District Circular Letters

December 28, 2000

BANKING SUPERVISION AND REGULATION:
PROPOSAL TO LOWER RISK WEIGHTING
FOR BANK CLAIMS ON SECURITIES FIRMS
and
INTERIM CAPITAL RULE FOR COLLATERAL
IN SECURITIES BORROWING

To State Member Banks, Bank
Holding Companies, U.S. Branches and
Agencies of Foreign Banks, and Others Concerned
in the Twelfth Federal Reserve District

Public Comment Requested on Lowering Risk Weighting for Bank Claims on Securities Firms R-1085 (PDF - 76 KB off-site)

The federal banking regulatory agencies requests public comment on a proposal to amend their capital standards for banks, bank holding companies, and savings associations to reduce the risk weight applied to claims on, or guaranteed by, qualifying securities firms.

The proposal would mitigate a competitive inequity for U.S. depository institutions and holding companies by lowering the risk weight applied to claims on qualifying securities firms from 100 percent to 20 percent. This change is consistent with the treatment of claims on securities firms under an April 1998 amendment to the Basel Accord. The Accord is an international framework for assessing the capital adequacy of depository institutions by risk weighting their assets and off-balance-sheet exposures and serves as a basis for the banking agencies' risk-based capital guidelines.

Under the proposal, qualifying securities firms incorporated in the United States must be registered broker-dealers subject to and in compliance with the net capital rule of the Securities and Exchange Commission, and subject to margin and other regulatory requirements applicable to registered broker-dealers. Securities firms incorporated in other countries that are members of the Organization for Economic Cooperation and Development (OECD) must be subject to supervisory and regulatory arrangements, including risk-based capital requirements, comparable to those imposed on depository institutions under the Basel Accord. Qualifying U.S. and OECD securities firms also must have a long-term credit rating in one of the three highest investment-grade credit ratings categories used by a nationally recognized statistical rating organization.

Comments are due by January 22, 2001.

Interim Rule and Request for Comment on Collateral in Securities Borrowings (R-1087)

The federal bank regulatory agencies requests public comment on an interim rule revising the risk-based capital treatment of cash collateral posted in connection with certain securities borrowing transactions. The agencies are also requesting comment on the capital treatment of securities borrowing transactions where securities are posted as collateral. The rule applies only to those banking organizations with significant trading activities that are subject to capital treatment under the market risk rules. The interim rule provides a capital treatment for U.S. banking organizations that is more in line with the capital treatment applied to their domestic and foreign competitors.

The interim rule is effective January 4, 2001. U.S. banking organizations may apply the provisions of this interim rule beginning December 5, 2000.

Comments on the rule are due by January 19, 2001.

Neither the Basel Accord nor the risk-based capital guidelines adopted by the three agencies specifically address securities borrowing transactions. In recent years, U.S. banking organizations have experienced rapid growth in securities borrowing transactions, which are used for various purposes, including short sales and securities fails (securities sold but not made available for delivery on the settlement date), and in conjunction with option and arbitrage positions.

The agencies recognize that securities borrowing is a long-established financial activity that historically has resulted in an exceedingly low level of losses. The interim rule recognizes this low risk and effectively lowers the capital requirement associated with these transactions.

Copies

Copies of the Board's notices (Dockets R-1085 (PDF - 76 KB off-site) and R-1087 (PDF - 32 KB off-site)are available from our Corporate Services Department. To request copies to be sent by mail, please call (415) 974-2060. To request copies to be sent by fax, please call (415) 974-3333, and specify, for Docket R-1085, document number 4237, and for Docket R-1087, 4123.

FEDERAL RESERVE BANK OF SAN FRANCISCO