,
Deputy Secretary of the Board.
    Dated at Washington, DC, this 10th day of August 2010.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: August 11, 2010.

    By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010-21051 Filed 8-24-10; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P


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