[Federal Register Volume 64, Number 74 (Monday, April 19, 1999)]
[Rules and Regulations]
[Pages 19034-19039]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-9185]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket No. 99-04]
RIN 1557-AB14
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-0996]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AC14
Risk-Based Capital Standards: Market Risk
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; and Federal Deposit Insurance
Corporation.
ACTION: Joint final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board
of Governors of the Federal Reserve System (Board), and the Federal
Deposit Insurance Corporation (FDIC) (collectively, the agencies) are
adopting as a final rule an interim rule amending their respective
risk-based capital standards for market risk applicable to
[[Page 19035]]
certain banks and bank holding companies with significant trading
activities. The interim rule implemented a revision to the Basle Accord
adopted in 1997. Prior to the revision, an institution that measured
specific risk with an internal model that adequately measured such risk
was subject to a minimum capital charge. An institution's capital
charge for specific risk had to be at least as large as 50 percent of a
specific risk charge calculated using the standardized approach. The
rule will finalize the interim rule, which reduced regulatory burden
for institutions with qualifying internal models because they no longer
must calculate a standardized specific risk capital charge.
EFFECTIVE DATE: This final rule is effective on July 1, 1999.
FOR FURTHER INFORMATION CONTACT: OCC: Margot Schwadron, Risk Expert
(202/874-5070), Amrit Sekhon, Risk Specialist (202/874-5070), Capital
Policy Division; or Ronald Shimabukuro, Senior Attorney (202/874-5090),
Legislative and Regulatory Activities Division, Office of the
Comptroller of the Currency, 250 E Street, S.W., Washington, DC 20219.
Board: James Houpt, Deputy Associate Director (202/452-3358),
Barbara Bouchard, Manager (202/452-3072), T. Kirk Odegard, Financial
Analyst (202/530-6225), Division of Banking Supervision; or Stephanie
Martin, Senior Counsel (202/452-3198), Mark E. Van Der Weide, Attorney
(202/452-2263), Legal Division. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), Diane Jenkins (202/452-
3544), Board of Governors of the Federal Reserve System, 20th and C
Streets, N.W., Washington, DC 20551.
FDIC: William A. Stark, Assistant Director (202/898-6972), Miguel
Browne, Manager (202/898-6789), John J. Feid, Chief (202/898-8649),
Division of Supervision; for legal issues, Jamey Basham, Counsel (202/
898-7265), Legal Division, Federal Deposit Insurance Corporation, 550
17th Street, N.W., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I. Background
The agencies' risk-based capital standards are based upon
principles contained in the July 1988 agreement entitled
``International Convergence of Capital Measurement and Capital
Standards'' (Accord). The Accord, developed by the Basle Committee on
Banking Supervision (Basle Committee) and endorsed by the central bank
governors of the Group of Ten (G-10) countries (G-10 Governors),
provides a framework for assessing an institution's capital adequacy by
weighting its assets and off-balance sheet exposures on the basis of
general counterparty credit risk.1 In December 1995, the G-
10 Governors endorsed the Basle Committee's amendment to the Accord
(effective by year-end 1997) to incorporate a measure for exposure to
market risk (market risk amendment) into the capital adequacy
assessment. On September 6, 1996, the agencies issued revisions to
their risk-based capital standards implementing the Basle Committee's
market risk amendment (market risk rules) (61 FR 47358). In September
1997, the Basle Committee modified the market risk amendment and on
December 30, 1997, the agencies issued an interim rule implementing
that modification (62 FR 68064).
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\1\ The G-10 countries are Belgium, Canada, France, Germany,
Italy, Japan, Netherlands, Sweden, Switzerland, the United Kingdom,
and the United States. The Basle Committee is comprised of
representatives of the central banks and supervisory authorities
from the G-10 countries and Luxembourg.
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Under the agencies' market risk rules, banks and bank holding
companies (institutions) with significant trading activities must
measure and hold capital for exposure to both general market risk and
specific risk. General market risk refers to changes in the market
value of on-and off-balance-sheet items resulting from broad market
movements in interest rates, equity prices, foreign exchange rates, and
commodity prices. An institution must measure its general market risk
using its internal risk measurement model, subject to certain
qualitative and quantitative criteria, to calculate a capital charge
based on the model-determined value-at-risk (VAR).2
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\2\ The VAR-based capital charge is the higher of (i) the
previous day's VAR measure, or (ii) the average of the daily VAR
measures for each of the preceding 60 business days multiplied by a
factor of three. Beginning no later than one year after becoming
subject to the market risk rules, an institution is required to
backtest its internal model. An institution may be required to apply
a higher multiplication factor, up to a factor of four, based on
backtesting results.
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Specific risk refers to changes in the market value of individual
debt and equity positions in a trading portfolio due to factors other
than broad market movements. Under the agencies' market risk rules, an
institution may measure its specific risk by using either the
standardized approach 3 or its own internal model, if the
institution can demonstrate to the appropriate banking agency that the
model adequately measures specific risk. When the agencies initially
adopted the market risk rules, an institution using its internal model
to measure specific risk was required to hold capital for specific risk
equal to at least 50 percent of the specific risk charge calculated
using the standardized approach (the minimum specific risk charge). If
the portion of the institution's VAR attributable to specific risk did
not equal the minimum specific risk charge, the institution's VAR-based
capital charge was subject to an add-on charge of the difference
between the two. In practice, this required an institution employing an
internal model to measure specific risk to also calculate the specific
risk charge using the standardized approach.
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\3\ The standardized approach applies a risk-weighting process
developed by the Basle Committee to individual financial
instruments. Under this approach, debt and equity instruments in the
institution's trading account are assessed a category-based fixed
capital charge.
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When the agencies included the minimum specific risk charge as part
of the market risk rules, they recognized that dual calculations of
specific risk--that is, calculating specific risk with internal models
as well as using the standardized approach to establish the minimum
specific risk charge--would be burdensome. However, the agencies'
decision to include the minimum specific risk charge was consistent
with the Basle Committee's belief that a minimum charge was necessary
to ensure that modeling techniques for specific risk adequately
measured that risk. After the Basle Committee adopted the market risk
amendment, many institutions improved their modeling techniques and, in
particular, their modeling of specific risk. Recognizing these
improvements, in September 1997 the Basle Committee decided to
eliminate the use of the minimum specific risk charge and the burden of
a separate calculation. The Basle Committee revised the market risk
amendment so that an institution using a valid internal model to
measure specific risk could use the VAR measures generated by the model
without comparing the model-generated results to the minimum specific
risk charge calculated under the standardized approach.4 The
revisions specified that the specific risk elements of internal models
would be assessed consistently with the assessment of the general
market risk elements of such models through backtesting and review by
the relevant agency.
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\4\ The revisions are described in the Committee's document
entitled ``Explanatory Note: Modification of the Basle Capital
Accord of July 1988, as Amended January 1996'' and is available
through the Board's and the OCC's Freedom of Information Office and
the FDIC's Public Information Center.
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To implement this revision to the market risk amendment, the
agencies
[[Page 19036]]
issued an interim rule with a request for comment (62 FR 68064) in
December 1997. As discussed in the interim rule, the agencies found
sufficient good cause to make the amendments effective immediately,
without prior opportunity for public comment or a delayed effective
date. The interim rule applied only to the calculation of specific risk
under the market risk rules, and all other aspects of the market risk
rules remained unchanged.
II. Comments Received
The agencies received a total of three public comments on the
interim rule (two from industry trade associations and one from a
financial institution). All three commenters supported the interim
rule, primarily because of its reduction of regulatory burden. None of
the commenters suggested any changes to the interim rule.
III. Final Rule
The agencies are adopting in final form, without substantive
change, the interim rule eliminating the requirement that when an
institution measures specific risk using its internal model, the total
capital charge for specific risk must equal at least 50 percent of the
standard specific risk capital charge. This final rule does not apply
to institutions that use the standardized method to calculate specific
risk.
For those institutions using internal models to calculate their
specific risk charges, the agencies will continue to review the
internal models to determine whether or not they adequately measure
specific risk. In reviewing these internal models, the agencies will
evaluate the extent to which the internal models adequately capture
idiosyncratic price variations of debt and equity instruments due to
circumstances unique to the issuer, as well as the instruments'
exposure to event and default risk. In order to capture specific risk
adequately, an institution's internal model must explain the historical
price variation in the portfolio. Internal models must also be
sensitive to changes in portfolio concentrations (both magnitude and
changes in composition), and require additional capital for greater
concentrations. The agencies likewise will take into account whether an
internal model is sensitive to an adverse environment. If an
institution's internal model adequately captures specific risk, the
institution may base its specific risk capital charge on the internal
model's estimates.
If an institution's internal model does not adequately measure
specific risk, the institution must continue to calculate the standard
specific risk capital charge and add that charge to its VAR-based
capital charge for general market risk to produce its total regulatory
capital requirement for market risk. If an institution's internal model
adequately addresses idiosyncratic risk but does not adequately capture
all other aspects of specific risk, including event and default risk,
the institution may use its internal model to calculate specific risk,
but it will have a ``specific risk add-on.'' The specific risk add-on
may be calculated using either one of two approaches, both of which
have the effect of subjecting the modeled specific risk to a minimum
multiplier of four.5
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\5\ The multiplier applicable to the modeled general market risk
elements will not be affected. Thus, the multiplier for general
market risk will continue to be three, unless a higher multiplier is
indicated by virtue of the institution's backtesting results for
general market risk, or unless no multiplier is applied because the
previous day's VAR for general market risk is higher than the 60-day
average times the multiplier.
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Under the first approach, an institution whose internal model is
able to separate its VAR measure into general market risk and specific
risk components must use as its measure for market risk the total VAR-
based capital charge (typically three times the internal model's
general and specific risk measure), plus an add-on consisting of the
isolated specific risk component of the VAR measure. Under the second
approach, an institution whose internal model does not separately
identify the specific and general market risk components of its VAR
measure must use as its measure for market risk the total VAR-based
capital charge, plus an add-on consisting of the VAR measures of the
subportfolios of debt and equity positions that contain specific risk.
An institution using the second approach may not alter its subportfolio
structures for the sole purpose of decreasing its VAR measure.
An institution using its internal model for specific risk capital
purposes must backtest the model to assess whether the model accurately
explains observed price variations arising from both general market
risk and specific risk. To assist in internal model validation, the
institution should perform backtests on its traded debt and equity
subportfolios that contain specific risk. The institution should
conduct these backtests with the understanding that subportfolio
backtesting is a productive mechanism for assuring that instruments
with higher levels of specific risk, especially event or default risk,
are modeled accurately. If subportfolio backtests indicate an
unacceptable internal model, especially for unexplained price variation
that may be arising from specific risk, the institution should take
immediate action to improve the internal model and ensure that it has
sufficient capital to protect against associated risks.
The agencies expect institutions to continue improving their
internal models, particularly with respect to measuring event and
default risk for traded debt and equity instruments. The agencies
intend to work with the industry in these efforts and believe that,
over time, market standards for measuring event and default risk will
emerge. As individual modeling methods are improved and become accepted
within the industry as effective measurement techniques for event and
default risk, the agencies will consider permitting such models to be
applied without any add-on charge. The Basle Committee may issue
general guidance for capturing event and default risk for trading book
instruments. Until such time as standards for measuring event and
default risk are established within the industry, the agencies intend
to cooperate with each other and communicate extensively with other
international supervisors to ensure that the market risk capital
requirements are implemented in an appropriate and consistent manner.
IV. Changes From the Interim Rule
In adopting the final rule, the Board and FDIC made certain wording
changes. These changes do not alter the effect or substance of the
final rule, and only conform or clarify the language.
First, both the Board and the FDIC changed their language which
states that a bank that incorporates specific risk into its internal
model but fails to demonstrate that its internal model adequately
measures all aspects of specific risk may use its internal model to
calculate specific risk subject to a ``specific risk add-on.'' This
change was made to make the agencies' language more consistent. Second,
the Board and the FDIC conformed their definition of ``specific risk''
to be more consistent with the OCC's language. Third, the FDIC has
changed paragraph (c) of Appendix C of Part 325 Section 5 to clarify
that, when an institution models the specific risk of either its
covered debt positions or its covered equity positions, but not both
components, the capital treatment specified for modeled specific risk
will apply as to the modeled component, and the standardized approach
will apply as to the non-modeled component. The add-on charge will
consist of the specific risk charge determined under the
[[Page 19037]]
standardized approach for the non-modeled component, plus the specific
risk add-on, if any, for the modeled component (because the model does
not adequately measure event and default risk). The FDIC's change in
this regard is technical. The language of the interim rule also
effectuated this approach, but the changes make it clearer to the
reader.
V. Regulatory Flexibility Act Analysis
Pursuant to section 603 of the Regulatory Flexibility Act (RFA),
RFA does not apply if any agency is not required to issue a Notice of
Proposed Rulemaking. Nevertheless, the agencies have considered the
impact of this final rule and determined that it will not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). The final rule will rarely, if ever, apply to small entities.
Moreover, this final rule reduces regulatory burden, by eliminating the
need for institutions that model specific risk to make dual
calculations under the standardized approach in order to determine
their minimum specific risk charge.
VI. Paperwork Reduction Act
The agencies have determined that the final rule does not involve a
collection of information pursuant to the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).
VII. Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(SBREFA) (Title II, Pub. L. 1004-121) provides generally for agencies
to report rules to Congress for review. The reporting requirement is
triggered when a federal agency issues a final rule. Accordingly, the
agencies filed the appropriate reports with Congress as required by
SBREFA.
The Office of Management and Budget has determined that these final
rules do not constitute ``major rules'' as defined by SBREFA.
VIII. OCC Executive Order 12866 Determination
The OCC has determined that the final rule does not constitute a
``significant regulatory action'' for the purpose of Executive Order
12866.
IX. OCC Unfunded Mandates Reform Act of 1995 Determination
Section 202 of the Unfunded Mandates Reform Act of 1995, Pub. L.
104-4 (Unfunded Mandates Act) requires that an agency prepare a
budgetary impact statement before promulgating a rule that includes a
Federal mandate that may result in expenditure by State, local, and
tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. If a budgetary impact statement is
required, section 205 of the Unfunded Mandates Act also requires an
agency to identify and consider a reasonable number of regulatory
alternatives before promulgating a rule. As discussed in the preamble,
this final rule eliminates the minimum specific risk charge for
institutions that use internal models that adequately capture specific
risk. The effect of this final rule is to reduce regulatory burden by
no longer requiring institutions to make dual calculations under both
the institution's internal model and the standardized specific risk
model. The OCC therefore has determined that the effect of the final
rule on national banks as a whole will not result in expenditures by
State, local, or tribal governments or by the private sector of $100
million or more. Accordingly, the OCC has not prepared a budgetary
impact statement or specifically addressed the regulatory alternatives
considered.
X. FDIC Assessment of Impact of Federal Regulation on Families
The FDIC has determined that this final rule will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act of 1999 (Pub. Law 105-277).
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Capital, National banks,
Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Accounting, Agriculture, Banks, banking, Confidential business
information, Crime, Currency, Federal Reserve System, Mortgages,
Reporting and recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Bank deposit insurance, Banks, banking, Capital adequacy, Reporting
and recordkeeping requirements, Savings associations, State non-member
banks.
Authority and Issuance
Office of the Comptroller of the Currency
12 CFR Chapter I
For the reasons set out in the joint preamble, the OCC's portion of
the joint interim rule with request for comment amending 12 CFR part 3
titled Risk-Based Capital Standards: Market Risk, published on December
30, 1997, at 62 FR 68067 is adopted as final without change.
Dated: March 24, 1999.
John D. Hawke, Jr.,
Comptroller of the Currency.
Federal Reserve System
12 CFR Chapter II
For the reasons set forth in the joint preamble, the Board's
portion of the joint interim rule with request for comment, amending 12
CFR parts 208 and 225, published on December 30, 1997, at 62 FR 68067
is adopted as final with the following changes:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
1. The authority citation for part 208 continues to read as
follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1823(j), 1828(o),
1831o, 1831p-1, 1831r-1, 1835a, 1882, 2901-2907, 3105, 3310, 3331-
3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 781(g), 781(i), 78o-
4(c)(5), 78q, 78q-1, and 78w; 31 U.S.C. 5318; 42 U.S.C. 4012a,
4104a, 4104b, 4106, and 4128.
2. In appendix E to part 208, the appendix heading is revised to
read as follows:
Appendix E to Part 208--Capital Adequacy Guidelines for State
Member Banks; Market Risk Measure
3. In appendix E to part 208, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and
includes event and default risk as well as idiosyncratic variations.
* * * * *
4. In Appendix E to part 208, section 5., paragraphs (a), (b), and
the
[[Page 19038]]
introductory text of paragraph (c) are revised to read as follows:
* * * * *
Section 5. Specific Risk
(a) Modeled specific risk. A bank may use its internal model to
measure specific risk. If the bank has demonstrated to the Federal
Reserve that its internal model measures the specific risk,
including event and default risk as well as idiosyncratic variation,
of covered debt and equity positions and includes the specific risk
measures in the VAR-based capital charge in section 3(a)(2)(i) of
this appendix, then the bank has no specific risk add-on for
purposes of section 3(a)(2)(ii) of this appendix. The model should
explain the historical price variation in the trading portfolio and
capture concentration, both magnitude and changes in composition.
The model should also be robust to an adverse environment and have
been validated through backtesting which assesses whether specific
risk is being accurately captured.
(b) Partially modeled specific risk. (1) A bank that
incorporates specific risk in its internal model but fails to
demonstrate to the Federal Reserve that its internal model
adequately measures all aspects of specific risk for covered debt
and equity positions, including event and default risk, as provided
by section 5(a), of this appendix must calculate its specific risk
add-on in accordance with one of the following methods:
(i) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(ii) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and equity positions that contain
specific risk.
(2) If a bank models the specific risk of covered debt positions
but not covered equity positions (or vice versa), then the bank may
determine its specific risk charge for the included positions under
section 5(a) or 5(b)(1) of this appendix, as appropriate. The
specific risk charge for the positions not included equals the
standard specific risk capital charge under paragraph (c) of this
section.
(c) Specific risk not modeled. If a bank does not model specific
risk in accordance with section 5(a) or 5(b) of this appendix, then
the bank's specific risk capital charge shall equal the standard
specific risk capital charge, calculated as follows:
* * * * *
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
1. The authority citation for part 225 continues to read as
follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909.
2. In appendix E to part 225, the appendix heading is revised to
read as follows:
Appendix E to Part 225--Capital Adequacy Guidelines for Bank
Holding Companies: Market Risk Measure
3. In appendix E to part 225, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and
includes event and default risk as well as idiosyncratic variations.
* * * * *
4. In appendix E to part 225, section 5., paragraphs (a), (b), and
the introductory text of paragraph (c) are revised to read as follows:
* * * * *
Section 5. Specific Risk
(a) Modeled specific risk. A bank holding company may use its
internal model to measure specific risk. If the organization has
demonstrated to the Federal Reserve that its internal model measures
the specific risk, including event and default risk as well as
idiosyncratic variation, of covered debt and equity positions and
includes the specific risk measures in the VAR-based capital charge
in section 3(a)(2)(i) of this appendix, then the organization has no
specific risk add-on for purposes of section 3(a)(2)(ii) of this
appendix. The model should explain the historical price variation in
the trading portfolio and capture concentration, both magnitude and
changes in composition. The model should also be robust to an
adverse environment and have been validated through backtesting
which assesses whether specific risk is being accurately captured.
(b) Partially modeled specific risk. (1) A bank holding company
that incorporates specific risk in its internal model but fails to
demonstrate to the Federal Reserve that its internal model
adequately measures all aspects of specific risk for covered debt
and equity positions, including event and default risk, as provided
by section 5(a) of this appendix, must calculate its specific risk
add-on in accordance with one of the following methods:
(i) If the model is susceptible to valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(ii) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and equity positions that contain
specific risk.
(2) If a bank holding company models the specific risk of
covered debt positions but not covered equity positions (or vice
versa), then the bank holding company may determine its specific
risk charge for the included positions under section 5(a) or 5(b)(1)
of this appendix, as appropriate. The specific risk charge for the
positions not included equals the standard specific risk capital
charge under paragraph (c) of this section.
(c) Specific risk not modeled. If a bank holding company does
not model specific risk in accordance with section 5(a) or 5(b) of
this appendix, then the organization's specific risk capital charge
shall equal the standard specific risk capital charge, calculated as
follows:
* * * * *
By order of the Board of Governors of the Federal Reserve
System, April 7, 1999.
Jennifer J. Johnson,
Secretary of the Board.
Federal Deposit Insurance Corporation
12 CFR Chapter III
For the reasons set forth in the joint preamble, FDIC's portion of
the joint interim final rule with request for comment amending 12 CFR
part 325, published December 30, 1997, at 62 FR 66068 is adopted as
final with the following changes:
PART 325--CAPITAL MAINTENANCE
1. The authority citation for part 325 continues to read as
follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, 2355, 2386 (12 U.S.C. 1828 note).
2. In appendix C to part 325, the appendix heading is revised to
read as follows:
Appendix C to Part 325--Risk-Based Capital for State Non-Member
Banks: Market Risk
3. In appendix C to part 325, section 2., paragraph (b)(2) is
revised to read as follows:
* * * * *
Section 2. Definitions
* * * * *
(b) * * *
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and
includes event and default risk as well as idiosyncratic variations.
* * * * *
4. In appendix C to part 325, section 5., paragraphs (a), (b), and
(c) introductory text are revised to read as follows:
* * * * *
[[Page 19039]]
Section 5. Specific Risk
(a) Modeled specific risk. A bank may use its internal model to
measure specific risk. If the bank has demonstrated to the FDIC that
its internal model measures the specific risk, including event and
default risk as well as idiosyncratic variation, of covered debt and
equity positions and includes the specific risk measure in the VAR-
based capital charge in section 3(a)(2)(i) of this appendix, then
the bank has no specific risk add-on for purposes of section
3(a)(2)(ii) of this appendix. The model should explain the
historical price variation in the trading portfolio and capture
concentration, both magnitude and changes in composition. The model
should also be robust to an adverse environment and have been
validated through backtesting which assesses whether specific risk
is being accurately captured.
(b) Add-on charge for modeled specific risk. A bank that
incorporates specific risk in its internal model but fails to
demonstrate to the FDIC that its internal model adequately measures
all aspects of specific risk for covered debt and equity positions,
including event and default risk, as provided by section 5(a) of
this appendix, must calculate the bank's specific risk add-on for
purposes of section 3(a)(2)(ii) of this appendix as follows:
(1) If the model is capable of valid separation of the VAR
measure into a specific risk portion and a general market risk
portion, then the specific risk add-on is equal to the previous
day's specific risk portion.
(2) If the model does not separate the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk add-on is the sum of the previous day's VAR measures
for subportfolios of covered debt and equity positions.
(c) Add-on charge if specific risk is not modeled. If a bank
does not model specific risk in accordance with paragraph (a) or (b)
of this section, the bank's specific risk add-on charge for purposes
of section 3(a)(2)(ii) of this appendix equals the sum of the
components for covered debt and equity positions. If a bank models,
in accordance with paragraph (a) or (b) of this section, the
specific risk of covered debt positions but not covered equity
positions (or vice versa), then the bank's specific risk add-on
charge for the positions not modeled is the component for covered
debt or equity positions as appropriate:
* * * * *
Dated at Washington, D.C. this 23rd day of March, 1999.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 99-9185 Filed 4-16-99; 8:45 am]
BILLING CODES 4810-33-P; 6210-01-P; 6714-01-P
