[Federal Register Volume 60, Number 31 (Wednesday, February 15, 1995)]
[Proposed Rules]
[Pages 8581-8583]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-3692]



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[[Page 8582]]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AB54


Capital Maintenance

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed Rule.

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SUMMARY: The FDIC is proposing to amend its 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 FDIC is 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 on the proposal must be received by March 17, 1995.

ADDRESSES: All comments should be submitted to Robert E. Feldman, 
Acting Executive Secretary, Attention: Room F-402, Federal Deposit 
Insurance Corporation, 550 17 Street NW., Washington, D.C. 20429. 
Comments may be hand delivered to Room F-402, 1776 F Street NW., 
Washington, DC, on business days between 8:30 a.m. and 5:00 p.m. [Fax 
number: (202)898-3838.] Comments will be available for inspection at 
the FDIC's Reading Room, Room 7118, 550 17th Street NW., Washington, 
D.C. between 9:00 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: For supervisory purposes, Stephen G. 
Pfeifer, Examination Specialist, Accounting Section, Division of 
Supervision (202/898-8904); for legal purposes, Dirck A. Hargraves, 
Attorney, Legal Division (202/898-7049).

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 commercial loans.

    \1\The Basle Accord was issued in 1988 by the Basle Committee, 
which is comprised of 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 FDIC adopted a Statement of Policy on Risk-Based Capital 
(Appendix A to Part 325) to implement the Basle Accord. This risk-
based capital policy statement applies to the state nonmember banks 
for which the FDIC is the appropriate federal banking agency.
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    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 countries 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.
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    Under both the Basle Accord and the FDIC's risk-based capital 
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 FDIC's risk-based capital policy statement provides 
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 (i.e., local 
currency claims) 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 
[[Page 8583]] 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 to 
clarify 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. Proposed Rule

    In view of the Basle Committee's announcement, the FDIC is 
proposing to amend its 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 do 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 FDIC invites comment on all aspects of this proposal.

III. Regulatory Flexibility Act

    The Board of Directors of the FDIC hereby certifies that adoption 
of this proposed amendment to part 325 will not have a significant 
economic impact on a substantial number of small business entities (in 
this case, small banking organizations) within the meaning of the 
Regulatory Flexibility Act requirements (5 U.S.C. 601 et seq.). This 
amendment will not necessitate the development of sophisticated 
recordkeeping or reporting systems by small institutions nor will small 
institutions need to seek out the expertise of specialized accountants, 
lawyers, or managers to comply with this regulation. In light of this 
certification, the Regulatory Flexibility Act requirements (at 5 U.S.C. 
603, 604) to prepare initial and final regulatory flexibility analyses 
do not apply.

IV. Paperwork Reduction Act

    The FDIC has determined that the proposed amendment, if adopted, 
would not increase the regulatory paperwork burden of state nonmember 
banks pursuant to the provisions of the Paperwork Reduction Act (44 
U.S.C. 3501 et seq.). Consequently, no information has been submitted 
to the Office of Management and Budget for review.

List of Subjects in 12 CFR Part 325

    Bank deposit insurance, Banks, Banking, Capital adequacy, Reporting 
and recordkeeping requirements, Savings Associations, State nonmember 
banks.

    For the reasons set forth in the preamble, the Board of Directors 
of the Federal Deposit Insurance Corporation proposes to amend part 325 
of title 12 of the Code of Federal Regulations as follows:

PART 325--CAPITAL MAINTENANCE

    1. The authority citation for Part 325 continues to read as 
follows:

    Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 
1828(o), 1831o, 3907, 3909; Pub. L. 102-233, 105 Stat. 1761, 1789, 
1790 (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat. 2236, 2355, 
2386 (12 U.S.C. 1828 note).

    2. Appendix A to part 325 is amended by revising footnote 12 in 
section II.B.2. to read as follows:

Appendix A to Part 325--Statement of Policy on Risk-Based Capital

* * * * *
    II. * * *
    B. * * *
    2. * * *\12\ * * *

    \12\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, 
the 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.
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* * * * *
    By order of the Board of Directors.

    Dated at Washington, D.C. this 31st day of January, 1995.

Federal Deposit Insurance Cprporation
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 95-3692 Filed 2-14-95; 8:45 am]
BILLING CODE 6714-01-P