Regulatory Capital Rule: Category I and II Banking Organizations, Banking Organizations With Significant Trading Activity, and Optional Adoption for Other Banking Organizations

Federal RegisterMar 27, 2026

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 3, 6, and 32

[Docket ID OCC-2026-0265]

RIN 1557-AF52

FEDERAL RESERVE SYSTEM

12 CFR Parts 208, 217, 225, 238, and 252

[Docket No. 1887]

RIN 7100-AH20

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AF29

Regulatory Capital Rule: Category I and II Banking Organizations, Banking Organizations With Significant Trading Activity, and Optional Adoption for Other Banking Organizations

AGENCY:

Office of the Comptroller of the Currency (OCC), Treasury; the Board of Governors of the Federal Reserve System (Board); and the Federal Deposit Insurance Corporation (FDIC).

ACTION:

Notice of proposed rulemaking.

SUMMARY:

The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation are proposing to modernize the capital requirements applicable to Category I and II depository institution holding companies and depository institutions, as well as revise the market risk capital framework for banking organizations with significant trading activity (the proposal). The proposal would improve the regulatory capital framework for covered banking organizations by enhancing its risk sensitivity and consistency and by simplifying core components of its design. The agencies expect the proposal would support the safety and soundness of covered banking organizations and U.S. financial stability while promoting lending and other financial intermediation activities in the banking system over a range of economic conditions.

DATES:

Comments must be received by June 18, 2026.

ADDRESSES:

Comments should be directed to:

•

OCC:

Commenters are encouraged to submit comments through the Federal eRulemaking Portal, if possible. Please use the title “Regulatory Capital Rule: Category I and II Banking Organizations, Banking Organizations with Significant Trading Activity, and Optional Adoption for Other Banking Organizations” to facilitate the organization and distribution of the comments and identify the number of the specific question(s) to which you are responding. You may submit comments by any of the following methods:

Federal eRulemaking Portal—Regulations.gov:

Go to

https://regulations.gov/

. Enter Docket ID “OCC-2026-0265” in the Search Box and click “Search.” Public comments can be submitted via the “Comment” box below the displayed document information or by clicking on the document title and then clicking the “Comment” box on the top-left side of the screen. For help with submitting effective comments, please click on “Commenter's Checklist.” For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. EST, or email

regulationshelpdesk@gsa.gov

•

Mail:

Chief Counsel's Office, Attention: Comment Processing, Office of the Comptroller of the Currency, 400 7th Street, SW, Suite 3E-218, Washington, DC 20219.

•

Hand Delivery/Courier:

400 7th Street SW, Suite 3E-218, Washington, DC 20219.

Instructions:

You must include “OCC” as the agency name and Docket ID “OCC-2026-0265” in your comment. In general, the OCC will enter all comments received into the docket and publish the comments on the

Regulations.gov

website without change, including any business or personal information provided such as name and address information, email 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 include 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 action by the following method:

Viewing Comments Electronically—Regulations.gov:

Go to

https://regulations.gov/

. Enter Docket ID “OCC-2026-0265” in the

Search Box and click “Search.” Click on the “Dockets” tab and then the document's title. After clicking the document's title, click the “Browse All Comments” tab. Comments can be viewed and filtered by clicking on the “Sort By” drop-down on the right side of the screen or the “Refine Comments Results” options on the left side of the screen. Supporting materials can be viewed by clicking on the “Browse Documents” tab. Click on the “Sort By” drop-down on the right side of the screen or the “Refine Results” options on the left side of the screen checking the “Supporting & Related Material” checkbox. For assistance with the

Regulations.gov

site, please call 1-866-498-2945 (toll free) Monday-Friday, 9 a.m.-5 p.m. EST, or email

regulationshelpdesk@gsa.gov

The docket may be viewed after the close of the comment period in the same manner as during the comment period.

Board:

You may submit comments, identified by Docket No. R-1887, and RIN 7100-AH20 by any of the following methods:

•

Agency website:

https://www.federalreserve.gov/apps/proposals/

. Follow the instructions for submitting comments, including attachments. Preferred Method.

•

Mail:

Benjamin W. McDonough, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551.

•

Hand Delivery/Courier:

Same as mailing address.

•

Other Means:

publiccomments@frb.gov

. You must include the docket number in the subject line of the message.

Comments received are subject to public disclosure. In general, comments received will be made available on the Board's website at

https://www.federalreserve.gov/apps/proposals/

without change and will not be modified to remove personal or business information including confidential, contact, or other identifying information. Comments should not include any information such as confidential information that would be not appropriate for public disclosure. Comments should identify the number for the specific question(s) to which they respond. Public comments may also be viewed electronically or in person in Room M-4365A, 2001 C St. NW, Washington, DC 20551, between 9 a.m. and 5 p.m. during Federal business weekdays.

FDIC:

You may submit comments to the FDIC, identified by RIN 3064-AF29 and identify the number for the specific question(s) to which you are responding, by any of the following methods:

Agency website:

https://www.fdic.gov/resources/regulations/federal-register-publications

. Follow instructions for submitting comments on the FDIC's website.

Mail:

Jennifer M. Jones, Deputy Executive Secretary, Attention: Comments/Legal OES (RIN 3064-AF29), Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

Hand Delivered/Courier:

Comments may be hand-delivered to the guard station at the rear of the 550 17th Street NW, building (located on F Street NW) on business days between 7 a.m. and 5 p.m.

Email:

comments@FDIC.gov

. Include the RIN 3064-AF29 on the subject line of the message.

Public Inspection:

Comments received, including any personal information provided, may be posted without change to

https://www.fdic.gov/resources/regulations/federal-register-publications

. Commenters should submit only information that the commenter wishes to make available publicly. The FDIC may review, redact, or refrain from posting all or any portion of any comment that it may deem to be inappropriate for publication, such as irrelevant or obscene material. The FDIC may post only a single representative example of identical or substantially identical comments, and in such cases will generally identify the number of identical or substantially identical comments represented by the posted example. All comments that have been redacted, as well as those that have not been posted, that contain comments on the merits of this document will be retained in the public comment file and will be considered as required under all applicable laws. All comments may be accessible under the Freedom of Information Act.

FOR FURTHER INFORMATION CONTACT:

OCC:

Venus Fan, Risk Expert, Benjamin Pegg, Technical Expert, or Diana Wei, Risk Expert, Capital Policy, (202) 649-6370; Carl Kaminski, Assistant Director, Ron Shimabukuro, Senior Counsel, Kevin Korzeniewski, Counsel, Daniel Perez, Counsel, Christopher Rafferty, Counsel, or Joanne Phillips, Counsel, Chief Counsel's Office, (202) 649-5490, Office of the Comptroller of the Currency, 400 7th Street SW, Washington, DC 20219. If you are deaf, hard of hearing, or have a speech disability, please dial 7-1-1 to access telecommunications relay services.

Board:

Anna Lee Hewko, Associate Director, (202) 530-6260; Andrew Willis, Manager, (202) 430-1667; Missaka Nuwan Warusawitharana, Manager, (202) 452-3461; Cecily Boggs, Lead Financial Institution Policy Analyst, (202) 530-6209; Marco Migueis, Principal Economist, (202) 452-6447; Diana Iercosan, Principal Economist, (202) 912-4648; Nadya Zeltser, Lead Financial Institution Policy Analyst, (202) 452-3164; Division of Supervision and Regulation; or Jay Schwarz, Deputy Associate General Counsel, (202) 452-2970; Mark Buresh, Senior Special Counsel, (202) 452-5270; Gillian Burgess, Senior Counsel, (202) 736-5564; Jonah Kind, Senior Counsel, (202) 452-2045, Legal Division, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW, Washington, DC 20551. For users of TTY-TRS, please call 711 from any telephone, anywhere in the United States.

FDIC:

Benedetto Bosco, Chief Capital Policy Section; Bob Charurat, Corporate Expert; Irina Leonova, Corporate Expert; Andrew Carayiannis, Chief, Policy and Risk Analytics Section; Michael Maloney, Senior Policy Analyst; Iris Li, Senior Policy Analyst; Olga Lionakis, Senior Policy Analyst; Richard Smith, Capital Markets Policy Analyst; Ernest Barkett, Financial Analyst; Kyle McCormick, Senior Policy Analyst; Keith Bergstresser, Senior Policy Analyst; Lauren Brown, Senior Risk and Policy Analyst; Rachel Romm-Nisson, Risk Analytics Specialist; Jim Yu, Senior Policy Analyst, Peter Yen, Senior Policy Analyst; Huiyang Zhou, Senior Quantitative Risk Specialist; Soo Jeong Kim, Capital Markets Policy Analyst; Capital Markets and Accounting Policy Branch, Division of Risk Management Supervision; Catherine Wood, Counsel; Merritt Pardini, Counsel; Kevin Zhao, Senior Attorney; Nicholas Soyer, Attorney, Michael Overmyer, Special Counsel, Legal Division;

regulatorycapital@fdic.gov

, (202) 898-6888; Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Introduction

A. Statutory Authority

B. Objectives of the Proposal

C. Overview of the Proposal

II. Scope, Design, and Other Overarching Issues

A. Scope of Application

B. Single Set of Risk-Based Requirements

C. Removal of Internal Models for Credit and Operational Risk

D. Overlaps With the Stress Capital Buffer Requirement

E. Indexing of Thresholds

F. The Role of International Standards in Developing U.S. Capital Requirements

G. Treatments Retained from the Current Standardized Approach

III. Definition of Capital

IV. Calculation of Risk-Weighted Assets Under the Expanded Risk-Based Approach

A. Credit Risk

1. Exposure Amounts

2. Proposed Risk Weights for Credit Risk

3. Off-Balance Sheet Exposures

4. Counterparty Credit Risk-Related Exposures

5. Credit Risk Mitigation

B. Securitization Framework

1. Definitions

2. Operational Requirements

3. Exposure Amount of a Securitization Exposure

4. Securitization Standardized Approach (SEC-SA)

5. Exceptions to the SEC-SA Risk-Based Capital Treatment for Securitization Exposures

6. Credit Risk Mitigation for Securitization Exposures

C. Equity Exposures

1. Adjusted Carrying Value

2. Simple Risk-Weight Approach (SRWA)

D. Operational Risk

1. Business Indicator

2. Business Indicator Component

3. Alternative Simple Approaches

4. Operational Risk Management

V. Calculation of Risk-Weighted Assets Under the Market Risk Framework

A. Market Risk

1. Background

2. Scope and Application of the Proposed Rule

3. Measure for Market Risk

4. Market Risk Covered Position

5. Internal Risk Transfers

6. General Requirements for Market Risk

7. Standardized Non-Default Capital Requirement

8. Models-Based Non-Default Capital Requirement

9. Default Risk Capital Requirement

10. Treatment of Certain Market Risk Covered Positions

11. Reporting and Disclosure Requirements

12. Technical Amendments

B. Credit Valuation Adjustment Risk

1. Background

2. Scope of Application

3. CVA Risk Covered Positions and CVA Hedges

4. General Risk Management Requirements

5. Measure for CVA Risk

6. Reporting and Disclosure Requirements

VI. Disclosure Requirements

A. Proposed Disclosure Requirements

B. Specific Public Disclosure Requirements

VII. Estimated Impact on Capital Requirements

A. Standalone Effect of Proposed Capital Rule Changes

1. Impact on Other Banking Organizations

B. Cumulative Effect of Proposed Capital Rule Changes

1. Cumulative Impact of Recent Proposals on Capital Requirements

2. Cumulative Impact of Recent Proposals on Common Eequity Tier 1 Capital Requirements by Risk Type

C. Impact by Banking Activities

1. Impact on Risk-Weighted Assets by Banking Activity

2. Cumulative Impact of Recent Proposals on Common Equity Tier 1 Capital Requirements by Banking Activity

D. Data and Estimation Methodology

1. Estimation of Risk-Weighted Assets Under the Proposed Expanded Risk-Based Approach

2. Extrapolation of Estimates to Other Time Periods and Banking Organizations

3. Attribution of Risk-Weighted Assets to Banking Activities

4. Estimation of Capital Requirements

5. Attribution of Stress Capital Buffer Requirement to Risk Categories

VIII. Economic Analysis

A. Overview of the Baseline

1. Capital Ratios of Category I and II Banking Organizations—Cross Section

2. Capital Ratios of Banking Organizations—Time Series

3. Portfolio Characteristics of Category I and II Banking Organizations—by Revenue

4. Portfolio Characteristics of Category I and II Banking Organizations—by Broad Asset Class

5. Dependency of the U.S. Economy on the Banking System

6. Nonbank Financial Intermediaries

B. Reasonable Alternatives

1. Alternative 1: Dual Calculation Implementation

2. Alternative 2: BCBS Models-Based Implementation

3. Alternative 3: BCBS Standardized Implementation

4. Quantitative Estimates and Discussion

C. Macroeconomic Effects and the Analysis of the Proposal With Respect to Estimates of Optimal Capital Levels

1. Impact of the Proposals

2. Development of the Literature on the Optimal Level of Capital in the Banking System

3. General Equilibrium Models of Optimal Capital Levels

4. Limitations of Applying the Academic Studies on Optimal Capital Levels To Evaluating the Proposals

5. Differences Across U.S. Households

6. Benefits From Improved Risks Measurement

7. Microprudential Consequences of the Proposals

D. Effects on Lending (Including Credit Cards, Residential Mortgages, and Business Lending)

1. Credit Cards

2. Residential Mortgages

3. Corporate Loans

E. Effects on Trading

1. Changes in Capital Requirements Across Different Trading Activities

2. Impact on Banking Organizations

3. Impacts on Markets

F. Effect on Competitiveness

1. On Internationally Active Banks

2. On Smaller Banks

3. On Nonbank Financial Intermediaries

4. On Consumer Welfare and Barriers to Entry

G. Conclusion

IX. Technical Amendments to the Capital Rule

A. Additional OCC Technical Amendments

B. Additional FDIC Technical Amendments

X. Related Proposals and Proposed Amendments to Related Rules

A. Related Proposals

B. OCC Amendments

C. Board Amendments

XI. Administrative Law Matters

A. Paperwork Reduction Act

B. Regulatory Flexibility Act

C. Plain Language

D. Riegle Community Development and Regulatory Improvement Act of 1994

E. OCC Unfunded Mandates Reform Act of 1995 Determination

F. Executive Orders 12866, 13563, and 14192

G. Providing Accountability Through Transparency Act of 2023

I. Introduction

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 proposing to modernize the capital requirements applicable to Category I and II depository institution holding companies and depository institutions (henceforth Category I and II banking organizations) and the market risk capital framework applicable to banking organizations with significant trading activity.

The proposal would improve the regulatory capital framework for covered banking organizations by enhancing its risk sensitivity and consistency, as well as by simplifying core components of its design.

Improving the risk sensitivity of the regulatory capital framework would mean that a banking organization's capital requirements more readily increase or decrease due to changes in the risk of its business activities. Improving the consistency of the regulatory capital framework would mean that the regulatory capital framework would apply similar capital requirements to exposures with similar risks across different banking organizations.

In 2019, the agencies adopted rules establishing four categories of capital standards for U.S. banking organizations with $100 billion or more in total consolidated assets and foreign banking organizations with $100 billion or more in combined U.S. assets. Under this framework, Category I standards apply to U.S.-domiciled bank holding companies identified as global systemically important BHCs and their depository institution subsidiaries. Category II standards apply to banking organizations with at least $700 billion in total consolidated assets or at least $75 billion in cross-jurisdictional activity and their depository institution subsidiaries. Category III standards apply to banking organizations with total consolidated assets of at least $250 billion or at least $75 billion in weighted short-term wholesale funding, nonbank assets, or off-balance sheet exposures and their depository institution subsidiaries. Category IV standards apply to banking organizations with total consolidated assets of at least $100 billion that do not meet the thresholds for a higher category and their depository institution subsidiaries.

See

12 CFR 3.2 (OCC); 12 CFR 217.400, 238.10, 252.5, (Board); 12 CFR 324.2 (FDIC); “Prudential Standards for Large Bank Holding Companies, Savings and Loan Holding Companies, and Foreign Banking Organizations,” 84 FR 59032 (Nov. 1, 2019); “Changes to Applicability Thresholds for Regulatory Capital and Liquidity Requirements,” 84 FR 59230 (Nov. 1, 2019).

The term covered banking organizations refers to Category I and II banking organizations, banking organizations with significant trading activity, and banking organizations that elect to use the expanded risk-based approach (as discussed further below).

Elements of the proposal would address comments received from the Economic Growth and Regulatory Paperwork Reduction Act (EGRPRA) public notices.

Consistent with other recent efforts to modify the regulatory capital framework, the agencies expect the proposal would support the safety and soundness of covered banking organizations and U.S. financial stability while promoting lending and other financial intermediation activities by covered banking organizations over a range of economic conditions.

The agencies, together with the Federal Financial Institutions Examination Council, commenced a review under the Economic Growth and Regulatory Paperwork Reduction Act of 1996 in 2024 to identify outdated or otherwise unnecessary regulatory requirements. The agencies will continue reviewing and considering these comments as part of any final rulemaking. Public Law 104-208, Div. A, Title II, section 2222, 110 Stat. 3009-414, (1996) (codified at 12 U.S.C. 3311). See also Regulatory Publication and Review Under the Economic Growth and Regulatory Paperwork Reduction Act of 1996, 90 FR. 35241 (Jul. 25, 2025).

Other recent initiatives to modernize the capital framework include the finalized changes to the enhanced supplementary leverage ratio standards, which would reinforce the role of leverage requirements as a backstop to risk-based capital requirements and address unintended incentive effects (

see

90 FR 55248 (Dec. 1, 2025); the community bank leverage ratio proposal, which would reduce regulatory burden while continuing to ensure the safety and soundness of community banks (

see

90 FR 55048 (Dec. 1, 2025); and recent proposals to revise the Board's stress testing framework, which would improve its transparency and reduce excess volatility in the stress capital buffer requirement (

see

90 FR 16843 (Apr. 22, 2025) and 90 FR 51856 (Nov. 18, 2025)).

Requirements under the proposal would generally be consistent with international capital standards issued by the Basel Committee on Banking Supervision (Basel Committee).

Where appropriate, however, the proposal may differ from the standards published by the Basel Committee (Basel standards) to reflect specific characteristics of U.S. markets, requirements under U.S. generally accepted accounting

principles (GAAP),

practices of U.S. banking organizations, and U.S. statutory mandates and policy objectives. For example, the proposal would remove the current requirement to deduct mortgage servicing assets (MSAs) from regulatory capital and instead subject all MSAs to a 250 percent risk weight. This aspect of the proposal is intended to remove a regulatory disincentive for residential mortgage servicing and origination, reducing impacts on broader policy objectives regarding the U.S. housing market.

The Basel Committee is a committee composed of central banks and banking supervisory authorities, which was established by the central bank governors of the G-10 countries in 1975. The consolidated Basel framework is available at

https://www.bis.org/basel_framework/

. For additional discussion of the revisions to the Basel framework with which this proposal would align, see also

https://www.bis.org/bcbs/publ/d424.htm

https://www.bis.org/bcbs/publ/d457.htm

, and

https://www.bis.org/bcbs/publ/d507.htm

GAAP often serve as a foundational measurement component for U.S. capital requirements.

See also

section 401(g) of the Economic Growth, Regulatory Relief, and Consumer Protection Act (regarding the Board's authority to establish enhanced prudential standards for foreign banking organizations with total consolidated assets of $100 billion or more). 12 U.S.C. 5365 note.

See

12 U.S.C. 1831o(c)(1)(A), (c)(1)(B)(i).

See

12 U.S.C. 93a (national banking associations); 12 U.S.C. 248(i), 324, 327, 329 (state member banks); 12 U.S.C. 1463 (savings associations); 12 U.S.C. 1467a(g)(1) (savings and loan holding companies); 12 U.S.C. 1844(b) (bank holding companies); 12 U.S.C. 3106 (certain U.S. operations of foreign banking organizations); 12 U.S.C. 3902(1)-(2), 3907(a), 3909(a), (c)(1)-(2) (depository institutions; affiliates of depository institutions, including holding companies; and certain U.S. operations of foreign banking organizations); 12 U.S.C. 5371 (insured depository institutions, depository institution holding companies, and nonbank financial companies supervised by the Board). Additional statutory authorities relevant to the agencies' capital rule can be found in the authority citations in the capital rule. See 12 CFR part 3 (OCC); 12 CFR part 217 (Board); 12 CFR part 324 (FDIC).

B. Objectives of the Proposal

The proposal aims to improve the capital framework for covered banking organizations by enhancing its risk sensitivity, reducing complexity, and improving transparency and consistency.

Risk sensitivity is a core feature of risk-based capital requirements. The proposed framework aims to improve the alignment of regulatory capital requirements with the risks presented by banking organizations' exposures. Such alignment could help promote safe and sound banking organizations that can lend through a range of economic conditions.

To further improve the capital framework, the proposal seeks to reduce complexity by simplifying its overall design. Redundant or unnecessarily complex requirements, such as multiple risk-based capital frameworks applying to the same banking organization, add costs that outweigh any incremental benefits presented by such an approach, whereas a simpler framework reduces compliance burden and strengthens transparency. Clear and transparent requirements support safety and soundness by making it easier for supervisors, investors, and other stakeholders to assess the financial condition of banking organizations. A central element of the proposal's effort to reduce redundancy is better integration with the Board's stress testing framework, which is achieved by considering jointly the calibrations of this proposal and the proposed stress test model changes that would inform stress capital buffer requirements.

The proposal would also promote consistency. Consistent capital requirements hold banking organizations with similar risk profiles to similar standards, thereby reducing unwarranted divergence. Consistency is also valuable internationally. The proposal is generally aligned with the Basel standards, with some differences as discussed in section II.F of this Supplementary Information. Broadly consistent regulatory frameworks should reduce complexity and compliance costs for banking organizations with cross-border operations, including both U.S. banking organizations operating abroad and foreign banking organizations operating in the United States.

By improving risk-based capital requirements, the proposal would bolster the role of large U.S. banking organizations in supporting the broader economy. The reforms that followed the 2007-09 financial crisis substantially increased the resilience of the U.S.

banking system. However, in some cases, these post-crisis reforms have imposed burdens that contributed to the migration of some activities, such as mortgage origination and servicing, outside of the regulated banking sector.

Revising the regulatory capital framework to better align requirements with risks—and in so doing easing requirements on some lower-risk, traditional banking activities—would contribute to U.S. banking organizations becoming better positioned to support the economy.

According to the 2024 Financial Stability Oversight Council report on nonbank mortgage servicing, nonbank mortgage companies originated approximately two-thirds of mortgages in the United States and owned the servicing rights on 54 percent of mortgage balances in 2022. In 2008, nonbank mortgage companies only accounted for 39 percent of mortgage originations and owned the servicing rights on 4 percent of mortgage balances.

See

page 3 FSOC Report on Nonbank Mortgage Servicing 2024 at

https://home.treasury.gov/system/files/261/FSOC-2024-Nonbank-Mortgage-Servicing-Report.pdf

C. Overview of the Proposal

The proposal would streamline the risk-based capital requirements applicable to Category I and II banking organizations. Currently, these banking organizations are subject to two sets of risk-based capital ratio requirements: one based on the standardized approach (which also generally applies to other banking organizations) and the other based on an internal models framework, the advanced approaches.

Under the proposal, Category I and II banking organizations would be subject to a single set of risk-based capital ratio requirements based on the “expanded risk-based approach”—which would include requirements for credit risk, equity risk, and operational risk—and the revised market risk framework.

The standardized approach would no longer apply to these banking organizations, and the advanced approaches would be removed from the regulatory capital framework. As discussed further below, other banking organizations could choose to adopt the expanded risk-based approach that would be required for Category I and II banking organizations.

See

12 CFR part 3, subparts D and E (OCC); 12 CFR part 217, subparts D and E (Board); 12 CFR part 324, subparts D and E (FDIC).

For purposes of this discussion, unless otherwise noted, the revised market risk framework is inclusive of requirements for credit valuation adjustment risk, as applicable.

The expanded risk-based approach is a standardized framework that would promote the simplicity, risk sensitivity, transparency, and consistency objectives of the proposal. This approach would improve risk sensitivity relative to the current standardized approach by varying capital requirements according to several new risk factors, such as loan-to-value ratios for real estate exposures, repayment history for retail exposures, and assessed creditworthiness for corporate exposures. Unlike the current standardized approach, the expanded risk-based approach would include a specific operational risk capital requirement. This difference, in part, supports the different calibration of credit risk weights under the expanded risk-based approach relative to the risk weights under the standardized approach.

The proposal would also revise the market risk framework, which would be applicable to Category I and II depository institution holding companies and to other banking organizations with significant trading activity. Significant trading activity would be defined to mean (1) more than $5 billion in trading activity or (2) trading activity equal to or higher than 10 percent of the banking organization's total assets. The new framework would improve risk sensitivity and consistency by revising the models-based approach for market risk and introducing a standardized approach for market risk. To reduce burden without a meaningful loss in resilience, the proposal would raise the threshold for applicability of the market risk framework from having trading activity of at least $1 billion to having trading activity of at least $5 billion.

As part of the revised market risk framework, the proposal would include a risk-sensitive and consistent framework for capturing the risks associated with credit valuation adjustment risk for derivative exposures.

This framework would apply to (1) Category I and II depository institution holding companies, (2) depository institutions that are subsidiaries of Category I or II depository institution holding companies and have significant trading activity, and (3) other banking organizations with significant trading activity that also have at least $1 trillion in notional derivative exposure.

Credit valuation adjustment risk is the exposure to changes in the valuation of derivative contracts driven by changes in counterparty credit risk.

The proposal would retain banking organizations' ability to use internal models, with supervisory approval, to calculate market risk capital requirements. Market risk is more effectively modeled than credit and operational risk because relevant data is observed at a much higher frequency and depth, providing the basis for both model calibration and empirical verification of model appropriateness.

The agencies consider the proposed requirements under the expanded risk-based approach to be appropriate for Category I and II banking organizations given their risk profiles, complexity, risk management resources, and international activities. The agencies recognize that the risk-sensitive requirements under the expanded risk-based approach may appeal to other banking organizations with certain business models and risk management systems. Therefore, the proposal would allow other banking organizations to elect to use the expanded risk-based approach. Banking organizations that choose this option would also be subject to the definition of capital that applies to Category I and II banking organizations.

This definition of capital would include the requirement to reflect accumulated other comprehensive income in regulatory capital and to use the deductions framework that applies to Category I and II banking organizations.

In addition to the changes to the calculation of risk-weighted assets, the proposal would change the definition of regulatory capital applicable to Category I and II banking organizations by removing the threshold-based deduction for mortgage servicing assets. Thus, all mortgage servicing assets would receive a 250 percent risk weight under the proposal, consistent with the risk weight in the current capital rule for MSAs that do not exceed the deduction thresholds. This proposed revision would eliminate a strong disincentive for mortgage origination and mortgage servicing by banking organizations.

The proposal would also amend certain dollar-based regulatory thresholds, where appropriate, to reflect inflation and ensure that such thresholds preserve their intended application in real terms over time.

Consistent with this proposal, the agencies are reviewing other thresholds throughout out the regulatory framework.

Certain thresholds in FDIC regulations are also indexed to reflect inflation. See 90 FR 55789 (Dec. 1, 2025).

Finally, the proposal would revise disclosure requirements to facilitate market participants' understanding of the financial condition and risk management practices of banking organizations subject to the expanded risk-based approach.

In addition, to align with these revisions, the agencies anticipate proposing revisions to the

reporting forms of the Federal Financial Institutions Examination Council (FFIEC) that would apply to covered banking organizations.

The disclosure requirements would only apply to the top tier of a consolidated banking organization.

In a separate rulemaking, the agencies are proposing modifications to the standardized approach risk-based capital requirements (standardized approach proposal), which would apply to banking organizations that do not use the expanded risk-based approach. Also, the Board is separately issuing a notice of proposed rulemaking that would revise the U.S. global systemically important banking holding company (GSIB) surcharge calculation applicable to Category I bank holding companies and the systemic risk report applicable to large holding companies (GSIB surcharge proposal).

Question 1: The agencies invite comment on the interaction of the revisions in the proposal with other existing rules and with other notices of proposed rulemaking.

Question 2: What would be an appropriate amount of time between the publication of any final rule and its effective date, and why?

II. Scope, Design, and Other Overarching Issues

A. Scope of Application

The proposal would require Category I and II banking organizations to use the expanded risk-based approach. These banking organizations present substantial systemic risks due to their size, complexity, interconnectedness, and cross-jurisdictional activity. Application of the expanded risk-based approach to them would provide granular, risk-sensitive, and standardized requirements that align with international standards.

While the expanded risk-based approach was designed for application to banking organizations that operate globally across multiple business lines, such as Category I and II banking organizations, the agencies are aware that the more differentiated treatments for traditional banking exposures such as mortgage, corporate, and retail exposures may appeal to certain smaller banking organizations. Therefore, the proposal would provide all banking organizations subject to the capital rule with the option of adopting the expanded risk-based approach in its entirety.

Under the proposal, a banking organization that chooses to adopt the expanded risk-based approach would become subject to the same definition of capital as Category I and II banking organizations and, therefore, be required to reflect most elements of accumulated other comprehensive income in regulatory capital even if it subsequently changes to the standardized approach. This is consistent with the one-time election to recognize accumulated other comprehensive income in regulatory capital in the current standardized approach and avoids changes in accumulated other comprehensive income recognition based on interest rate cycles. For a banking organization that chooses to adopt the proposed expanded risk-based approach, the inclusion of most elements of other accumulated other comprehensive income in regulatory capital would be subject to a transition period of five years from the effective date of any final rule.

This transition period would mirror the transition period under the standardized approach proposal provided to Category III and IV banking organizations that do not currently recognize accumulated other comprehensive income in regulatory capital.

To align with a banking organization's annual capital planning processes, any change in election between the expanded risk-based approach and the standardized approach would take effect 12 months after the date on which the banking organization provides written notice of the change in election to its primary Federal supervisor. This requirement would help ensure that any change in election reflects structural balance sheet considerations and not short-term capital reductions.

Banking organizations with significant trading activities face an elevated level of market risk and, therefore, would continue to be subject to the market risk framework. The proposal would increase the current dollar-based threshold for the application of market risk capital requirements from $1 billion to $5 billion or more of trading assets and trading liabilities. The proposal would also revise the calculation of the dollar-based threshold amount to be based on four-quarter averages of trading assets and trading liabilities instead of point-in-time amounts. Banking organizations would continue to be subject to market risk capital requirements if their trading assets and trading liabilities represent 10 percent or more of total assets. Banking organizations that do not meet the thresholds for being subject to market risk capital requirements would calculate risk-weighted assets for trading exposures under the standardized approach or the expanded risk-based approach, as applicable. Additionally, under the proposal, Category I and II depository institution holding companies would be subject to market risk capital requirements regardless of the amount of their trading activities.

The proposal would apply capital requirements for credit valuation adjustment risk to all Category I and II depository institution holding companies, as well as to their subsidiary depository institutions that are subject to the market risk framework. In addition, capital requirements for credit valuation adjustment risk would apply to other banking organizations subject to the market risk framework that have over-the-counter derivative notional amounts of $1 trillion or more. Due to their substantial derivative portfolios, these banking organizations have meaningful exposure to losses resulting from changes to their credit valuation adjustment accounting reserve. This threshold aims to balance coverage of credit valuation adjustment risk and burden. According to data reported in the FR Y-9C form, depository institution holding companies above this threshold accounted for over 98 percent of the over-the-counter derivative exposures of depository institution holding companies as of 2025Q2.

Question 3: What are the advantages and disadvantages of the proposed scope of application of the expanded risk-based approach?

Question 4: What are the advantages and disadvantages of allowing all banking organizations to adopt the expanded risk-based approach? What are the challenges associated with adopting the expanded risk-based approach for Category III, IV, and smaller banking organizations? To what extent would this optionality limit the transparency and consistency of the risk-based capital requirements? What limitations or restrictions on how frequently a banking organization could switch from the expanded risk-based approach to the standardized approach and vice versa should the agencies include and why?

B. Single Set of Risk-Based Requirements

Under the proposal, banking organizations would be subject to a single set of risk-based capital ratio requirements.

This contrasts with the current framework, which requires Category I and II banking organizations to calculate two sets of risk-based capital ratios: one using the standardized approach and the other

using the internal models-based advanced approaches. By employing risk-sensitive, simplified, consistent, and transparent requirements, aligned with international standards, the expanded risk-based approach would result in an appropriate stand-alone requirement.

This revision would be consistent with comments received under EGRPRA as commenters requested that banking organizations be required to calculate risk-weighted assets under a single approach.

The capital conservation buffer requirement would apply to the risk-based capital ratios of Category I and II banking organizations in the same manner as it currently applies to the standardized approach ratios. For Category I depository institution holding companies, the capital conservation buffer requirement would continue to consist of the stress capital buffer requirement, the countercyclical capital buffer (if activated), and the GSIB surcharge. For Category II depository institution holding companies, the capital conservation buffer would continue to consist of the stress capital buffer requirement plus the countercyclical capital buffer (if activated). For the subsidiary depository institutions of Category I or II depository institution holding companies, the capital conservation buffer requirement would continue to equal 2.5 percent plus the countercyclical capital buffer requirement (if activated).

C. Removal of Internal Models for Credit and Operational Risk

The proposal would eliminate the advanced approaches framework and introduce in its place the expanded risk-based approach to improve the consistency and transparency of the risk-based capital requirements applicable to Category I and II banking organizations. This approach would help address many of the challenges associated with the use of internal models to calculate risk-based capital requirements for credit risk and operational risk.

In 2007, the agencies jointly issued a final rule requiring large, internationally active banking organizations to calculate risk-based capital requirements for credit risk and operational risk under the advanced approaches.

In seeking to ensure that these banking organizations are adequately capitalized, the advanced approaches require banking organizations to estimate their exposure to severe unexpected losses.

However, available information since adoption of this rule suggests that the advanced approaches do not always result in consistent minimum requirements across U.S. banking organizations with similar risk profiles.

While internal models to calculate risk-based capital requirements for credit risk and operational risk do provide valuable information and may be more accurate in some cases than standardized approaches, as discussed below the severity of the outcomes the advanced approaches rule requires banking organizations to model coupled with data limitations and the subjectivity embedded in modeling assumptions has presented substantial challenges.

See Risk-Based Capital Standards: Advanced Capital Adequacy Framework—Basel II, 72 FR 69288 (Dec. 7, 2007). The agencies subsequently revised certain aspects of the advanced approaches framework in the rulemakings that established the current capital rule. See 78 FR 62018 (Oct. 11, 2013).

For both credit risk and operational risk, the advanced approaches capital requirements aimed to cover the risk of loss over a one-year window at the 99.9th percentile level. See 72 FR 69288 (Dec. 7, 2007); 12 CFR part 3 (OCC); part 217 (Board); part 324 (FDIC).

See,

e.g.,

Tobias Berg, and Philipp Koziol “An analysis of the consistency of banks' internal ratings,” Journal of Banking and Finance 78, 27-41 (2017),

https://dx.doi.org/10.1016/j.jbankfin.2017.01.013;

and Barbora Stepankova, and Petr Teply, “Consistency of Banks' Internal Probability of Default Estimates: Empirical Evidence from the COVID-19 crisis,” Journal of Banking and Finance 154, 106969 (2023),

https://doi.org/10.1016/j.jbankfin.2023.106969.

Financial risk models designed to capture severe loss events can suffer from substantial uncertainty.

Such uncertainty can result in substantial and unwarranted differences in capital requirements across similar exposures that are unrelated to differences in risk.

See Jon Danielsson, “Blame the Models,” Journal of Financial Stability, 321-28 (2008),

https://doi.org/10.1016/j.jfs.2008.09.003.

The advanced approaches require banking organizations to estimate loss given default conditional on an economic downturn. Ensuring that banking organizations' loss given default estimates are consistent with the risk of their exposures has proven challenging for several reasons, including (1) limited data on loss given default and its drivers under downturn conditions; (2) inconsistencies in constructing the loss given default variables, arising from factors such as methodological differences and difficulties in capturing all cash inflows and outflows after default;

and (3) difficulty in verifying certain modeling assumptions, such as the time window used to calculate loss given default in an economic downturn. To a lesser degree, verifying the appropriateness of banking organizations' probability of default models is challenging in some cases due to limited data for certain low default portfolios and varying practices in identifying defaults across banking organizations.

30 31

For example, horizontal supervisory reviews have found material deviations in loss rates at different banking organizations with respect to the same defaulted exposure.

For example, banking organizations have followed different practices regarding whether to count technical defaults (which are situations where the borrower failed to uphold an aspect of the loan agreement but has not failed to make regularly scheduled payments) as defaults for purposes of modeling probability of default.

Various analyses conducted by the Basel Committee, to which the agencies contributed, demonstrated significant divergence across banking organizations in credit risk-weighted assets calculated under the internal models-based approaches that could not be explained by differences in the riskiness of banking organizations' portfolios. See

https://www.bis.org/publ/bcbs256.pdf

and

https://www.bis.org/bcbs/publ/d363.pdf.

For operational risk, banking organizations subject to the advanced approaches are required to estimate the 99.9th percentile of the distribution of the aggregated annual operational losses under the advanced measurement approaches (AMA). This requirement has presented substantial challenges for banking organizations and supervisors as a considerable amount of relevant data would be needed to empirically verify model performance. Given the severe outcome that the requirement is designed to estimate, model and parameter uncertainty can result in substantial divergence in model outcomes and, consequently, substantial divergence in capital requirements.

In addition, infrequent large operational loss events tend to have substantial influence on model outcomes and can result in substantial volatility.

Together, these factors result in substantial uncertainty in internally modeled operational risk capital requirements and likely inconsistent requirements across banking organizations with similar operational risk profiles.

See G. Mignola, and R. Ugoccioni, “Sources of Uncertainty in Modeling Operational Risk Losses,” Journal of Operational Risk 1(2): 33-50 (2006); J. Nešlehová, P. Embrechts, and V. Chavez-Demoulin, “Infinite Mean Models and the LDA for Operational Risk,” Journal of Operational Risk 1(1): 3-25 (2006); and E. Cope, G. Mignola, G. Antonini, and R. Ugoccioni, “Challenges and Pitfalls in Measuring Operational Risk from Loss Data,” Journal of Operational Risk 4(4): 3-27 (2009).

See E. Cope, G. Mignola, G. Antonini, and R. Ugoccioni, “Challenges and Pitfalls in Measuring Operational Risk from Loss Data” Journal of Operational Risk 4(4): 3-27 (2009); and J. Opdyke, and A. Cavallo, “Estimating Operational Risk Capital: The Challenges of Truncation, the Hazards of Maximum Likelihood Estimation, and the Promise of Robust Statistics,” Journal of Operational Risk 7(3): 3-90 (2012).

Taken together, the severe outcomes that the advanced approaches rule expects banking organizations to model, the limitations of available data, and the subjectivity of modeling assumptions

contribute to concerns about the reliability of internal model outputs and unwarranted divergences in risk-based capital requirements for credit and operational risk across banking organizations.

The application of the stress capital buffer requirement to Category I and II bank holding companies also reduces the usefulness of retaining the advanced approaches for these banking organizations. Under the proposal, the stress capital buffer requirement would apply to the single set of risk-based capital ratios to which these bank holding companies would be subject, providing risk-sensitive capital requirements that reflect a granular, forward-looking assessment of risks. In this context, removing the advanced approaches simplifies the framework without reducing the resilience of Category I and II bank holding companies.

Under the current capital rule, banking organizations are required to maintain capital commensurate with the level and nature of all risks to which they are exposed

and to have a process for assessing their overall capital adequacy in relation to their risk profile and a comprehensive strategy for maintaining an appropriate level of capital.

In addition, certain large banking organizations are required to develop and maintain a capital plan

and conduct internal stress tests.

The proposal would not change these requirements. As discussed above, the advanced approaches have limitations as a means to set consistent minimum risk-based capital requirements. However, internal models can provide valuable information to a banking organization's internal risk management, stress testing, and planning functions and can be used to complement minimum capital requirements in assessing a banking organization's capital adequacy. Category I and II banking organizations, as well as other banking organizations, should continue to employ internal modeling capabilities for sound risk management as appropriate for the complexity of their activities.

See 12 CFR 3.10(e)(1) (OCC); 12 CFR 217.10(e)(1) (Board); 12 CFR 324.10(e)(1) (FDIC).

See 12 CFR 3.10(e)(2) (OCC); 12 CFR 217.10(e)(2) (Board); 12 CFR 324.10(e)(2) (FDIC).

See 12 CFR 225.8; 12 CFR 238.170.

See 12 CFR part 46 (OCC); 12 CFR part 238, subparts P and R, and 12 CFR part 252, subparts B and F (Board); 12 CFR part 325 (FDIC).

The proposal would continue to allow the use of internal models to calculate market risk capital requirements, but only for trading desks where modeling can be demonstrated to be appropriate. Market risk is more easily and effectively modeled than credit and operational risk because data on trading positions are observed at a much higher frequency and depth, in particular for commonly traded instruments. Trading creates price observations, which in turn provide daily feedback on model calibration and performance to support empirical verification through techniques such as back-testing. For these reasons, the benefits of retaining models are larger for market risk than for other exposure types.

Question 5: What are the advantages and disadvantages of removing internal models for credit risk and operational risk? Are there alternatives that the agencies should consider and if so, why?

Question 6: The Basel standards include a floor to risk-weighted assets, the “output floor,” which corresponds to 72.5 percent of risk-weighted assets calculated only using standardized approaches. The proposal would not include this output floor because proposed requirements would be almost completely standardized and, therefore, the output floor would be unlikely to bind in most situations. What would be the advantages and disadvantages of including a floor to risk-weighted assets corresponding to 72.5 percent of the risk-weighted assets calculated using only the standardized approaches in the proposal.

D. Overlaps With the Stress Capital Buffer Requirement

In proposing these revised risk-based capital requirements for Category I and II banking organizations, the Board is mindful of the overlaps between the capital and stress testing frameworks. Together, this proposal and a recent proposal to enhance the transparency and public accountability of the Board's stress test,

which requested public comment on certain revisions to the Board's stress test models, aim to improve risk sensitivity of requirements in a way that considers the cumulative effect of the entire capital framework.

See Enhanced Transparency and Public Accountability of the Supervisory Stress Test Models and Scenarios; Modifications to the Capital Planning and Stress Capital Buffer Requirement Rule, Enhanced Prudential Standards Rule, and Regulation LL, 90 FR 51856 (Nov. 18, 2025).

The stress capital buffer requirement represents an explicitly forward-looking element in the risk-based capital requirements of large bank holding companies. Informed by the Board's stress testing framework, the stress capital buffer requirement aims to capture exposures comprehensively and granularly under conditions of severe stress.

Under the current rule, a bank holding company's stress capital buffer requirement is applied to its risk-based capital ratios calculated under the standardized approach, which do not include a specific requirement for operational risk, and is not applied to the bank holding company's requirements under the advanced approaches. This historical choice was motivated, in part, by the goal of limiting redundancy between the stress capital buffer requirement, based on the Board's forward-looking assessment of stress risks, and the bank holding company's modeling of tail risks under the advanced approaches.

“In addition, both the supervisory stress test and the advanced approaches are calibrated to reflect tail risks; thus it could be duplicative to require a firm to meet the requirements of the advanced approaches on a post-stress basis.” 83 FR 18160 (Apr. 25, 2018).

Consistent with international standards, the proposed expanded risk-based approach would include a specific measure of operational risk in risk-weighted assets. Also, the proposed changes to the market risk framework would improve the measurement of tail risks in ways that are expected to raise minimum market risk capital requirements for the most complex banking organizations.

The outstanding Board stress testing proposal would introduce meaningful revisions to stress test models and scenarios, including the models for operational risk and trading positions. Operational risk modeling would be enhanced by focusing on the more robust historical simulation model. Similarly, the stress test proposal would improve the modeling of trading positions under the global market shock component of the severely adverse scenario by better measuring their liquidity horizons. Both proposed revisions, on their own and independent of other factors, are projected to somewhat reduce aggregate projected stress capital buffer requirements.

As the Board noted in October 2025, in aggregate, the proposed stress test model and scenario changes inform the Board's determination of a firm's stress capital buffer requirement and are not expected materially change capital requirements for firms subject to the supervisory stress test, across various stress test scenarios and jump-off conditions at the start of the test. That proposal included illustrative analysis that considered the potential effects of the proposed stress test model changes, independent of other factors and components that inform the Board's stress capital buffer determinations for specific firms, within the 2024 and 2025 supervisory stress tests. In that analysis, implementing the proposed model changes and proposed revisions to the global

market shock component of the severely adverse scenario in the 2024 and 2025 stress tests would have, independent of other factors, increased the aggregate projected common equity tier 1 (CET1) stress ratio, on average, by 29 basis points, which would have corresponded to a reduction in stress capital buffer requirements of approximately 23 basis points or approximately 2.2 percent of current required capital. See 90

Federal Register

51856, 51874-51877 (Nov. 18, 2025). The analysis estimates that the proposed model changes would reduce stress capital buffer requirements by approximately 13 basis points and that the proposed revisions to the global market shock scenario component would reduce stress capital buffer requirements by approximately 10 basis points. For U.S. GSIBs, the analysis estimates a decline of 25 basis points in stress capital buffer requirements. See also Federal Reserve Board—Federal Reserve Board requests comment on proposals to enhance the transparency and public accountability of its annual stress test; Dodd-Frank Act Stress Tests 2026 (Dec. 1, 2025).

In summary, this proposal is projected to increase the minimum requirements for operational risk and market risk, while the stress test proposal's analysis of the proposed model changes estimated a decrease in related requirements for these risks, as they inform the stress capital buffer requirement. The Board expects both sets of revisions to improve risk sensitivity and coherence of the capital framework, while the revisions in this proposal would contribute to international consistency. The capital impact of these revisions would largely offset each other, and the Board considers that the combined calibration of these risks would be appropriate (see section VII for additional analysis of the cumulative calibration of requirements by risk type).

Question 7: The current Board stress testing methodology reflects a constant balance sheet assumption and assumes that a banking organization's risk-weighted assets generally remain unchanged over the nine-quarter projection horizon. What would be the advantages and disadvantages of adjusting the stress testing methodology to project changes in risk-weighted assets for banking organizations subject to the expanded risk-based approach and banking organizations subject to the market risk framework? For example, what would be the advantages and disadvantages of projecting changes in the risk-weighted assets applicable to credit exposures to better reflect deteriorations in obligors' credit quality during a stress period (such as migrating corporate exposures in the investment grade 65 percent risk weight category into the general corporate category or from the general corporate category into the past due category)? What would be the advantages and disadvantages of adjusting risk-weighted assets for operational risk by projecting lower income amounts during a stress period? What, if any, changes should the Board consider to better project risk-weighted assets for trading positions and derivatives during a stress period in light of the proposed market risk framework, including the proposed credit valuation adjustment risk requirement (these may include revisions to reflect changes in modelability of risk factors and volatility)?

E. Indexing of Thresholds

The proposal uses certain thresholds to differentiate requirements based on a banking organization's size, risk profile, and complexity as well as on the characteristics of the exposures. However, static dollar-based thresholds can lead to unintended consequences if threshold levels are not periodically updated or indexed to inflation. For example, banking organizations can become subject to additional requirements and burden over time for reasons unrelated to changes in their risk profile. Under the proposal, certain dollar-based thresholds would be adjusted in the future to reflect inflation, pursuant to a pre-determined indexing methodology.

Indexing dollar-based thresholds would preserve threshold levels in real terms, which would efficiently and transparently preserve the thresholds' intended application and align with intended policy objectives over time.

This revision would also be consistent with comments received under EGRPRA as commenters requested indexing of thresholds going forward to reflect inflation.

The proposed indexing methodology would adjust thresholds based on the consumer price index for urban wage earners and clerical workers (CPI-W) published by the U.S. Bureau of Labor Statistics. The use of CPI-W to index thresholds is consistent with other bank regulations, such as those relating to the Community Reinvestment Act and the Board's Regulation CC.

Further, the indexing methodology included under the proposal would generally align with the methodology used to adjust certain thresholds within FDIC regulations.

Specifically, certain dollar thresholds would be adjusted at the end of every consecutive two-year period based on the cumulative percent change of the non-seasonally adjusted CPI-W since the effective date of any final rule. This two-year period is intended to provide an appropriate cadence for capturing meaningful changes in inflation on a timely basis while minimizing the burden of adjustment. To address the possibility of periods of unusual inflation, the indexing methodology would also allow for discretionary adjustment to thresholds by the agencies during an off year. The proposal would also not lower thresholds in the event of deflation.

Additionally, thresholds adjusted under the proposed indexing methodology would be rounded based on the size of the threshold (

e.g.,

billions, millions, thousands), generally, to the nearest two significant digits, as appropriate.

The agencies' regulations that implement the Community Reinvestment Act define small and intermediate-small banks by reference to asset-size criteria expressed in dollar amounts, which are adjusted annually based on the year-to-year change in inflation through a

Federal Register

notice. Specifically, this adjustment corresponds to the average of the Consumer Price Index for Urban Wage Earners and Clerical Workers, not seasonally adjusted, for each 12-month period ending in November, with rounding to the nearest million.

See, e.g.,

Community Reinvestment Act Regulations Asset-Size Thresholds, 89 FR 106480, 106481 (Dec. 30, 2024). See also 12 CFR 229.11.

See

Adjusting and Indexing Certain Regulatory Thresholds, 90 FR 55789 (Dec. 1, 2025).

Any periods of deflation would be reflected in future threshold increases, as threshold adjustments in the future would be based on the positive net cumulative change in CPI-W.

For example, a threshold that would otherwise be calculated as $5.964 million would be rounded to $6.0 million, or the nearest $0.1 million.

The proposal would index the following thresholds: (1) the $1 million threshold for a retail exposure to qualify as regulatory retail; (2) the $50 million annual revenue threshold for a borrower to qualify as a small or medium-sized entity; (3) the $10 million threshold used to determine whether a company in which a covered banking organization owns equity instruments meets the definition of financial institution; (4) the $1 billion and the $30 billion business indicator thresholds that determine the marginal coefficients applicable for the calculation of the business indicator component in the operational risk capital requirement; (5) the $20,000 threshold for mandatory collection of operational loss events; (6) the $5 billion trading activity threshold for application of the market risk framework; (7) the $1 trillion derivatives exposure threshold for application of the credit valuation adjustment risk requirement; (8) the $20 million threshold above which net short positions must be included in the market risk framework; and (9) the $2 billion threshold for an equity issuer to be classified as having large market capitalization in the market risk standardized approach.

To effectuate threshold changes under the proposal, the agencies would announce threshold adjustments pursuant to the indexing methodology by publishing the updated thresholds.

Threshold adjustments would be calculated based on cumulative CPI-W data through August of the year in which the adjustment is made, relative to the same initial baseline.

The U.S. Bureau of Labor Statistics publishes the CPI-W on a monthly basis.

Question 8: What are the advantages and disadvantages of the proposed approach for indexing thresholds? What alternatives should the agencies consider and why? What are the advantages and disadvantages of using a different index for adjusting thresholds, such as nominal GDP or the GDP deflator, instead of CPI-W?

Question 9: Are there specific thresholds within the proposal that can result in an increase in operational burden when indexed? If so, which are they and why?

Question 10: What are the advantages and disadvantages of discretionary off-year adjustments for periods of unusual inflation? Should the agencies consider a framework for adjustment in off years, such as based on inflation or other threshold and, if so, why?

F. The Role of International Standards in Developing U.S. Capital Requirements

The agencies participate in international fora, including the Basel Committee, that support broadly aligned prudential financial regulation across major economies, consistent with the agencies' mandates and various statutory authorizations.

Standards issued by these international fora are not binding under U.S. law. The agencies routinely consider the potential benefits of such standards as part of a reasoned decision-making process when developing domestic rulemakings to implement prudential requirements.

See, e.g.,

12 U.S.C. 1828 note, 3901, 3907, 3911, and 5373;

see also

22 U.S.C. 9522 note; Federal Deposit Insurance Corporation Improvement Act of 1991 § 305(b)(2), Public Law 102-242, 105 Stat. 2236, 2355.

Where appropriate and consistent with the agencies' statutory authorities and policy objectives, maintaining consistency between domestic financial regulatory policy and international standards can generate significant benefits, particularly regarding large, internationally active banking organizations. Large, internationally active banks and the U.S. financial system more broadly are highly interconnected with the global financial system. Promoting the application of suitable and robust prudential standards across jurisdictions can enhance the resilience of the U.S. financial system by reducing the likelihood of distress or other problems that arise in a foreign jurisdiction having negative effects in the United States.

The Basel Committee was originally formed after the failure of Herstatt Bank in Germany in 1974, which contributed to serious disruptions to foreign currency and banking markets within and beyond Germany, demonstrating the need for better coordination among bank regulators in different jurisdictions. See

https://www.bis.org/bcbs/history.htm.

Comparability of standards across jurisdictions can also reduce complexity and compliance costs for banking organizations with significant cross-border operations or activities.

In particular, similar prudential standards enable the agencies and foreign supervisors to look to home country capital regimes when such requirements are generally consistent with international standards.

For example, similar prudential standards help to facilitate the Board's assessment of the capital adequacy of foreign banking organizations in connection with applications to establish operations within the United States.

In addition, consistent standards help ensure that foreign banking organizations with U.S. operations are subject to standards at the consolidated level that promote safety and soundness and competitive equity with U.S. banking organizations. The adoption of similar prudential standards across many jurisdictions means that, consistent with section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act),

the Board's enhanced prudential standards for large foreign banking organizations may rely on the home country capital and stress testing regimes applicable to a foreign banking organization, avoiding unnecessary duplication of requirements.

Additionally, comparability of standards across jurisdictions helps home country and host country supervisors, along with banking organization management and public markets, understand and monitor positions and risks across jurisdictions by providing all parties with a set of shared principles, concepts, and measuring tools.

See GAO Report “Bank Capital Requirements—Potential Effects of New Changes on Foreign Holding Companies and U.S. Banks Abroad” (Jan. 2012),

https://www.gao.gov/assets/gao-12-235.pdf

; see also GAO Report “International Banking—International Coordination of Bank Supervision: The Record to Date” (Feb. 1986),

https://www.gao.gov/assets/nsiad-86-40.pdf.

See,

e.g.,

Board of Governors of the Federal Reserve System and U.S. Department of the Treasury, “Capital Equivalency Report” (June 1992),

https://fraser.stlouisfed.org/title/capital-equivalency-report-9009;

12 U.S.C. 3105(j).

See,

e.g.,

12 CFR 211.24, 225.2(r)(3).

Public Law 111-203, 124 Stat. 1376 (2010). In applying section 165 to a foreign-based bank holding company, the Dodd-Frank Act directs the Board to give due regard to the principle of national treatment and equality of competitive opportunity, and to take into account the extent to which the foreign banking organization is subject, on a consolidated basis, to home country standards that are comparable to those applied to financial companies in the United States. See 12 U.S.C. 5365(b)(2).

See,

e.g.,

12 CFR 252.143(a). Absent home-country standards consistent with the Basel Capital Framework, a foreign banking organization would be required to demonstrate to the Board's satisfaction that it would meet Basel Capital Framework standards at the consolidated level were those standards to apply. See 79 FR 17240 (Mar. 27, 2014).

See GAO Report “International Banking—International Coordination of Bank Supervision: The Record to Date” (Feb. 1986),

https://www.gao.gov/assets/nsiad-86-40.pdf.

Notwithstanding these benefits, the agencies have, at various times, concluded that departures from international standards are appropriate and desirable in light of domestic requirements or considerations, or where U.S. regulators simply believe different standards are more appropriate. Consistent with previous rulemakings that implemented aspects of the Basel standards in the United States,

the proposal may differ from the Basel standards in certain areas to reflect factors such as specific characteristics of U.S. markets, requirements under GAAP,

practices of U.S. banking organizations, and U.S. legal requirements and policy objectives.

For example, the GSIB surcharge framework adopted by the Board includes a second method for calculating GSIB surcharges that is different from the Basel GSIB surcharge methodology. See 80 FR 49082 (Aug. 14, 2015). Additionally, alignment with the Basel standards can be achieved without using all methods specified in them and, in the past, the agencies have chosen not to adopt some methods included within the Basel standards. See,

e.g.,

61 FR 47358 (Sept. 6, 1996), 72 FR 69288 (Dec. 7, 2007), and 78 FR 62018 (Oct. 11, 2013).

See 12 U.S.C. 1831n.

See,

e.g.,

12 U.S.C. 1831bb and 5371; 15 U.S.C. 78o-7 note.

G. Treatments Retained From the Current Standardized Approach

Taking the current standardized approach as a starting point, the proposal would generally adopt treatments consistent with the Basel standards when they would improve the risk sensitivity and consistency of the requirements applicable to covered banking organizations, do not conflict with existing U.S. law, and are appropriate for U.S. banking organizations. Many elements of the expanded risk-based approach would be consistent with the Basel standards and different in some respects from the treatment under the current standardized approach. In some cases, the current standardized approach is

appropriately risk sensitive for application to Category I and II banking organizations and, therefore, the agencies are retaining those treatments with minimal or no change.

For example, the expanded risk-based approach would treat sovereign exposures, certain exposures to government-sponsored entities, and exposures to public sector entities the same as the current standardized approach.

III. Definition of Capital

Under the proposal, all banking organizations required to apply the expanded risk-based approach, or that choose to adopt the expanded risk-based approach, would be subject to the same definition of capital. The proposal would broadly maintain the definition of capital for Category I and II banking organizations in the current capital rule, with one modification to eliminate the requirement to deduct MSAs

above a threshold from common equity tier 1 capital.

Banking organizations that choose to adopt the expanded risk-based approach would, therefore, be required to include most components of accumulated other comprehensive income in regulatory capital.

An MSA arises when a banking organization sells a loan to a third party but retains the obligation to service the loan in exchange for a fee. Banking organizations may also purchase, sell, or transfer MSAs separately from the underlying mortgage loans.

In addition, the proposal would require a banking organization to deduct from common equity tier 1 capital any portion of a credit-enhancing interest only strip that does not constitute an after-tax-gain-on sale, as discussed in section IV.B.5.f. of this

SUPPLEMENTARY INFORMATION

Under the current capital rule, Category I and II banking organizations must deduct from common equity tier 1 capital amounts of MSAs, temporary difference DTAs that the banking organization could not realize through net operating loss carrybacks, and significant investments in the capital of unconsolidated financial institutions in the form of common stock (collectively, threshold items) that individually exceed 10 percent of the banking organization's common equity tier 1 capital minus certain deductions and adjustments. In addition, these banking organizations must deduct from common equity tier 1 capital the aggregate amount of the threshold items that exceeds 15 percent of common equity tier 1 capital.

Under the proposal, Category I and II banking organizations would no longer be required to deduct any amount of MSAs from common equity tier 1 capital and would not consider MSAs when calculating the aggregate deduction amount for temporary difference DTAs and significant investments in the capital of unconsolidated financial institutions in the form of common stock. Instead, MSAs would be subject to a 250 percent risk weight, consistent with the treatment in the current capital rule for MSAs that do not exceed the deduction thresholds.

MSAs can be a useful tool for banking organizations to manage interest rate risk. The value of MSAs generally increases when interest rates rise, which extends the expected duration of related servicing fees. As a result, they may provide a hedge against losses on other assets that decline in value in the same interest rate environment.

The agencies' standardized approach proposal would make the same modification to the definition of regulatory capital for all other banking organizations.

Moreover, MSAs are important for banking organizations to maintain their relationship with borrowers by retaining customer-facing relationships even after transferring the underlying loans, allowing cross-selling of products. Banking organizations can also improve efficiency by increasing scale. A deduction approach for MSAs can discourage banking organizations from creating economies of scale, which can hinder their ability to compete in mortgage underwriting or servicing businesses and to manage risks.

At the same time, MSAs have long been subject to elevated capital requirements because of the high level of uncertainty regarding the ability of banking organizations to realize value from these assets, especially under adverse financial conditions. MSAs may face significant valuation risk, which mainly stems from prepayment risk, default risk, and liquidity risk. For example, increased refinancing of mortgage loans due to lower interest rates can quickly erode the value of MSA portfolios, as can increased incidents of mortgage defaults. MSAs can also be difficult to value, as banking organization portfolios of MSAs can be heterogeneous and MSA valuations rely on assessments of future economic variables. Maintaining the 250 percent risk weight for MSAs would promote regulatory capital requirements that are commensurate with the risk of these assets.

In the 2013 capital rule (78 FR 62069, Oct 11, 2013), in connection with section 475 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C. 1828 note), the agencies made a finding that the treatment under the capital rule of readily marketable purchased MSAs would not have an adverse effect on the Deposit Insurance Fund or the safety and soundness of insured depository institutions. The proposal would continue to apply a 250 percent risk weight to all MSAs, while removing the threshold deduction, and the agencies continue to consider the proposed treatment to not have an adverse effect on the Deposit Insurance Fund or the safety and soundness of insured depository institutions.

Question 11: What are the advantages and disadvantages of the proposed treatment of MSAs? What are the implications of the proposed treatment of MSAs for banking organizations' mortgage origination business? To what extent does the 250 percent risk weight appropriately reflect the risk of these assets throughout the economic cycle? Given the potential volatility of MSAs under certain circumstances, what are the advantages and disadvantages of the agencies imposing a higher limit on MSA as a percentage of common equity tier 1 capital (for example, 100 percent) and why? What are the advantages and disadvantages of differentiating the treatment of MSAs based on the size of the banking organization (for example, banking organizations with assets under $10 billion or over $100 billion) or applicable capital framework (for example, banking organizations that elect the community bank leverage ratio framework)?

IV. Calculation of Risk-Weighted Assets Under the Expanded Risk-Based Approach

A. Credit Risk

Credit risk arises from the possibility that an obligor, including a borrower or counterparty, will fail to perform on an obligation. While loans are a significant source of credit risk, other products, activities, and services also expose banking organizations to credit risk, including investments in debt securities and other credit instruments, credit derivatives, and cash management services. Off-balance sheet activities, such as letters of credit, unfunded loan commitments, and the undrawn portion of lines of credit, also expose banking organizations to credit risk. Certain transactions give rise to counterparty credit risk, which generally refers to the risk that a counterparty to a transaction will default before the final settlement of the transaction and will fail to make all the payments required by the transaction. Transactions that give rise to counterparty credit risk include repo-style transactions, eligible margin loans, and derivatives transactions. Counterparty credit exposure is determined by the market value of the transaction, which fluctuates with market conditions. Thus, the current exposure to a counterparty's default continuously changes and the future exposure is uncertain.

Under the proposal, a banking organization subject to the expanded

risk-based approach would follow similar mechanics to those in the current standardized approach to determine its risk-weighted assets for credit risk. Such a banking organization would first determine the exposure amount of each on-balance sheet exposure, derivative contract, and off-balance sheet commitment, trade and transaction-related contingency, guarantee, repo-style transaction, financial standby letter of credit, forward agreement, or other similar transaction (excluding certain transaction types or exposures as specified in the proposed rule). In certain cases, exposure amount is measured at the netting-set level. The banking organization would then multiply the exposure amount by the risk weight appropriate to the exposure based on the exposure type or counterparty. In addition, the proposal would allow for the recognition of certain credit risk mitigants through adjustments to the risk-weighted asset amount for protected exposures.

Section IV.A.1. of this

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describes in general terms the approaches for determining exposure amount under the proposal; section IV.A.2. of this

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describes the risk-weight treatment for credit exposures under the proposal; section IV.A.3. of this

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describes the proposed exposure measurement of off-balance sheet exposures; section IV.A.4. of this

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describes the proposed exposure measurement for counterparty credit risk-related exposures; and section IV.A.5. of this

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describes the available approaches for recognizing the benefits of credit risk mitigants including certain guarantees, certain credit derivatives, financial collateral, and prepaid credit protection arrangements.

1. Exposure Amounts

a. On-Balance Sheet Exposure Amount

Under the proposal, as under the current standardized approach, the exposure amount of an on-balance sheet exposure would generally be the banking organization's carrying value

of the exposure, consistent with the value of the asset on the balance sheet as determined in accordance with GAAP. Continuing to use the carrying value of an asset under GAAP to determine a banking organization's exposure amount would minimize burden and provide a consistent framework that can be easily applied across all banking organizations because, in most cases, GAAP serves as the basis for the information presented in financial statements and regulatory reports.

Carrying value under § __. 2 of the current capital rule means, with respect to an asset, the value of the asset on the balance sheet of the banking organization as determined in accordance with GAAP. For all assets other than available-for-sale debt securities or purchased credit deteriorated assets, the carrying value is not reduced by any associated credit loss allowance that is determined in accordance with GAAP. See 12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). The exposure amount arising from an OTC derivative contract; a repo-style transaction or an eligible margin loan; a cleared transaction; a default fund contribution; or a securitization exposure would be calculated in accordance with §§ __. 113, 121, or 131 of the proposal, respectively, as described in sections IV.A.4, IVA.5.b., and IV.B. of this Supplementary Information. The standardized approach proposal also includes a technical amendment that would modify the term adjusted allowance for credit losses (AACL) and carrying value to exclude allowance for credit losses (ACLs) on purchased seasoned loans (PSLs) in addition to those on purchased credit deteriorated (PCD) assets and available-for-sale (AFS) debt securities. The standardized approach proposal also amends the definition of AACL and carrying value to provide the same treatment as PCD assets to other assets that may in the future become subject to the gross approach following a change to GAAP by FASB.

See 12 U.S.C. 1831n.

b. Off-Balance Sheet Exposure Amount

In addition to on-balance sheet exposures, banking organizations are exposed to credit risk associated with off-balance sheet exposures. Banking organizations often enter into contractual arrangements with obligors or counterparties to provide credit or other support. Such arrangements may not be recorded on-balance sheet under GAAP until the arrangement is drawn upon. These off-balance sheet exposures often include commitments, contingent items, guarantees, certain repo-style transactions, financial standby letters of credit, and forward agreements. Under the proposal, consistent with the current standardized approach, in most cases a banking organization determines the exposure amount for an off-balance sheet component of an exposure by multiplying the notional amount of the off-balance sheet component by the appropriate credit conversion factor specified in the rule. The proposed credit conversion factors would range from 10 percent to 100 percent to reflect the likelihood that a given off-balance sheet item would become an on-balance sheet credit exposure, taking into account the contractual features of the off-balance sheet item. For example, a 100 percent credit conversion factor would apply to a guarantee provided by a banking organization because the banking organization is effectively assuming the risk of the guaranteed exposure and thus such an off-balance sheet item should be converted at the full amount. In contrast, with respect to commitments, often an obligor does not draw down on the commitment or only draws down a portion of the available credit, so such off-balance sheet items would be converted at less than 100 percent. Thus, the proposal would vary the credit conversion factors according to the likelihood that different types of off-balance sheet items may become on-balance sheet credit exposures.

c. Approaches for Determining Exposure Amount for Counterparty Credit Risk-Related Transactions

The current capital rule includes several approaches that a banking organization may use to calculate the exposure amount for repo-style transactions, eligible margin loans, derivative transactions, and netting sets of such transactions. These approaches take into account the offsetting of positions and financial collateral that meets the criteria in the rule within a netting set and incorporate both current and potential future exposure. For purposes of the expanded risk-based approach, the proposal would continue to include the collateral haircut approach for eligible margin loans and repo-style transactions, and netting sets of such transactions, and the standardized approach for counterparty credit risk (SA-CCR) for derivative contracts, netting sets of such transactions, and would expand SA-CCR to qualifying cross-product netting sets of derivative transactions and certain repo-style transactions, with modifications further described below in section IV.A.4. of this

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To determine the exposure amount for eligible margin loans, repo-style transactions, or the netting sets of such transactions, the proposed expanded risk-based approach would include the collateral haircut approach with two proposed modifications to increase risk sensitivity: (1) adjustments to the market price volatility haircuts; and (2) a modified formula that reflects netting and diversification benefits, each further described below in section IV.A.4.a. of this

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. A banking organization would have the option of applying SA-CCR to certain repo-style transactions that are subject to a qualifying cross-product master netting agreement that includes derivative transactions.

To determine the exposure amount for derivative contracts, the proposed expanded risk-based approach would require banking organizations to apply SA-CCR, with certain modifications to better reflect evolving market dynamics

and the potential for increased central clearing. The agencies are proposing to revise SA-CCR to permit the netting of collateralized-to-market and settled-to-market client-facing derivative transactions and incorporate non-cleared repo-style transactions. Specifically, the agencies are proposing to permit a banking organization to elect to treat as a derivative contract any non-cleared repo-style transaction subject to a qualifying cross-product master netting agreement that also contains a derivative contract. These proposed amendments and other proposed technical revisions to SA-CCR are described below in section IV.A.4.b. of this

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As stated earlier, the proposal would increase simplicity, transparency, consistency, and comparability of capital requirements by reducing banking organization's use of models. Therefore, the proposal does not include the internal models methodology (IMM) or the simple value-at-risk (VaR) methodology for measuring counterparty credit risk or the use of a banking organization's own estimates of haircuts for purposes of the collateral haircut approach.

2. Proposed Risk Weights for Credit Risk

The proposed expanded risk-based approach would introduce credit risk weights that generally align with the Basel standards and use many of the same definitions in § __.2 of the current capital rule. Some elements of the proposed expanded risk-based approach for credit risk would apply the same risk weights provided in the current standardized approach, including exposures to sovereigns, specified supranational entities

and multilateral development banks,

government sponsored entities (GSEs) in the form of senior debt and guaranteed exposures, Federal Home Loan Bank (FHLB) and Federal Agricultural Mortgage Corporation (Farmer Mac) equity exposures,

public sector entities (PSEs), exposures that are 90 days or more past due or in nonaccrual,

and certain insurance assets. Consistent with statutory mandates, the proposal would also maintain the same risk-weight treatment provided in the current standardized approach to pre-sold construction loans, statutory multifamily mortgages, and high-volatility commercial real estate (HVCRE) exposures.

Under the proposal, specified supranational entities would include the Bank for International Settlements, the European Central Bank, the European Commission, the International Monetary Fund, the European Stability Mechanism, and the European Financial Stability Facility. Consistent with the current capital rule, exposures to such entities would continue to be subject to a zero percent risk weight for the purposes of the expanded risk-based approach.

Under the proposal, multilateral development bank would include International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member or which the primary Federal supervisor determines poses comparable credit risk. Consistent with the current capital rule, exposures to these entities would continue to be subject to a zero percent risk weight for the purposes of the expanded risk-based approach

For treatment of other exposures to GSEs, see discussion related to equity exposures in section IV.C. and subordinated exposures in section IV.A.2.f. of this

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Certain residential mortgage exposures that are 90 days past due or in nonaccrual would receive a higher risk weight under the proposal. See section IV.A.2.c.v of this

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Relative to the advanced approaches under the current capital rule, the proposed expanded risk-based approach would result in more consistent and transparent capital requirements for credit risk exposures across banking organizations. The proposal would also facilitate comparisons of capital adequacy across banking organizations by reducing excessive, unwarranted divergence in risk-weighted assets for similar exposures. Relative to the current standardized approach, the proposal would incorporate more granular risk factors to allow for a broader range of risk weights.

Specifically, the expanded risk-based approach would introduce new risk weights for exposures to depository institutions, foreign banks, and credit unions; subordinated exposures, including those to GSEs; and real estate, retail, and corporate exposures. The proposed risk weights for each of these categories are described in the following sections of this

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Question 12: What are the pros and cons of continuing the risk-weights in the current standardized approach for sovereigns, specified supranational entities and multilateral development banks, GSEs in the form of senior debt and guaranteed exposures, FHLB and Farmer Mac equity exposures, PSEs, exposures that are 90 days or more past due or in nonaccrual, insurance assets, and other exposures?

Question 13: To enhance the risk sensitivity of the rule, what alternatives to “exposures that are 90 days or more past due or in nonaccrual” should the agencies consider to identify exposures in or near default? What are the advantages and disadvantages of using an approach similar to the definition of defaulted exposures in the advanced approaches, that would include exposures where (a) the banking organization has taken a partial charge-off, write-down of principal, or negative fair value adjustment on the exposure for credit-related reasons, until the banking organization has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure; or (b) a distressed restructuring of the exposure was agreed to by the banking organization, until the banking organization has reasonable assurance of repayment and performance for all contractual principal and interest payments on the exposure as demonstrated by a sustained period of repayment performance, provided that a distressed restructuring includes the following made for credit-related reasons: forgiveness or postponement of principal, interest, or fees, or an interest rate reduction?

a. Exposures to Government-Sponsored Enterprises

The proposal would assign a 20 percent risk weight to most GSE

exposures, consistent with the current standardized approach. GSE exposures that are subordinated exposures or equity exposures, however, would receive higher risk weights. As discussed later in sections IV.C. and IV.A.2.f. of this

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, equity exposures and subordinated exposures would generally be subject to an increased risk weight to reflect their heightened risk relative to senior credit exposures. As an exception to this general rule, the proposal would apply a 20 percent risk weight to all exposures to FHLB or Farmer Mac, including equity exposures and exposures to subordinated debt instruments, which is consistent with the treatment under the current standardized approach.

Government-sponsored enterprise (GSE) under § __. 2 of the current capital rule means an entity established or chartered by the U.S. government to serve public purposes specified by the U.S. Congress but whose debt obligations are not explicitly guaranteed by the full faith and credit of the U.S. government.

See

12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC).

b. Exposures to Depository Institutions, Foreign Banks, and Credit Unions

The proposal would define the scope of exposures to depository institutions,

foreign banks, and credit unions in a manner that is consistent with the definitions and scope of exposures covered under the current capital rule. Under the proposal, a bank exposure would mean an exposure (such as a receivable, guarantee, letter of credit, loan, OTC derivative contract, or senior debt instrument) to a depository institution, foreign bank, or credit union.

70 71

Under § __.2 of the current capital rule, a depository institution means a depository institution as defined in section 3 of the Federal Deposit Insurance Act, a foreign bank means a foreign bank as defined in section 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a depository institution), and a credit union means an insured credit union as defined under the Federal Credit Union Act (12 U.S.C. 1751

et seq.

See

12 CFR 3.2 (OCC); 12 CFR 217.2 (Board); 12 CFR 324.2 (FDIC). Exposures to other financial institutions, such as bank holding companies, savings and loans holding companies, and securities firms, generally would be considered corporate exposures.

See

78 FR 62087 (Oct. 11, 2013).

The proposal would require banking organizations to apply a 150 percent risk weight to bank exposures that are either subordinated exposures, as described in section IV.A.2.f. of this

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, or covered debt instruments that are not deducted.

The proposed treatment for bank exposures supports the simplicity, transparency, and consistency objectives of the proposal in a manner that is appropriately risk sensitive. The proposal would provide three categories for bank exposures that are ranked from the highest to the lowest in terms of creditworthiness: Grade A, Grade B, and Grade C. The assignment of a bank exposure to a category would be based on the indicators of creditworthiness of the obligor depository institution, foreign bank, or credit union. As outlined below, the proposal would rely on the current capital rule's definition of investment grade and the proposed definition of speculative grade for differentiating the credit risk of bank exposures. In addition, the proposal would incorporate publicly disclosed capital levels to differentiate the financial strength of a depository institution, foreign bank, or credit union in a manner that is both objective and transparent to supervisors and the public.

More specifically, a Grade A bank exposure would mean a bank exposure for which the obligor depository institution, foreign bank, or credit union (1) is investment grade, and (2) whose most recent publicly disclosed capital ratios meet or exceed the higher of: (a) the minimum capital requirements and any additional amounts necessary to not be subject to limitations on distributions and discretionary bonus payments under the capital rules established by the prudential supervisor of the depository institution, foreign bank, or credit union, and (b) if applicable, the capital ratio requirements for the well-capitalized category under the agencies' prompt corrective action framework,

or under similar rules of the National Credit Union Administration.

For a bank exposure to be considered investment grade, a banking organization would have to determine that the obligor has adequate capacity to meet financial commitments, consistent with the current rule.

Further, a bank exposure to a depository institution that had opted into the community bank leverage ratio (CBLR) framework and is investment grade would be considered to be a Grade A bank exposure, including if the obligor depository institution were in the grace period under the CBLR framework.

As a result, under the proposal, a depository institution that uses the CBLR framework would not be required to calculate or disclose risk-based capital ratios for purposes of qualifying as a Grade A bank exposure. Additionally, as described further in the next paragraph, a Grade A exposure to depository institutions that have opted into the CBLR framework would receive a reduced risk weight relative to other Grade A exposures.

The capital ratios used for this determination are the ratios on the depository institution's most recent quarterly Consolidated Report of Condition and Income (Call Report).

See

12 CFR part 702 (National Credit Union Administration).

Under § __.2 of the current capital rule, “investment grade” means that the entity to which the banking organization is exposed through a loan or security, or the reference entity with respect to a credit derivative, has adequate capacity to meet financial commitments for the projected life of the asset or exposure. Such an entity or reference entity has adequate capacity to meet financial commitments if the risk of its default is low and the full and timely repayment of principal and interest is expected.

See

12 CFR 3.12(a)(1) (OCC); 12 CFR 217.12(a)(1) (Board); 12 CFR 324.12(a)(1) (FDIC).

See also 12 CFR part 1240.

The proposed scope, risk drivers, and risk weights described below are generally consistent with those in the Basel standards.

i. Regulatory Residential Real Estate Exposures

Under the proposal, a regulatory residential real estate exposure would be defined as a first-lien residential mortgage exposure (as defined in § __.2 of the current capital rule) that is not an ADC exposure, a pre-sold construction loan, a statutory multifamily mortgage, or an HVCRE exposure, provided the exposure meets certain prudential criteria.

First, the loan would be required to be secured by a residential property that is either owner-occupied or rented. Second, the exposure would be required to be made in accordance with prudent underwriting standards, including standards relating to the supervisory LTVs as described in the interagency real estate lending guidelines.

Third, during the underwriting process, the banking organization would be required to apply underwriting policies that account for the ability of the obligor to repay based on clear and measurable underwriting standards that enable the banking organization to evaluate these credit factors. The agencies expect these underwriting standards to be consistent with the agencies' safety and soundness and real estate lending guidelines.

Fourth, the property must be valued in accordance with the proposed requirements included in the proposed LTV ratio calculation, as discussed below in section IV.A.2.c.iv. of this

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. Finally, the loan must not have been modified or restructured.

Consistent with the standardized approach in the capital rule, under the proposal, when a banking organization holds the first-lien and junior-lien(s) residential mortgage exposures and no other party holds an intervening lien, the banking organization must combine the exposures and treat them as a single first-lien regulatory residential real estate exposure, if the first-lien meets all of the criteria for a regulatory residential real estate exposure.

For more information on determining the value of the property, see section IV.A.2.c.iv. of this

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See 12 CFR part 30, appendix C and 12 CFR part 34, appendix A to subpart D (OCC); 12 CFR part 208, appendix C (Board); 12 CFR parts 364 and 365 (FDIC).

Consistent with the current standardized approach, a residential real estate loan that is modified or restructured solely pursuant to the U.S. Treasury's Home Affordable Mortgage Program is not modified or restructured under this criterion for regulatory residential real estate exposures.

As discussed, residential real estate exposures that meet these criteria present relatively lower credit risk than other residential real estate exposures. Loans on property that are owner-occupied or rented have both a consistent expected flow of payments on the loan, as well as an occupant of the property that is present. Evaluating the ability of the obligor to repay using consistent and transparent metrics allows banking organizations and supervisors to more easily compare the obligor's ability to repay with other borrowers in the banking organization's loan portfolio. Modified or restructured loans reflect that there might be deterioration in the ability of the borrower to repay and, though not necessarily indications of likely default, merit higher applicable risk weights than those that have no such indications of potential deterioration in credit quality.

ii. Regulatory Commercial Real Estate Exposures

The proposal would define a regulatory commercial real estate exposure as a real estate exposure that is not a regulatory residential real estate exposure, an ADC exposure, a pre-sold construction loan, a statutory multifamily mortgage, or an HVCRE exposure, provided the exposure meets several prudential criteria. First, the exposure would be required to be primarily secured by fully completed real estate.

Second, the banking organization would be required to hold a first priority security interest in the property that is legally enforceable in all relevant jurisdictions.

Third, the exposure would be required to be made in accordance with prudent underwriting standards, including standards relating to supervisory LTVs. Fourth, during the underwriting process, the banking organization would be required to apply underwriting policies that account for the ability of the obligor to repay in a timely manner

based on clear and measurable underwriting standards that enable the banking organization to evaluate these credit factors. The agencies expect that these underwriting standards would be consistent with the agencies' safety and soundness and real estate lending guidelines. The property would be required to be valued in accordance with the requirements included in the proposed LTV ratio calculation, as discussed below. Finally, the loan must not have been modified or restructured.

Commercial properties where the construction is complete and the property is ready for its intended use.

When the banking organization also holds a junior security interest in the same property and no other party holds an intervening security interest, the banking organization must treat the exposures as a single first-lien regulatory commercial real estate exposure, if the first lien meets all the criteria for a regulatory commercial real estate exposure.

As previously discussed, commercial real estate exposures that meet these criteria would present relatively lower credit risk than other commercial real estate exposures. Loans on property that is still under construction are reliant on the completion of the property for repayment of the loan, which can be delayed or interrupted by many factors such as changes in market condition or financial difficulty of the obligor.

A perfected, first priority security interest would provide the banking organization with priority for repayment in the case of bankruptcy of the obligor.

Evaluating the ability of the obligor to repay using consistent and transparent metrics allows banking organizations and supervisors to more easily compare the obligor's ability to repay with other borrowers in the banking organization's loan portfolio. As with residential exposures, permanent commercial real estate loans that have been modified or restructured indicate there might be a deterioration in the ability of the borrower to repay, meriting higher applicable risk weights than those that have no such indications.

See,

e.g., https://www.occ.gov/publications-and-resources/publications/comptrollers-handbook/files/commercial-real-estate-lending/pub-ch-commercial-real-estate.pdf.

See,

e.g., https://www.occ.treas.gov/static/ots/exam-handbook/ots-exam-handbook-214aa.pdf.

Question 19: What are the pros and cons of the proposed requirements for real estate exposures to qualify as regulatory commercial real estate exposures? How would the requirement for the banking organization to hold a first-priority security interest in the property that is legally enforceable in all relevant jurisdictions impact loans to different types of commercial borrowers? For those commercial real estate exposures where banking organizations do not hold a first priority security interest in the underlying property, what, if any, alternatives should the agencies consider that would result in the same priority for repayment in the case of bankruptcy of the obligor?

iii. Exposures That Are Dependent on the Cash Flows Generated by the Real Estate

As noted above, the proposal would differentiate the risk weight of regulatory residential, regulatory commercial, and other real estate exposures based on whether the obligor's ability to service the loan is dependent on cash flows generated by the real estate.

If the underwriting process at origination of the real estate exposure considers any cash flows generated by the real estate securing the loan, such as from lease or rental payments or from the sale of the real estate, as a source of repayment, then the exposure would meet the proposal's definition of dependent on the cash flows generated by the real estate. Evaluating the dependence on cash flows generated from the real estate is a conservative and straightforward measure of credit risk. Reliance on cash flows from the property for repayment of a loan indicates increased risk of nonpayment relative to when the borrower has sufficient funds from other sources, such as income or business profits, for full repayment of the loan. Given their increased credit risk, the proposal would assign higher risk weights to exposures that are dependent on proceeds or cash flows generated from the real estate itself to service the loan.

Under the proposal, additional loan characteristics can affect whether an exposure would be considered dependent on cash flows generated by the real estate. The proposal's definition of dependent on the cash flows generated by the real estate would exclude any residential mortgage exposure that is secured by the obligor's principal residence, as such mortgage exposures present reduced credit risk relative to real estate exposures that are secured by the obligor's non-principal residence.

100

For residential properties that are not the obligor's principal residence, including vacation homes and other second homes, such properties would be considered dependent on the cash flows generated by the real estate unless the banking organization has relied solely on the obligor's personal income and resources, rather than rental income (or resale or refinance of the property), to ascertain the obligor's capacity to repay the loan.

101

100

See Breck Robinson, Federal Reserve Bank of Richmond, and Richard M. Todd, Federal Reserve Bank of Minneapolis, “The Role of Non-Owner-Occupied Homes in the Current Housing and Foreclosure Cycle,” Pg. 6, which cites multiple studies that loans on non-owner occupied properties have higher loss rates on mortgages to non-occupant owners than on mortgages to owner-occupants, at least after controlling for credit scores and other standard underwriting criteria.

https://www.richmondfed.org/~/media/richmondfedorg/publications/research/working_papers/2010/pdf/wp10-11.pdf.

101

For example, if (1) a borrower purchases a two-unit property with the intention of making one unit their principal residence, (2) the borrower intends to rent out the second unit to a third party, and (3) the banking organization considered the cash flows from the rental unit as a source of repayment, the exposure would not meet the proposal's definition of dependent on the cash flows generated by the real estate because the property securing the exposure is the borrower's principal residence.

For regulatory commercial real estate exposures, the applicable risk weights similarly would be determined based on whether repayment is dependent on the cash flows generated by the real estate. For example, the agencies would expect that rental office buildings, hotels, and shopping centers leased to tenants are often dependent on the cash flows generated by the real estate for repayment of the loan. In the case of a loan to an obligor to purchase or refinance real estate where the obligor will operate a business, such as a retail store or factory, and rely solely on the revenues from the business or resources of the obligor other than rental, resale, or other income from the real estate for repayment, the exposure would not be considered dependent on the cash flows generated by the real estate under the proposal. Similarly, a loan to the owner-operator of a farm would not be considered dependent on the cash flows generated by the real estate under the proposal if the obligor will rely solely on the sale of products from the farm or other resources of the obligor other than rental, resale, or other income from the real estate for repayment.

Question 20: What are the pros and cons of the agencies establishing a “materially” dependent on cash flows test that would consider the source of repayment to be partly from the borrower's own resources and partly from the cash flows/income generated by the real estate? What, if any, quantitative threshold should the agencies consider in determining whether a real estate exposure is dependent on cash flows generated by the real estate (for example, the cash flows generated from real estate reflect between 5 and 50 percent of amount needed for repayment of the loan)? Further, if the agencies decide to adopt a quantitative threshold, either for regulatory residential or regulatory commercial real estate exposures, what should the agencies consider when calibrating such a threshold for regulatory residential, and separately for regulatory commercial real estate

exposures, and what would be the appropriate calibration levels for each? Provide specific examples, including calculations and supporting data. Relatedly, please provide views on how to define cash flows and what expenses, if any, the agencies should consider.

iv. Calculating the Loan-to-Value Ratio

The proposal would require a banking organization to use LTV ratios to assign a risk weight to a regulatory residential or regulatory commercial real estate exposure. The proposed calculation of the LTV ratio would be generally consistent with the real estate lending guidelines except with respect to the recognition of private mortgage insurance, as described below.

Under the proposal, an LTV ratio would be calculated as the extension of credit divided by the value of the property. The extension of credit would mean the total outstanding amount of the loan including the notional total of any undrawn committed amount of the loan. The total outstanding amount of the loan would reflect the current amortized balance as the loan pays down, which would allow a banking organization to assign a lower risk weight to a loan over time as the principal is repaid. Similarly, if an extension of credit increases, a banking organization would reflect that increase in the LTV ratio.

For purposes of the LTV ratios in Tables 2, 3, 4, 5 below, a banking organization would calculate the loan amount without making any adjustments for credit loss provisions or private mortgage insurance. Not recognizing private mortgage insurance for these purposes would be consistent with the current capital rule's definition of eligible guarantor, which does not recognize an insurance company engaged predominately in the business of providing credit protection (such as a monoline bond insurer or re-insurer).

102

During the 2007-2009 housing market stress, the performance of private mortgage insurance deteriorated at the same time as the underlying exposures.

103

Under the proposal and consistent with the current capital rule, private mortgage insurance is considered when banking organizations identify if a residential mortgage exposure is made in accordance with prudent underwriting standards. As discussed earlier, under the proposal a residential mortgage exposure must be made in accordance with prudent underwriting standards and must meet other requirements to be considered regulatory residential real estate exposures and therefore eligible to be risk weighted according to the LTV table described below.

104

102

A guarantor is not an eligible guarantor under the current capital rule if the guarantor's creditworthiness is positively correlated with the credit risk of the exposures for which it has provided guarantees. 78 FR 62141 (Oct.11, 2013).

103

See

Laurie Goodman and Karan Kuhl, “Sixty Years of Private Mortgage Insurance in the United States,” The Urban Institute Housing Finance Policy Center, August 2017. Pg. 7,

https://www.urban.org/sites/default/files/publication/92676/2017_08_18_sixty_years_of_pmi_finalizedv3_3.pdf.

104

As described in section IV.A.2.c.i. of this

SUPPLEMENTARY INFORMATION

, regulatory residential mortgage exposures must be made in accordance with prudent underwriting standards, including standards relating to supervisory LTVs, which allow for the consideration of private mortgage insurance for permanent mortgage or home equity loans on owner-occupied, 1- to 4-family residential properties.

The value of the property would mean the value at the time of origination of all real estate properties securing the extension of credit, including the increased estimated value of the property if the property is being improved by an extension of credit. The value of the property would also include the fair value of any readily marketable collateral and other acceptable collateral, as defined in the real estate lending guidelines, that secures the extension of credit.

For exposures subject to the Real Estate Lending, Appraisal Standards, and Minimum Requirements for Appraisal Management Companies or Appraisal Standards for Federally Related Transactions (collectively, the appraisal rule),

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the market value of real estate would be a valuation that meets all requirements of that rule. For exposures not subject to the appraisal rule, the proposal would require that (1) the market value of real estate be obtained from an independent valuation of the property using prudently conservative valuation criteria; and (2) the valuation be done independently from the banking organization's origination and underwriting process. Most real estate exposures held by insured depository institutions are subject to the agencies' appraisal rule, which also provides for evaluations in some cases, and provides for certain exceptions, such as where a lien on real estate is taken out of an abundance of caution. To help ensure that the value of the real estate is determined in a prudently conservative manner, the proposal would also provide that, for exposures not subject to the appraisal rule, the valuations of the real estate properties would need to exclude expectations of price increases and be adjusted downward to take into account the potential for the current market prices to be significantly above the values that would be sustainable over the life of the loan.

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See

12 CFR part 34, subpart C or subpart G (OCC); 12 CFR part 208, subpart E or 12 CFR part 225, subpart G (Board); 12 CFR part 323 (FDIC).

In addition, when the real estate exposure finances the purchase of the property, the value would be the lower of (1) the actual acquisition cost of the property and (2) the market value obtained from either (i) the valuation requirements under the appraisal rule (if applicable) or (ii) as described above, an independent valuation of the property using prudently conservative valuation criteria and that is separate from the banking organization's origination and underwriting process.

Using the value of a property at origination when calculating the LTV ratio protects against volatility risk or short-term market price inflation. For purposes of the LTV ratio calculation, the proposal would require banking organizations to use the value of the property at the time of origination, except under the following circumstances: (1) the banking organization's primary Federal supervisor requires the banking organization to revise the property value downward; (2) an extraordinary event occurs resulting in a permanent reduction of the property value (for example, a natural disaster); or (3) modifications are made to the property that increase its market value and are supported by a new appraisal or independent evaluation using prudently conservative criteria. These proposed exceptions are intended to constrain the use of values other than the value of the property at loan origination only to exceptional circumstances that are sufficiently material to warrant use of a revised valuation.

For purposes of determining the value of the property, the proposal would use the definition of readily marketable collateral and other acceptable collateral from the real estate lending guidelines. Therefore, readily marketable collateral would mean insured deposits, financial instruments, and bullion in which the banking organization has a perfected security interest. Financial instruments and bullion would need to be salable under ordinary circumstances with reasonable promptness at a fair market value determined by quotations based on actual transactions, by an auction, or by a similarly available daily bid and ask price market. Other acceptable collateral would mean any collateral in which the banking organization has a perfected security interest that has a quantifiable value and is accepted by the banking organization in accordance with safe and sound lending practices.

Under the proposal, other acceptable collateral would include, among other items, unconditional irrevocable standby letters of credit for the benefit of the banking organization. Readily marketable collateral and other acceptable collateral must be appropriately discounted by the banking organization consistent with the banking organization's usual practices for making loans secured by such collateral. The reasonableness of a banking organization's underwriting criteria would continue to be reviewed through the supervisory process to help ensure its real estate lending policies are consistent with safe and sound banking practices.

Question 21: What other approaches should the agencies consider to recognize private mortgage insurance in the determination of the risk weight of residential mortgage exposures? What would be the pros and cons of providing explicit recognition of private mortgage insurance in the calculation of LTV ratio for purposes of determining the risk weights for regulatory real estate exposures? What, if any, increases in procyclicality and incentives for increased risk-taking by banking organizations might such recognition create? What conditions could the agencies impose on such recognition to mitigate concerns about the wrong-way risk of monoline credit insurance? In recognition that private mortgage insurance may not provide protection under all relevant stress events, what are the advantages and disadvantages of recognizing a portion (such as 50 percent) of the value of the private mortgage insurance in determining the total outstanding amount of the loan in the calculation of the LTV ratio? Please provide any data and analysis supporting alternative approaches.

v. Risk Weights for Regulatory Residential Real Estate Exposures

Under the proposal, a banking organization would assign a risk weight to a regulatory residential real estate exposure based on the exposure's LTV ratio without PMI and whether the exposure is dependent on the cash flows generated by the real estate, in accordance with Tables 2 and 3 below.

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LTV ratios and dependence on cash flows generated by the real estate would factor into the risk-weight treatment for real estate exposures under the proposal because these risk factors are meaningful determinants of credit risk for real estate exposures. The proposed risk weights in each LTV ratio category are intended to reflect differences in the credit risk of these exposures.

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Residential real estate exposures that are 90 days past due or in nonaccrual would be assigned a 150 percent risk weight, unless the exposure is a residential mortgage exposure that is not dependent on the cash flows generated by the real estate, which would be assigned a 100 percent risk weight.

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The risk weight assigned to loans does not impact the appropriate treatment of loans under the agencies' other regulations and guidance, such as the supervisory LTV limits under the real estate lending guidelines.

EP27MR26.061

EP27MR26.062

The proposed risk weights in Tables 2 and 3 would appropriately balance the benefits of risk sensitivity, transparency, and consistency in the risk weight for real estate exposures across banking organizations subject to the expanded risk-based approach. Applying lower risk weights to loans with lower LTVs aligns the credit risk of the loan with the applicable risk weight, and relying on cash flows from the property for repayment has historically indicated increased credit risk that merits higher risk weights.

The proposal would also recognize the reduction in credit risk of regulatory residential real estate exposures due to amortization, as the obligor pays down principal and builds equity.

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The risk weights for such exposures could decrease throughout the life of the respective loans as obligors make payments. For example, analysis by the agencies indicates that residential mortgage loans issued in the 90 percent to 100 percent LTV ratio category would have a lifetime average risk weight approximately five percentage points

lower than the applicable risk weight at origination.

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For purposes of the LTV ratio calculation, the proposal would require banking organizations to use the value of the property at the time of origination, except under limited circumstances. See also Luis Otero González, Pablo Durán Santomil, Milagros Vivel Búa and Rubén Lado Sestayo, “The Impact of Loan-to-Value on The Default Rate of Residential MBS” Journal of Credit Risk (July 2016),

https://www.risk.net/journal-of-credit-risk/2465626/the-impact-of-loan-to-value-on-the-default-rate-of-residential-mortgage-backed-securities

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See

section VII of this

SUPPLEMENTARY INFORMATION

for more information explaining the analysis of the estimated “effective” risk weights applicable to residential mortgage exposures under the proposal.

The agencies recognize that some home buyers, especially low- and moderate-income home buyers or those in historically underserved markets, are more likely to be obligors of loans with higher LTV ratios and thus higher risk weights under the approach described above. As a result, borrowing costs for some low- and moderate-income home buyers could be higher relative to obligors with lower LTV ratios. However, many low-to-moderate income borrowers obtain mortgages through loan programs administered by the Federal Housing Administration (FHA) or Department of Veterans Affairs (VA). Consistent with the current capital rule, banking organizations generally would apply a 20 percent risk weight to real estate exposures guaranteed by the U.S. government through the FHA or VA under the proposal. In addition, the proposed risk weights applicable to regulatory residential real estate exposures that have high LTV ratios would be generally consistent with the applicable risk weights under the current standardized approach for residential real estate exposures. The agencies estimate that the proposed risk-based capital requirements for regulatory residential real estate exposures that are not dependent on the cash flows of the real estate—reflecting both credit risk weights and estimated operational risk requirements—would be lower than the applicable risk-based capital requirements for residential real estate mortgages exposures under the current standardized approach for exposures with LTV ratios at or below 90 percent and very similar for such exposures with LTV ratios between 90 and 99 percent.

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According to agency analysis, effective risk weights, which reflect both credit risk weights and estimated add-ons to reflect operational risk, are relatively constant or falling for almost all types of mortgage obligors relative to the applicable 50 percent risk weight for prudently underwritten residential mortgage exposures in the current standardized framework. For instance, for low-to-moderate income obligors, the total equivalent risk weight under the proposal is estimated to be 46 percent (42 percent from credit risk and 4 percent from operational risk).

See

the economic analysis presented in section VIII.D.2 of this

SUPPLEMENTARY INFORMATION

Question 22: Given the proposed treatment of residential real estate exposures, how, if at all, would the proposed risk weights impact home affordability and home ownership opportunities, particularly for low-to-moderate income obligors or customers in other historically underserved markets? Please provide supporting data.

Question 23: What alternative approaches for determining applicable risk weights to residential real estate exposures should the agencies consider and why? Please provide data supporting alternative approaches, including factors that were the basis for underwriting the loans and the historical repayment performance of the loans.

vi. Risk Weights for Regulatory Commercial Real Estate Exposures

Similar to the proposed approach to regulatory residential real estate exposure, the proposal would require a banking organization to assign a risk weight to a regulatory commercial real estate exposure based on the exposure's LTV ratio and whether the exposure is dependent on the cash flows generated by the real estate, in accordance with Tables 4 and 5 below. Further, in the case of a regulatory commercial real estate exposure that is not dependent on cash flows generated by the real estate for repayment, a banking organization would be required to assign the risk weight applicable to the obligor, as reflected in Table 4. If the LTV ratio of such an exposure is greater than 60 percent, and the banking organization does not have sufficient information about the exposure to determine what the risk weight applicable to the obligor would be, the banking organization would be required to assign a 100 percent risk weight to the exposure unless the exposures is 90 days more past due or in nonaccrual.

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Commercial real estate exposures that are 90 days past due or in nonaccrual would be assigned a 150 percent risk weight.

EP27MR26.063

EP27MR26.064

Regulatory commercial real estate exposures not dependent on cash flows generated by the real estate often involve situations where the borrowing entity occupies the property or the obligor has significant other cash flows to repay the loan that the banking organization considered when underwriting the loan. While these exposures generally present lower credit risk relative to exposures to commercial real estate dependent on cash flows

generated by the real estate, or other types of corporate exposures where real estate collateral is not present, the risk profile of the obligor impacts the applicable risk weight to appropriately reflect the credit quality of the obligor in addition to the real estate collateral. Therefore, the applicable risk weights in Table 4 for regulatory commercial real estate exposures not dependent on cash flows generated by the real estate reflect both the LTV ratio and the risk profile of the obligor. In contrast, because the risks of commercial real estate exposures dependent on cash flows generated by the real estate are more dependent on the property, the risk weights in Table 5 reflect only the LTV ratio as a risk driver and generally are higher relative to Table 4.

vii. ADC Exposures That Are Not HVCRE Exposures

Under the proposal, the agencies would define an ADC exposure as an exposure secured by real estate for the purpose of acquiring, developing, or constructing residential or commercial real estate properties, as well as all land development loans, and all other land loans. Some ADC exposures meet the definition of HVCRE exposure in § __.2 of the capital rule and would be assigned a 150 percent risk weight.

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Real estate exposures that meet the definition of ADC exposure but do not meet the definition of HVCRE exposure and are not 90 days past due or in nonaccrual would be assigned a 100 percent risk weight under the proposal. The proposed regulatory treatment for ADC exposures would not take into consideration cash flow dependency or the LTV ratio. ADC exposures are mostly short-term or bridge loans to cover construction or development, or lease up or sales phases of a real estate project, rather than amortizing permanent loans for completed residential or commercial real estate. ADC exposures have heightened risk compared to permanent commercial real estate exposures, reflecting uncertainty

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