[Federal Register Volume 59, Number 198 (Friday, October 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-25299]


[[Page Unknown]]

[Federal Register: October 14, 1994]


                                                   VOL. 59, NO. 198

                                           Friday, October 14, 1994

DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 94-16]
RIN 1557-AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-0849]

 

Capital; Capital Adequacy Guidelines

AGENCIES: The Office of the Comptroller of the Currency (OCC), 
Department of the Treasury and the Board of Governors of the Federal 
Reserve System (FRB).

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The OCC and FRB (the agencies) are proposing to amend their 
respective risk-based capital guidelines to modify the definition of 
the OECD-based group of countries. Claims on the governments and banks 
of this group generally receive lower risk weights than corresponding 
claims on the governments and banks of non-OECD-based countries. The 
agencies are proposing this amendment on the basis of an announcement, 
made on July 15, 1994, by the Basle Committee on Banking Supervision 
(Basle Committee) that, subject to national consultation, the Basle 
Committee plans to introduce a change to the Basle Accord in 1995. The 
effect of the proposed modification would be to exclude from the OECD-
based group of countries which are eligible for the lower risk weights 
any country that has rescheduled its external sovereign debt within the 
previous five years.

DATES: Comments must be received on or before December 13, 1994.

ADDRESSES: Interested parties are invited to submit written comments to 
any or all of the agencies. Each agency will share the comments that it 
receives with the other agencies.
    OCC: Written comments should be submitted to Docket No. 94-16, 
Communications Division, Ninth Floor, Office of the Comptroller of the 
Currency, 250 E. Street, Washington, D.C., 20219, Attention: Karen 
Carter. Comments will be available for inspection and photocopying at 
that address.
    FRB: Comments should refer to Docket No. R-0849 and may be mailed 
to William W. Wiles, Secretary, Board of Governors of the Federal 
Reserve System, 20th Street and Constitution Avenue, N.W., Washington, 
D.C. 20551. Comments may also be delivered to Room B-2222 of the Eccles 
Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the guard 
station in the Eccles Building courtyard on 20th Street, N.W. (between 
Constitution Avenue and C Street) at any time. Comments may be 
inspected in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
Rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT:

    OCC: Geoffrey White, Senior International Economic Advisor, 
International Banking and Finance Division, (202) 874-4730; Ronald 
Shimabukuro, Senior Attorney, Bank Operations and Assets Division, 
(202) 874-4460; or Roger Tufts, Senior Economic Advisor, Office of the 
Chief National bank Examiner, (202) 874-5070.
    FRB: Roger Cole, Deputy Associate Director (202/452-2618), Norah 
Barger, Manager (202/452-2402), Robert Motyka, Supervisory Financial 
Analyst (202/452-3621), Division of Banking Supervision and Regulation; 
or Greg Baer, Managing Senior Counsel (202/452-3236), Legal Division. 
For the hearing impaired only, Telecommunication Device for the Deaf, 
Dorothea Thompson (202)/452-3544).

SUPPLEMENTARY INFORMATION:

I. Background

    In 1988 the central bank governors of the G-10 countries endorsed 
international capital standards (the Basle Accord)1 establishing a 
risk-based framework for measuring the capital adequacy of 
internationally-active banks. Under the framework, risk-weighted assets 
are calculated by assigning assets and off-balance-sheet items to broad 
categories based primarily on their credit risk, that is, the risk that 
a banking organization will incur a loss due to an obligor or 
counterparty default on a transaction. Risk weights range from zero 
percent, for assets with minimal credit risk (such as U.S. Treasury 
securities), to 100 percent, which is the risk weight that applies to 
most private sector claims, including all commercial loans.
---------------------------------------------------------------------------

    \1\The Basle Accord was proposed by the Basle Committee, which 
comprises representatives of the central banks and supervisory 
authorities from the G-10 countries (Belgium, Canada, France, 
Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the 
United Kingdom, and the United States) and Luxembourg.
    In 1989 the Board adopted risk-based capital guidelines 
implementing the Basle Accord for state member banks and bank 
holding companies.
---------------------------------------------------------------------------

    While the Basle Accord primarily focuses on credit risk, it also 
incorporates country transfer risk considerations.2 In addressing 
transfer risk, the Basle Committee members examined several methods for 
assigning obligations of foreign countries to the various risk 
categories. Ultimately, the Basle Committee decided to use a defined 
group of countries considered to be of high credit standing as the 
basis for differentiating claims on foreign governments and banks. For 
this purpose, the Basle Committee determined this group as the full 
members of the Organization for Economic Cooperation and Development 
(OECD), as well as countries that have concluded special lending 
arrangements with the International Monetary Fund (IMF) associated with 
the IMF's General Arrangements to Borrow.3 These countries are 
referred to as the OECD-based group of countries4 and encompass 
most of the major industrial countries, including all members of the G-
10 and the European Union.
---------------------------------------------------------------------------

    \2\Transfer risk generally refers to the possibility that an 
asset cannot be serviced in the currency of payment because of a 
lack of, or restraints on, the availability of needed foreign 
exchange in the country of the obligor.
    \3\The OECD is an international organization of countries which 
are committed to market-oriented economic policies, including the 
promotion of private enterprise and free market prices; liberal 
trade policies; and the absence of exchange controls. Full members 
of the OECD at the time the Basle Accord was endorsed included 
Australia, Austria, Belgium, Canada, Denmark, Finland, France, 
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, the 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, 
Switzerland, Turkey, the United Kingdom, and the United States. In 
May 1994, Mexico was accepted as a full member of the OECD. In 
addition, Saudi Arabia has concluded special lending arrangements 
associated with the International Monetary Fund's General 
Arrangements to Borrow.
    \4\FRB regulations define this group as the ``OECD-based group 
of countries.'' OCC regulations define a member of this group as an 
``OECD-based country.'' While the choice of words is slightly 
different, the definitions are effectively the same, and the use of 
either definition in this preamble should be taken to refer to both.
---------------------------------------------------------------------------

    Under both the Basle Accord and the agencies' guidelines, claims on 
the governments and banks of the OECD-based group of countries 
generally receive lower risk weights than corresponding claims on the 
governments and banks of non-OECD countries. Specifically, the 
agencies' guidelines provide for the following treatment:
     Direct claims on, and the portions of claims that are 
directly and unconditionally guaranteed by, OECD-based central 
governments (including central banks) are assigned to the zero percent 
risk weight category. Claims on central governments outside the OECD-
based group are assigned to the zero percent risk weight category only 
if such claims are denominated in the national currency and funded by 
liabilities in the same currency.
     Claims conditionally guaranteed by OECD-based central 
governments and claims collateralized by securities issued or 
guaranteed by OECD-based central governments generally are assigned to 
the 20 percent risk weight category. The same types of claims on non-
OECD countries are assigned to the 100 percent risk category.
     Long-term claims on OECD banks are assigned to the 20 
percent risk-weight category. Long-term claims on non-OECD banks are 
assigned to the 100 percent risk category. (Short-term claims on all 
banks, whether they are members of the OECD-based group of countries or 
not, are assigned a 20 percent risk weight.)
     General obligation bonds that are obligations of states or 
other political subdivisions of the OECD-based group of countries are 
assigned to the 20 percent risk category. Revenue bonds of such 
political subdivisions are assigned to the 50 percent risk category. 
Both general obligation and revenue bonds of political subdivisions of 
non-OECD countries are assigned to the 100 percent risk category.
    Recently, the OECD has taken steps to expand its membership. In 
light of these steps, the Basle Committee was urged to clarify an 
ambiguity in the Basle Accord as to whether the OECD members eligible 
for the lower risk weights include only those members that were in the 
OECD when the Basle Accord was endorsed in 1988 or all members, 
regardless of entry date into the OECD. The Basle Committee also 
reviewed the overall appropriateness of the criteria the Basle Accord 
uses to determine whether claims on a foreign government or bank 
qualify for placement in a lower risk category. As part of this review, 
the Basle Committee reassessed whether membership in the OECD (or the 
conclusion of special lending arrangements with the IMF) would, by 
itself, be sufficient to ensure that only countries with relatively low 
transfer risk would continue to be eligible for lower risk weight 
treatment.
    On July 15, 1994, the Basle Committee made an announcement that 
clarified that the reference in the Basle Accord to OECD members 
applies to all current members of the organization. The announcement 
also stated that it is the Basle Committee's intention, subject to 
national consultation, to record a change to the Basle Accord in 1995 
that would modify the definition of the OECD-based group of countries 
for risk-based capital purposes. The change, if adopted, would exclude 
from lower risk weight treatment any country within the OECD-based 
group of countries that has rescheduled its external sovereign debt 
within the previous five years. The Basle Committee announcement was 
endorsed by the G-10 Governors.

II. The Agencies' Proposal

    In view of the Basle Committee's announcement, the agencies are 
proposing to amend their respective risk-based capital guidelines to 
modify the definition of the OECD-based group of countries. Under the 
proposal, the OECD-based group of countries would continue to include 
countries that are currently full members of the OECD, regardless of 
entry date, as well as countries that have concluded special lending 
arrangements with the IMF associated with the Fund's General 
Arrangements to Borrow, but would exclude any country within this group 
that has rescheduled its external sovereign debt within the previous 
five years. The effect of the proposed modification would be to clarify 
that membership in the OECD-based group of countries must coincide with 
relatively low transfer risk in order for a country to be eligible for 
differentiated capital treatment.
    For purposes of this proposal, an event of rescheduling of external 
sovereign debt generally would include renegotiations of terms arising 
from the country's inability or unwillingness to meet its external debt 
service obligations. Renegotiations of debt in the normal course of 
business generally does not indicate transfer risk of the kind that 
would preclude an OECD-based country from qualifying for lower risk 
weight treatment. One example of such a routine renegotiation would be 
a renegotiation to allow the borrower to take advantage of a change in 
market conditions, such as a decline in interest rates.
    The agencies invite comment on all aspects of this proposal.

III. Regulatory Flexibility Act

    The agencies hereby certify that adoption of this proposal would 
have a significant economic impact on a substantial number of small 
business entities (in this case, small banking organizations), in 
accord with the spirit and purposes of the Regulatory Flexibility Act 
(5 U.S.C. 601 et seq.). In addition, because the risk-based capital 
standards generally do not apply to bank holding companies with 
consolidated assets of less than $150 million, this proposal will not 
affect such companies. Accordingly, no regulatory flexibility analysis 
is required.

IV. Paperwork Reduction Act

    The agencies have determined that adoption of the proposed 
amendments would not increase the regulatory paperwork burden of 
banking organizations pursuant to the provisions of the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.).

Executive Order 12866

    The OCC has determined that this proposed rule is not a significant 
regulatory action, as that term is defined by Executive Order 12866.

List of Subjects

12 CFR Part 3

    Administrative practice and procedure, Capital, National banks, 
Reporting and recordkeeping requirements, Risk.

12 CFR Part 208

    Accounting, Agriculture, Banks, banking, Capital adequacy, 
Confidential business information, Currency, Federal Reserve System, 
Reporting and recordkeeping requirements, Securities, State member 
banks.

12 CFR Part 225

    Administrative practice and procedure, Banks, banking, Capital 
adequacy, Federal Reserve System, Holding companies, Reporting and 
recordkeeping requirements, Securities.

Authority and Issuance

Office of the Comptroller of the Currency

12 CFR Chapter I

    For the reasons set out in the joint preamble, title 12, chapter I, 
part 3 of the Code of Federal Regulations is proposed to be amended as 
set forth below.

PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES

    1. The authority citation for Part 3 is revised to read as follows:

    Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n 
note, 3907 and 3909.

    2. In section 1 of appendix A to part 3, paragraph (c)(16) is 
revised to read as follows:

Appendix A to Part 3--Risk-Based Capital Guidelines

Section 1. Purpose, Applicability of Guidelines, and Definitions.

* * * * *
    (c) * * *
    (16) OECD-based country means a member of the grouping of 
countries that are full members of the Organization of Economic 
Cooperation and Development, plus countries that have concluded 
special lending arrangements with the International Monetary Fund 
(IMF) associated with the IMF's General Arrangements to Borrow, but 
excludes any country that has rescheduled its external sovereign 
debt within the previous five years. These countries are hereinafter 
referred to as ``OECD countries''.
* * * * *
    Dated: October 4, 1994
Eugene A. Ludwig,
Comptroller of the Currency.

Federal Reserve System

12 CFR Chapter II

    For the reasons set forth in the joint preamble, the Board proposes 
to amend 12 CFR parts 208 and 225 as set forth below:

PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL 
RESERVE SYSTEM (REGULATION H)

    1. The authority citation for part 208 is revised to read as 
follows:

    Authority: 12 U.S.C. 36, 248 (a) and (c), 321-338a, 371d, 461, 
481-486, 601, 611, 1814, 1823(j), 1828(o), 1831o, 1831p-1, 3105, 
3310, 3331-3351, and 3906-3909; 15 U.S.C. 78b, 78l(b), 78l(g), 
78l(i), 78o-4(c)(5), 78q, 78q-1 and 78w; 31 U.S.C. 5318.

    2. Appendix A to part 208 is amended by revising footnote 22 in 
section III.B.1. to read as follows:

Appendix A to Part 208--Capital Adequacy Guidelines for State Member 
Banks: Risk-Based Measure

* * * * *
    III. * * *
    B. * * *
    1. * * *\22\ * * *

    \22\ The OECD-based group of countries comprises all full 
members of the Organization for Economic Cooperation and Development 
(OECD), as well as countries that have concluded special lending 
arrangements with the International Monetary Fund (IMF) associated 
with the IMF's General Arrangements to Borrow, but excludes any 
country that has rescheduled its external sovereign debt within the 
previous five years. The OECD includes the following countries: 
Australia, Austria, Belgium, Canada, Denmark, Finland, France, 
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, 
Switzerland, Turkey, the United Kingdom, and the United States. 
Saudi Arabia has concluded special lending arrangements with the IMF 
associated with the IMF's General Arrangements to Borrow.
* * * * *

PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL 
(REGULATION Y)

    1. The authority citation for part 225 continues to read as 
follows:

    Authority: 12 U.S.C. 1817(j)(13), 1818,1831i, 1843(c)(8), 
1844(b), 1972(l), 3106, 3108, 3310, 3331-3351, 3907, and 3909.

    2. Appendix A to part 225 is amended by revising footnote 25 in 
section III.B.1. to read as follows:

Appendix A To Part 225--Capital Adequacy Guidelines for Bank Holding 
Companies: Risk-Based Measure

* * * * *
    III. * * *
    B. * * *
    1. * * *\25\ * * *

    \25\ The OECD-based group of countries comprises all full 
members of the Organization for Economic Cooperation and Development 
(OECD), as well as countries that have concluded special lending 
arrangements with the International Monetary Fund (IMF) associated 
with the IMF's General Arrangements to Borrow, but excludes any 
country that has rescheduled its external sovereign debt within the 
previous five years. The OECD includes the following countries: 
Australia, Austria, Belgium, Canada, Denmark, Finland, France, 
Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, 
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, 
Switzerland, Turkey, the United Kingdom, and the United States. 
Saudi Arabia has concluded special lending arrangements with the IMF 
associated with the IMF's General Arrangements to Borrow.
* * * * *
    By the order of the Board of Governors of the Federal Reserve 
System, October 6, 1994.
Jennifer J. Johnson,
Deputy Secretary of the Board.
[FR Doc. 94-25299 Filed 10-13-94; 8:45 am]
BILLING CODES: 4810-33-P; 6210-01-P