CAPITAL FRAMEWORK FOR "NON-COMPLEX" INSTITUTIONS

66193

Federal Register / Vol. 65, No. 214 / Friday, November 3, 2000 / Proposed Rules

Dated: October 30, 2000.

David Orr,

Acting Administrator, Grain Inspection,

Packers and Stockyards Administration.

[FR Doc. 00–28145 Filed 11–2–00; 8:45 am]

BILLING CODE 3410–EN–P

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the

Currency

12 CFR Part 3

[Docket No. 00–24]

RIN 1557—AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R–1084]

FEDERAL DEPOSIT INSURANCE

CORPORATION

12 CFR Part 325

RIN 3064–AC44

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 2000–90]

RIN 1550–AB11

Simplified Capital Framework for Non-

Complex Institutions

AGENCIES: Office of the Comptroller of

the Currency, Treasury; Board of

Governors of the Federal Reserve

System; Federal Deposit Insurance

Corporation; and Office of Thrift

Supervision, Treasury.

ACTION: Advance notice of proposed

rulemaking.

SUMMARY: The Office of the Comptroller

of the Currency (OCC), the Board of

Governors of the Federal Reserve

System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the

Office of Thrift Supervision (OTS)

(collectively, the Agencies) are

considering developing a simplified

regulatory capital framework applicable

to non-complex banks and thrifts (non-

complex institutions). The Agencies

believe that the size, structure,

complexity, and risk profile of many

banking and thrift institutions (banking

organizations or institutions) may

warrant the application of a simplified

capital framework that could relieve

regulatory burden associated with the

existing capital rules.

The Agencies are considering the

advantages and disadvantages

associated with developing a regulatory

capital framework specifically for non-

complex institutions. The main

objective of this advance notice of

proposed rulemaking is to obtain

preliminary views from the industry

and the public regarding such a

framework

that could relieve

regulatory burden associated with the

existing capital rules.

The Agencies are considering the

advantages and disadvantages

associated with developing a regulatory

capital framework specifically for non-

complex institutions. The main

objective of this advance notice of

proposed rulemaking is to obtain

preliminary views from the industry

and the public regarding such a

framework. The information gathered as

a result of this advance notice of

proposed rulemaking will assist the

Agencies in determining whether to

propose a simplified capital framework

and, if so, how the framework should be

structured and implemented.

In considering the development of a

less burdensome regulatory framework,

the Agencies would not lower capital

standards or encourage a reduction in

existing capital levels. Rather, a

simplified, less burdensome framework

may result in higher minimum

regulatory capital requirements for

certain institutions than required under

current capital standards. Many non-

complex institutions currently maintain

levels of capital in excess of the

regulatory minimum requirements, and

the Agencies would therefore expect

that most banking organizations subject

to a simplified framework would not

have to increase capital levels.

This advance notice of proposed

rulemaking sets forth broad options for

a simplified framework. The options

advanced for comment include adopting

a simplified risk-based framework (and

maintaining the leverage ratio

requirement) or adopting a leverage-

based approach. The leverage-based

approach may include either a

traditional leverage framework or one

that is modified to address off-balance

sheet risks.

DATES: Comments must be received by

no later than February 1, 2001.

ADDRESSES: Comments should be

directed to:

OCC: Comments may be submitted to

Docket No. 00–24, Communications

Division, Third Floor, Office of the

Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219.

Comments will be available for

inspection and photocopying at that

address

fied to address off-balance

sheet risks.

DATES: Comments must be received by

no later than February 1, 2001.

ADDRESSES: Comments should be

directed to:

OCC: Comments may be submitted to

Docket No. 00–24, Communications

Division, Third Floor, Office of the

Comptroller of the Currency, 250 E

Street, SW., Washington, DC 20219.

Comments will be available for

inspection and photocopying at that

address. In addition, comments may

be sent by facsimile transmission to

(202) 874–5274, or by electronic mail

to regs.comments@occ.treas.gov. You

can make an appointment to inspect

the comments by calling (202) 874–

5043.

Board: Comments, which should refer to

Docket No. R–1084, may be mailed to

Ms. Jennifer J. Johnson, Secretary, the

Board of Governors of the Federal

Reserve System, 20th and C Streets,

NW., Washington, DC 20551, or

mailed electronically to

regs.comments@federalreserve.gov.

Comments addressed to Ms. Johnson

may be delivered to the Board’s

mailroom between 8:45 a.m. and 5:15

p.m., and to the security control room

outside of those hours. Both the

mailroom and the security control

room are accessible from the

courtyard entrance on 20th Street

between Constitution Avenue and C

Street, NW.. Comments may be

inspected in Room MP–500 between 9

a.m. and 5 p.m. weekdays pursuant to

§ 261.12, except as provided in

§ 261.14 of the Board’s Rules

Regarding Availability of Information,

12 CFR 261.12 and 261.14.

FDIC: Send written comments to Robert

E. Feldman, Executive Secretary,

Attention: Comments/OES, Federal

Deposit Insurance Corporation, 550

17th Street, NW, Washington, DC

20429. Comments may be hand-

delivered to the guard station at the

rear of the 550 17th Street Building

(located on F Street), on business days

between 7 a.m. and 5 p.m. (facsimile

number (202) 898–3838; Internet

address: comments@fdic.gov).

Comments may be inspected and

photocopied in the FDIC Public

Information Center, Room 100, 801

17th Street, NW, Washington, DC

20429, between 9 a.m. and 4:30 p.m.

on business days

e hand-

delivered to the guard station at the

rear of the 550 17th Street Building

(located on F Street), on business days

between 7 a.m. and 5 p.m. (facsimile

number (202) 898–3838; Internet

address: comments@fdic.gov).

Comments may be inspected and

photocopied in the FDIC Public

Information Center, Room 100, 801

17th Street, NW, Washington, DC

20429, between 9 a.m. and 4:30 p.m.

on business days.

OTS: Send comments to Manager,

Dissemination Branch, Information

Management & Services Division,

Office of Thrift Supervision, 1700 G

Street, NW, Washington, DC 20552,

Attention Docket No. 2000–90. Hand

deliver comments to Public Reference

Room, 1700 G Street, NW, lower level,

from 9 a.m. to 4 p.m. on business

days. Send facsimile transmissions to

FAX number (202) 906–7755 or (202)

906–6956 (if the comment is over 25

pages). Send e-mails to

public.info@ots.treas.gov and include

your name and telephone number.

Interested persons may inspect

comments at 1700 G Street, NW, from

10 a.m. until 4 p.m. on Tuesdays and

Thursdays, or obtain comments or an

index of comments by facsimile by

telephoning the Public Reference

Room at (202) 906–5900 from 9 a.m.

until 5 p.m. on business days.

Comments and the related index will

also be posted on the OTS Internet

Site at ‘‘www.ots.treas.gov.’’

FOR FURTHER INFORMATION CONTACT:

OCC: Amrit Sekhon, Risk Specialist,

Capital Policy Division, (202) 874–

5211; or Ron Shimabukuro, Senior

Attorney, Legislative and Regulatory

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ments and the related index will

also be posted on the OTS Internet

Site at ‘‘www.ots.treas.gov.’’

FOR FURTHER INFORMATION CONTACT:

OCC: Amrit Sekhon, Risk Specialist,

Capital Policy Division, (202) 874–

5211; or Ron Shimabukuro, Senior

Attorney, Legislative and Regulatory

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66194

Federal Register / Vol. 65, No. 214 / Friday, November 3, 2000 / Proposed Rules

1 The 1998 Accord was developed by the

supervisory authorities represented on the Basel

Committee on Banking Supervision and endorsed

by the G–10 Central Bank Governors. The

framework is described in a document entitled

‘‘International Convergence of Capital

Measurement’’ issued in July 1998 (with subsequent

amendments). The Basel Committee on Banking

Supervision is comprised of representatives of the

central banks and supervisory authorities from the

G–10 countries (Belgium, Canada, France, Germany,

Italy, Japan, Netherlands, Sweden, Switzerland, the

United Kingdom, and the United States) and

Luxembourg. The Agencies’ risk-based capital

standards implementing the 1988 Accord are set

forth in 12 CFR part 3 (OCC), 12 CFR parts 208 and

225, Appendices A and E (Board), 12 CFR part 325

(FDIC) and 12 CFR part 567 (OTS).

2 The categories are 100 percent (the standard risk

weight for most claims); 50 percent (primarily for

residential mortgages); 20 percent for claims on, or

guarantees provided by, certain entities (for

example, qualifying depository institutions); and

zero percent for very low risk assets (such as claims

on, or guarantees provided by, qualifying

governments).

3 Regulatory capital may be comprised of three

components. In general terms, Tier 1 capital

includes common stockholder’s equity, qualifying

noncumulative perpetual preferred stock (and for

bank holding companies limited amounts of

cumulative perpetual preferred stock), and minority

interests in the equity accounts of consolidated

subsidiaries

n, or guarantees provided by, qualifying

governments).

3 Regulatory capital may be comprised of three

components. In general terms, Tier 1 capital

includes common stockholder’s equity, qualifying

noncumulative perpetual preferred stock (and for

bank holding companies limited amounts of

cumulative perpetual preferred stock), and minority

interests in the equity accounts of consolidated

subsidiaries. Tier 2 capital includes limited

amounts of the allowance for loan and lease losses,

perpetual preferred stock, hybrid capital

instruments and mandatory convertible debt, and

term subordinated debt. Tier 3 capital (available

only for certain institutions that apply specific rules

for market risk) consists of short-term subordinated

debt subject to certain restrictions on repayment.

Items deducted from regulatory capital include

goodwill and certain other intangible assets,

investments in unconsolidated subsidiaries,

reciprocal holdings of other banking institutions’

capital instruments and some deferred tax assets. At

least 50 percent of regulatory capital must be Tier

1. See each agency’s capital rules referenced in

footnote 1 for a more complete discussion.

4 The 1988 Accord and the implementing United

States standards addressed capital in relation to

credit risk. In January 1996, the 1988 Accord was

amended to include a measure for market risk. The

amendment was incorporated into FRB, FDIC, and

OCC standards in September 1996.

5 Leverage guidlines for each agency are located

at 12 CFR part 3 (OCC); 12 CFR part 208, Appendix

B and 12 CFR part 225, Appendix D (Board); 12

CFR part 325 (FDIC); and 12 CFR part 567 (OTS).

6 The Basel Committee consultative document

was issued on June 3, 1999. Comment was requeted

through March 2000. The document is available

through the Bank for International Settlements

website at www.bis.org.

Activities Division, (202) 874–5090,

Office of the Comptroller of the

Currency, 250 E Street SW,

Washington, DC 20219

, Appendix D (Board); 12

CFR part 325 (FDIC); and 12 CFR part 567 (OTS).

6 The Basel Committee consultative document

was issued on June 3, 1999. Comment was requeted

through March 2000. The document is available

through the Bank for International Settlements

website at www.bis.org.

Activities Division, (202) 874–5090,

Office of the Comptroller of the

Currency, 250 E Street SW,

Washington, DC 20219.

Board: Norah Barger, Assistant Director

(202/452–2402), Barbara Bouchard,

Manager (202/452–3072), Division of

Banking Supervision and Regulation,

or David Adkins, Supervisory

Financial Analyst (202/452–5259).

For the hearing impaired only,

Telecommunication Device for the

Deaf (TDD), Janice Simms (202/872–

4984), Board of Governors of the

Federal Reserve System, 20th and C

Streets, NW, Washington, DC 20551.

FDIC: Mark S. Schmidt, Associate

Director, (202/898–6918), Division of

Supervision, William A. Stark,

Assistant Director, (202/898–6972),

Division of Supervision, or Keith A.

Ligon, Chief, Policy Unit, (202/898–

3618), Division of Supervision.

OTS: Michael D. Solomon, Senior

Program Manager for Capital Policy

(202/906–5654), or Teresa A. Scott,

Counsel (Banking and Finance) (202/

906–6478), Office of Thrift Supervision,

1700 G Street, NW, Washington, DC

20552.

SUPPLEMENTARY INFORMATION:

I. Background

In 1989, the Agencies each adopted

regulatory capital standards based on

the Basel Capital Accord (1988

Accord).1 The 1988 Accord sets forth a

general framework for measuring the

capital adequacy of internationally

active banks under which assets and off-

balance-sheet items are ‘‘risk-weighted’’

based on their perceived credit risk

using four broad risk categories.2

Institutions subject to the 1988 Accord

are required to maintain a minimum

ratio of regulatory capital 3 to total risk-

weighted assets of 8 percent.4

In addition to risk-based capital

requirements, United States banking

organizations must comply with a

minimum leverage ratio requirement

lance-sheet items are ‘‘risk-weighted’’

based on their perceived credit risk

using four broad risk categories.2

Institutions subject to the 1988 Accord

are required to maintain a minimum

ratio of regulatory capital 3 to total risk-

weighted assets of 8 percent.4

In addition to risk-based capital

requirements, United States banking

organizations must comply with a

minimum leverage ratio requirement. 5

Generally, strong banking organizations

(e.g., institutions assigned a composite

rating of 1 under the Uniform Financial

Institutions Ratings System) must

maintain a minimum ratio of Tier 1

capital to average total consolidated on-

balance sheet assets of 3 percent. For

other banking organizations, the

minimum leverage ratio is 4 percent.

The Agencies view the risk-based and

leverage capital requirements as

minimums. Institutions should hold

capital at a level that is commensurate

with their individual risk profile.

United States banking organizations

are also subject to Prompt Corrective

Action (PCA) regulations. Generally,

under these rules an institution’s

regulatory capital ratios are used to

classify the institution into a PCA

category. Institutions with the highest

capital ratios (i.e., at or above a 10

percent total risk-based capital ratio, at

or above a 6 percent Tier 1 risk-based

capital ratio, and at or above a 5 percent

leverage capital ratio) are usually

categorized as ‘‘well capitalized.’’

Institutions with lower capital ratios are

assigned to lower capital categories.

Institutions that are less than well

capitalized have restrictions or

conditions on certain activities and may

also be subject to mandatory or

discretionary supervisory action.

Although the 1988 Accord was

developed for large and internationally

active banking organizations, when the

Agencies adopted the risk-based capital

standards domestically, the standards

were applied to all banking

organizations regardless of size,

structure, complexity, and risk profile

ns or

conditions on certain activities and may

also be subject to mandatory or

discretionary supervisory action.

Although the 1988 Accord was

developed for large and internationally

active banking organizations, when the

Agencies adopted the risk-based capital

standards domestically, the standards

were applied to all banking

organizations regardless of size,

structure, complexity, and risk profile.

The four broad risk-weight categories,

while imperfect, were viewed as a

significant improvement over the

previous domestic capital framework

that did not take into account asset

credit quality and discouraged banking

organizations from holding low-risk

assets. In addition, the capital adequacy

framework incorporated off-balance

sheet items into the risk-based capital

formula. The consistent application of

an international regulatory capital

regime was also expected to minimize

competitive equity concerns.

The 1988 Accord has had a stabilizing

effect on the international banking

system. Since its inception, capital

levels have risen and competitive equity

has been enhanced. Over the past

decade, however, the world financial

system has become more complex and

challenging. The Basel Committee on

Banking Supervision (Basel Committee)

recognizes that the 1988 Accord needs

to evolve along with recent financial

innovations and changes in the financial

marketplace. Accordingly, the Basel

Committee is working to develop a new

capital adequacy framework that would

enhance the 1988 Accord.

As outlined in its June 1999

consultative paper, A New Capital

Adequacy Framework, the Basel

Committee is contemplating substantial

revisions to the 1988 Accord. 6 Among

other things, the Basel Committee is

exploring the concept of using

sophisticated internal risk measurement

systems in the development of

minimum capital standards

new

capital adequacy framework that would

enhance the 1988 Accord.

As outlined in its June 1999

consultative paper, A New Capital

Adequacy Framework, the Basel

Committee is contemplating substantial

revisions to the 1988 Accord. 6 Among

other things, the Basel Committee is

exploring the concept of using

sophisticated internal risk measurement

systems in the development of

minimum capital standards. The Basel

Committee is also developing a

standardized approach that proposes

revisions to the risk-weight framework

of the 1988 Accord which might

incorporate external ratings in the

assessment of a minimum capital

requirement.

While the approaches contemplated

in the proposed revisions to the 1988

Accord may be appropriate for some

large, complex, internationally active

banks, many small domestic banking

organizations may not have or need the

infrastructure to implement a

sophisticated internal ratings-based

approach to regulatory capital.

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66195

Federal Register / Vol. 65, No. 214 / Friday, November 3, 2000 / Proposed Rules

Regardless of what revisions are made to

the 1988 Accord, however, given the

complexity of existing regulatory capital

rules, a simplified capital framework

could reduce regulatory burden for

many institutions without

compromising the principles of

prudential supervision.

The Agencies wish to explore all

options in the development of a

regulatory framework for non-complex

institutions. The following discussion

outlines the Agencies’ preliminary

views on ways to simplify the regulatory

capital framework for such institutions.

The Agencies encourage comments from

the industry and the public on all

aspects of this advance notice of

proposed rulemaking.

II. Discussion

A

he Agencies wish to explore all

options in the development of a

regulatory framework for non-complex

institutions. The following discussion

outlines the Agencies’ preliminary

views on ways to simplify the regulatory

capital framework for such institutions.

The Agencies encourage comments from

the industry and the public on all

aspects of this advance notice of

proposed rulemaking.

II. Discussion

A. Overview

This advance notice of proposed

rulemaking discusses how non-complex

institutions could be defined and

presents three possible alternatives for

measuring the regulatory capital of non-

complex institutions. The Agencies

believe that three key factors could

serve to define a non-complex

institution. These are the nature of the

institution’s activities, its asset size, and

its risk profile. Broadly stated, a

relatively small institution engaged in

non-complex activities that presents a

low-risk profile could be subject to a

more simplified capital framework

without compromising the safety and

soundness of the institution or the

banking system. The three broad

alternatives for a simplified framework

are a simple leverage ratio, a modified

leverage ratio and a risk-based

framework.

Question 1: Do institutions view

maintenance of the current risk-based

capital standards as posing undue

burden for small institutions? If so,

how? Would views change if the current

standards were revised to make them

more risk-sensitive, in line with the

contemplated revisions to the 1988

Basel Accord as set forth in the June

1999 consultative paper?

Question 2: For non-complex

institutions, should the Agencies

maintain the current risk-based capital

standards or develop a simplified

capital adequacy framework? What are

the advantages and disadvantages of

adopting a separate framework?

B. Defining a Non-Complex Institution

The Agencies are considering the

nature of a non-complex institution’s

activities, its asset size, and its risk

profile as determinants of eligibility for

the simplified capital framework

ntain the current risk-based capital

standards or develop a simplified

capital adequacy framework? What are

the advantages and disadvantages of

adopting a separate framework?

B. Defining a Non-Complex Institution

The Agencies are considering the

nature of a non-complex institution’s

activities, its asset size, and its risk

profile as determinants of eligibility for

the simplified capital framework. In

general, the Agencies believe that a

‘‘non-complex institution’’ would

possess the following characteristics:

—A relatively small asset size (e.g.,

consolidated assets of less than $5

billion).

—A relatively simple and low-risk

balance sheet (e.g., primarily

traditional, nonvolatile assets and

liabilities).

—A moderate level of off-balance sheet

activity that is compatible with core

business activities (e.g., commitments,

in the case of residential lenders).

—A minimal use of financial derivatives

(i.e., institution uses financial

derivatives solely for risk

management purposes.)

—A relatively simple scope of

operations and relatively little

involvement in nontraditional

activities as a source of income.

In this section, the Agencies describe

possible criteria that could be used to

determine whether an institution could

be considered a non-complex

institution.

Nature of Activities

Objective criteria could be used to

measure the level of complexity

associated with the activities conducted

by domestic banking organizations. The

Consolidated Reports of Condition and

Income and Thrift Financial Reports

(regulatory reports) provide the

Agencies with information on the

structure and operations of an

institution. While subject to certain

limitations, these data elements could

provide objective support for defining a

set of non-complex institutions.

The Agencies are considering using

various data elements as an initial

screen for determining whether a

particular institution exhibits a

‘‘complex’’ profile

latory reports) provide the

Agencies with information on the

structure and operations of an

institution. While subject to certain

limitations, these data elements could

provide objective support for defining a

set of non-complex institutions.

The Agencies are considering using

various data elements as an initial

screen for determining whether a

particular institution exhibits a

‘‘complex’’ profile. That is, where an

institution reports a significant amount

of certain data elements, the Agencies

may consider the institution to be

complex. Items collected within

regulatory reports that could be used

include: Trading assets and liabilities;

interest only strips; credit derivatives—

guarantor and beneficiary; foreign

exchange spot contracts; other off-

balance sheet assets and liabilities;

foreign exchange, equity, commodity,

and other derivatives; purchased

mortgage servicing rights; purchased

credit card relationships; structured

notes; performance standby letters of

credit; and interest rate derivatives. Data

elements such as these could provide an

initial screen for determining whether a

particular institution exhibits a

‘‘complex’’ profile.

The Agencies envision using

additional data elements that might

become available due to revisions to

regulatory reporting requirements. A

concern about such screening criteria is

setting an appropriate threshold level

for reported activities. The number of

institutions that may qualify as non-

complex depends upon the threshold

level set in establishing the screening

criteria

‘‘complex’’ profile.

The Agencies envision using

additional data elements that might

become available due to revisions to

regulatory reporting requirements. A

concern about such screening criteria is

setting an appropriate threshold level

for reported activities. The number of

institutions that may qualify as non-

complex depends upon the threshold

level set in establishing the screening

criteria.

Question 3: What specific data

elements should be considered in

determining whether an institution is

non-complex? At what level should the

thresholds be set for such elements to

qualify for the non-complex framework?

Question 4: What information sources

other than regulatory reports are

available for measuring the level of

complexity of domestic banking

organizations (e.g., examination reports

or other supervisory information or

ratings)?

Asset Size

The Agencies believe that a strong

relationship exists between the asset

size of an institution and its relative

complexity. In general, banking

organizations of larger asset size exhibit

greater levels of complexity. The

strength of this correlation changes with

the size of the institution. For example,

banking organizations with assets of less

than $5 billion generally engage in less

complex activities than larger banking

organizations. This effect is generally

more pronounced for institutions with

less than $1 billion in assets. However,

some smaller banking organizations are

engaged in activities reflecting a high

level of complexity. The Agencies are

considering the extent to which asset

size alone might be sufficient to

determine which banking organizations

may be eligible for the non-complex

capital framework

organizations. This effect is generally

more pronounced for institutions with

less than $1 billion in assets. However,

some smaller banking organizations are

engaged in activities reflecting a high

level of complexity. The Agencies are

considering the extent to which asset

size alone might be sufficient to

determine which banking organizations

may be eligible for the non-complex

capital framework.

Question 5: What are the advantages

and disadvantages of using asset size to

determine ‘‘complexity’’? What would

be a reasonable and appropriate asset

size limit for banking organizations to

qualify for the non-complex framework?

Question 6: Should banking

organizations within a holding company

be subject to an asset size limit based on

an aggregate or individual institution

basis?

Question 7: Should the Agencies

apply a simplified framework to all non-

complex institutions regardless of size?

Question 8 :Should off-balance sheet

assets (e.g., securitized assets) be

considered within the asset size limit?

If not, why not?

Risk Profile

The Agencies are considering whether

banking organizations of any size that

present a higher risk profile should be

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66196

Federal Register / Vol. 65, No. 214 / Friday, November 3, 2000 / Proposed Rules

7 Section 38 of the Federal Deposit Insurance Act

(12 U.S.C. 1831o) establishes PCA guidelines as

they relate to capital standards. In general, the

capital standards prescribed by each appropriate

Federal banking agency shall include a leverage

limit and a risk-based capital requirement.

However, the section also states that an appropriate

Federal banking agency may, by regulation,

establish any additional relevant capital measures

to carry out the purpose of this section, or rescind

any relevant capital measure upon determining that

the measure is no longer an appropriate means for

carrying out the purpose of this section

ude a leverage

limit and a risk-based capital requirement.

However, the section also states that an appropriate

Federal banking agency may, by regulation,

establish any additional relevant capital measures

to carry out the purpose of this section, or rescind

any relevant capital measure upon determining that

the measure is no longer an appropriate means for

carrying out the purpose of this section.

required to comply with a more

sophisticated risk measurement and

capital adequacy framework. A small

asset size and lack of complexity do not

necessarily equate to lower risk. There

can be instances where a small and

otherwise non-complex banking

organization may be exposed to risks

that warrant excluding the institution

from the simplified framework.

Factors considered when assessing an

institution’s overall risk profile should

include the level of involvement in

activities that present greater degrees of

credit, liquidity, market, or other risks,

such as sub-prime lending activities,

significant asset securitization activities,

or trading activities. The issues

encountered in trying to define ‘‘high-

risk’’ are similar to those encountered in

trying to define ‘‘non-complex.’’

Approaches could include objective

measures derived from regulatory

reporting data (as discussed previously)

or more subjective alternatives that

incorporate assessments made by

supervisors in reports of examination, or

some combination of objective measures

and subjective assessments.

Question 9: What methods for

determining a ‘‘low-risk’’ institution are

reasonable and appropriate?

C. Setting a Minimum Capital Threshold

for Non-Complex Institutions

While a simplified capital framework

for non-complex institutions might be

less burdensome, such a framework

might also be less risk sensitive and

flexible. For this reason, the Agencies

believe that the minimum capital

standard should be set at a level that

more than adequately addresses the

risks that may not precisely or

specifically be measured and identified

by the simplified framework

utions

While a simplified capital framework

for non-complex institutions might be

less burdensome, such a framework

might also be less risk sensitive and

flexible. For this reason, the Agencies

believe that the minimum capital

standard should be set at a level that

more than adequately addresses the

risks that may not precisely or

specifically be measured and identified

by the simplified framework. The

minimum capital level in such a

framework should be a relatively high

threshold above which supervisory

concerns regarding capital adequacy are

minimized. Therefore, a higher

minimum capital requirement may

ensure that banking organizations that

are exempted from the risk-sensitive

measures continue to hold sufficient

capital.

Setting a higher minimum capital

threshold for non-complex institutions

raises issues and concerns. To the

greatest extent possible, the simplified

framework should avoid creating

regulatory arbitrage incentives vis-a´-vis

the risk-based capital standards.

However, the minimum capital level for

non-complex institutions must continue

to promote safety and soundness. A

higher minimum threshold in exchange

for simpler standards, therefore, may be

an appropriate trade-off.

One method to address these concerns

is to establish a system that allows a

degree of flexibility in designating an

institution non-complex and subject to

the simplified capital framework. For

example, a non-complex institution

could be allowed, but not required, to

calculate its capital under the simplified

framework. A non-complex institution

could instead elect to use the more

sophisticated, risk-based framework

applicable to international or

‘‘complex’’ banking organizations. The

trade-off between burden and benefit

could be a determination reached by the

individual institution, with appropriate

supervisory oversight

could be allowed, but not required, to

calculate its capital under the simplified

framework. A non-complex institution

could instead elect to use the more

sophisticated, risk-based framework

applicable to international or

‘‘complex’’ banking organizations. The

trade-off between burden and benefit

could be a determination reached by the

individual institution, with appropriate

supervisory oversight.

Question 10: What factors should be

considered in the determination of a

minimum threshold capital level for

non-complex institutions? Should

additional or different elements be

included in the definition of capital

under a non-complex framework?

Question 11: Should the institution

have the option to decide whether to

use the simplified framework?

D. Options for Measuring the Capital

Adequacy of Non-Complex Institutions

Each option should promote safety

and soundness while minimizing

regulatory burden. In addition, any

alternative to the existing framework

would have to be compatible with PCA

mandates. The Agencies have some

flexibility in establishing a relevant

capital measure for non-complex

institutions for PCA purposes.7 The

Agencies do not foresee eliminating the

leverage requirements established under

the Prompt Corrective Action standards.

The alternatives set out in the

following paragraphs are: (1) A risk-

based ratio (that maintains a leverage

requirement); (2) a leverage ratio; and

(3) a modified leverage ratio that

incorporates certain off-balance sheet

exposures. The Agencies also recognize

that the risk-based capital framework

remains a viable option for non-complex

institutions. The Agencies are seeking

input on these and any other

alternatives to measure regulatory

capital commensurate with the size,

structure, complexity, and risk profile of

non-complex institutions. Comment is

requested on the benefits and drawbacks

and potential impact on banking

organizations of each approach.

A Risk-Based Ratio

One alternative for a non-complex

framework is a risk-based capital

standard

Agencies are seeking

input on these and any other

alternatives to measure regulatory

capital commensurate with the size,

structure, complexity, and risk profile of

non-complex institutions. Comment is

requested on the benefits and drawbacks

and potential impact on banking

organizations of each approach.

A Risk-Based Ratio

One alternative for a non-complex

framework is a risk-based capital

standard. Such a risk-based capital

standard would be consistent with the

principles underlying the evolving risk-

based standards under discussion by the

Basel Committee, but could be tailored

to the size, structure, and risk profile of

less complex banking organizations. For

example, the risk-based approach could

be based upon a modified risk-weight

system that is consistent with the

structure of non-complex institutions.

Potentially, such a risk-based

standard for non-complex institutions

could both reduce burden and set

capital requirements in relation to risk.

Implementation of such a system could

also prove advantageous because it

would not require a structural overhaul

to the way banking organizations

currently compute capital requirements.

A potential weakness of such an

approach could be that, while striving

for the dual purposes of greater

simplicity and a better match between

capital requirements and risk, the

approach might fall short of attaining

either goal. In effect, it may turn out that

greater simplicity in risk-based capital

measures means requirements that are

less closely aligned to risk (and closer

to a leverage measure).

Alternatively, finer and more accurate

measurements of risk that require

greater computational complexity in the

determination of regulatory capital

means greater regulatory burden. A key

consideration in the development of a

simplified framework is to strike an

appropriate balance between these

potentially conflicting goals.

A Leverage Ratio

Another option for a capital adequacy

measure for non-complex institutions is

to use only a leverage ratio

of risk that require

greater computational complexity in the

determination of regulatory capital

means greater regulatory burden. A key

consideration in the development of a

simplified framework is to strike an

appropriate balance between these

potentially conflicting goals.

A Leverage Ratio

Another option for a capital adequacy

measure for non-complex institutions is

to use only a leverage ratio. Under this

alternative, non-complex institutions

would no longer be required to comply

with the risk-based capital framework.

The leverage ratio provides a simple,

straightforward measure of capital

relative to total assets.

A concern is that the leverage ratio

does not adequately account for off-

balance sheet exposures and that a

minimum capital requirement should

accommodate this expanding area of

banking risk. Even non-complex

institutions can generate significant off-

balance sheet exposures (e.g., by issuing

standby letters of credit, selling loans

with recourse, or extending short-term

loan commitments). Another weakness

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Federal Register / Vol. 65, No. 214 / Friday, November 3, 2000 / Proposed Rules

of the leverage ratio is that it does not

account for the wide spectrum of credit

risk and creates an incentive for the

institution to avoid investing in low-risk

assets.

A Modified Leverage Ratio

To address some of the concerns with

the leverage ratio discussed above, it

might be appropriate to consider

modifying the measure to account for

off-balance sheet exposures. A modified

leverage ratio could incorporate the

simplicity of the leverage ratio while

seeking to remedy its main weaknesses.

A modified leverage ratio would be a

relatively simple measure—a major

objective of the non-complex

framework

some of the concerns with

the leverage ratio discussed above, it

might be appropriate to consider

modifying the measure to account for

off-balance sheet exposures. A modified

leverage ratio could incorporate the

simplicity of the leverage ratio while

seeking to remedy its main weaknesses.

A modified leverage ratio would be a

relatively simple measure—a major

objective of the non-complex

framework. A disadvantage of the

modified leverage ratio is that, unlike

the risk-based approach, it would

provide no capital benefit to banking

organizations that maintain a low-risk

profile and might encourage institutions

to invest in higher-risk assets.

The appropriate capital framework for

a non-complex institution depends

partly on the screening criteria chosen

to assess complexity or risk. If complex

or high-risk banking organizations can

be effectively screened out of the non-

complex category, then the benefits of a

leverage-based approach will likely be

enhanced. Similarly, if banking

organizations with significant off-

balance sheet items are screened out of

the non-complex framework, then use of

a modified leverage ratio (that

incorporates off-balance sheet items)

might be unnecessary to assure

sufficient levels of regulatory capital.

Question 12: What elements of the

current risk-based framework should be

retained within a simplified risk-based

framework? What elements should not

be included?

Question 13: Should classes of assets

be re-assigned to other and potentially

new risk weights, based on relative

comparisons of historical charge-off data

or other empirical sources, including

but not limited to credit ratings?

Question 14: Is a leverage ratio a

sufficient method for determining

capital adequacy of non-complex

institutions in a range of economic

conditions?

Question 15: If off-balance sheet items

are incorporated into a modified

leverage ratio, what items should be

incorporated, and how?

Question 16: What degree of burden

reduction is foreseeable regarding any of

the alternatives? Do the foreseeable

benefits of

n 14: Is a leverage ratio a

sufficient method for determining

capital adequacy of non-complex

institutions in a range of economic

conditions?

Question 15: If off-balance sheet items

are incorporated into a modified

leverage ratio, what items should be

incorporated, and how?

Question 16: What degree of burden

reduction is foreseeable regarding any of

the alternatives? Do the foreseeable

benefits of burden reduction outweigh

any concerns about establishing a non-

complex domestic framework?

E. Implementation Issues

The establishment of a simplified

capital framework presents a host of

implementation issues. How would

banking organizations be placed within

the simplified framework? Once

subjected to the simplified framework,

how would the institution transition to

a more complex framework, if needed?

Would there be a transition or

adjustment period? These

implementation issues can be foreseen,

but not fully addressed, until a

framework is determined.

Moreover, the Agencies must

determine the least burdensome and

most efficient manner to collect data

necessary to identify the universe of

non-complex institutions and to provide

this information to banking

organizations in a timely manner.

Options include requiring the Agencies

to determine which banking

organizations are subject to the non-

complex framework using current

regulatory reports, or requiring a

banking organization to seek entry into

the non-complex framework by filing an

application.

On an ongoing basis, a change in size,

structure, complexity, or risk profile of

a non-complex institution could impact

its continued eligibility for the

simplified framework. Institutions that

were no longer deemed ‘‘non-complex’’

could be required to comply with the

standards applicable to complex

banking organizations or to take other

remedial steps. For an institution

transitioning from the non-complex

framework to the complex regime, an

adjustment period might be necessary to

meet reporting and capital

requirements

ontinued eligibility for the

simplified framework. Institutions that

were no longer deemed ‘‘non-complex’’

could be required to comply with the

standards applicable to complex

banking organizations or to take other

remedial steps. For an institution

transitioning from the non-complex

framework to the complex regime, an

adjustment period might be necessary to

meet reporting and capital

requirements.

Establishment of a process for

monitoring on-going eligibility for the

simplified framework should also be

considered. The process used to collect

and report data should not undermine

burden reduction, one of the primary

objectives of a non-complex framework.

Question 17: How could the non-

complex capital adequacy framework be

initially implemented and thereafter

applied on an ongoing basis?

Question 18: Should banking

organizations no longer deemed ‘‘non-

complex’’ be required to comply with

the otherwise applicable capital

standards? What other alternatives

could be made available for these

banking organizations? What types of

transition would be most appropriate?

III. OCC and OTS Executive Order

12866 Determination

The Comptroller of the Currency and

the Director of the Office of Thrift

Supervision have determined that this

advance notice of proposed rulemaking

does not constitute a significant

regulatory action under Executive Order

12866.

Dated: October 26, 2000.

John D. Hawke, Jr.,

Comptroller of the Currency.

By order of the Board of Governors of the

Federal Reserve System, October 23, 2000.

Jennifer J. Johnson,

Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, DC, this 17th day of

October, 2000.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: October 19, 2000.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 00–28270 Filed 11–2–00; 8:45 am]

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;

6720–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No

t Washington, DC, this 17th day of

October, 2000.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: October 19, 2000.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 00–28270 Filed 11–2–00; 8:45 am]

BILLING CODE 4810–33–P; 6210–01–P; 6714–01–P;

6720–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 2000–NM–70–AD]

RIN 2120–AA64

Airworthiness Directives; Airbus Model

A319, A320, and A321 Series Airplanes

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) that is applicable to all

Airbus Model A319, A320, and A321

series airplanes. This proposal would

require revising the Airworthiness

Limitations Section of the Instructions

for Continued Airworthiness to

incorporate service life limits for certain

items and inspections to detect fatigue

cracking, accidental damage, or

corrosion in certain structures. This

proposal is prompted by issuance of a

revision to Airbus Industrie A319/A320/

A321 Maintenance Planning Document

and Airworthiness Limitation Items

document, which specify new or more

restrictive compliance times for

structural inspection and replacement

action. The actions specified by the

proposed AD are intended to ensure the

structural integrity of these airplanes.

DATES: Comments must be received by

December 4, 2000.

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