District Circular Letters

• District Circular Letters Index

November 12, 1997

REGULATIONS H and Y:
RISK-BASED CAPITAL GUIDELINES

BASLE COMMITTEE:
AMENDMENT TO THE CAPITAL ACCORD

To All State Member Banks,
Bank Holding Companies, and Others Concerned
in the Twelfth Federal Reserve District

Proposed Rulemaking Regarding Unrealized Holding Gains (Docket R-0982)

The Federal Reserve Board has requested public comment on a joint interagency proposal to amend respective risk-based capital standards for banks, bank holding companies and thrifts with regard to the treatment of certain unrealized revaluation gains on equity securities.

These gains are reported as a component of equity capital under generally accepted accounting principals (GAAP), but are not currently included in regulatory capital under the federal banking agencies capital standards.

Comment is requested by December 26, 1997.

The proposal, if adopted as a final rule, would establish uniform interagency rules permitting institutions to include in supplementary (Tier 2) capital up to 45 percent of unrealized gains on certain available-for-sale equity securities.

The proposal, which is consistent with the prudential standards of the Basle Accord, also is being issued by the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision.

Proposals Regarding Certain Construction Loans and Mutual Fund Investments

The Board and the other regulatory agencies are proposing to amend their respective risk-based capital standards and leverage capital standards for banks and thrifts. The proposal would represent a significant step in implementing section 303 of the Riegle Community Development and Regulatory Improvement Act of 1994, with regard to the Agencies' capital adequacy standards. (Section 303 requires the Agencies to work jointly to make uniform their regulations and guidelines implementing common statutory or supervisory policies.)

The effect of the proposal would be that the Agencies would have uniform risk-based capital treatments for construction loans on presold residential properties, real estate loans secured by junior liens on 1- to 4-family residential properties, and investments in mutual funds, as well as uniform and simplified minimum Tier 1 capital leverage standards.

The Board is similarly proposing to amend its risk-based capital guidelines for bank holding companies as covered in Regulation Y by revising the treatment for junior liens on 1- to 4-family residential properties and mutual funds and the language for construction loans on presold residential properties, and to simplify the leverage capital guidelines for bank holding companies. The proposal, which was developed on an interagency basis, would also implement part of section 303 of the Riegle Community Development and Regulatory Improvement Act.

The effect of the proposal would be that the bank holding company risk-based capital treatment for construction loans on presold residential properties, real estate loans secured by junior liens on 1- to 4-family residential properties, and investments in mutual funds would be consistent with the risk-based capital treatment of the other Federal banking and thrift regulatory agencies, and the bank holding company Tier 1 leverage standards would be simplified and revised to take into account the market risk capital rule.

Comments regarding Dockets R-0947 and R-0948 must be received on or before December 26, 1997.

Proposal Regarding Recourse Obligations and Direct Credit Substitutes (Docket R-0985)

The Board has requested public comment on a joint interagency proposal to revise risk-based capital standards to address the regulatory capital treatment of recourse obligations and direct credit substitutes that expose banks, bank holding companies, and thrifts to credit risk.

Comment is requested by February 3, 1998.

The proposal would treat direct credit substitutes and recourse obligations consistently and would use credit ratings and possibly certain other alternative approaches to match the risk-based capital assessment more closely to a banking organization's relative risk of loss in asset securitizations.

The joint proposal by the Board, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision was developed under the auspices of the Federal Financial Institutions Examination Council.

The federal banking agencies intend that any final rules adopted in connection with this proposal that result in increased risk-based capital requirements for banking organizations apply only to transactions consummated after the effective date of the final rules.

Modification to the Amendment to the Capital Accord to Incorporate Interest Rate Risk

The Basle Committee on Banking Supervision has modified the Amendment to the Capital Accord to incorporate market risk that it issued in January 1996 and that was subsequently adopted by the Federal Reserve Board for state member banks and bank holding companies.

The modified Amendment is effective January 1, 1998.

The modification has the effect of removing the so-called floor which would have applied to banks using internal models to assess specific risk as part of their overall modeling of market risk. Banks will benefit from the removal of the floor since its retention would have burdened them with dual calculations.

The text of the Basle Committee document is attached. The document is also available on the Basle Committee website, at http://www.bis.org.

Copies

Copies of the Board's notices (Docket R-0982, Docket R-0947, Docket R-0948 and Docket R-0985) are available from our Corporate Services Department. To request copies to be sent via mail, please call (415) 974-2748. To request copies of Dockets R-0982, R-0947, and R-0948 to be sent via fax, please call (415) 974-3333, and specify document numbers 4168, 4171, and 4172, respectively. Docket R-0985 is unavailable via fax due to the length of the document.

Additional Information

For additional information regarding these matters, please contact our Banking Supervision and Regulation Department, at (415) 974-2927.

FEDERAL RESERVE BANK OF SAN FRANCISCO