DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket No. 08-xxxx] RIN 1557-AD07 FEDERAL RESERVE SYSTtEM 12 CFR Parts 208 and 225 f [Regulations H and Y; Docket No. R-xxxx] a FEDERAL DEPOSIT INSURANCE CORPORATION 1r2 CFR Part 325 RIN xxxx-AC96 D DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 567 [No. 2008-xx] RIN xxxx-ABxxxx Risk-Based Capital Guidelines; Capital Adequacy Guidelines: Standardized Framework; Proposed Rule and Notice 31 AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Treasury. ACTION: Joint notice of proposed rulemaking. SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) (collectively, the agencies) propose a new risk-based capital framework (standardized framework) based on the standardized approach for credit risk and the t basic indicator approach for operational risk described in the capital adequacy framework titled f “International Convergence of Capital Measurement and Capital Standards: A Revised a Framework” (New Accord) released by the Basel Committee on Banking Supervision. The standardized framework generally would be available, on an optional basis, to banks, bank r holding companies, and savings associations (banking organizations) that apply the general risk- D based capital rules. DATES: Comments on this joint notice of proposed rulemaking must be received by [INSERT DATE [90] DAYS AFTER PUBLICATION IN THE FEDERAL REGISTER], 2008. ADDRESSES: Comments should be directed to: OCC: Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by e-mail, if possible. Please use the title “Risk-Based Capital Guidelines; Capital Adequacy Guidelines: Standardized Framework; Proposed Rule and Notice” to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods: • Federal eRulemaking Portal – “Regulations.gov”: Go to http://www.regulations.gov, under the “More Search Options” tab click next to the “Advanced Docket Search” option 32 where indicated, select “Comptroller of the Currency” from the agency drop-down menu, then click “Submit.” In the “Docket ID” column, select [“OCC-2008-XXXX”] to submit or view public comments and to view supporting and related materials for this [insert type of rulemaking action]. The “How to Use This Site” link on the Regulations.gov home page provides 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. t • E-mail: [email protected]. f • Mail: Office of the Comptroller of the Currency, 250 E Street, SW, Mail Stop 1-5, a Washington, DC 20219. r • Fax: (202) 874-4448. D • Hand Delivery/Courier: 250 E Street, SW, Attn: Public Information Room, Mail Stop 1-5, Washington, DC 20219. Instructions: You must include “OCC” as the agency name and “Docket Number [OCC- 2008-XXXX]” 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. 33 You may review comments and other related materials that pertain to this [insert type of rulemaking action] by any of the following methods: • Viewing Comments Electronically: Go to http://www.regulations.gov, under the “More Search Options” tab click next to the “Advanced Document Search” option where indicated, select “Comptroller of the Currency” from the agency drop-down menu, then click “Submit.” In the “Docket ID” column, select “[OCC-2008-XXXX]” to view public comments for this rulemaking action. t • Viewing Comments Personally: You may personally inspect and photocopy comments at f the OCC’s Public Information Room, 250 E Street, SW, Washington, DC. For security a reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-5043. Upron arrival, visitors will be required to present valid government-issued photo identification and submit to security screening in order to inspect D and photocopy comments. • 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-xxxx, by any of the following methods: • Agency Web Site: http://www.federalreserve.gov Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm. • Federal eRulemaking Portal: http://www.regulations.gov Follow the instructions for submitting comments. 34 • E-mail: [email protected]. Include docket number in the subject line of the message. • FAX: (202) 452-3819 or (202) 452-3102. • Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW, Washington, DC 20551. All public comments are available from the Board’s Web site at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as submitted, unless modified t for technical reasons. Accordingly, your comments will not be edited to remove any identifying f or contact information. Public comments may also be viewed electronically or in paper form in a Room MP-500 of the Board’s Martin Building (20th and C Street, NW) between 9:00 a.m. and 5:00 p.m. on weekdays. r FDIC: You may submit by any of the following methods: D • Federal eRulemaking Portal: http://www.regulations.gov Follow the instructions for submitting comments. • Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429. • Hand Delivered/Courier: The guard station at the rear of the 550 17th Street Building (located on F Street), on business days between 7:00 a.m. and 5:00 p.m. • E-mail: [email protected]. • Public Inspection: Comments may be inspected and photocopied in the FDIC Public Information Center, Room E-1002, 3502 Fairfax Drive, Arlington, VA 22226, between 9:00 a.m. and 5:00 p.m. on business days. 35 Instructions: Submissions received must include the Agency name and title for this notice. Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided. OTS: You may submit comments, identified by No. 2008-xx, by any of the following methods: • Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. t • E-mail address: [email protected]. Please include No. 2008-xx in the subject f line of the message and include your name and telephone number in the message. a • Fax: (202) 906-6518. • Mail: Regulation Comments, Chief Counsel’s Office, Office of Thrift Supervision, 1700 G r Street, NW, Washington, DC 20552, Attention: No. 2008-xx. D • Hand Delivery/Courier: Guard’s Desk, East Lobby Entrance, 1700 G Street, NW, from 9:00 a.m. to 4:00 p.m. on business days, Attention: Regulation Comments, Chief Counsel’s Office, Attention: No. 2007-xx. Instructions: All submissions received must include the Agency name and docket number or Regulatory Information Number (RIN) for this rulemaking. All comments received will be posted without change to the OTS Internet Site at http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1, including any personal information provided. Docket: For access to the docket to read background documents or comments received, go to http://www.ots.treas.gov/pagehtml.cfm?catNumber=67&an=1. 36 In addition, you may inspect comments at the Public Reading Room, 1700 G Street, NW, by appointment. To make an appointment for access, call (202) 906-5922, send an e-mail to [email protected], or send a facsimile transmission to (202) 906-7755. (Prior notice identifying the materials you will be requesting will assist us in serving you.) We schedule appointments on business days between 10:00 a.m. and 4:00 p.m. In most cases, appointments will be available the next business day following the date we receive a request. FOR FURTHER INFORMATION CONTACT: t OCC: Margot Schwadron, Senior Risk Expert, (202) 874-6022, Capital Policy Division; f Carl Kaminski, Attorney; or Ron Shimabukuro, Senior Counsel, Legislative and Regulatory a Activities Division, (202) 874-5090; Office of the Comptroller of the Currency, 250 E Street, SW, Washington, DC 20219. r Board: Barbara Bouchard, Associate Director, (202) 452-3072; or William Tiernay, D Senior Supervisory Financial Analyst, (202) 872-7579, Division of Banking Supervision and Regulation; or Mark E. Van Der Weide, Assistant General Counsel, (202) 452-2263; or April Snyder, Counsel, (202) 452-3099, Legal Division. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869. FDIC: Nancy Hunt, Senior Policy Analyst, (202) 898-6643; Ryan Sheller, Capital Markets Specialist, (202) 898-6614; or Bobby R. Bean, Chief, Policy Section, Capital Markets Branch, (202) 898-3575, Division of Supervision and Consumer Protection; or Benjamin W. McDonough, Senior Attorney, (202) 898-7411, 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. 37 OTS: Michael Solomon, Director, Capital Policy Division, (202) 906-5654; or Teresa Scott, Senior Project Manager, Capital Policy Division, (202) 906-6478, Office of Thrift Supervision, 1700 G Street, NW, Washington, DC 20552. SUPPLEMENTARY INFORMATION: Table of Contents I. Background II. Proposed Rule t A. Applicability of the Standardized Framework f B. Reservation of Authority a C. Principle of Conservatism D. Merger and Acquisition Transition Provisions r E. Calculation of Tier 1 and Total Qualifying Capital D F. Calculation of Risk-Weighted Assets 1. Total Risk-Weighted Assets 2. Calculation of Risk-Weighted Assets for General Credit Risk 3. Calculation of Risk-Weighted Assets for Unsettled Transactions, Securitization Exposures, and Equity Exposures 4. Calculation of Risk-Weighted Assets for Operational Risk G. External and Inferred Ratings 1. Background 2. Use of External Ratings H. Risk-Weight Categories 1. Exposures to Sovereign Entities 38 2. Exposures to Supranational Entities and Multilateral Development Banks (MDBs) 3. Exposures to Depository Institutions, Foreign Banks, and Credit Unions 4. Exposures to Public Sector Entities 5. Corporate Exposures 6. Regulatory Retail Exposures 7. Residential Mortgage Exposures 8. Pre-Sold Construction Loans and Statutory Multifamily Mortgages t 9. Past Due Loans f 10. Other Assets a I. Off-Balance Sheet Items J. OTC Derivative Contracts r 1. Background D 2. Treatment of OTC Derivative Contracts 3. Counterparty Credit Risk for Credit Derivatives 4. Counterparty Credit Risk for Equity Derivatives 5. Risk Weight for OTC Derivative Contracts K. Credit Risk Mitigation (CRM) 1. Guarantees and Credit Derivatives 2. Collateralized Transactions L. Unsettled Transactions M. Risk-Weighted Assets for Securitization Exposures 1. Securitization Overview and Definitions 2. Operational Requirements 39 3. Hierarchy of Approaches 4. Ratings-Based Approach (RBA) 5. Exposures that Do Not Qualify for the RBA 6. CRM for Securitization Exposures 7. Risk-Weighted Assets for Early Amortization Provisions 8. Maximum Capital Requirement N. Equity Exposures t 1. Introduction and Exposure Measurement f 2. Hedge Transactions a 3. Measures of Hedge Effectiveness 4. Simple Risk-Weight Approach (SRWA) r 5. Non-Significant Equity Exposures D 6. Equity Exposures to Investment Funds 7. Full Look-Through Approach 8. Simple Modified Look-Through Approach 9. Alternative Modified Look-Through Approach 10. Money Market Fund Approach O. Operational Risk 1. Basic Indicator Approach (BIA) 2. Advanced Measurement Approach (AMA) P. Supervisory Oversight and Internal Capital Adequacy Assessment Q. Market Discipline 1. Overview 40