[Federal Register Volume 60, Number 148 (Wednesday, August 2, 1995)]
[Proposed Rules]
[Pages 39495-39572]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-18099]




  Federal Register / Vol. 60, No. 148 / Wednesday, August 2, 1995 / 
Proposed Rules  
=======================================================================
-----------------------------------------------------------------------

[[Page 39495]]


DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 95-17]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. R-0802]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325


Joint Agency Policy Statement: Supervisory Policy Statement 
Concerning a Supervisory Framework for Measuring and Assessing Banks' 
Interest Rate Risk Exposure

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

ACTION: Policy statement; request for comment.

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

SUMMARY: The OCC, the Board, and the FDIC (collectively, ``the 
agencies'') seek comment on a proposed interagency Supervisory Policy 
to establish a uniform supervisory framework for measuring banks' 
interest rate risk (IRR) exposures. The proposed policy establishes a 
framework that the agencies would use to measure and monitor the level 
of IRR at individual banks. The measurement process proposed and 
described in this policy statement is intended to facilitate the 
agencies' assessment of a bank's IRR exposure and its capital adequacy. 
The results of the supervisory and internal models would be one factor 
used by the agencies in their assessments' of a bank's capital adequacy 
for IRR. Other factors that the agencies will consider include the 
quality of the bank's IRR risk management process, the overall 
financial condition of the bank, and the level of other risks at the 
bank for which capital is needed. Pursuant to the final rule banks may 
be required to hold additional capital.
    The proposed supervisory framework provides measures of the change 
in a bank's economic value for a given change in interest rates using a 
supervisory model. The framework also considers the results of a bank's 
internal model results when that model provides a measure of the change 
in a bank's economic value. Banks not specifically exempted from 
detailed IRR reporting would submit new IRR Call Report schedules 
indicating the maturity, repricing, or price sensitivity of their 
various on- and off-balance sheet instruments. A bank also would have 
the option of reporting its internal model estimates of the price 
sensitivity of its major portfolios and its economic value.
    Concurrent with the publication of this proposed Supervisory Policy 
statement, the agencies have issued a final rule that amends their 
capital guidelines for IRR. Those amendments indicate that the agencies 
will consider in their evaluation of a bank's capital adequacy, the 
exposure of a bank's capital and economic value to changes in interest 
rates. The amendments are in response to section 305 of the FDIC 
Improvement Act of 1991 (FDICIA) which requires the agencies to amend 
their risk-based capital standards to take adequate account of interest 
rate risk.
    As noted in the discussion of the final rule on IRR, the agencies 
intend, at a subsequent date, to incorporate explicit minimum 
requirements for IRR into their risk-based capital standards. The 
agencies anticipate that the measurement framework described in this 
proposed policy, will be the basis for such a capital requirement. 
Toward that end, the agencies intend to work with the industry to 
evaluate the reliability and accuracy of the results from the 
supervisory model and bank internal models. Any explicit minimum 
capital charge would be implemented through the agencies' rulemaking 
process and would provide the opportunity for public comment before a 
final rule is adopted.

DATES: Comments must be received by October 2, 1995.

ADDRESSES: Interested parties are invited to submit written comments to 
any or all of the agencies. All comments will be shared among the 
agencies.
    OCC: Written comments should be submitted to Docket No. 95-17, 
Communications Division, Ninth Floor, Office of the Comptroller of the 
Currency, 250 E Street, S.W., Washington, D.C. 20219, Attention: Karen 
Carter. Comments will be available for inspection and photocopying at 
that address.
    Board of Governors: Comments, which should refer to Docket No. R-
0802, may be mailed to Mr. William Wiles, Secretary, Board of Governors 
of the Federal Reserve System, 20th and Constitution Avenue, N.W., 
Washington, D.C. 20551. Comments addressed to Mr. Wiles may also be 
delivered to the Board's mail room between 8:45 a.m. and 5:15 p.m. and 
to the security control room outside of those hours. Both the mail room 
and control room are accessible from the courtyard entrance on 20th 
Street between Constitution Avenue and C Street, N.W. Comments may be 
inspected in Room B-1122 between 9:00 a.m. and 5:00 p.m., except as 
provided in 261.8 of the Board's ``Rules Regarding Availability of 
Information,'' 12 CFR 261.8.
    FDIC: Written comments should be sent to, Jerry L. Langley, 
Executive Secretary, Attention: Room F-402, Federal Deposit Insurance 
Corporation, 550 17th Street, N.W., Washington, D.C. 20429. Comments 
may be hand-delivered to Room F-402, 1776 F Street N.W., Washington, 
D.C. 20429, on business days between 8:30 a.m. and 5:00 p.m. [FAX 
number (202) 898-3838; Internet address: comments @ fdic.gov]. Comments 
will be available for inspection and photocopying in Room 7118, 550 
17th Street, N.W., Washington, D.C. 20429, between 9:00 a.m. and 4:30 
p.m. on business days.

FOR FURTHER INFORMATION CONTACT:
    OCC: Christina Benson, Capital Markets Specialist, or Lisa 
Lintecum, National Bank Examiner (202/874-5070), Office of the Chief 
National Bank Examiner; Michael Carhill, Financial Economist, Risk 
Analysis Division (202/874-5700); and Ronald Shimabukuro, Senior 
Attorney, Bank Operations and Assets Division (202/874-4460), Office of 
the Comptroller of the Currency, 250 E Street, S.W., Washington, D.C. 
20219.
    Board of Governors: James Houpt, Assistant Director (202/452-3358), 
William F. Treacy, Supervisory Financial Analyst (202/452-3859), 
Division of Banking Supervision and Regulation; Gregory Baer, Managing 
Senior Counsel (202/452-3236), Legal Division, Board of Governors of 
the Federal Reserve System. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), Dorothea Thompson (202/
452-3544), Board of Governors of the Federal Reserve System, 20th and C 
Streets, N.W., Washington, D.C. 20551.
    FDIC: William A. Stark, Assistant Director (202/898-6972) or 
Phillip J. Bond, Senior Capital Markets Specialist (202/898-3519), 
Division of Supervision, Federal Deposit Insurance Corporation, 550 
17th Street, N.W., Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

    Interest rate risk is the risk that changes in market interest 
rates will have an adverse effect on a bank's 

[[Page 39496]]
earnings and its underlying economic value. Changes in interest rates 
affect a bank's reported earnings by changing its net interest income 
and the level of other interest-sensitive income and operating 
expenses. The underlying economic value of the bank's assets, 
liabilities, and off-balance sheet instruments also is affected by 
changes in interest rates. These changes occur because the present 
value of future cash flows and in some cases, the cash flows 
themselves, are affected when interest rates change. The combined 
effects of the changes in these present values reflect the change in 
the bank's underlying economic value.
    Interest rate risk is inherent in the role of banks as financial 
intermediaries. However, a bank that has an excessive level of interest 
rate risk can face diminished future earnings, impaired liquidity and 
capital positions, and, ultimately, may jeopardize its solvency.
    The agencies believe that safety and soundness requires effective 
management and measurement of interest rate risk, and each agency has 
provided supervisory guidance to banks and examiners on this subject. 
In addition, the agencies believe that a bank's capital adequacy should 
be assessed in the context of the risks it faces, including interest 
rate risk. Section 305 of FDICIA Pub. L. 102-242 (12 U.S.C. 1828 note), 
on which a final rule is being issued at the same time as this 
statement, specifically requires the agencies to take account of 
interest rate risk in assessing capital adequacy. Both of these aspects 
of interest rate risk depend on, among other things, a meaningful 
measurement of the bank's risk exposure.
    The agencies believe that a bank should have an IRR measurement 
system that is commensurate with the nature and scope of its IRR 
exposures. Among the difficulties in performing a supervisory 
evaluation of interest rate risk, however, is that measurement systems 
and management philosophies can differ significantly from one bank to 
another. As a result, although two banks may each be well-managed, 
their measured exposure may not be directly comparable. This difficulty 
has been magnified by the rapid pace of change in financial markets and 
instruments themselves.
    In implementing Section 305 of FDICIA, and in light of the rapid 
evolution in financial instruments and practices, the agencies believe 
there is a need for a more formal supervisory assessment of banks' 
interest rate risk exposures. To support that effort, the agencies 
propose a measurement framework that includes a supervisory measurement 
system (``supervisory model'') that will, on a standardized basis, 
measure the risk of all banks not exempted from reporting additional 
information on their IRR exposures. In addition, banks will be 
encouraged to report, through a voluntary and confidential supplemental 
Call Report schedule, the results of their internal IRR measurement 
systems. These measured results would then serve as an additional 
source of information for an examiner's assessment of the bank's risk 
management and capital adequacy. The results also would provide 
information on industry trends and patterns that will better inform 
both present and future supervisory efforts related to interest rate 
risk.
    The measurement framework described in this policy statement 
focuses on the exposure to a bank's underlying economic value from 
movements in market interest rates. The exposure to a bank's economic 
value, as used in this policy statement, is defined as the change in 
the present value of its assets, minus the change in the present value 
of its liabilities, plus the change in the present value of its off-
balance sheet interest-rate positions. The agencies haven chosen this 
focus because they believe that changes in a bank's economic value best 
reflect the potential impact of embedded options and the potential 
exposure that the bank's current business activities pose to the bank's 
future earnings stream, and hence, its ability to sustain adequate 
capital levels. Changes in economic value measure the effect that a 
change in interest rates will have on the value of all of the future 
cash flows generated by a bank's current financial positions, not just 
those cash flows which affect earnings over the few months or quarters. 
Thus, changes in economic value provide a more comprehensive measure of 
risk than measures which focus solely on the exposure to a bank's near-
term earnings. It is for this reason that the agencies have amended 
their capital standards to identify explicitly a bank's exposure to 
declines in economic value from changes in interest rates as an 
important factor to consider in evaluating a bank's capital adequacy.
II. Summary of Approach

    In assessing the sensitivity of a bank's economic value to changes 
in interest rates, the agencies are proposing to use the results of a 
supervisory model and, for those electing to provide such analysis, the 
results of banks' own internal models. These assessments will rely on 
data reported in regulatory Call Reports. Recognizing that the burden 
for reporting IRR exposures would fall most heavily on smaller 
organizations with limited resources, the policy statement makes 
provisions for smaller, well-managed institutions that are less likely 
to be significantly exposed to IRR to be exempt from additional 
reporting. As described in further detail in the policy statement, the 
agencies propose that banks with (i) assets under $300 million, (ii) 
composite supervisory CAMEL ratings of 1 or 2 and, (iii) moderate or 
low holdings of assets with intermediate and long term maturity or 
repricing characteristics, be exempted from expanded reporting 
requirements for IRR.
    Banks that are not specifically exempted by the proposed policy 
statement will submit additional Call Report information on the 
repricing and maturity of their portfolios. The proposed supervisory 
model applies a series of IRR risk-weights to a bank's reported 
repricing and maturity balances. These weights estimate the price 
sensitivity of a bank's reported balances to a 200 basis point increase 
and decrease in interest rates. The summation of these balances, along 
with certain price sensitivity information that a bank may be required 
to self-report, results in a net risk-weighted exposure for the bank. 
That exposure represents the estimated change in the bank's economic 
value to the specified rate change.
    The proposed supervisory model represents a refinement of the model 
presented in the September 1993 notice of proposed rulemaking 
(September NPR) [58 FR 48206, September 14, 1993]. The September NPR 
solicited comments on a framework for measuring banks' exposure to IRR 
for capital purposes pursuant to Section 305 of FDICIA. The final rule 
for Section 305 does not incorporate an explicit measurement framework 
for IRR into the agencies' risk-based capital standards. The agencies 
have concluded that it is appropriate to first collect industry data 
and evaluate the performance of the measurement framework before 
explicitly incorporating the results of that framework into their risk-
based capital standards. The data collected by the agencies will assist 
current supervisory efforts and will facilitate the development of a 
measurement framework that could be explicitly incorporated into 
capital standards in the future. This proposed policy statement would 
implement that supervisory measurement framework. The proposed 
framework is broadly consistent with the one discussed in the September 
NPR. The agencies, however, have made several refinements to the 

[[Page 39497]]
supervisory model to improve its accuracy while still endeavoring to 
limit the burden of the expanded reporting and maintain model 
transparency. The refinements to the September NPR model include:

    (1) Separate risk-weights and reporting for residential 
adjustable-rate mortgages;
    (2) Separate risk-weights and reporting for residential fixed-
rate mortgages and all other amortizing assets;
    (3) Self-reporting by banks of price sensitivities of 
instruments with complex and/or non-standardized cash flow 
characteristics such as structured notes, collateralized mortgage 
obligations (CMOs), and mortgage servicing rights;
    (4) Supplemental reporting for banks with concentrations in 
adjustable- and fixed-rate mortgage loans.
    (5) Greater flexibility in reporting deposits without stated 
maturity or repricing dates;
    (6) Separate reporting and treatment in the baseline schedule 
for residential mortgage loans which are held by the bank for sale 
and delivery to a secondary market participant under terms of a 
binding commitment.

    A summary of the public comments and agency analysis that led to 
these refinements are included in section IV of this document and the 
refinements themselves are described in detail in the policy statement 
and accompanying reporting instructions.
    For a bank choosing also to report the results of its internal IRR 
model, the agencies are proposing to collect the dollar change in value 
of the bank's major portfolios and the net change in the bank's 
economic value using the same rate scenario incorporated in the 
supervisory model. To the extent specific details concerning a bank's 
financial instruments are incorporated in an internal model with 
adequate integrity and reasonable assumptions, those results should 
provide the agencies with an improved understanding of a bank's IRR 
profile. For a bank reporting internal model results, an examiner would 
have the benefit of weighing the results of both measures in assessing 
a bank's overall IRR exposure for capital adequacy purposes. Moreover, 
comparisons between the results of the supervisory model and internal 
models are expected to aid the agencies in determining what, if any, 
refinements should be made to the proposed measurement framework before 
incorporating it into a minimum capital charge for IRR.

III. CDFI Section 335 Considerations

    On September 23, 1994 the Reigle Community Development and 
Regulatory Improvement Act of 1994 (``CDFI'') (Pub. L. 103-325) was 
enacted. Section 335 of CDFI amended section 305 of FDICIA by 
instructing the agencies to be sure that steps taken to implement 
Section 305 ``take into account the size and activities of the 
institutions and do not cause undue reporting burdens.'' The agencies 
believe that the Congressional mandate to avoid undue reporting burdens 
is also applicable and desirable for purposes of implementing the 
proposed policy statement. Consequently, as already noted, the agencies 
have formulated a reporting exemption test that takes into account the 
size and activities of an institution. In addition, the reporting 
requirements for the supervisory model also considers the nature and 
scope of a bank's activities. Banks holding certain types of financial 
instruments that often have complex or nonstandardized cash flow 
characteristics will be expected to have the ability to calculate on 
their own, or obtain from reliable sources, estimates of those 
instruments' market value sensitivity. Banks with holdings of fixed- 
and adjustable-rate residential mortgage loans and securities that 
exceed certain levels would be required to report additional 
information on those portfolios to better assess the embedded option 
risks associated with those products.
IV. September 1993 Notice of Proposed Rulemaking

A. Description of September NPR

    In September 1993, the Banking Agencies issued a notice of proposed 
rulemaking (September NPR) [58 FR 48206, September 14, 1993] that 
solicited comments on a framework for measuring a bank's IRR exposure 
and determining the amount of capital the bank needed for IRR.
    The framework outlined in the September NPR incorporated the use of 
a three-level measurement process to evaluate banks' IRR exposures. The 
first measure was a quantitative screen, based on existing Call Report 
information, that exempted potential low risk banks from additional 
reporting requirements. The exemption screen used two criteria: (1) The 
amount of a bank's off-balance-sheet interest rate contracts in 
relation to its total assets; and (2) the relation between a bank's 
fixed- and floating-rate loans and securities that mature or reprice 
beyond five years and its total capital.
    Banks not meeting the proposed exemption test were required to 
calculate their economic exposure by either: (1) A supervisory model 
that measured the change in the economic value of bank for a specified 
change in interest rates; or (2) the bank's own IRR model, provided 
that the model was deemed adequate by examiners for the nature and 
scope of the bank's activities and that it measured the bank's economic 
exposure using the interest rate scenarios specified by the agencies.

B. Comments on the September NPR Measurement Framework

    The agencies collectively received a total of 133 comments on the 
September NPR. The majority of commenters were banks. Thrift, trade 
associations, bank consultants, and other government-sponsored agencies 
and regulators also commented. The majority of commenters responded 
favorably to modifications that the agencies made from an earlier, 
advanced notice of proposed rulemaking (ANPR) [57 FR 35507, August 10, 
1992]. In particular, most commenters expressed strong support for 
using the results of a bank's own IRR model to determine its level of 
exposure and corresponding need for capital. Commenters noted the 
potential inaccuracies of standardized regulatory models as one reason 
for allowing the use of internal models. Internal models, they 
believed, would better capture the unique characteristics of individual 
bank portfolios. Many commenters also stated that permitting the use of 
internal models would provide banks with incentives to improve their 
internal risk measurement systems.
    Many commenters raised concerns about various elements of the 
measurement framework outlined in the September NPR. Most commenters 
believed that the proposed treatment of non-maturity deposits 
understated their effective maturity. Others questioned the accuracy of 
the proposed supervisory model and the appropriateness of the proposed 
exemption test criteria.

C. Agencies' Responses to Comments

    The agencies have carefully considered the concerns raised by 
commenters regarding the structure and elements of the proposed 
measurement framework and the accuracy of the proposed supervisory 
model. Although the agencies have decided to retain many of the 
principles and structures outlined in the September NPR framework, the 
agencies are also proposing several modifications and refinements to 
that framework. These modifications include changes to the proposed 
exemption criteria, the structure of the supervisory model, and the 
treatment of certain types of assets and non-maturity deposits. These 
modifications are discussed in greater detail in the sections that 
follow. 

[[Page 39498]]

1. Exemption Criteria
    The September NPR included criteria that would exempt a bank from 
additional measurement and reporting requirements. The proposal set 
forth the following two criteria that a bank would have to meet to 
qualify for an exemption:
    (1) The total notional principal amount of all of the bank's off-
balance-sheet interest rate contracts must not exceed 10 percent of its 
assets; and
    (2) 15 percent of the sum of the bank's fixed- and floating-rate 
loans and securities that mature or reprice beyond 5 years must be less 
than 30 percent of its total capital.
    There was general support among commenters for some type of 
exemption. The majority of commenters addressing this issue, however, 
voiced concerns with the proposed test. Many commenters believed that a 
10 percent threshold for off-balance sheet contracts would discourage 
the use of such instruments in managing and reducing IRR exposures. 
Commenters also expressed concerns that the maturity test, incorporated 
in the second criterion, used contractual maturities rather than 
expected average lives and would overstate the risk associated with 
amortizing loans and securities, such as mortgage-related products. 
Several commenters suggested modifying the criterion to use bank 
management's estimates of average lives, rather than contractual 
maturities.
    Several commenters questioned whether the proposed exemption 
criteria provided sufficient safeguards against exempting banks that 
may pose significant risks to the Bank Insurance Fund due to their 
potential IRR exposures. A few commenters noted the potential for 
material intermediate-term maturity (e.g., 1- to 5-years) mismatches. A 
minority of commenters question the need for, or efficacy of, any 
exemption test.
    The agencies continue to believe that an exemption is desirable and 
that section 335 of CDFI Bill reinforces the need to consider ways of 
minimizing burdens associated with this policy statement. The agencies 
also believe that there is a need to ensure sufficient safeguards 
against exempting banks that may pose significant systemic risks or 
costs to the Bank Insurance Fund. Consequently, the agencies propose to 
modify the exemption test to focus on three considerations: the size of 
the bank; the quality of its overall condition and management, as 
measured by its composite CAMEL rating; and the level of its potential 
repricing exposure as measured by its intermediate and longer-term 
assets. Specifically, to be exempted, a bank would have to meet the all 
of the following three conditions:
    (1) The bank must have total assets of less than $300 million; and
    (2) Have a ``1'' or ``2'' composite CAMEL 1 rating from its 
primary supervisor; and

    \1\ CAMEL refers to the Uniform Financial Institution's Rating 
System that the agencies have adopted. Each bank is assigned a 
uniform composite rating based on an evaluation of pertinent 
financial and operational standards, criteria and principles. This 
overall rating is expressed through use of a numerical scale of 
``1'' through ``5'' with ``1'' indicating the highest rating and 
``5'' the lowest. The composite rating assess five key performance 
dimensions that are commonly identified by the acronym ``CAMEL'': 
Capital adequacy, Asset quality, Management, Earnings and Liquidity.
---------------------------------------------------------------------------

    (3) The sum of:
    (a) 30 percent of its loans and securities with contractual 
maturity or repricing dates between one and five years, and
    (b) 100 percent of its loans and securities with contractual 
maturity or repricing dates beyond five years must be less than 30 
percent of the bank's total assets.

Banks that meet this proposed exemption test could elect to submit the 
proposed IRR Call Report schedules on a voluntary basis. The agencies 
encourage such voluntary reporting.
    The exemption test does not alleviate the need for an exempted bank 
to employ sound IRR measurement and management practices and to have 
sufficient capital for its risk exposure. Exempted banks will continue 
to be subject to safety and soundness IRR examinations that the 
agencies may conduct. As a result of such examinations, a bank that is 
exempt from this policy statement may be directed by their primary 
supervisor to improve its IRR measurement and management practices, or 
to hold additional capital for IRR. In addition, the agencies would 
retain the right to require any bank to comply with the provisions of 
this policy statement and any subsequent rulemakings regarding IRR.
2. Interest Rate Scenarios
    The September NPR outlined a number of factors that should be 
considered in selecting an appropriate interest scenario for measuring 
banks' IRR exposures and evaluating capital adequacy. These factors 
included:
    (1) The time horizon over which banks and supervisors could 
reasonably be expected to identify risk and implement mitigating 
responses;
    (2) The likelihood of occurrence, as reflected by historical rate 
volatility; and
    (3) The appropriate historical sample period used to determine the 
likelihood of a given rate movement.
    The agencies sought comment on several alternative methodologies 
for developing appropriate interest rate scenarios, including both 
parallel and non-parallel changes in interest rates. Among the non-
parallel methods, the interest rate scenario could be based upon 
observed nominal changes in interest rates, or upon observed 
proportional changes in interest rates. As an alternative, the agencies 
also sought comment on using a simple parallel shift in interest rates 
across the entire maturity spectrum (``parallel rate shocks'').
    The agencies received a range of comments on the selection and 
determination of the appropriate interest rate scenarios. Commenters 
were divided on whether a short or long historical sample was most 
appropriate for determining the potential range of interest rate 
movements. Those favoring a shorter sample period believed such a 
period best reflected current and likely probabilities of rate changes. 
Others favored a longer sample period, primarily to minimize the impact 
of any one rate cycle. Opinions were also divided on whether a monthly, 
quarterly, or annual time horizon was most appropriate for analyzing 
potential rate scenarios. The majority of commenters favored either a 
monthly or quarterly horizon, on the grounds that such time frames 
represented the time bank management would need to implement risk 
mitigating actions in response to an adverse movement in interest 
rates. Others, however, disagreed and favored the use of an annual time 
horizon.
    Commenters also expressed diverse views on whether the proposed 
rate scenarios should be based on nominal or proportional changes in 
historical rates, or on the basis of a simple parallel rate shock. A 
majority of commenters argued against the use of parallel rate shocks, 
on the grounds that such scenarios were not realistic of probable 
future interest rate changes. Of these commenters, most favored 
scenarios that would be based on proportional rate changes, such that 
the size of the rate change used to measure exposures would depend 
upon, and vary with, the current level of market interest rates. Other 
commenters, however, favored the use of parallel rate shocks, primarily 
on the grounds of simplicity and ease of understanding.
    The agencies propose to use a simple 200 basis point, instantaneous 
parallel upward and downward shift in interest rates for measuring and 
evaluating 

[[Page 39499]]
banks' exposures for purposes of assessing capital adequacy. The 
agencies believe that such rate movements are realistically 
conservative given the movements in interest rates experienced in 1994. 
They also believe that such rate scenarios are sufficiently transparent 
and easy to understand that they can be easily incorporated into either 
a bank's own IRR model or the supervisory model. The scenarios are 
incorporated into the proposed supervisory model via the proposed risk-
weights that are applied to a bank's reported maturity and repricing 
balances.
    The agencies stress that their adoption of these rate scenarios 
does not replace the need for a bank to evaluate its IRR exposure over 
a wider range of possible rate changes for its own risk management 
purposes. Such rate changes may include non-parallel yield curve shifts 
and gradual, as well as immediate, rate changes. To ensure greater 
consistency, however, in the agencies' assessments of banks' exposures 
and their need for capital, banks are encouraged to include the 
proposed instantaneous and parallel 200 basis point rate scenarios into 
their internal IRR measurement processes.
3. Structure of Supervisory Model
    The supervisory model in the September NPR grouped assets, 
liabilities, and off-balance-sheet positions by various categories, 
based on their general cash flow and product characteristics. Each 
category and time band was assigned risk-weights corresponding to a 
rising rate scenario and a declining-rate scenario. The risk-weights 
were constructed by the agencies, using hypothetical market instruments 
that were representative of the category being measured. For amortizing 
instruments, the risk-weights incorporated assumptions about 
prepayments.
    A number of commenters expressed concerns regarding the accuracy of 
the model proposed in the September NPR. Frequently cited concerns 
included: the use of hypothetical, rather than bank-specific, 
instruments to derive risk weights; the level of data aggregation; the 
use of standardized prepayment assumptions; and the treatment of 
interest rate protection agreements (caps and floors). A number of 
commenters voiced concerns about the treatment of residential mortgage-
related products. In general, these commenters believed that additional 
detail on mortgage holdings, such as coupon information on fixed- rate 
mortgages, and more explicit information on periodic and lifetime 
interest caps for adjustable-rate products, would improve the model's 
accuracy.
    The agencies sought comment in the September NPR on whether 
commercial banks with portfolios that are similar to thrift should be 
required to use the Net Portfolio Value model used by the Office of 
Thrift Supervision (OTS) for federally-supervised thrift institutions. 
Most commenters believed that such a requirement would impose 
substantially greater reporting burdens without necessarily improving 
the accuracy of the measure and might create incentives for banks to 
substitute such a model for the judgment of bank management. A minority 
of commenters disagreed and stated that the approach and data used by 
the OTS were superior and more accurate than what the banking agencies 
had proposed.
    The agencies have carefully considered commenters' concerns about 
the proposed supervisory model's accuracy. The agencies believe it is 
critical to have a supervisory model that can identify banks with 
significant IRR exposures. They also are attentive to the risk that 
model measurement errors could lead to undesirable incentives or 
incorrect assessments regarding the risk and complexity of products, 
activities, or banks. At the same time, the agencies recognize the need 
to balance the desire for increased accuracy against the potential 
costs of greater reporting detail and model complexity. The agencies 
are particularly concerned that the supervisory model retain sufficient 
transparency so that bankers can understand its methodology and 
anticipate and compute their bank's measured exposure and that it not 
replace the role or need for sound internal interest rate risk 
management systems.
    The agencies intend to make five modifications to the structure of 
the supervisory model to improve its accuracy and which are described 
below. The first four changes modify the basic supervisory model 
outlined in the September NPR. This revised basic model will be the 
baseline model for non-exempted banks. The last modification creates 
supplemental modules for banks that have concentrations in residential 
mortgage-related instruments. The agencies are mindful that the 
supplemental schedules will impose additional reporting requirements 
for some banks. Nonetheless, the agencies are concerned that the 
baseline model may not be sufficiently accurate to capture the risk at 
banks with significant holdings of mortgage loans or mortgage pass-
through securities, and therefore propose to require additional 
reporting for those banks. A detailed description of the model, the 
risk weights, and information requirements are discussed in the policy 
statement. Schedule 1, provided in the attached policy statement, 
illustrates the type of information that will be used in the baseline 
supervisory model, while Schedules 2-4 illustrate the information used 
for the supplemental modules.
    a. Adjustable-rate residential mortgages. The first modification 
that the agencies have made is to treat adjustable-rate residential 
mortgage loans and securities (ARMs) separately from fixed-rate 
residential mortgage assets. As modified, information on ARMs will be 
reported by a bank on the basis of the reset frequency of the ARM's 
pricing index, rather than by the ARM's next date to repricing. In 
addition, a bank will report ARMs that are currently within 200 basis 
points of their lifetime cap separately from those ARMs that are 
further away from their lifetime caps. The agencies believe that this 
stratification of ARM products will provide a better reflection of 
their potential price sensitivity to changes in market interest rates 
than the treatment described in the September NPR.
    b. Fixed-rate residential mortgages and other amortizing assets. 
The second modification the agencies made is to treat fixed-rate 
residential mortgage assets separately from other amortizing assets. In 
the September NPR, these assets had been combined into a single 
category. As a result of this combination, the same prepayment 
assumptions were applied to all amortizing assests. By separating these 
two categories, the agencies propose to apply different prepayment 
assumptions to the two categories.
    c. Self-reporting of market value sensitivities. The third 
modification will require a bank that holds certain types of financial 
instruments to provide in its Call Report submissions, estimates of 
changes in market value sensitivities of those instruments for the 
specified 200 basis point interest rate scenarios. These estimates may 
be obtained from the bank's own internal risk measurement systems or 
from reliable third-party sources, provided that the bank knows, 
understands, and documents the assumptions underlying those estimates. 
All estimates and supporting documentation will be subject to examiner 
review. The September NPR used this approach for certain mortgage 
derivatives securities. The agencies propose to extend this treatment 
to other products. The products for which banks would be required to 
self-report market value sensitivities generally have complex options 
or cash flow 

[[Page 39500]]
characteristics. These characteristics make it difficult to adequately 
measure these products in a standardized model without collecting 
detailed transaction-oriented data.
    Self-reporting of market value sensitivities generally would be 
required for the following products or portfolios:

    (1) All mortgage-backed derivative securities that meet the 
FFIEC's definition of ``high-risk.'' 2

    \2\ Effective February 10, 1992, the agencies and the Office of 
Thrift Supervision adopted revised supervisory policies on 
securities activities that were developed under the auspices of the 
FFIEC. The revised policies established a framework for identifying 
``high-risk mortgage derivative products.''
---------------------------------------------------------------------------

    (2) All structured notes, as defined in the Call Report 
instructions;
    (3) Non-high-risk mortgage derivative securities when those 
holdings represent 10 percent or more of a bank's assets.
    (4) Mortgage servicing rights that are capitalized and reported 
on the bank's balance sheet;
    (5) Off-balance-sheet interest rate options, caps, and floors, 
including interest rate swaps with embedded option characteristics.

    The agencies believe that given the potential price sensitivity of 
these products or portfolios to interest rate changes, it is reasonable 
to expect banks to be able to calculate or obtain reliable estimates of 
their market value sensitivities. Industry comments on the availability 
of such information are especially welcomed.
    d. Trading account portfolios. The agencies also propose to change 
the manner in which trading account positions are treated in the 
supervisory model. These changes are in response to commenters concerns 
regarding the burden associated with distributing trading positions 
into the maturity ladder and applying a 200 basis point rate shock to 
those positions.
    As modified, banks will be asked to self report the change in the 
economic value of all of their trading account positions for a 100 
basis point parallel increase or decrease in interest rates. This rate 
change, smaller than the 200 basis point change used for the rest of 
the bank's holdings, reflects the shorter holding period typical for 
trading account positions. It also is similar to the 100 basis point 
scenario used by the Basle Committee on Banking Supervision (Basle 
Committee) in its April 1995 proposal on capital requirements for the 
market risks of traded debt securities.\3\

    \3\ The Basle Committee on Banking Supervision is a committee of 
banking supervisory authorities which was established by the 
central-bank Governors of the Group of Ten countries in 1975.
---------------------------------------------------------------------------

    The agencies believe the self-reporting treatment for trading 
accounts is consistent with supervisory guidance issued by each of the 
agencies that directs banks with significant trading activities to have 
internal risk measurement and limit systems commensurate with the size 
and complexity of their activities.
    As previously noted, the Basle Committee has recently released for 
comment a proposal to incorporate the market risks of trading 
activities into the Basle Accord risk-based capital standards.\4\ The 
agencies published in the Federal Register on July 25, 1995 (60 FR 
38082) a notice of proposed rulemaking on the Basle market risk 
proposal. If the agencies adopt a final rule to implement the Basle 
market risk proposal for banks with a large concentration of trading 
activities, the agencies anticipate that modifications to this policy 
statement will be required to ensure that IRR exposures arising from 
those activities are not ``double-counted.'' One approach that the 
agencies are considering is to exclude trading activities from this 
proposed policy statement and IRR measure for those banks that are 
subject to the market risk proposal. If such an approach is adopted, 
those banks would be exempted from having to report the changes in the 
market value of their trading portfolios for the IRR measure. If, 
however, a bank's trading portfolio offsets the exposure from other 
components of the bank's balance sheet, this treatment would overstate 
the bank's total IRR exposure.

    \4\ The Committee's proposal is described in a consultative 
paper, entitled ``Planned Supplement to the Capital Accord to 
Incorporate Market Risks,'' issued in Basle, Switzerland on April 
12, 1995. Copies of that paper may be obtained by contacting: The 
OCC's Communications Division, Ninth Floor, Office of the 
Comptroller of the Currency, 250 E Street, S.W., Washington, D.C. 
20219. A copy of the paper also is available at the FDIC Reading 
Room, 550 North 17th Street, NW, Washington, D.C.
---------------------------------------------------------------------------

    e. Supplemental modules. The final modification made by the 
agencies to the supervisory model structure is the development of 
supplemental modules for fixed-rate and adjustable-rate residential 
mortgage loans and pass-through securities. A bank whose holdings of 
these products exceeds certain threshold levels will be required to 
report additional information on those holdings in their Call Report 
submissions. The agencies will apply expanded tables of risk-weights to 
those portfolios. The supplemental module for fixed-rate residential 
mortgages requires a bank to stratify its balances into eight coupon 
ranges. The agencies have developed separate risk-weights for each 
coupon range which reflect the differences in expected prepayment 
speeds that are associated with the underlying coupon rates. To develop 
these risk-weights, the agencies have used the September 30, 1994 
pricing tables generated by the Office of Thrift Supervision's Net 
Portfolio Value Model.\5\ The agencies will apply this supplemental 
module and associated risk-weights when a bank's holdings of fixed-rate 
residential mortgage loans and pass-through securities represent 20 
percent or more of its total assets. Schedule 2 in the attached policy 
statement illustrates the information that will be used in the 
supplemental module for fixed-rate residential mortgages. This expanded 
module will be optional for a bank whose holdings of these instruments 
are less than 20 percent of its assets.

    \5\ Appendix 4 of the policy statement provides a description of 
the derivation of the risk-weights for the baseline supervisory 
model and supplemental modules.
---------------------------------------------------------------------------

    Two levels of supplemental modules have been developed by the 
agencies for adjustable-rate residential mortgages. The first level, 
illustrated by Schedule 3 in the attached policy statement, requires 
information on ARMs to be stratified by reset frequency (as in the 
baseline model), periodic caps, and the ARMs' distances from lifetime 
caps. This module will be used by the agencies when a bank's ARM 
holdings are greater than 10 but less than 25 percent of its assets. 
The second level, illustrated by Schedule 4 in the attached policy 
statement, requires that ARM balances be further stratified by the 
underlying rate index of the ARM. This module will apply to banks whose 
holdings equal or exceed 25 percent of their total assets. The agencies 
have developed risk-weights that correspond with each various reset 
frequency, lifetime cap, periodic cap, and, index combination, again 
using pricing tables generated from the OTS Net Portfolio Value Model.
    The agencies are mindful that many commenters to the September NPR 
raised concerns about tradeoffs between attempts to improve the 
supervisory model accuracy and associated reporting burdens, especially 
with regards to the use of the OTS model. Nonetheless, the agencies 
believe the distribution of coupons for fixed-rate mortgage portfolios 
and the interaction of the parameters illustrated in Schedules 3 and 4 
significantly affect the price sensitivity of mortgage loans and 
securities. The agencies believe that by explicitly considering these 
parameters, the supplemental modules will enhance the accuracy of the 
supervisory model. The agencies believe that this increased accuracy is 


[[Page 39501]]
warranted due to the increased holdings of mortgage products among 
commercial and savings banks. They also note the flexibility that many 
banks exercise in their ability to tailor the various pricing 
combinations of their ARM products. As banks expand their activities in 
these products, the agencies are particularly concerned that banks not 
ignore the potential impact and interaction of these pricing 
parameters.
    Draft instructions for completing the supplemental modules and a 
technical description of the risk-weights used in the modules are 
provided in the appendices 2 and 4 to the proposed policy statement.
    4. Non-maturity deposit assumptions. The September NPR established 
limits on the maximum maturities that a bank could attribute to its 
non-maturity deposits when measuring its IRR exposures for capital 
adequacy. Non-maturity deposits were defined to be those instruments 
without a specific maturity or repricing date and included demand 
deposits (DDA), negotiable order of withdrawal (NOW), savings, and 
money market deposit (MMDA) accounts. In the September NPR, banks were 
subject to the following constraints in distributing these deposits 
across time bands:

    (1) A bank could distribute its DDA and MMDA accounts across any 
of the first three time bands, with a maximum of 40 percent of those 
balances in the 1 to 3 year time band;
    (2) A bank could distribute its savings and NOW account balances 
across any of the first four time bands, with a maximum of 40 
percent of the total of those balances in the 3 to 5 year time band.

    The treatment of non-maturity deposits was one of the most 
commented upon aspects of the September NPR. Most commenters stated 
that the proposed treatment could, in many cases, understate the 
effective maturity of these deposits and urged the agencies to adopt a 
more flexible approach or extend the permissible maturities. Commenters 
expressed concern that the adoption of the proposed rules could lead to 
incorrect assessments of risk exposures or inappropriate incentives to 
shorten asset maturities.
    The agencies recognize that the treatment of non-maturity deposits 
will be, for many banks, the single most important assumption in 
measuring their IRR exposures. The agencies also agree that many banks 
historically have been able to exercise considerable flexibility in the 
timing and magnitude of pricing changes for these accounts. It is for 
this reason that the agencies had proposed to allow banks some 
flexibility in the treatment of these deposits. Nonetheless, the 
agencies believe that there are risks associated with assuming that a 
bank has sufficient flexibility in its management of these deposits so 
as to offset any IRR position it may have. While these deposits can, in 
many circumstances, help to mitigate a bank's IRR exposure, historical 
experience suggests that an institution can incur significant levels of 
IRR though it may have sizeable holdings of non-maturity deposits. The 
agencies also are concerned that increased competitive pressures and 
changing customer demographics may, over time, make these deposits more 
rate sensitive or prone to migration into other investment vehicles.
    Given these considerations, the agencies believe it is appropriate 
to extend, but not eliminate, the maximum permissible maturities for 
non-maturity deposits. Within these maturity ranges, a bank would have 
the flexibility to distribute its balances based on its own assumptions 
and experience. The agencies will expect that bank management will be 
able to document to examiners the rationale for the treatment they have 
chosen.
    In addition to extending permissible maturities, the agencies 
believe that demand deposit balances held by businesses should be 
treated differently than demand balances held by other entities. In 
particular, the agencies believe that a shorter maturity is appropriate 
for commercial demand deposit accounts since many of these accounts are 
in the form of compensating balances.\6\ The implicit earnings from 
these compensating balances are often used to offset service charges 
incurred by the customer, and the level of these implicit earnings 
attributed to the deposits is generally dependent upon the level of 
current market rates. As such, these balances behave very much like 
interest-sensitive balances. As market rates increase, the level of 
balances drops due to a higher earnings credit, while as rates decline, 
the level of balances will generally increase.

    \6\ For purposes of this policy statement, the term 
``commercial'' is used to mean ``nonpersonal'' as that term is 
defined under the Board of Governor of the Federal Reserve System's 
Regulation D dealing with reserve requirements.
---------------------------------------------------------------------------

    The agencies propose to extend the range of permissible maturities 
for non-maturity deposits by revising the distribution rules for those 
deposits. As proposed, a bank may distribute its deposits across time 
bands according to its individual assumptions and experience, subject 
to the following constraints:

    (1) Commercial Demand Deposits: A bank would report 50 percent 
of it's commercial demand deposits in the 0-3 month time band. The 
remaining balances may be distributed across the first four time 
bands, with a maximum of 20 percent of total balances in the 3-5 
year time band.
    (2) Retail DDA, Savings, and NOW Accounts: A bank may distribute 
the balances in these accounts across any of the first five time 
bands, with a maximum of 20 percent in the 5-10 year time band and 
no more than 40 percent combined in the 3-5 and 5-10 year bands.
    (3) MMDA Accounts: A bank may distribute the balances in these 
accounts across any of the first three time bands, with a maximum of 
50 percent in the 1-3 year band.

Table A summarizes the distribution that would result if a bank 
reported its balances so as to maximize its allowable maturities.

                        Table A.--Maturity Distribution Limits for Non-Maturity Deposits                        
----------------------------------------------------------------------------------------------------------------
                                                  0-3 months  3-12 months   1-3 years    3-5 years    5-10 years
                                                  (percent)    (percent)    (percent)    (percent)    (percent) 
----------------------------------------------------------------------------------------------------------------
Commercial DDA.................................           50            0           30           20  ...........
Retail DDA.....................................            0            0           60           20           20
MMDA...........................................            0           50           50  ...........  ...........
Savings........................................            0            0           60           20           20
NOW............................................            0            0           60           20           20
----------------------------------------------------------------------------------------------------------------


[[Page 39502]]


    The agencies believe that these maturity limits provide appropriate 
guidelines for the purpose of standardized IRR measurement across the 
banking industry. These limits are not intended to replace the need for 
banks to evaluate and consider the sensitivity of their individual 
deposit bases when managing their IRR exposures. Examiners will 
consider a bank's assessment of its deposit base and how those 
assessments may differ from those used in the standardized supervisory 
model during the examination process when evaluating a bank's capital 
adequacy for IRR. The agencies do not propose to require banks to 
incorporate these assumptions into their internal IRR models when 
submitting internal model results to the agencies. Rather, through the 
examination process, examiners will consider whether the treatment used 
in the bank's model is appropriate, based on the analysis the bank 
provides.
5. Use of a Bank's Internal IRR Model
    The September NPR permitted a bank to use the results of its 
internal IRR model, as an alternative to the supervisory model, when 
assessing its need for capital for IRR, provided that its model was 
deemed adequate by the appropriate supervisor. Most commenters 
expressed strong support for using the results of a bank's internal 
model and believed that such a model would provide a more accurate 
assessment of risk than the proposed supervisory model.
    The proposed policy statement provides for the consideration of a 
bank's internal model results in the assessment of that bank's level of 
IRR exposure and its need for capital. The results and quality of a 
bank's IRR measurement process will be one factor that examiners will 
consider in assessing a bank's need for capital. Among the factors that 
an examiner will consider when evaluating the quality of a bank's 
internal model is whether the risk profile it generates is an adequate 
measure of the bank's risk position, taking account of the types of 
instruments held or offered by the bank, the integrity and completeness 
of the data used in the model, and whether the assumptions and 
relationships underlying the model are reasonable. When assessing the 
exposure of a bank's economic value to changes in interest rates, 
examiners generally will place greater reliance on the results of a 
bank's internal model, rather than the supervisory model, provided that 
the bank's own model:
    (1) Measures IRR from an economic perspective, as defined in this 
proposal;
    (2) Uses the proposed supervisory scenario of an instantaneous and 
parallel 200 basis point movement in interest rates; and
    (3) Is deemed by the examiner to provide a more accurate assessment 
of the bank's IRR risk profile than the supervisory model and meets the 
criteria discussed in Section VII of the proposed policy statement.
    Reacting to the September NPR, some commenters requested the 
agencies to provide more explicit guidelines on the criteria that 
examiners will use to evaluate the adequacy of a bank's model. Other 
commenters cautioned the agencies against creating checklists of 
acceptable assumptions or measurement techniques. Such lists, they 
believed, would be incomplete given the diverse nature of banks and 
would stifle innovation in both risk measurement and product 
development. Some commenters also expressed concern that the 
assumptions and results of the supervisory model would be used as an 
explicit benchmark against which internal models would be judged and 
compared. These commenters were concerned that examiners would require 
the bank to conduct detailed and ongoing reconciliations between the 
bank's internal model and the supervisory model results. Such 
requirements, they believed, imposed unnecessary burdens and lessened 
the incentives for banks to use their own IRR models. Commenters 
raising these concerns generally urged the agencies to refrain from 
imposing supervisory model assumptions on bank models and from 
requiring banks that have their own internal model to report the 
information required for the supervisory model.
    A key issue for the agencies, and one reason for delaying the 
implementation of explicit minimum capital standards for IRR, is the 
degree of specification the agencies need to establish when internal 
models are used for assessing regulatory capital adequacy. The agencies 
are aware that there are a variety of measurement systems and 
assumptions in use by the industry to measure exposures. While such 
variation may be appropriate given the diverse nature of commercial 
banks, it may lead to different assessments of risk and hence, capital 
requirements, for institutions that have similar risk profiles. More 
explicit guidance from the agencies on acceptable techniques and 
assumptions could help to lessen this variation and the risk that 
different amounts of capital may be required for banks with similar 
portfolios. Such guidance also would help reduce inconsistencies among 
examiners and agencies in evaluating internal models. Efforts to devise 
more explicit guidance could, however, result in standards which are 
inappropriate for some institutions and may impede the industry's 
continued innovation of more sophisticated risk measurement techniques. 
The agencies welcome industry comments and suggestions on criteria and 
standards that they should establish for accepting internal model 
results.
    With regard to reporting, the agencies propose that internal model 
results be reported on voluntary basis in a supplemental Call Report 
schedule like that portrayed in Schedule A. In response to the concerns 
of many commenters, the agencies propose that such reporting be on a 
confidential basis. Although many commenters to the September NPR 
requested that banks submitting internal model results not be required 
to also report the data required for the supervisory model, the 
agencies propose the data for the supervisory model be collected from 
all non-exempt banks. While recognizing the reporting burden that this 
imposes, the agencies believe that collecting data for both internal 
and the proposed supervisory model results will be important for 
effective supervision. Moreover, such data also will help the agencies 
evaluate the use of both the supervisory model and internal models as 
the basis for ultimately establishing minimum capital charges for IRR. 
By monitoring the maturity and repricing data collected for the 
supervisory model, the agencies will be able to assess whether 
supervisory and internal models results capture major shifts in 
portfolio compositions. Such monitoring may help identify key model 
assumptions that should be highlighted for examiner review and common 
strengths or weaknesses of internal measures when compared to the 
supervisory model. This information will help the agencies to provide 
better guidance to examiners and bankers on acceptable risk measurement 
techniques. It will also assist the agencies in determining what, if 
any, improvements could be made to the proposed supervisory model 
before explicit minimum capital charges are implemented.

V. Reporting Requirements

    The implementation of this policy statement relies on changes to 
the Call Report. The examples of Call Report schedules shown in this 
proposal and the accompanying draft reporting instructions for those 
schedules are provided to assist the reader in analyzing the full 
implications of the proposal. Once comments are received on the 
measurement framework and any 

[[Page 39503]]
modifications that the agencies believe are appropriate are made, the 
proposed Call Report schedules would also be amended to reflect those 
changes. At that time, the Call Report schedules would be submitted to 
FFIEC's Reports Task Force for inclusion in the comment document for 
March 1996 Call Report changes. The FFIEC will submit any Call Report 
changes to OMB for review as required under the Paperwork Reduction Act 
44 U.S.C. 3501. Opportunity for public comment is always provided in 
relation to such a submission. Nevertheless, the agencies invite 
comments regarding the paperwork implications of this proposed policy 
statement, and will carefully consider any comments received in the 
development of the policy, as well as in recommending to the FFIEC 
proposed revisions to the Call Report.

VI. Implementation Schedule

    The agencies propose to require any additional reporting by non-
exempt banks beginning with the March 1996 Call Reports. Full 
implementation of this policy statement for assessing the adequacy of 
bank capital would be effective December 31, 1996.

VII. Requests for Comments

    Comments are requested on all aspects of the proposed policy 
statement, including the suggested implementation schedule. The 
agencies particularly request comments on the following issues:

1. Exemption for Small Banks
    The agencies propose to exempt certain small banks from the 
proposed policy statement and associated reporting requirements in 
order to lessen regulatory burdens on small, well-managed banks. The 
criteria for exemption considers the size of the bank, its overall 
CAMEL rating and the proportion of assets in intermediate and longer-
term maturities.
    a. Are the three criteria used for the exemption appropriate and 
reasonable?
    b. Does the use of a bank's confidential CAMEL rating as one of the 
exemption criteria raise concerns that it may allow public users of 
Call Reports to discern a bank's CAMEL rating?
    c. Does the proposed exemption criteria provide adequate safeguards 
against exempting banks that pose significant risks to the deposit 
insurance fund due to IRR?

2. Baseline Supervisory Model

    The agencies are proposing that all non-exempted banks provide 
information for a baseline supervisory model, the results of which, 
would be one factor that an examiner would use to assess a bank's level 
of IRR exposure and its need for capital. The baseline model uses seven 
time bands and applies a series of risk-weights to a bank's reported 
repricing and maturities balances in each of those time bands. For 
certain types of instruments or activities, a bank would be required to 
provide their own estimate of the change in value (self-report) of the 
instruments or activities for the specified interest rate scenario.
    a. Does the proposed baseline supervisory model provide a 
reasonable basis for measuring a bank's IRR exposure? If not, what 
changes should be made to the model?
    b. Are the amount and type of data proposed to be collected for the 
model appropriate and reasonable? If not, what changes could be made 
either to improve the usefulness of the data collected and/or reduce 
the burden of the proposal?
    c. Do banks have the ability to calculate or obtain reasonable 
estimates of changes in market values for the items where self-
reporting would be required? If not, how should such items be 
incorporated into the model? What factors should examiners consider in 
reviewing and assessing the reliability of bank's self-reported 
estimates?
    d. Are the risk-weights proposed for the baseline model appropriate 
for an immediate and parallel 200 basis change in interest rates?
    e. What portion, if any, of the proposed Call Report interest rate 
risk data and output from the proposed supervisory measurement system 
should be made available to the public through Call Report disclosures 
and the Uniform Bank Performance Report?

3. Treatment of Non-Maturity Deposits

    The agencies propose limits on how a bank could distribute deposits 
without specified maturities (DDA, NOW, MMDA and savings) among the 
time bands for the supervisory model. In setting these limits, the 
agencies propose to treat commercial DDA balances separately from other 
DDA balances. As proposed, these limits only apply to the standardized 
supervisory model. The proposal would give an examiner the latitude to 
use a bank's own non-maturity deposit assumptions when evaluating the 
bank's capital adequacy for IRR provided that the bank can demonstrate 
and support those assumptions.
    a. Is it appropriate to treat commercial DDA balances separately 
from other DDA balances?
    b. Are the proposed maturity limits reasonable for a standardized 
reporting and measurement framework?
    c. Is it appropriate to give examiners latitude to use a bank's own 
non-maturity deposit assumptions? If so, should the agencies specify 
minimum standards of analysis that will be acceptable for banks that 
wish to use their own assumptions? What types of analyses or factors 
should be incorporated into such standards?

4. Supplemental Modules for Mortgage Holdings

    The agencies have proposed supplemental reporting and expanded 
risk-weight tables that would apply to banks that have concentrations 
in either fixed- or adjustable-rate residential mortgage products. 
These supplemental modules are designed to improve the supervisory 
model's accuracy by incorporating more fully, the parameters which may 
affect a mortgage's price sensitivity. The agencies propose to derive 
the risk-weights for the supplemental modules from pricing tables 
generated by the OTS's Net Portfolio Value Model (OTS model).
    a. Is the information that would be collected for the supplemental 
modules appropriate and meaningful? If not, what changes should be 
made?
    b. Are the thresholds proposed for requiring a bank to use the 
supplemental modules appropriate? If not, what threshold would be 
appropriate?
    c. Do the supplemental modules and risk-weights sufficiently 
address concerns about the supervisory model's accuracy for banks with 
significant holdings of residential mortgage products? Will their use 
lessen the possibility of different regulatory treatment for 
institutions subject to the OTS model and those subject to this policy 
statement?
    d. Will the use of the supplemental modules and the associated 
risk-weights used in those modules provide appropriate incentives for 
bank decision-making? Will their use discourage the development of a 
bank's own measurement capabilities?
    e. Is the OTS model a reasonable source for developing the risk-
weights used in this module? If not, are there other sources that would 
be more better?
    f. The agencies believe the supplemental schedules related to 
mortgages are necessary because the price sensitivity of these products 
may vary substantially depending upon their coupon and cap 
characteristics. Are the proposed supplemental schedules appropriate 
and is the level of precision sought by the agencies reasonable? 

[[Page 39504]]


5. Frequency of Updating Risk-Weights

    In the interest of minimizing regulatory burden and providing 
greater transparency and certainty for the supervisory model, the 
agencies propose to update the risk weights for the baseline and 
supplemental schedules only in the event of a significant movement in 
market rates or other market factors that materially change the 
accuracy of the derived price sensitivities and associated risk 
weights. The OTS, in contrast, recalculates the price sensitivities for 
its model each quarter in order to achieve the precision it believes 
necessary to distinguish among different coupon rates of mortgage and 
other products.
    a. Does the agencies' intention to limit the updating of risk-
weights represent an appropriate balance among the objectives of 
minimizing regulatory burden, providing transparency and certainty, and 
providing sufficient measurement accuracy? If not, what other 
approaches would be appropriate?
    b. Does this limitation on updating risk weights materially reduce 
the benefits and accuracy that the supplemental schedules for mortgages 
are designed to provide?
    c. The supplemental reporting schedule for fixed-rate mortgages 
proposes to collect balance information by set coupon ranges. An 
alternative that the agencies have considered is to collect balances on 
the basis of their distance from prevailing current market coupons. 
Such a treatment would allow the risk weight applied to any given 
mortgage coupon to vary as its spread to current mortgage rates varies. 
Would such a treatment be an improvement over the approach currently 
proposed by the agencies? What, if any, difficulties would be 
encountered in reporting balances on the basis of their spread to 
current mortgage coupons?

6. Use of Carrying Values

    In the interest of simplicity, the agencies propose to apply the 
risk weights, including those derived from the OTS price sensitivities, 
to the carrying value of a bank's instruments. To the extent that the 
carrying and market values differ, this introduces an error in the 
estimated price sensitivity of an instrument. The price sensitivity of 
instruments whose market values exceed their carrying values will be 
understated whereas the price sensitivity of instruments whose market 
values are below carrying values will be overstated.
    a. Is the use of carrying values an appropriate simplification and 
does the use of carrying values for both assets and liabilities 
sufficiently mitigate the materiality of such errors? If not, what 
other approach(es) would be appropriate?

7. Use of Internal Models

    a. Does the proposed policy statement provide appropriate 
incentives for the use of banks' internal models and for banks to 
enhance their internal risk measurement systems?
    b. Are the criteria described for assessing a bank's internal model 
appropriate? What other factors or criteria should examiners consider 
in assessing and reviewing a bank's internal model results?
    c. Should the agencies provide additional guidelines on acceptable 
parameters, assumptions, and methodologies for internal models? What 
types of guidance would be most useful?
    d. Is the proposed voluntary schedule for reporting internal model 
results appropriate? Are there sufficient incentives for banks to 
provide this information on a voluntary basis?

8. Treatment of Trading Account

    The agencies propose that banks ``self-report'' the change in value 
of their trading account activities for a 100 basis point change in 
interest rates. The agencies also are considering whether trading 
account activities should be excluded from this policy statement and 
IRR measure if a bank is subject to the market risk capital 
requirements as proposed by the Basle Committee.
    a. Is the 100 basis point interest rate scenario that the agencies 
propose to use when measuring the IRR exposure in a bank's trading 
portfolio appropriate? If not, what scenario would be appropriate?
    b. What modifications, if any, should be made to this proposal for 
banks that may be subject to the Basle Committee's proposed capital 
standards for market risk in trading activities? What, if any, 
operational problems would be created if such banks were simply 
exempted from including and reporting their trading activities for 
purposes of this policy statement? What, if any, competitive issues 
would such a treatment present?
    The text of the proposed policy statement follows. The first two 
appendices to the proposed policy statement provide proposed reporting 
schedules and accompanying instructions for those schedules that are 
under consideration by the agencies as part of this proposed policy 
statement. The third appendix provides the risk weights that would be 
used in the proposed supervisory model. The fourth appendix provides 
technical descriptions of the derivation of the model's risk weights 
and the supplemental modules for residential mortgage-related products.

Proposed Policy Statement

I. Purpose

    This supervisory policy statement is adopted by 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.'' The statement 
establishes a supervisory framework that the agencies will use to 
assess and measure the interest rate risk (IRR) exposures of insured 
commercial and FDIC supervised savings banks. The results of this 
measurement framework will be used by the agencies in their evaluation 
of a bank's IRR exposure and whether it needs capital for IRR. Each 
agency has additional guidance and policies on the measurement and 
management of IRR. Those policies and guidelines set forth each 
agency's expectations regarding safe and sound banking practices for 
IRR management. This policy statement does not replace or supersede 
those issuances. The adoption of this policy statement by the agencies 
does not replace the agencies' expectations that all insured depository 
institutions have internal IRR measurement and management processes 
that are commensurate with the nature and level of their IRR exposures.

II. Background

    Interest rate risk is the adverse effect that changes in market 
interest rates have on a bank's earnings and its underlying economic 
value. Changes in interest rates affect a bank's earnings by changing 
its net interest income and the level of other interest-sensitive 
income and operating expenses. The underlying economic value of the 
bank's assets, liabilities, and off-balance sheet instruments also are 
affected by changes in interest rates. These changes occur because the 
present value of future cash flows and in some cases, the cash flows 
themselves, change when interest rates change. The combined effects of 
the changes in these present values reflect the change in the bank's 
underlying economic value.
    Interest rate risk is inherent in the role of banks as financial 
intermediaries. Interest rate risk, however, introduces volatility to 
bank earnings and to the economic value of the bank. A bank that has an 
excessive level of IRR can diminish its future earnings, impair its 

[[Page 39505]]
liquidity and capital positions, and, ultimately, jeopardize its 
solvency.
    The agencies believe that safety and soundness requires effective 
management and measurement of IRR, and each agency has provided 
supervisory guidance to banks and examiners on this subject. In 
addition, the agencies believe that a bank's capital adequacy should be 
assessed in the context of the risks it faces, including interest rate 
risk. Both of these aspects of IRR depend, among other things, on a 
meaningful measurement of the bank's risk exposure.
    The agencies believe that a bank should have an IRR measurement 
system that is commensurate with the nature and scope of its IRR 
exposures. Among the difficulties in performing a supervisory 
evaluation of interest rate risk, however, is that measurement systems 
and management philosophies can differ significantly from one bank to 
another. As a result, although two banks may each be well-managed, 
their measured exposure may not be directly comparable. This difficulty 
has been magnified by the rapid pace of change in financial markets and 
instruments themselves. In light of the rapid evolution in financial 
instruments and practices, the agencies believe there is a need for the 
more formal assessment of banks' IRR exposures that this policy 
statement establishes.
    The measurement framework described in this policy statement 
focuses on the exposure to a bank's underlying economic value from 
movements in market interest rates. The exposure to a bank's economic 
value, as used in this policy statement, is defined as the change in 
the present value of its assets, minus the change in the present value 
of its liabilities, plus the change in the present value of its 
interest-rate related off-balance sheet positions. The agencies have 
chosen this focus because they believe that changes in a bank's 
economic value best reflect the potential effect of embedded options 
and the potential exposure that the bank's current business activities 
pose to the bank's future earnings stream, and hence, its ability to 
sustain adequate capital levels. Changes in economic value measure the 
effect that a change in interest rates will have on the value of all of 
the future cash flows generated by a bank's current financial 
positions, not just those cash flows which affect earnings over the few 
months or quarters. Thus, changes in economic value provide a more 
comprehensive measure of risk than measures which focus solely on the 
exposure to a bank's near-term earnings.

III. Definitions and Applicability

A. Definitions
    For the purpose of this policy statement, the following definitions 
apply:
    (1) Interest Rate Risk Exposure means the estimated dollar decline 
in the economic value of the bank in response to a potential change in 
market interest rates under the specified interest rate scenarios, as 
measured by either the supervisory measure or, where applicable, a 
bank's internal model.
    (2) Economic value of the bank means the net present value of its 
assets, minus the net present value of its liabilities, plus the net 
present value of its off-balance-sheet instruments.
    (3) Interest rate scenarios means the specified changes in market 
interest rates used in calculating a bank's IRR exposure.
    (4) Mortgage derivative products means interest-only and principal-
only stripped mortgage-backed securities (IOs and POs), tranches of 
collateralized mortgage obligations (CMOs) and real estate mortgage 
investment conduits (REMICS), CMO and REMIC residual securities, and 
other instruments having the same characteristics as these securities.
    (5) Net risk-weighted position means the sum of all risk-weighted 
positions of a bank's assets, liabilities and off-balance sheet items, 
plus the estimated change in market values for any self-reported items. 
For the purposes of the supervisory measure, this number represents the 
amount by which the economic value of the bank is estimated to change 
in response to a potential change in market interest rates under the 
specified interest rate scenarios.
    (6) Non-maturity deposits mean demand deposit accounts (DDAs), 
money market deposit accounts (MMDAs), savings accounts, and negotiable 
order of withdrawal accounts (NOWs).
    (7) Notional principal amount means the total dollar amount upon 
which payments on a contract are based.
    (8) Structured notes mean those instruments identified as 
structured notes for Call Report purposes.
    (9) Commercial demand deposits mean ``nonpersonal'' demand deposits 
as that term is defined under the Board of Governors of the Federal 
Reserve System's Regulation D.
B. Applicability and Exemption for Small Banks With Low Risk
    All banks will be subject to the provisions of this policy 
statement and will be expected to provide information for the 
supervisory model, unless:
    (1) The total assets of the bank are less than $300 million, and;
    (2) The bank's primary supervisor has assigned it a composite CAMEL 
rating of either ``1'' or ``2''; and
    (3) The sum of:
    (a) 30% of the bank's fixed- and floating-rate loans and securities 
that have contractual maturity or repricing dates between 1 and 5 
years, and
    (b) 100% of the bank's fixed- and floating-rate loans and 
securities that have contractual maturity or repricing dates beyond 5 
years,

is less than or equal to 30% of the bank's total assets.
    Notwithstanding this exemption, the appropriate bank supervisor may 
apply any or all provisions of this policy statement to a bank if the 
supervisor deems such application is necessary to ensure the capital 
adequacy of the bank. This means that a bank which otherwise meets the 
exemption criteria may be required by the agencies to provide maturity 
and repricing data needed for the supervisory model. The agencies would 
intend to invoke this requirement only in circumstances where a bank 
appears to have excessive IRR levels and lacks sufficient internal risk 
measures such that a determination of its need for capital cannot be 
adequately assessed by the agencies. Banks that are exempted from the 
provisions of this policy statement would continue to be subject to 
safety and soundness IRR examinations and, as a result of such exams, 
could be directed by their supervisor to improve or strengthen their 
risk management practices, or hold additional capital for IRR.
    If a previously exempted bank fails to meet the exemption criteria 
as of the June reporting date, it would be required to report the 
necessary data in the Reports of Condition and Income beginning in 
March of the next year regardless of its exemption status for the 
remainder of the current year. The one exception to this requirement is 
a bank that is involved in business combinations (pooling of interest, 
purchase acquisitions, or reorganizations) that would result in a 
change in their exemption status. In those instances, the bank will be 
subject to any new reporting requirements beginning with the first 
quarterly report date following the effective date of the business 
combination involving the bank and one or more depository institutions.
C. Specified Interest Rate Scenarios
    For the purpose of measuring a bank's level of IRR exposure for 
capital adequacy, under either the supervisory model or a bank's 
internal model, the 

[[Page 39506]]
agencies will consider both a rising and falling interest rate scenario 
based on an instantaneous uniform 200 basis point parallel change in 
market interest rates at all maturities. The agencies may, from time to 
time, modify the specified interest rate scenarios as appropriate, 
considering historical and current interest rate levels, interest rate 
volatilities and other relevant market and supervisory considerations.

IV. Description of the Supervisory Model

A. Overview
    The intent of the supervisory model is to provide the agencies with 
a measure that estimates the sensitivity of a bank's economic value to 
a specified change in interest rates with sufficient accuracy so as to 
allow the agencies to identify banks that have high IRR exposures. The 
model applies a series of IRR risk weights to a bank's reported 
repricing and maturity balances. These weights estimate price 
sensitivity of a bank's reported balances to a 200 basis point change 
in interest rates. The summation of these weighted balances, along with 
certain price sensitivity information that a bank may be required to 
self-report, results in a net risk-weighted exposure for the bank. This 
net risk-weighted exposure is an estimate of the sensitivity of the 
bank's economic value to the specified change in interest rates.
    The maturity and repricing information contained in the Call Report 
that all non-exempted banks are required to file, along with the IRR 
risk weights that are applied to that information, form the baseline 
supervisory model. Banks with concentrations in fixed- or adjustable-
rate residential mortgage products are required to submit additional 
information on those holdings through supplemental Call Report 
schedules. Supplemental IRR risk weights are applied to this 
information. These supplemental reporting schedules and IRR risk 
weights are referred to as supplemental modules to the baseline 
supervisory model.
B. Supervisory Model Calculations
    The structure and format of the supervisory model is designed to 
allow a bank manager to be able to calculate the IRR exposure of his or 
her bank so as to not be dependent upon the agencies for obtaining 
model results. The calculation of a bank's IRR exposure using the 
supervisory model generally requires the following steps

    (1) The bank's assets, liabilities, and off-balance sheet 
contracts must be assigned to the appropriate balance sheet 
categories based on the instrument's cash flow characteristics.
    (2) Within each balance sheet category, each asset, liability or 
off-balance sheet contract must be assigned to the appropriate time 
band generally based on each instrument's remaining maturity or next 
repricing date.
    (3) Balances within each time band must be multiplied by the 
appropriate risk weight to produce a risk-weighted position for each 
interest rate scenario.
    (4) All risk-weighted positions must be summed to produce a net 
risk-weighted position for each interest rate scenario which is the 
basis for determining the bank's measured exposure to interest rate 
risk.

    A bank performs the first two steps in its compilation and 
submission of the IRR Call Report schedules. Those schedules and 
accompanying instructions are contained in the Appendices 1 and 2 to 
this policy statement. The risk-weights required for step three are 
contained in the tables in Appendix 3 to this policy statement.
C. Information Requirements of the Supervisory Model
    Use of the supervisory model requires information on the maturity 
and repricing characteristics of a bank's assets, liabilities and off-
balance-sheet positions. This information is collected by the agencies 
through the quarterly Call Report submissions filed by non- exempted 
banks and illustrated by Schedule 1.7 This reporting schedule 
requires a bank to report its assets, liabilities and off-balance-sheet 
items across seven maturity ranges (time bands) based on the 
instrument's time remaining to maturity or next repricing date. The 
time bands used:

     7 The agencies have not yet recommended to the Federal 
Financial Examination Council (FFIEC), Call Report changes for IRR. 
The schedules and associated reporting requirements and instructions 
that are discussed in this proposed policy statement and appendix 
are under consideration by the agencies. These items are included in 
this policy statement to provide commenters with a fuller 
understanding of the proposal and to give them opportunities to 
comment on items under consideration by the agencies. The agencies 
plan to forward to the FFIEC recommended Call Report changes for 
IRR. Once final recommendations are made by the agencies, the FFIEC 
will publish the proposed changes for public comment.
---------------------------------------------------------------------------

    (1) Less than or equal to 3 months;
    (2) Greater than 3 months and less than or equal to 12 months;
    (3) Greater than 1 year and less than or equal to 3 years;
    (4) Greater than 3 years and less than or equal to 5 years;
    (5) Greater than 5 years and less than or equal to 10 years;
    (6) Greater than 10 years and less than or equal to 20 years;
    (7) Greater than 20 years.

BILLING CODE 6714-01-P

[[Page 39507]]
[GRAPHIC][TIFF OMITTED]TP02AU95.000


BILLING CODE 6714-01-C

[[Page 39508]]

    In the interest of minimizing reporting burdens, no coupon or yield 
data are collected for the baseline supervisory model. Rather, the 
model applies general assumptions regarding coupon rates and other 
characteristics of the underlying assets, liabilities, and off- 
balance-sheet instruments in developing the interest rate sensitivity 
weights. Banks with concentrations in fixed-rate or adjustable-rate 
residential mortgages are required to provide additional information on 
those holdings. For fixed-rate mortgages, this information includes 
data on the underlying coupons of the mortgage assets. For adjustable-
rate mortgages, the information includes data on lifetime and periodic 
caps. These supplemental modules for fixed- and adjustable-rate 
mortgages are discussed in Section E of this policy statement.
    A brief description of how various types of assets, liabilities, 
and interest-rate related off-balance sheet instruments are reported is 
provided below. Instructions for completing the schedules required for 
the supervisory model are provided in the Call Report package issued by 
the FFIEC.\8\

    \8\ Draft reporting instructions for the schedules under 
consideration by the agencies are provided in Appendix 2 of this 
policy statement. As previously noted, the schedules and associated 
reporting requirements and instructions discussed in this proposed 
policy statement have not been finalized and submitted to the FFIEC.
---------------------------------------------------------------------------

    a. Reporting for assets. The price sensitivity of a financial 
instrument is determined by the instrument's cash flow characteristics. 
Accordingly, maturity and repricing data on most assets are collected 
in one of five categories that reflect different types of cash flows:
    (1) Adjustable-rate 1-4 family mortgage instruments, including 
adjustable-rate mortgage loans and adjustable-rate, pass-through 
mortgage securities. This category would not include home-equity loans; 
those loans would be reported with other amortizing loans based on 
their remaining maturity or next repricing date;
    (2) Fixed-rate 1-4 family mortgages, including both fixed-rate 
mortgage loans and pass-through, fixed-rate mortgage-backed securities, 
again excluding home-equity loans;
    (3) Other amortizing loans and securities, including asset-backed 
securities, consumer loans and other easily identifiable instruments 
that involve scheduled periodic amortization of principal more 
frequently than once a year;
    (4) Zero- or low-coupon securities, including securities with 
coupons of less than 3 percent that do not involve scheduled periodic 
payments of principal; and
    (5) All other loans and securities, including loans and securities 
that involve only periodic payments of interest, with payment of 
principal at maturity.
    Banks holding certain types of assets are required to self-report 
the current market value and estimates of the change in market value of 
these instruments for the specified interest rate scenarios. Banks can 
use either their internal estimates or estimates obtained from a 
reliable third-party source, provided that the bank knows, understands, 
and documents the assumptions and methodologies used to calculate the 
estimated market value sensitivities. Assumptions, pricing 
methodologies and all other documentation must be reasonable and 
available for examiner review. Self-reporting is used for the following 
assets:
    (1) All mortgage-backed derivative securities that meet the FFIEC's 
definition of ``high-risk.'' \9\

    \9\ Effective February 10, 1992 agencies and the Office of 
Thrift Supervision adopted revised supervisory policies on 
securities activities that were developed under the auspices of the 
FFIEC. The revised policies established a framework for identifying 
``high-risk mortgage derivative products.''
---------------------------------------------------------------------------

    (2) All structured notes, as defined in the Call Report 
instructions;
    (3) Non-high risk mortgage derivative securities when those 
holdings represent 10 percent or more of a bank's assets. Banks whose 
holdings are less than 10 percent of assets have the option of either 
self-reporting or reporting those instruments as non-amortizing 
securities based on bank management's estimate of the instrument's 
current average life.
    (4) Trading account portfolios. A bank should report the change in 
the economic value of all of their trading account positions for a 100 
basis point parallel increase and decrease in interest rates.\10\

    \10\ The agencies expect banks to have prudential internal risk 
limits and effective risk measurement systems for their trading 
activities. For banks with significant trading operations, the 
adequacy and results of those systems will be closely reviewed by 
examiners and would be incorporated into their assessment of the 
bank's overall risk position. The Basle Committee on Bank 
Supervision is also considering methods of evaluating IRR in trading 
accounts and determining appropriate capital requirements. This 
process could lead to an international agreement which would affect 
the treatment of trading activities for U.S. banks.
---------------------------------------------------------------------------

    (5) Mortgage servicing rights that are capitalized and reported on 
the bank's balance sheet.
    b. Reporting for Liabilities. The majority of bank liabilities 
repay principal only at maturity. Hence, the supervisory model applies 
the same set of risk-weights to all of a bank's interest-sensitive 
liabilities. Bank liabilities differ, however, in the certainty of 
their maturity. In particular, many bank liabilities have uncertain or 
indeterminate contractual maturities. Given these differences, 
liabilities with contractual maturities are reported separately from 
those with indeterminate contractual maturities.
    The agencies have adopted uniform rules for distributing non-
maturity deposits accounts across the time bands. These rules specify 
the longest time band that can be used for each type of deposit and the 
maximum percentage amount that can be reported into that time band. In 
its reporting of these deposits, a bank may distribute such deposits 
across the time bands according to the bank's own assumptions and 
experience, subject to the following constraints:
    (1) Commercial Demand Deposits: A bank should report 50 percent of 
its commercial demand deposits in the 0-3 month time band. The 
remaining balances may be distributed across the first four time bands, 
with a maximum of 20 percent of total balances in the 3-5 year time 
band.
    (2) Retail DDA, Savings, and NOW Accounts: A bank may distribute 
the balances in these accounts across any of the first five time bands, 
with a maximum of 20 percent in the 5-10 year time band and no more 
than 40 percent combined in the 3-5 and 5-10 year bands.
    (3) MMDA Accounts: A bank may distribute these balances across any 
of the first three time bands, with a maximum of 50 percent in the 1-3 
year band.
    Within these deposit reporting parameters, a bank is permitted to 
use different distributions of these deposits for the rising and 
falling rate scenarios. This flexibility is designed to reflect the 
embedded optionality associated with these products.
    c. Reporting for Off-Balance-Sheet Positions. Off-balance-sheet 
contracts that represent a firm obligation for both parties are 
reported within the maturity ladder framework using a two-entry 
approach to reflect how the contract alters the timing of cash flows. 
For interest rate swaps, the first entry would be reported in the time 
band corresponding to the next repricing date of the contract, and the 
second entry would be reported in the time band corresponding to the 
maturity of the instrument. For futures, forwards, and FRAs, the first 
entry would be reported in the time band corresponding to 

[[Page 39509]]
settlement date of the contract, and the second entry would be reported 
in the time band corresponding to the settlement date plus the maturity 
of the instrument underlying the contract.
    Contracts that are based on non-amortizing instruments are reported 
separately from those based on amortizing principal amounts or on 
underlying instruments that amortize. Examples of ``non-amortizing'' 
contracts include futures, forward-rate agreements, swaps on which the 
notional principal amount of the contract does not amortize, 
securitization of credit card receivables under a spread account 
approach, and firm commitments to buy or sell non-mortgage loans or 
securities. Examples of ``amortizing'' contracts are commitments to buy 
and sell mortgages and commitments to originate mortgage loans.

Self Reporting for Options

    Option-related contracts are not distributed and reported within 
the time bands of the maturity ladder schedule. A bank that holds such 
contracts is required to ``self-report'' the market value sensitivities 
of those positions.11

     11 This differs from earlier proposals where the agencies 
proposed that options-related contracts be reported on the basis of 
their delta-equivalent values. The agencies have made this change in 
the treatment of option-related contracts due to their concerns that 
delta-equivalent values may be difficult to compute for longer-dated 
caps and floors, and the limitations of using delta as a proxy for 
market value sensitivities when evaluating effect of large rate 
movements.
---------------------------------------------------------------------------

D. IRR Risk Weights
    Under the supervisory model, a bank's IRR exposure is calculated by 
multiplying its reported repricing and maturity positions by IRR risk 
weights. These risk weighted positions, when summed and added to the 
sensitivities of any self-reported items, form the bank's net risk-
weighted position.
    Each risk weight is constructed to approximate the percentage 
change in value of the reported position that would result from a 200 
basis point, instantaneous and uniform movement in market interest 
rates. Separate risk weights are used for the rising and falling 
interest rate scenarios to account for the asymmetrical price behavior 
of various bank assets, liabilities and off-balance-sheet instruments.
    The set of risk weights used in the baseline supervisory model for 
each scenario consists of:
    (1) Four ``ARM'' risk weights for adjustable-rate residential 
mortgage loans and securities. There is one risk weight for each of the 
three reset frequency categories, plus one risk-weight for those ARMs 
that are within 200 basis points of their lifetime cap;
    (2) Seven ``Fixed-Rate Residential Mortgage'' risk weights (i.e., 
one for each time band) for fixed-rate residential mortgage loans and 
pass-through mortgage securities;
    (3) Seven ``Other Amortizing'' risk weights for asset-backed 
securities, consumer loans and amortizing off-balance-sheet 
instruments;
    (4) Seven ``Zero or Low Coupon'' asset risk weights for instruments 
with a coupon of 3 percent or less;
    (5) Seven ``All Other'' asset risk weights for non-amortizing 
instruments; and,
    (6) Seven liability risk weights for all liability instruments.
    The risk weights used in the baseline supervisory model are 
provided in Table 1 and also in Appendix 3 of the policy statement. The 
agencies propose to limit the frequency of revisions to the risk-
weights such that revisions would not be made until such time as market 
rates have moved sufficiently as to prompt a revision of all the risk 
weights. Such changes may occur only once every several years.

BILLING CODE 6714-01-P

[[Page 39510]]
[GRAPHIC][TIFF OMITTED]TP02AU95.001



[[Page 39511]]
[GRAPHIC][TIFF OMITTED]TP02AU95.002


BILLING CODE 6714-01-C

[[Page 39512]]

    The agencies constructed the risk weights shown in Table 1 by using 
hypothetical market instruments that are representative of the category 
being measured. The risk weights are based on the percentage change in 
the present value of the benchmark instruments for the specified 
interest rate scenario. Risk weights for adjustable- and fixed-rate 
residential mortgage loans and securities were derived from data 
provided by the OTS (Office of Thrift Supervision) Net Portfolio Value 
Model as of September 30, 1994 for use in the OTS Asset and Liability 
Pricing Tables published by the OTS. The mortgage risk weights directly 
incorporate convexity for the rate scenario and prepayment assumptions 
for mortgage loans and securities.12 A complete description of the 
instruments and methodologies used by the agencies to construct the 
risk weights for each category is contained in Appendix 4 of this 
policy statement.

    \12\ Convexity refers to the non-linear price/yield relationship 
of fixed-rate financial instruments. Instruments without option 
features, such as Treasury notes, have positive convexity, meaning 
that as the price of the instrument falls, its yield will increase 
by a proportionately greater amount. Other instruments, such as 
certain mortgage-backed securities, have negative convexity.
---------------------------------------------------------------------------

E. Description of Supplemental Modules
    Residential mortgage products have option features that make the 
value of the instrument more sensitive to interest rate changes than 
many other types of financial instruments. To more accurately measure 
the sensitivity of these products, a bank that has holdings of these 
instruments in excess of specified levels is required to provide 
additional information on those holdings in its Call Report 
submissions. The agencies will apply expanded tables of risk weights to 
those portfolios when estimating the bank's IRR exposure. Both one-to-
four family residential mortgage loans and pass-through securities are 
considered mortgage holdings for these supplemental modules. Mortgage 
loans that a bank has funded but holds for sale do not need to be 
reported in the supplemental modules or included in the calculation of 
a bank's holdings of mortgage products provided that the bank has a 
firm and binding commitment from a third party to purchase the loan. 
Loans with such binding commitments are reported separately in Schedule 
1 and receive a risk-weight commensurate with short-term (three months 
or less) non-amortizing instruments. A bank, however, may elect to 
report these loans in the supplemental reporting schedules.
    1. Fixed-Rate Residential Mortgages: A bank with fixed-rate 
residential mortgage holdings that exceeds 20% of its total assets will 
report as part of its quarterly Call Report submissions, additional 
information on those holdings based upon their time remaining to 
maturity and coupon rate (Schedule 2). The term ``coupon rate'' for 
fixed-rate mortgage loans refers to the loan's stated coupon rate, 
while for pass-through securities, it refers to the weighted average 
coupon (WAC) of the underlying mortgages. For each maturity and coupon 
range, the agencies have developed and will apply risk weights which 
reflect the differences in expected price sensitivities that are 
associated with each coupon range.

BILLING CODE 6714-01-P

[[Page 39513]]
[GRAPHIC][TIFF OMITTED]TP02AU95.003


BILLING CODE 6714-01-C

[[Page 39514]]

    2. Adjustable-Rate Residential Mortgages: Adjustable-rate mortgage 
loans and securities have price sensitivities that are substantially 
different than fixed-rate mortgage assets primarily due to their coupon 
reset features. The coupon adjustments are generally limited by caps 
and floors both for the life of the mortgage and also at their rest 
period. These caps are known as lifetime and period caps. In general, 
there are three factors that most influence the price sensitivity of an 
ARM: the reset frequency, the periodic cap, and the lifetime cap. The 
relationship between the periodic and lifetime caps and the effect of 
that relationship on ARM prices is complex and varies based upon the 
likelihood that either cap will become binding. Consequently, 
information on both the periodic cap and the lifetime cap will be 
collected from banks with significant ARM holdings.
    A bank with ARM holdings greater than 10% but less than 25% of its 
total assets will through its Call Report submissions, provide 
additional information on those holdings (Schedule 3). The bank will 
report its ARM balances by the ARM's reset frequency, the nature of its 
periodic cap, and the distance to its lifetime cap. ARM balances will 
be reported for the three reset frequencies (6 months or less, over 6 
months but less than or equal to 1 year, and over 1 year). The three 
reset frequencies are divided by whether or not the ARM carries a 
periodic cap, and in the over 6 months to 1 year column, by the size of 
the periodic cap. The distance to the lifetime cap is stratified into 
four groups:
    (1) ARMs that are within 200 basis points of their lifetime caps;
    (2) ARMs that are 201 to 400 basis points from their lifetime caps;
    (3) ARMs that are 401 to 600 basis points from their lifetime caps;
    (4) ARMs that are more than 600 basis points from their lifetime 
caps.
    A bank whose ARM holdings exceed 25% of its total assets will 
provide further information on its ARM balances, including information 
on the ARM's index type and weighted average coupon, as illustrated by 
Schedule 4.

BILLING CODE 6714-01-P

[[Page 39515]]
[GRAPHIC][TIFF OMITTED]TP02AU95.004



[[Page 39516]]
[GRAPHIC][TIFF OMITTED]TP02AU95.005


BILLING CODE 6714-01-C

[[Page 39517]]


V. Calculation of IRR Exposure

    A bank's IRR exposure is calculated for both the rising and 
declining interest rate scenarios. The exposures derived for each 
scenario may differ in magnitude due to asymmetries in the price 
sensitivity of financial instruments as interest rates change (e.g., 
convexity). For each scenario, the first step in computing a bank's IRR 
exposure is to multiply each reported repricing or maturity position 
(as reported in Schedules 1, 2, 3 or 4) by the appropriate risk weight. 
This product, referred to as the ``risk weighted position,'' represents 
the estimated dollar change in the present value of that position for 
the 200 basis point rate scenario. The next step is to sum all of the 
risk weighted positions and add to these positions the sensitivities of 
any self-reported items. This result, referred to as the ``net risk 
weighted position,'' represents the estimated change in the economic 
value of the bank and is the bank's IRR exposure for the that rate 
scenario.
    Appendix 1 provides example worksheets and IRR calculations for 
hypothetical banks subject to the baseline and supplemental modules.

VI. Use of a Bank's Internal IRR Model Results

    The supervisory model set forth in this policy statement is one 
tool that examiners will use to assess a bank's level of IRR exposure 
and its need for capital. Examiners also will consider the IRR 
exposures that are indicated by the bank's internal IRR model. The 
agencies recognize that many banks have sophisticated internal models 
for measuring IRR that take account of complexities that are not 
captured by the supervisory model and that are tailored to the 
products, activities, and circumstances of each bank. In cases where 
the bank's internal model provides a more accurate assessment of the 
bank's IRR exposure, the results of that model will be the primary 
basis for an examiner's conclusion about the bank's level of IRR 
exposure.
    Factors that examiners will consider in determining whether a 
bank's internal model provides a more accurate assessment of the bank's 
IRR profile than the supervisory model include:
    (1) Whether the bank's internal model is appropriate to the nature, 
scope, and complexities of the bank and its activities;
    (2) Whether the model includes all material IRR positions of the 
bank;
    (3) Whether the model provides a more precise measurement of the 
changes in the economic value to the bank than the supervisory model;
    (4) Whether the model considers all relevant repricing data, 
including information on contractual maturities and repricing dates, 
contractual interest rate floors and/or ceilings;
    (5) Whether the model measures the bank's IRR exposure over a 
probable range of potential interest rate changes, including but not 
limited to, the rate scenarios established in this policy statement;
    (6) Whether the assumptions and structure of the model are 
reasonable, documented and periodically reviewed and validated by an 
appropriate level of senior management that has sufficient independence 
from units that take or create IRR exposures;
    (7) Whether the results of the model are communicated to and 
reviewed by senior management and the institution's Board of Directors 
on at least a quarterly basis.

VII. Use of Measurement Process Results

    The results of the measurement process established by this policy 
statement will be one factor that an examiner will use when evaluating 
a bank's capital adequacy with regards to IRR. In reviewing a bank's 
capital adequacy, an examiner will consider the exposure of the bank's 
capital and economic value to changes in interest rates, as measured by 
the supervisory model and, where applicable, the bank's internal model. 
Other factors that an examiner will consider include the quality of a 
bank's IRR management, internal controls, and the overall financial 
condition of the bank, including its earnings capacity, capital base, 
and the level of other risks which may impair future earnings or 
capital. When assessing the adequacy of the bank's IRR management 
process, an examiner will consider:
    (1) The adequacy and effectiveness of senior management and Board 
oversight;
    (2) The adequacy of and compliance with the bank's policies, 
procedures and internal controls;
    (3) The existence of and adherence to specific risk limits relating 
to loss of capital;
    (4) Management's knowledge and ability to identify and manage 
sources of IRR effectively; and
    (5) The adequacy of internal risk measurement and monitoring 
systems.
    At the completion of each safety and soundness examination, 
examiners will form and document conclusions as to the adequacy of a 
bank's capital and risk management process with regard to interest rate 
risk. An examiner's conclusions about both the level of risk and the 
adequacy of the risk management process will play an integral role in 
determining a bank's need for capital for IRR. Banks with high levels 
of measured exposure or weak management systems generally will need to 
hold capital for IRR. The specific amount of capital that may be needed 
will be determined on a case-by-case basis by the examiner and the 
appropriate supervisory agency. This determination and the examiner's 
overall conclusions regarding IRR will be discussed with bank 
management at the close of each examination.
    During the intervals between examinations, the agencies will use 
the supervisory model to help monitor changes in a bank's IRR exposure. 
Significant changes in reported exposures or in a bank's overall 
financial condition will be analyzed by the bank's primary supervisor 
to determine whether additional supervisory actions are warranted. Such 
actions may include additional discussions with bank management, 
requests for additional information, on-site reviews of the bank, and 
reevaluation of the bank's capital adequacy.
Appendix 1--Proposed Call Report Schedules and Supervisory Model 
Worksheets

    This appendix contains sample call report schedules and worksheets 
that would be used for the proposed supervisory model. As noted in the 
proposed policy statement, the schedules shown in this appendix are 
under consideration by the agencies but have not yet been submitted to 
the FFIEC for approval. These schedules and worksheets are included in 
this document to provide readers and commenters a better understanding 
of the proposed supervisory risk measurement system.

I. Sample Call Report Schedules

    Schedule 1 illustrates the information that would be collected from 
all banks that do not meet the reporting exemption criteria. This 
information would be used for the baseline supervisory model. Schedules 
2-4 illustrate the information that would be collected from non- exempt 
banks that have concentrations in fixed- or adjustable-rate residential 
mortgage loans or pass-through securities. This information would be 
used in lieu of the items for these portfolios on Schedule 1. The 
balances reported in the supplemental schedules would be subjected to 
the expanded set of risk weights shown in Appendix 3. Draft reporting 
instructions for Schedules 1-4 are provided in Appendix 2. 

[[Page 39518]]

    Schedule 5 illustrates the information on a bank's internal IRR 
model results that the agencies propose to collect on a voluntary and 
confidential basis. A bank that has an internal IRR model that measures 
the bank's economic exposure for a 200 basis point parallel rate shock 
would provide summary information on the estimated change in value for 
various asset, liability, and off-balance-sheet categories.

BILLING CODE 6714-01-P
      

[[Page 39519]]
    [GRAPHIC][TIFF OMITTED]TP02AU95.006
    


[[Page 39520]]
    [GRAPHIC][TIFF OMITTED]TP02AU95.007
    


[[Page 39521]]
    [GRAPHIC][TIFF OMITTED]TP02AU95.008
    


[[Page 39522]]
    [GRAPHIC][TIFF OMITTED]TP02AU95.009
    


[[Page 39523]]
    [GRAPHIC][TIFF OMITTED]TP02AU95.010
    

BILLING CODE 6714-01-C

[[Page 39524]]


II. Baseline Supervisory Model Worksheet

    To illustrate how a bank's IRR exposure would be calculated under 
the baseline supervisory model, the following worksheets are provided 
for a hypothetical bank (Bank A) that is not exempted from reporting 
(see policy statement) and has filed the proposed Schedule 1. Since 
Bank A's fixed-rate residential mortgage loan and security holdings are 
less than 20% of its total assets and its adjustable-rate holdings are 
less than 10% of total assets, it is not subject to any the 
supplemental reporting schedules. Schedule 1A shows the completed 
Schedule 1 for Bank A. Tables 1A and 2A are the baseline model 
worksheets for the rising and falling rate scenarios, respectively for 
Bank A.
    Column A in Tables 1A and 2A combine and transcribe the balance 
information that Bank A reported. For example, Bank A reported $4.126 
million of fixed-rate mortgage securities and $5.432 million of fixed-
rate mortgage loans that had maturities of 10- to 20-years. These 
balances have been combined and reported in Item 1(f) in Tables 1A and 
2A.
    Column B in Tables 1A and 2A shows the supervisory model risk 
weights for each instrument type and maturity category. The risk 
weights represent the estimated percentage change in the value of the 
reported balances for a 200 basis point rise (Table 1A) and decline 
(Table 2A) in interest rates. For example, the value of a 3- to 5-year 
non-amortizing loan or security, as shown in Item 6(d) is estimated to 
decline by 6.60% if interest rates increase by 200 basis points and 
increase in value by 7.10% if rates decline by 200 basis points. The 
risk weights shown in Column B are established by the agencies and 
published in Appendix 3 to this policy statement. Because liabilities 
represent future obligations of the bank, the risk-weights used for 
liabilities are shown as positive numbers for the rising rate scenario 
(representing a benefit to the bank) and negative numbers for the 
declining rate scenario.
    Column C in Tables 1A and 2A represents the estimated dollar change 
in the present value of each reported balance. These values are 
obtained by multiplying the reported balance in Column A by the 
corresponding risk weight in Column B. For example, Bank A has $3.458 
million in ARMs that are near their lifetime caps (line 2(d) in Tables 
1A and 2A). The agencies have estimated that the value of such ARMs 
will decline by approximately 7.00% if rates increase by 200 basis 
points. Thus, the estimated decline in value for Bank A's reported ARM 
balances near lifetime caps is approximately $242 thousand ($3.458 
million times-7.00%). Note that for self-reported items, no 
multiplication is needed. Rather, the estimated dollar change in value 
reported by the bank in Schedule 1A is incorporated directly into the 
exposure estimate.
    Bank A's net IRR exposure is calculated by summing the individual 
risk-weighted positions and self-reported change amounts shown in 
Column C. The sum of the risk-weighted asset positions plus self-
reported items for Bank A indicates a decline in value for these 
portfolios of approximately $17.560 million under the rising rate 
scenario. This decline is partially offset by $11.093 million and 
$0.266 million increases in value for liabilities and other off-balance 
sheet items, respectively. Bank A's net risk-weighted position is the 
sum of these items and indicates that the economic value of Bank A is 
expected to decline by $6.201 million under the rising rate scenario. 
Conversely, under the declining rate scenario, the economic value of 
Bank A is expected to increase by $10.103 million.

BILLING CODE 6714-01-P

[[Page 39525]]
[GRAPHIC][TIFF OMITTED]TP02AU95.011



[[Page 39526]]
[GRAPHIC][TIFF OMITTED]TP02AU95.012



[[Page 39527]]
[GRAPHIC][TIFF OMITTED]TP02AU95.013


BILLING CODE 6714-01-C

[[Page 39528]]


 III. Supplemental Module Worksheets

    The calculation of net IRR exposure for a bank using the 
supplemental schedules is similar to the process described for the 
baseline model. The primary difference is that the risk-weighted 
positions for the applicable residential mortgage portfolios are 
derived from the supplemental schedules and expanded risk-weight tables 
rather than from baseline schedules.
    To illustrate the calculation, worksheets are provided for a 
hypothetical bank (Bank B) that has filed supplemental Schedule 2 
(fixed-rate mortgages) and Schedule 4 (adjustable-rate mortgages). Bank 
B uses these schedules because both its fixed-rate and adjustable-rate 
residential mortgage loans and pass-through securities holdings exceed 
25% of its total assets. Schedules 1B, 2B and 4B (corresponding to the 
proposed Schedules 1, 2 and 4) show the data that Bank B has reported. 
Table 1B is the worksheet used to calculate Bank B's IRR exposure for 
the rising rate scenario. This worksheet is similar to the worksheets 
used for the baseline model. Column A combines and transcribes the 
balance information that Bank B reported in Schedules 1B, 2B and 4B. 
Column B shows the applicable risk-weights for each instrument and 
maturity category. Column C reflects the estimated dollar change in 
value for each portfolio. The only difference in this worksheet and the 
one used for the baseline model is that risk-weighted positions in 
Column C for the fixed- and adjustable-rate mortgages are obtained by 
applying the expanded set of risk-weights (provided in Appendix 3) to 
the balances reported in Schedules 2B and 4B.

BILLING CODE 6714-01-P

[[Page 39529]]
[GRAPHIC][TIFF OMITTED]TP02AU95.014



[[Page 39530]]
[GRAPHIC][TIFF OMITTED]TP02AU95.015


BILLING CODE 6714-01-C

[[Page 39531]]

    Table 2B illustrates how the change in value for Bank B's fixed-
rate mortgage portfolio is calculated. The first block of information 
in Table 2B is the balances that Bank B reported in Schedule 2B. Note 
that the total balance shown in the right-hand corner of Table 2B, 
$144.245 million, corresponds to the total balance shown in Column A 
for line 1 in Table 1B. The second block of information reproduces the 
risk-weights shown in Appendix 3 for Schedule 2. The last block of 
information shows the net risk-weighted position for each coupon and 
maturity category and is derived by multiplying the balances shown in 
the first block by the corresponding risk-weight in the second block. 
For example, Bank B has $1.008 million of fixed-rate balances with a 
maturity of 5-10 years and coupons between 6.76 and 7.25 percent. The 
agencies have estimated the present value of such balances will decline 
by 7.80% if interest rates increase by 200 basis points. Thus, the 
estimated decline in the value of these balances is $79 thousand, the 
product of $1.008 million times-7.80%. The change in value for each 
maturity and coupon category are summed to produce a net change in Bank 
B's fixed-rate mortgage portfolio of -$13.796 million. This amount is 
transcribed to Column C in line 1 for the worksheet shown in Table 1B.

               Schedule 2B.--Bank B--Fixed-Rate Mortgages               
                    [Supplemental Reporting Schedule]                   
   [To be completed by banks with FRM holdings > 20% of total assets]   
------------------------------------------------------------------------
                                  Remaining time to maturity            
                     ---------------------------------------------------
                                    (Column B)   (Column C)             
Balance with coupons   (Column A)     over 5      over 10     (Column D)
         of:           5 years or     years        years       over 20  
                          less      through 10   through 20     years   
                                      years        years                
------------------------------------------------------------------------
2. <=6.75%..........         $149         $246       $1,284       $9,362
3. 6.76%-7.25%......          793       1,0008        2,451       10,041
4. 7.26%-7.75%......          726        1,095        2,068       13,498
5. 7.76%-8.25%......          833        1,163        1,984       15.984
6. 8.26%-8.75%......          623        1,994        2,201       16,498
7. 8.76%-9.25%......          511        2,541        2,468       27,375
8. 9.26%-9.75%......          336        2,006        1,604       19,230
9. >=9.75%..........          597          736          948        1,892
------------------------------------------------------------------------


                                     Table 2B.--Bank B--Fixed-Rate Mortgages                                    
                                       [Supplemental Reporting Worksheet]                                       
                                            Balance from Schedule 2B                                            
----------------------------------------------------------------------------------------------------------------
                                                             Remaining time to maturity                         
                                                ----------------------------------------------------            
                                                               (Column B)   (Column C)                          
            Balance with coupons of:              (Column A)     over 5      over 10     (Column D)     Total   
                                                  5 years or     years        years       over 20               
                                                     less      through 10   through 20     years                
                                                                 years        years                             
----------------------------------------------------------------------------------------------------------------
2.<=6.75%......................................         $149         $246       $1,284       $9,362      $11,041
3. 6.76%-7.25%.................................          793        1,008        2,451       10,041       14,293
4. 7.26%-7.75%.................................          726        1,095        2,068       13,498       17,387
5. 7.76%-8.25%.................................          833        1,163        1,984       15,984       19,964
6. 8.26%-8.75%.................................          623        1,994        2,201       16,498       21,316
7. 8.76%-9.25%.................................          511        2,541        2,468       27,375       32,895
8. 9.26%-9.75%.................................          336        2,006        1,604       19,230       23,176
9. >9.75%......................................          597          736          948        1,892        4,173
                                                ----------------------------------------------------------------
      Total....................................        4,568       10,789       15,008      113,880      144,245
----------------------------------------------------------------------------------------------------------------


                                                                        
                       Risk Weights--Rising Rates                       
------------------------------------------------------------------------
                                  Remaining time to maturity            
                     ---------------------------------------------------
                                    (Column B)   (Column C)             
Balance with coupons   (Column A)     over 5      over 10     (Column D)
         of:           5 years or     years        years       over 20  
                          less      through 10   through 20     years   
                       (percent)      years        years      (percent) 
                                    (percent)    (percent)              
------------------------------------------------------------------------
<=6.75%.............        -6.00        -7.90        -8.90       -12.30
6.76%-7.25%.........        -5.90        -7.80        -8.80       -11.90
7.26%-7.75%.........        -5.70        -7.60        -8.50       -11.50
7.76%-8.25%.........        -5.50        -7.20        -8.20       -11.00

[[Page 39532]]
                                                                        
8.26%-8.75%.........        -5.20        -6.80        -7.70       -10.30
8.76%-9.25%.........        -4.70        -6.10        -7.10        -9.50
9.26%-9.75%.........        -4.10        -5.40        -6.40        -8.50
>=9.75%.............        -3.00        -3.90        -4.90        -6.30
------------------------------------------------------------------------



                                                                                                                
                                   Net Position (Balance  x  Risk Weight) ($)                                   
----------------------------------------------------------------------------------------------------------------
                                                             Remaining time to maturity                         
                                                ----------------------------------------------------            
                                                               (Column B)   (Column C)                          
            Balance with coupons of:              (Column A)     over 5      over 10     (Column D)     Total   
                                                  5 years or     years        years       over 20               
                                                     less      through 10   through 20     years                
                                                                 years        years                             
----------------------------------------------------------------------------------------------------------------
<=6.75%........................................         ($9)        ($19)       ($114)     ($1,152)     ($1,294)
6.76%-7.25.....................................         (47)         (79)        (216)      (1,195)      (1,536)
7.26%-7.75%....................................         (41)         (83)        (176)      (1,552)       1,853)
7.76%-8.25%....................................         (46)         (84)        (163)      (1,758)      (2,050)
8.26%-8.75%....................................         (32)        (136)        (169)      (1,699)      (2,037)
8.76%-9.25%....................................         (24)        (155)        (175)      (2,601)      (2,955)
9.26%-9.75%....................................         (14)        (108)        (103)      (1,635)      (1,859)
>=9.75%........................................         (18)         (29)          46)        (119)        (212)
                                                ----------------------------------------------------------------
      Total....................................        (231)        (693)      (1,162)     (11,711)     (13,796)
----------------------------------------------------------------------------------------------------------------

BILLING CODE 6714-01-P

[[Page 39533]]
[GRAPHIC][TIFF OMITTED]TP02AU95.016


BILLING CODE 6714-01-C

[[Page 39534]]

    Tables 3B-6B illustrate how the change in value for Bank B's ARM 
holdings is calculated. Table 3B shows the calculation for the Bank B's 
ARMs that are priced off of the current market index and have heset 
frequencies or 6 months or less. Table 4B shows the similar calculation 
for the current market-indexed ARMs with reset frequencies of 6 months 
to 1 year while Table 5B is for the current market-indexed ARMs with 
reset frequencies over 1 year. Table 6B is for Bank B's lagging market-
indexed ARMs. The steps for calculating the change in value for each of 
these sub-portfolios is identical so only Table 3B is described.
    The first block of information on Table 3B is the balance and 
coupon data that Bank B reported for this category of ARMs on Schedule 
4B. The second block of information reproduces the applicable risk 
weights for this product in the rising rate scenario from Appendix 3. 
The highlighted risk weights represent the risk weights applied to the 
balances and coupon data reported by Bank B in Schedule 4B. The third 
block of information is the net position for each category of ARMs, 
representing the estimated decline in value for a 200 basis increase in 
interest rates. The net position is derived by multiplying the balance 
shown in the first block by the corresponding risk-weight in the second 
block. For example, Bank B has $3.023 million of current market-indexed 
ARMs that have a reset frequency of 6 months or less that are currently 
within 200 basis points of their lifetime cap and that also have a 
periodic cap. These balances have a weighted average coupon of 5.60%. 
The applicable risk-weight for these mortgages is the one shown for 
ARMs with these characteristics and a weighted average coupon between 
4.76 and 6.25 percent, or --8.70%. The decline in value for these 
mortgage loan balances is $263 thousand, the product of the balance 
($3.023 million) times the applicable risk weight (-8.70%). Similar 
calculations are used to for the remaining balances reported in Tables 
3B-6B. The total amounts are then summed ($2.372 million) and reported 
in Column C of the worksheet in Table 1B.

BILLING CODE 6714-01-P

[[Page 39535]]
[GRAPHIC][TIFF OMITTED]TP02AU95.017



[[Page 39536]]
[GRAPHIC][TIFF OMITTED]TP02AU95.018



[[Page 39537]]
[GRAPHIC][TIFF OMITTED]TP02AU95.019



[[Page 39538]]
[GRAPHIC][TIFF OMITTED]TP02AU95.020


BILLING CODE 6714-01-C

[[Page 39539]]

    Tables 7B-12B show the calculations for Bank B's IRR exposure for 
the declining rate scenario.

BILLING CODE 6714-01-P

[[Page 39540]]
[GRAPHIC][TIFF OMITTED]TP02AU95.021


6714-01-C

                                                                                                                

[[Page 39541]]
                                     Table 8B.--Bank B--Fixed-Rate Mortgages                                    
                                       [Supplemental Reporting Worksheet]                                       
                                            Balance from Schedule 2B                                            
----------------------------------------------------------------------------------------------------------------
                                                             Remaining time to maturity                         
                                                ----------------------------------------------------            
                                                               (Column B)   (Column C)                          
            Balance with coupons of:              (Column A)     over 5      over 10     (Column D)     Total   
                                                  5 years or     years        years       over 20               
                                                     less      through 10   through 20     years                
                                                                 years        years                             
----------------------------------------------------------------------------------------------------------------
2. <=6.75%.....................................         $149         $246       $1,284       $9,362      $11,041
3. 6.76%-7.25%.................................          793        1,008        2,451       10,041       14,293
4. 7.26%-7.75%.................................          726        1,095        2,068       13,498       17,387
5. 7.76%-8.25%.................................          833        1,163        1,984       15,984       19,964
6. 8.26%-8.75%.................................          623        1,994        2,201       16,498       21,316
7. 8.76%-9.25%.................................          511        2,541        2,468       27,375       32,895
8. 9.26%-9.75%.................................          336        2,006        1,604       19,230       23,176
9. >9.75%......................................          597          736          948        1,892        4,173
                                                ----------------------------------------------------------------
      Total....................................        4,568       10,789       15,008      113,880      144,245
----------------------------------------------------------------------------------------------------------------



------------------------------------------------------------------------
                                  Remaining time to maturity            
                     ---------------------------------------------------
                                    (Column B)   (Column C)             
Balance with coupons   (Column A)     over 5      over 10     (Column D)
         of:           5 years or     years        years       over 20  
                          less      through 10   through 20     years   
                       (percent)      years        years      (percent) 
                                    (percent)    (percent)              
------------------------------------------------------------------------
<=6.75%.............         5.80         7.80         9.30        13.40
6.76%-7.25%.........         5.20         6.90         8.50        12.10
7.26%-7.75%.........         4.50         5.80         7.50        10.60
7.76%-8.25%.........         3.70         4.80         6.50         9.10
8.26%-8.75%.........         3.10         3.80         5.50         7.60
8.76%-9.25%.........         2.60         3.10         4.50         6.20
9.26%-9.75%.........         2.30         2.70         3.80         5.10
>=9.75%.............         2.10         2.40         2.90         3.50
------------------------------------------------------------------------


----------------------------------------------------------------------------------------------------------------
                                                             Remaining time to maturity                         
                                                ----------------------------------------------------            
                                                               (Column B)   (Column C)                          
                                                  (Column A)     over 5      over 10     (Column D)             
            Balance with coupons of:              5 years or     years        years       over 20       Total   
                                                     less      through 10   through 20     years                
                                                  (percent)      years        years      (percent)              
                                                               (percent)    (percent)                           
----------------------------------------------------------------------------------------------------------------
<=6.75%........................................           $9          $19         $119       $1,255       $1.402
6.76%-7.25%....................................           41           70          208        1,215        1,534
7.26%-7.75%....................................           33           64          155        1,431        1,682
7.76%-8.25%....................................           31           56          129        1,455        1,670
8.26%-8.75%....................................           19           76          121        1,254        1,470
8.76%-9.25%....................................           13           79          111        1,697        1,900
9.26%-9.75%....................................            8           54           61          981        1,104
>=9.75%........................................           13           18           27           66          124
                                                ----------------------------------------------------------------
      Total....................................          166          434          932        9,353       10,886
----------------------------------------------------------------------------------------------------------------


BILLING CODE 6714-01-P

[[Page 39542]]
[GRAPHIC][TIFF OMITTED]TP02AU95.022



[[Page 39543]]
[GRAPHIC][TIFF OMITTED]TP02AU95.023



[[Page 39544]]
[GRAPHIC][TIFF OMITTED]TP02AU95.024



[[Page 39545]]
[GRAPHIC][TIFF OMITTED]TP02AU95.025


BILLING CODE 6714-01-C

[[Page 39546]]


Appendix 2--Draft Reporting Instructions

General Instructions

I. Interest Rate Risk Reporting Requirements
A. Schedule 1
    Schedule 1 must be completed by those commercial banks and FDIC-
supervised savings banks which do not meet all of the following 
exemption criteria:
    (1) The institution's total assets are less than $300 million, and
    (2) The bank's primary federal supervisor has assigned the 
institution a composite CAMEL rating of either ``1'' or ``2''; and
    (3) The sum of:
    a. 30% of the institution's fixed- and floating-rate loans and 
securities with contractual maturity or repricing dates between 1 and 5 
years, and
    b. 100% of the institution's fixed- and floating-rate loans and 
securities with contractual maturity or repricing dates beyond 5 years,

is less than 30% of the institution's total assets as of the report 
date.
    Exempted institutions may file Schedule 1 on a voluntary basis. 
Institutions that file Schedule 1 should report ``N/A'' in Schedule RC-
B, Memorandum Item 2; Schedule RC-C, Part I, Memorandum Item 2 on FFIEC 
034; Schedule RC-C, Part I, Memorandum Item 3 on FFIEC 031, 032, and 
033; and Schedule RC-E, Memorandum Items 5 and 6. FDIC-supervised 
savings banks which file Schedule 1 should report ``N/A'' in Schedule 
RC-J.
    All shifts in reporting status, with one exception, are to begin 
with the March Reports for Condition and Income. Such a shift will take 
place only if the reporting bank's condition fails to meet the 
exemption criteria, as previously noted, as of the June reporting date. 
Banks involved with business combinations (pooling of interests, 
purchase acquisitions, or reorganizations) will be subject to new 
reporting requirements, if any, beginning with the first quarterly 
report date following the effective date of a business combination 
involving a bank and one or more depository institutions.
II. Criteria for Required Completion of Supplemental Schedules 2-4
    These schedules are applicable only to banks that answered ``yes'' 
to the reporting requirement for Schedule 1. This section identifies 
which of the supplemental interest rate risk reporting schedules, if 
any, must be completed based on the reporting bank's level of mortgage 
holdings as a percent of total assets as of the report date.
A. Schedule 2
    If ``total adjusted fixed-rate mortgage holdings'' divided by total 
assets (on an unrounded basis) is greater than 20 percent of total 
assets, then the bank should place an ``X'' in the box marked ``Yes''. 
Otherwise, indicate ``No'' in Item 1. If the box marked ``Yes'' is 
checked, then the bank must complete Schedule 2. Banks completing 
Schedule 2 should only report the total amount of fixed-rate mortgage 
holdings on Schedule 1, Items 1(b) and 2(b), in Column A; the 
distribution of these instruments across Columns B through H is not 
required.
    For purposes of this item, ``total adjusted fixed-rate mortgage 
holdings'' equals the sum of the bank's permanent loans secured by 
first liens on 1-4 family residential mortgages, which have fixed 
interest rates; and the bank's mortgage-backed pass-through securities 
not held for trading, which have fixed interest rates less any of those 
loans held for sale and delivery to secondary market participants such 
as FNMA or FHLMC under terms of a binding commitment.
B. Schedule 3
    If ``total adjusted adjustable-rate mortgage holdings'' divided by 
total assets (on an unrounded basis) is equal to or greater than 10 
percent but less than 25 percent of total assets, then the bank should 
place an ``X'' in the box marked ``Yes'' in Item No. 1. Otherwise, 
indicate ``No'' in Item No. 1. If the box marked ``Yes'' is checked, 
then the bank must complete Schedule 3. Banks completing Schedule 3 are 
exempt from completing Schedule 4 and the memoranda section of Schedule 
1.
C. Schedule 4
    If ``total adjusted adjustable-rate mortgage holdings'' divided by 
total assets (on an unrounded basis) is greater than or equal to 25 
percent of total assets, then the bank should place an ``X'' in the box 
marked ``Yes'' in Item No. 1. Otherwise, indicate ``No'' in Item No. 1. 
If the box marked ``Yes'' is checked, then the bank must complete 
Schedule 4. Banks completing Schedule 4 are exempt from completing 
Schedule 3 and the memoranda section of Schedule 1.
    For purposes of Schedules 3 and 4, ``total adjusted adjustable-rate 
mortgage holdings'' equals the sum of the bank's permanent loans 
secured by first liens on 1-4 family residential mortgages which have 
adjustable interest rates and the bank's mortgage pass-through 
securities not held for trading which have adjustable interest rates 
less any of those loans held for sale and delivery to secondary market 
participants such as FNMA or FHLMC under terms of a binding commitment.
    Institutions that are not required to complete the supplemental 
schedules may elect to do so on a voluntary basis.
III. Reporting Instructions--Schedule 1
    The information required in Schedule 1 primarily represents the 
distribution across Columns B through H of maturity and repricing data 
for selected assets, liabilities and off- balance sheet items that are 
outstanding as of the report date. These distributed dollar amounts 
must equal the total dollar amounts reported in Column A. Assets in 
nonaccrual status are excluded from this schedule. Additionally, a 
self-reporting section is to be completed by those banks holding 
particular types and/or concentrations of interest rate sensitive 
assets and off-balance sheet contracts. This section requests 
information concerning the carrying value of these items as well as 
estimates of market value changes for the 200 basis point rising and 
falling interest rate scenarios. The carrying value of the bank's 
trading account holdings is requested separately in the self-reported 
section, along with market value changes given 100 basis point rising 
and falling interest rate scenarios. Estimates for self-reported items 
may be obtained from a reliable third party source or from the 
institution's internal risk measurement system. Schedule 1 also 
contains a memoranda section for the reporting of adjustable-rate 
mortgage holdings by reset frequency for those banks with less than 10% 
of total assets in adjustable-rate mortgages.
Definitions
    A fixed interest rate is a rate that is specified at the 
origination of the transaction, is fixed and invariable during the term 
of the asset or liability, and is known to both the borrower and the 
lender. Also treated as a fixed interest rate is any rate that changes 
during the term of the asset or liability on a predetermined basis, 
with the exact rate of interest over the life of the instrument known 
with certainty to both the borrower and the lender at origination or 
when the instrument is acquired.
    The remaining maturity is the amount of time remaining from the 
report date until the final contractual maturity of an asset or 
liability.
    A floating or adjustable rate is a rate that varies, or can vary, 
in relation to an index, to some other interest rate such as the rate 
on certain U.S. Government 

[[Page 39547]]
securities or the bank's ``prime rate,'' or to some other variable 
criterion the exact value of which cannot be known in advance.
    The reset or repricing frequency is how often the contract permits 
the interest rate on an instrument to be changed (e.g., daily, monthly, 
quarterly, semiannually, annually) without regard to the length of time 
between the report date and the date the rate can next change.
    The next repricing date is the amount of time remaining from the 
report date until the instrument's contract permits the rate of 
interest to change.
Distribution of Securities, Loans and Leases, and Other Interest-
Bearing Assets
    Banks must distribute the carrying value of selected securities, 
loans and leases and other interest-bearing assets in the specified 
balance sheet categories of this schedule in accordance with the 
procedures set forth in the item instructions below.
    All permanent loans secured by first liens on 1-4 family 
residential mortgages and 1-4 family residential mortgage pass-through 
securities should be reported on the following basis:
    (1) The entire carrying value of each asset with a fixed rate of 
interest should be reported on the basis of the asset's remaining 
contractual maturity, and
    (2) The entire carrying value of each asset with a floating or 
adjustable rate of interest should be reported on the basis of its 
reset frequency.
    The bank's own estimates of expected cash flows associated with 
these mortgage products should not be used in this schedule. Loans held 
for sale and delivery to secondary market participants under terms of 
binding commitments are reported separately in Item No. 2(c) without 
regard to maturity or repricing.
    The carrying value of other debt securities, all other loans and 
leases, and all other interest-bearing assets should be reported on the 
following basis:
    (1) Assets which carry a fixed rate of interest should be spread 
among the Columns according to their remaining maturity (as defined 
below), and
    (2) Assets which carry a floating or adjustable rate of interest 
should be reported on the basis of the time remaining until the next 
repricing date.
Distribution of Time Deposits, Non-Maturity Deposits, and All Other 
Interest-Bearing Liabilities
    All time deposits and other interest-bearing nondeposit liabilities 
should be distributed across Columns B through H according to remaining 
contractual maturity for fixed-rate liabilities and according to next 
repricing date for adjustable-rate liabilities. The maturity and 
repricing for all non-maturity deposits (DDAs, MMDAs, NOW accounts, and 
other savings deposits) is determined by bank management based on its 
own assumptions and experience and must be reported in both rising and 
falling interest rate scenarios in accordance with the parameters 
described in the item instructions below.
Distribution of Off-Balance Sheet Positions
    Institutions are required to distribute selected off-balance sheet 
contracts that are not held for trading among the time bands (Columns) 
of Schedule 1. The off-balance sheet items include interest rate 
forward contracts, interest rate futures contracts, interest rate swaps 
without embedded options, and commitments to originate, buy, and sell 
loans and securities. Such commitments should exclude unused lines of 
credit and commitments to sell 1-4 family mortgage loans that the bank 
holds for sale and delivery to secondary market participants.
    Off-balance sheet contracts should be reported as either amortizing 
or non-amortizing contracts depending on whether the notional value of 
the contract amortizes over time.
    The selected off-balance sheet items must be reported using two 
entries to reflect the timing of the cash flows. The notional amounts 
of the contracts are offsetting: one entry is positive and the other is 
an offsetting negative entry. This reporting method reflects the way in 
which the off-balance sheet instruments affect the institution's 
balance sheet. In general, if the outstanding contract serves to 
lengthen an asset's maturity (i.e., long futures) then the first entry 
is negative and the second entry is positive. If the outstanding 
contract serves to shorten an asset's maturity (i.e., pay-fixed swap) 
then the first entry is positive and the second entry is negative. 
Reporting instructions for particular types of off-balance sheet 
contracts are provided in sections that follow.
    Excluded from this section are: (1) Interest rate option contracts, 
including caps, floors, collars, corridors, and swaptions, and (2) 
interest rate swaps with embedded options, such as index amortizing 
swaps. These items are included in the self-reported section below.
Self-Reported Items
    This self-reported section requests information regarding certain 
assets and off- balance sheet contracts. Institutions are required to 
provide estimates of changes in market values for each instrument given 
both a 200 basis point rise and decline in interest rates. These 
estimates may be obtained from reliable third party sources or from the 
institution's internal risk measurement system.
Item Instructions
    The total amount reported in Column A must equal the sum of Columns 
B through H.
    Item 1, Debt Securities (exclude self reported items): The sum of 
Items 1(a) and 1(b), Column A for this item plus the amount of 
nonaccrual pass-through securities included in Schedule RC-N, Column C, 
must equal the sum of Schedule RC-B, Items 4(a)(1) through 4(a)(3), 
Columns A and D.
    Fixed-rate debt securities should be reported without regard to 
their call date unless the security has actually been called. When 
fixed-rate debt securities have been called, they should be reported on 
the basis of the time remaining until the call date. Adjustable-rate 
debt securities should be reported on the basis of their reset 
frequency without regard to their call date even if the security has 
actually been called.
    Fixed-rate debt securities that the reporting bank has the option 
to redeem prior to maturity (``put bonds'') should be reported on the 
basis of the time remaining until the earliest ``put'' date. 
Adjustable-rate ``put bonds'' should be reported on the basis of reset 
frequency without regard to ``put'' dates.
    The information requested in Items 1(c), 1(d), and 1(e) applies to 
both fixed-rate and adjustable-rate instruments.
    Item 1(a), ARM Securities (use Memoranda section below): Report the 
total carrying value \13\ of all adjustable-rate mortgage-backed pass-
through certificates, such as those guaranteed by the Government 
National Mortgage Association (GNMA) and those issued by the Federal 
National Mortgage Association (FNMA), the Federal Home Loan Mortgage 
Corporation (FHLMC), and others (e.g., other depository institutions or 
insurance companies) 

[[Page 39548]]
which are included in Schedule RC-B, Items 4(a)(1) through 4(a)(3).

    \13\ For purposes of this schedule, available-for-sale debt 
securities are to be reported on the basis of their fair value, 
while held-to-maturity debt securities are to be reported on the 
basis of their amortized cost. Therefore, throughout the 
instructions to this schedule, references to the carrying value 
should be read as such.
---------------------------------------------------------------------------

    The reporting of these adjustable-rate pass-through securities by 
reset frequency depends upon the institution's asset concentration 
level and is requested in the Memoranda Section of this schedule as 
well as in Schedules 3 and 4.
    Item 1(b), Fixed-Rate Mortgage Securities: Report the carrying 
value of all fixed-rate mortgage-backed pass-through certificates, such 
as those guaranteed by the Government National Mortgage Association 
(GNMA) and those issued by the Federal National Mortgage Association 
(FNMA), the Federal Home Loan Mortgage Corporation (FHLMC), and others 
(e.g., other depository institutions or insurance companies) which are 
included in Schedule RC-B, Items 4(a)(1) through 4(a)(3).
    Item 1(c), All Other Amortizing Securities: Report the carrying 
value of all other debt securities (not reported in Items 1(a) and 1(b) 
above) which have regularly scheduled principal amortization more 
frequently than on an annual basis, exclude amortizing securities which 
require a balloon payment of 25 percent or more of the original 
principal at maturity. This may include:
    (1) U.S. Government agency and corporation obligations reported in 
Schedule RC-B, Item 2(a) and 2(b).
    (2) Securities issued by states and political subdivisions in the 
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
    (3) Other debt securities reported in Schedule RC-B, Item 5, 
including home equity loan-backed securities (and the appropriate 
subitems on the FFIEC 031, 032, and 033 report forms).
    Exclude from all other amortizing securities:
    (1) All equity securities reported in Schedule RC-B, Items 6(a) 
through 6(c).
    (2) Zero- or low-coupon (3 percent or less) securities (report in 
Item 1(e) below).
    (3) All debt securities which are on nonaccrual status.
    (4) All structured notes (include in Item 8 of the self-reported 
items below).
    (5) All ``high-risk'' mortgage securities (include in Item 6 of the 
self-reported items below.)
    (6) CMO and REMIC holdings. If CMO and REMIC holdings exceed 10% of 
total assets, they must be included in Items 6 or 7 of the self-
reporting section below. For holdings of 10% or less of assets, an 
institution may elect to report these balances in the non-amortizing 
section based on bank management's estimate of the instrument's current 
average life.
    Item 1(d), Non-Amortizing Securities: Report all debt securities 
with coupons greater than 3 percent that have either: (1) regularly 
scheduled principal payments less frequently than on an annual basis, 
or (2) full repayment of principal at maturity. Also reported in this 
item are amortizing securities which require a balloon payment of 75 
percent or more of the original principal at maturity. Non-amortizing 
securities may include:
    (1) U.S. Treasury securities reported in Schedule RC-B, Item 1.
    (2) U.S. Government agency and corporation obligations reported in 
Schedule RC-B, Items 2(a) and 2(b).
    (3) Securities issued by states and political subdivisions in the 
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
    (4) CMOs and REMICs reported in Schedule RC-B, Items 4(b)(1) 
through 4(b)(3) if the institution is not required or does not elect to 
self-report the estimated changes in the market values of these 
instruments for a 200 basis point increase and decrease in interest 
rates. Institutions should not report CMO and REMIC holdings in this 
item if these exceed 10% of total assets. If CMOs and REMIC holdings 
exceed 10% of total assets, they must be included in the self-reporting 
section below.
    (5) Other debt securities reported in Schedule RC-B, Item 5 (and 
the appropriate subitems on the FFIEC 031, 032, and 033 report forms).
    Exclude from non-amortizing securities:
    (1) All equity securities reported in Schedule RC-B, Items 6(a) 
through 6(c).
    (2) Zero- or low-coupon (3 percent or less) securities (report in 
Item 1(e) below).
    (3) All debt securities which are on nonaccrual status.
    (4) All structured notes (include in Item 8 of the self-reported 
items below).
    (5) All ``high-risk'' mortgage securities (include in Item 6 of the 
self-reported items below).
    (6) Non-high-risk mortgage securities that are included in the 
self-reported items below.
    Item 1(e), Zero- or Low-Coupon Securities Report: On the basis of 
final maturity, all holdings of debt securities with coupon rates of 3 
percent or less. Such holdings may include:
    (1) U.S. Treasury securities reported in Schedule RC-B, Item 1, 
including all U.S. Treasury bills issued on a discount basis.
    (2) U.S. Government agency and corporation obligations reported in 
Schedule RC-B, Items 2(a) and 2(b).
    (3) Securities issued by states and political subdivisions in the 
U.S. reported in Schedule RC-B, Items 3(a) through 3(c).
    (4) Other debt securities reported in Schedule RC-B, Item 5 (and 
the appropriate subitems on the FFIEC 031, 032, and 033 report forms).
    Exclude from zero- or low-coupon securities:
    (1) All equity securities reported in Schedule RC-B, Items 6(a) 
through 6(c).
    (2) All debt securities which are on nonaccrual status.
    (3) All structured notes (include in Item 8 of the self-reported 
items below).
    (4) All ``high-risk'' mortgage securities (include in Item 6 of the 
self-reported items below).
    Item 2, Loans and Leases: Loan amounts should be reported net of 
unearned income to the extent that they have been reported net of 
unearned income in Schedule RC-C.
    The sum of Items 2(a), 2(b) and 2(c), Column A of this schedule, 
plus the amount of permanent loans secured by first liens on 1-4 family 
residential mortgages in nonaccrual status reported in Schedule RC-N, 
Column C, Memorandum Item 4(c)(2) on FFIEC 033 and 034, and Memorandum 
Item 3(c)(2) on FFIEC 031 and 032 must equal RC-C, Item 1(c)(2)(a).
    Included in Items 2(c), 2(d) and 2(e) is information regarding both 
fixed- and adjustable-rate instruments.
    Item 2(a), ARM Loans (use Memorandum section below): Report the 
total amount of permanent loans secured by first liens on 1-4 family 
residential mortgages that are included in RC-C, Item 1(c)(2)(a), which 
are subject to a floating or adjustable interest rate. Exclude from 
this item any loans in nonaccrual. Also exclude loans held for sale 
with firm commitments (report in Item 2(c) below).
    The reporting of these items according to reset frequency depends 
on the institution's asset concentration level and is requested in the 
Memoranda section of this schedule as well as Schedules 3 and 4.
    Item 2(b), Fixed-Rate Mortgage Loans: Report all permanent loans 
secured by first liens on 1-4 family residential mortgages included in 
RC-C, Item 1(c)(2)(a) that are subject to a fixed or predetermined 
interest rate on the basis of time remaining until their final 
contractual maturity. Exclude any loans in nonaccrual status. Also 
exclude loans held for sale with firm commitments (report in Item 2(c) 
below).
    Item 2(c), Mortgage Loans Held for Sale with Firm Commitments: 
Report in this item the total amount of all outstanding loans secured 
by first liens 

[[Page 39549]]
on 1-4 family residential mortgages which are held by the bank for sale 
and delivery to a secondary market participant under the terms of a 
binding commitment.
    Item 2(d), Other Amortizing Loans: Report all other loans and 
leases with regularly scheduled principal amortization (more frequently 
than annually), which are not included above in Items 2(a), 2(b) and 
2(c).
    Include in this item all revolving lines of credit and credit card 
receivables. The reporting of adjustable-rate revolving credit should 
be according to the next repricing date, while fixed-rate revolving 
credit should be reported based on management determination of the 
likely repayment horizon. Relevant considerations in assigning a 
repayment period should include, at a minimum: (1) Required minimum 
monthly payments, (2) the effect of ``payment holidays,'' (3) 
historical repayment patterns, (4) the effect of credit card accounts 
used strictly for transactions purposes, and (5) the effect of pricing 
incentives such as tiered rates linked to the amount outstanding.
    Exclude amortizing loans which require a balloon payment of 75 
percent or more of the original principal at maturity. For this 
schedule, such loans are considered to be non-amortizing and are 
included in Item 2(d), ``All other loans'', below. Also exclude any 
loans in nonaccrual status.
    Item 2(e), All Other Loans: Report all other loans and leases with 
no scheduled principal amortization or with principal amortization 
scheduled annually or less frequently that are not included above in 
Items 2(a) through 2(c). Also include loans which require a balloon 
payment of 25 percent or more of the original principal at maturity. 
Exclude any loans in nonaccrual status.
    Item 3, All Other Interest-Bearing Assets: Report all interest-
earning assets, other than loans and securities. The sum of the amount 
reported in Column A for this item must equal the sum of Schedule RC, 
Item 1(b), ``Interest-bearing balances due from depository 
institutions,'' Item 3(a), ``Federal funds sold,'' and Item 3(b) 
``Securities purchased under agreements to resell,'' less any amount 
reported in nonaccrual status.
    Item 4, Liabilities: For purposes of this schedule, report all 
fixed-rate time deposits and interest-bearing nondeposit liabilities on 
the basis of their remaining maturity, and adjustable-rate time 
deposits and nondeposit interest-bearing liabilities on the basis of 
their next repricing date. Non-maturity deposits include: (1) 
Commercial demand deposit accounts; (2) money market deposit accounts 
(MMDAs); and (3) NOW accounts, all other savings deposits, and all 
other retail demand deposit accounts. The distribution of these non-
maturity deposits across the time bands will be based on management 
determination within defined constraints.
    The term ``commercial'' for purposes of this schedule refers to all 
demand deposit accounts in which the beneficial interest is held by a 
depositor that is not an individual or sole proprietorship. Such 
accounts include, but are not limited to, demand deposits held by: 
corporations, partnerships, and other associations; the U.S. and 
foreign governments; states and political subdivision in the U.S.; U.S. 
and foreign banks. Only those commercial accounts which are 
noninterest-bearing demand deposit accounts are differentiated for 
reporting purposes; all other commercial deposits (i.e., NOW accounts, 
MMDAs and other savings deposits) are not differentiated for purposes 
of this schedule.
    The term ``retail'' for purposes of this report refers to all 
demand deposit accounts in which the beneficial interest is held by a 
depositor that is an individual or sole proprietorship.
    Institutions must report all non-maturity deposits across the time 
bands each quarter according to management's own assumptions and 
experience in both a rising rate and a declining rate scenario in 
accordance with the following parameters:
    (1) Commercial Demand Deposit Accounts: A minimum of 50 percent of 
an institution's commercial demand deposit accounts is required to be 
reported in Column B, ``Up to 3 months.'' The remaining balances can be 
distributed across Columns B through E (``Up to 3 months,'' ``Greater 
than 3 months-1 year,'' ``1-3 years,'' and ``3-5 years'') with a 
maximum of 20 percent of the total balance in Column E, ``3-5 years.''
    (2) MMDA Accounts: These deposit accounts may be distributed across 
Columns B through D (``Up to 3 months,'' ``Greater than 3 months-1 
year,'' and ``1-3 years'') with a maximum of 50 percent reported in the 
Column D, ``1-3 years.''
    (3) NOW Accounts, Other Savings Deposits and Retail Demand Deposit 
Accounts: These deposit accounts may be distributed across Columns B 
through F (``Up to 3 months,'' ``Greater than 3 months-1 year,'' ``1-3 
years,'' ``3-5 years,'' and ``5-10 years'') under the following 
constraints: a maximum of 20 percent in Column F, ``5-10 years,'' and a 
maximum of 20 percent combined in Columns E and F, ``3-5 years'' and 
``5-10 years.''
    Item 4(a), Time Deposits: Report the total amount of all time 
deposits, regardless of amount. This item includes both time 
certificates of deposit and open-account time deposits. The amount in 
Column A must equal the sum of Schedule RC-E, Memorandum Items 2(b), 
2(c), and 2(d). For purposes of this schedule, time deposits with 
``step up'' features should be reported on the basis of remaining 
maturity.
    Item 4(b), All Other Interest-Bearing Nondeposit Liabilities: The 
amount reported in this item must equal the sum of the following items 
from Schedule RC: Item 14(a), ``Federal funds purchased;'' Item 14(b), 
Securities sold under agreements to repurchase;'' Item 15(a), ``Demand 
notes issued to the U.S. Treasury;'' Item 16(a), ``Other borrowed money 
with original maturity of one year or less;'' Item 16(b), ``Other 
borrowed money with original maturity of more than one year;'' Item 17, 
``Mortgage indebtedness and obligations under capitalized leases;'' 
Item 19, ``Subordinated notes and debentures;'' and Item 22, ``Limited-
life preferred stock and related surplus.''
    Item 4(c), Commercial Demand Deposits--Rising Rates: Report the 
total amount of all demand deposit accounts (included in Schedule RC-E, 
Columns A and B) representing funds in which any beneficial interest is 
held by a depositor which is not an individual or sole proprietorship.
    Item 4(d), MMDAs--Rising Rates: Report the total amount of all 
MMDAs as reported on Schedule RC-E, Memorandum Item 2(a)(1).
    Item 4(e), NOW Accounts, Other Savings Deposits, and Other Demand 
Deposits--Rising Rates: Report the total amount of all NOW accounts 
that are included in Schedule RC-E, Memorandum Item 3, all other 
savings deposits as reported on Schedule RC-E, Memorandum Item 2(a)(2), 
and all demand deposits representing funds in which any beneficial 
interest is held by an individual or sole proprietorship included in 
Schedule RC-E, Item 1, Columns A and B.
    Item 4(f), Commercial Demand Deposits--Declining Rates: Report the 
total amount of all demand deposit accounts (included in Schedule RC-E, 
Columns A and B) representing funds in which any beneficial interest is 
held by a depositor which is not an individual or sole proprietorship.
    Item 4(g), MMDAs--Declining Rates: Report the total amount of all 
MMDAs as reported on Schedule RC-E, Memorandum Item 2(a)(1). 

[[Page 39550]]

    Item 4(h), NOW Accounts, Other Savings Deposits, and Other Demand 
Deposits--Declining Rates: Report in this item the total amount of all 
NOW accounts that are included in Schedule RC-E, Memorandum Item 3, all 
other savings deposits as reported on Schedule RC-E, Memorandum Item 
2(a)(2), and all demand deposits representing funds in which any 
beneficial interest is held by an individual or sole proprietorship 
included in Schedule RC-E, Item 1, Columns A and B.
    Item 5, Off-Balance Sheet Positions: In this section, respondents 
must report selected off-balance sheet contracts using two entries. 
Each contract has two offsetting entries (one is positive, one is 
negative) which reflect the timing of the cash flows. This reporting 
method reflects the way in which the off-balance sheet instruments 
affect the institution's economic value.
    Item 5(a), Non-Amortizing Contracts: Report the notional amounts of 
the following contracts that are not held for trading: (1) Futures 
contracts whose predominant risk characteristic is interest rate risk 
as reported in Schedule RC-L, Item 14(a), ``Futures contracts, Column 
A, ``Interest Rate Contracts;'' (2) forward contracts whose predominant 
risk characteristic is interest rate risk reported in Schedule RC-L, 
Item 14(b), ``Forward contracts,'' Column A, ``Interest Rate 
Contracts;'' and (3) interest rate swaps, excluding basis swaps, 
reported in Schedule RC-L, Item 14(e), ``Swaps,'' Column A, ``Interest 
Rate Contracts.'' Also included in this item are commitments to 
originate, buy, and sell non-amortizing loans and securities. Exclude 
all unused lines of credit.
    Exclude from this item all exchange-traded option contracts and 
over-the-counter option contracts and any swaps with embedded options. 
Swaptions, i.e., options to enter into a swap contract, and contracts 
known as caps, floors, collars and corridors should be reported as 
options and are included in Item 11 of the self-reported section below. 
Also exclude all contracts held for trading (report in Item 12 of the 
self-reporting section below.)
    Futures contracts and interest rate forwards must be reported in 
Columns B through H on the following basis: The first entry corresponds 
to the settlement date of the contract, and the offsetting entry 
corresponds to the settlement date plus the maturity of the instrument 
underlying the contract.
    Long positions in futures contracts and forward rate agreements 
represent commitments to purchase specified financial instruments at a 
specified future date at a specified price or yield. For outstanding 
long positions, the first entry corresponding to the contract 
settlement date must be negative. The offsetting positive entry must be 
reported according to the settlement date plus the maturity of the 
instrument underlying the contract.
    Short positions in futures contracts and forward rate agreements 
represent commitments to sell specified financial instruments at a 
specified future date at a specified price or yield. For an outstanding 
short position, the first entry corresponding to the contract 
settlement date must be positive. The offsetting negative entry must be 
reported according to the settlement date plus the maturity of the 
instrument underlying the contract.
    Interest rate swaps must be reported in Columns B through H on the 
following basis: The first entry corresponds to the next repricing date 
of the adjustable-rate coupon, and the offsetting entry corresponds to 
the maturity of the swap.
    For swaps in which the reporting bank pays an adjustable rate and 
receives a fixed rate, the first entry corresponding to the next 
repricing date of the floating rate coupon must be negative. The 
offsetting positive entry must be reported according to the maturity of 
the swap.
    For swaps in which the reporting bank pays a fixed rate and 
receives an adjustable rate, the first entry corresponding to the next 
repricing date of the floating rate coupon must be positive. The 
offsetting negative entry must be reported according to the maturity of 
the swap.
    Securitized credit cards where the credit card holders pay a fixed 
rate and the security has an adjustable-rate coupon are treated 
similarly to interest rate swaps. Like swaps, the first entry 
corresponds to the repricing date of the adjustable-rate coupon that is 
paid to the holder of the security. However, the offsetting entry in 
these transactions corresponds to the expected maturity of the 
security. Exclude securitized credit cards where the cards and the 
security are both fixed rate or both variable rate.
    Firm commitments to originate, buy or sell non-amortizing loans or 
securities must be reported in Columns B through H on the following 
basis: The first entry corresponds to the settlement date of the 
commitment contract. The offsetting entry corresponds to the settlement 
date plus the maturity of the underlying instrument if the underlying 
instrument carries a fixed rate, or to the settlement date plus the 
time until the next repricing date of the underlying instrument if the 
underlying instrument carries an adjustable rate.
    For commitments to originate or buy non-amortizing loans or 
securities, the first entry corresponding to the contract settlement 
date must be negative. The offsetting positive entry must be reported 
according to the settlement date plus the maturity of the underlying 
instrument if the underlying instrument carries a fixed rate, or to the 
settlement date plus the time until the next repricing date if the 
underlying instrument carries an adjustable rate.
    For commitments to sell non-amortizing loans or securities, the 
first entry corresponding to the contract settlement date must be 
positive. The offsetting negative entry must be reported according to 
the settlement date plus the maturity of the underlying instrument if 
the underlying instrument carries a fixed rate, or to the settlement 
date plus the time until the next repricing date of the underlying 
instrument if the underlying instrument carries an adjustable rate.
    Item 5(b) Amortizing Contracts: Report all outstanding commitments 
to originate, buy and sell mortgages and other amortizing loans and 
securities. Include only those commitments for which interest rates 
have already been locked in, either on a fixed-rate or adjustable-rate 
basis. Also include all other interest rate contracts whose notional 
value amortizes over time.
    Commitments to originate, buy or sell mortgages and other 
amortizing loans or securities must be reported in Columns B through H 
on the following basis: The first entry corresponds to the settlement 
date of the commitment contract. The offsetting entry corresponds to 
the settlement date plus the maturity of the underlying instrument if 
the underlying instrument carries a fixed rate, or to the settlement 
date plus the time until the next repricing date of the underlying 
instrument if the underlying instrument carries an adjustable rate. All 
commitments should be reported on a gross basis, using a zero percent 
fallout factor.
    For commitments to originate or buy mortgages and other amortizing 
loans or securities, the first entry corresponding to the contract 
settlement date must be negative. The offsetting positive entry must be 
reported according to the settlement date plus the maturity of the 
underlying instrument if the underlying instrument carries a fixed 
rate, or to the settlement date plus the time until the next repricing 
date of the underlying instrument if the underlying instrument carries 
an adjustable rate.
    For commitments to sell mortgages and other amortizing loans or 
securities, 

[[Page 39551]]
the first entry corresponding to the contract settlement date must be 
positive. The offsetting negative entry must be reported according to 
the settlement date plus the maturity if the underlying instruments 
carry a fixed rate, or to the settlement date plus the time until the 
next repricing date if the underlying instruments carry an adjustable 
rate.
Self-Reported Items
    Maturity and repricing information is not requested in this 
section. However, banks must report the carrying value of on-balance 
sheet instruments in Column A and the market value of all instruments 
in Column B. In addition banks must report in Columns C and D, 
respectively, each instrument's estimated change in market value given 
a 200 basis point instantaneous and parallel rise and decline in 
interest rates. These estimates may be obtained from a reliable third 
party source or from the institution's internal risk measurement 
system. Item 7 in this section requests estimated market value changes 
of the institution's trading account holdings given 100 basis point 
instantaneous and parallel rise and decline in interest rates.
    Item 6, High-Risk Mortgage Securities: Report all high-risk 
mortgage securities included in Schedule RC-B, Memorandum Item 8. This 
item includes all mortgage derivative products (stripped mortgage-
backed securities, CMOs, REMICs, and CMO and REMIC residuals) that meet 
the definition of a high-risk mortgage security under the FFIEC's 
Supervisory Policy Statement on Securities Activities.
    Item 7, Nonhigh-Risk Mortgage Securities: Non-high risk mortgage 
securities are those mortgage derivative products which did not meet 
the definition of a high-risk mortgage security under the FFIEC's 
Supervisory Policy Statement on Securities Activities as of their most 
recent testing date. Institutions with greater than 10% of total assets 
in nonhigh-risk mortgage derivative securities as of the report date 
must report information about such instruments in this item. 
Institutions that are not required to complete this item may elect to 
do so on a voluntary basis.
    Item 8, Structured Notes: Report all structured notes included in 
Schedule RC-B, Memorandum Item 9. Structured notes are debt securities 
whose cash flow characteristics are dependent upon one or more indices 
and/or have embedded forwards or options. Included below is a list of 
common structures. For further information concerning these products, 
refer to the instructions for Schedule RC-B, Memorandum Item 9.

(1) Step-up Bonds
(2) Index Amortizing Notes (IANs)
(3) Dual Index Notes
(4) De-leveraged Bonds
(5) Range Bonds
(6) Inverse Floaters

    Item 9, Mortgage Servicing Rights: Report the unamortized portion 
of excess residential mortgage servicing fees receivable included in 
Schedule RC-F, Item 3. Also report the unamortized amount (carrying 
value) of mortgage servicing rights included in Schedule RC-M, Item 
7(a) on FFIEC 034; Item 5(a) on FFIEC 033; and Item 6(a) on FFIEC 031 
and 032.
    Item 10, Interest Rate Swaps with Embedded Options: Report all 
interest rate swaps with embedded options. Exclude all interest rate 
swaps held for trading.
    Item 11, Interest Rate Options: Report interest rate option 
contracts not held in trading accounts, including options to purchase/
sell interest-bearing financial instruments and whose predominant risk 
characteristic is interest rate risk as well as contracts known as 
caps, floors, collars, corridors and swaptions. Include all exchange-
traded and over-the-counter interest rate contracts as reported on 
Schedule RC-L, Items 14(c), Column A, and Item 14(d), Column A.
    Item 12, Trading Account: Report in this item the carrying value of 
all trading account assets, liabilities and off-balance sheet 
contracts. Also report the market value changes of these holdings given 
both a 100 basis point instantaneous and parallel rise and decline in 
interest rates. The carrying value of these items are included in 
Schedule RC, Items 5 and 15(b), and Schedule RC-L, Item 15, Column A on 
FFIEC 033 and 034; and Schedule RC-D, Items 12 and 15, and Schedule RC-
L, Item 15, Column A on FFIEC 031 and 032.
Memoranda Section
    This memoranda section is to be completed only by those banks whose 
ARM holdings are less than 10% of total assets as of the report date 
and have checked an ``X'' in the ``No'' boxes on Item 1 of both 
Schedules 3 and 4.
    Memoranda Items 1-4 divide total ARM securities and loans included 
in Schedule 1, Items 1(a) and 2(a) above into two categories, those 
adjustable-rate instruments whose rates are greater than or equal to 
200 basis points (bp) away from their lifetime interest rate cap, and 
those whose rates are less than 200 bp from their lifetime interest 
rate cap. The lifetime interest rate cap is the upper limit on the 
mortgage rate that can be charged over the life of a loan. Report in 
Memorandum Items 1 and 2 the entire amount of those instruments whose 
rates are greater than or equal to 200 bp away from their lifetime 
interest rate cap according to the frequency with which the interest 
rate on the mortgage may contractually reset. Report in Memorandum 
Items 3 and 4 the total amount of adjustable ARM securities and loans 
whose rates are less than 200 bp from their lifetime interest rate cap.
    With respect to the relationship of this memoranda section to the 
main body of this schedule, the sum of Memorandum Items 1, Columns A 
through C, and Memorandum Item 3 must equal Schedule 1, Item 1(a).
    The sum of Memoranda Item 2, Columns A through C, and Memorandum 
Item 4 must equal Schedule 1, Item 2(a).
Memoranda
    Item 1, ARM Securities: Report the carrying value of all 
adjustable-rate, mortgage-backed pass-through securities on the basis 
of their reset frequency. Exclude any securities in nonaccrual status. 
Also exclude those pass-through securities whose rates are less than 
200 bp of their lifetime interest rate cap. For this memoranda section, 
such securities are to be reported in Memorandum Item 3.
    Column A, 0 to 6 Months: Report the dollar amount of the bank's 
adjustable-rate pass-through securities whose rates may reset 
semiannually or more frequently (e.g., semiannually, quarterly, 
monthly, weekly, daily).
    Column B, 6 Months to 1 Year: Report the dollar amount of the 
bank's adjustable-rate, pass-through securities whose rates reset 
annually or more frequently, but less frequently than semiannually.
    Column C, Greater than 1 Year: Report the dollar amount of the 
bank's adjustable-rate, pass-through securities whose rates reset less 
frequently than annually.
    Item 2, ARM Loans: Report all adjustable-rate, permanent loans 
secured by first liens on 1-4 family residential mortgages on the basis 
of the reset frequency. Exclude all loans in nonaccrual status. Also 
exclude those loans whose rates are less than 200 bp from their 
lifetime interest rate cap. For this memoranda section, such loans are 
to be reported in Memorandum Item 4.
    Column A, 0 to 6 Months: Report the dollar amount of the bank's 
adjustable-rate, permanent loans secured by first liens on 1-4 family 
residential mortgages whose rates reset 

[[Page 39552]]
semiannually or more frequently (e.g. semiannually, quarterly, monthly, 
weekly, daily.)
    Column B, 6 Months to 1 Year: Report the dollar amount of the 
bank's adjustable-rate, permanent loans secured by first liens on 1-4 
family residential mortgages whose rates reset annually or more 
frequently, but less frequently than semiannually.
    Column C, Greater than 1 Year: Report the dollar amount of the 
bank's adjustable-rate, permanent loans secured by 1-4 family 
residential mortgages whose rates reset less frequently than annually.
Near Lifetime Cap
    Item 3, ARM Securities: Report the total amount of the bank's 
adjustable-rate, pass-through securities whose rates are less than 200 
bp from their lifetime interest rate cap.
    Item 4, ARM Loans: Report the total amount of the bank's 
adjustable-rate, permanent loans secured by 1-4 family residential 
mortgages whose rates are less than 200 bp from their lifetime interest 
rate cap.
IV. Reporting Instructions--Schedule 2
General Instructions
    Institutions which complete Schedule 2 should only report the total 
amount of fixed-rate mortgage holdings on Schedule 1, Items 1(b) and 
2(b), Column A. The distribution of these instruments across Columns B 
through H is not required.
    The information required in this supplemental schedule represents 
the distribution of individual fixed-rate mortgages holding balances by 
maturity and coupon rate. In the distribution of Schedule 2 items, the 
entire carrying value of all fixed-rate mortgage holdings should be 
reported on the basis of final maturities. The bank's own estimate of 
expected cash flows is not reported on this schedule.
    Items 2 through 9 of Schedule 2 list eight coupon rate ranges, 
beginning with a rate of less than or equal to 6.75% proceeding in 50 
bp increments, to a rate of greater than 9.75%. Columns A through D 
list four time ranges, which represent the time remaining from the 
report date until the final maturity of the instrument: 5 years or 
less, over 5 years through 10 years, over 10 years through 20 years, 
and greater than 20 years. Respondents must report selected assets by 
the coupon rate 14 in each of the relevant time bands.

    \14\ The term ``coupon rate'' is used in this schedule as a 
generic term, but for loans and pass-through securities it has two 
distinct definitions. Whereas loans are to be reported according to 
each individual loan's coupon or stated interest rate, pass-through 
securities are to be reported according to the weighted average 
coupon (WAC) of the underlying collateral. If this rate is not 
known, it should be estimated by adding 50 bp to the rate the bank 
receives on each pass-through certificate. The 50 bp represents the 
deduction of servicing fees and any applicable guarantee fees. As a 
consequence of these fees, the pass-through rate is lower than the 
WAC of the underlying of mortgages. Therefore, to estimate the WAC 
of the mortgage pool, the fees should be added back to the pass-
through rate.
---------------------------------------------------------------------------

Examples
    An 8%, fixed-rate, residential mortgage loan which matures in 15 
years would be reported in Item 5, Column C.
    An 8.5%, fixed-rate, mortgage pass-through security which matures 
in three years would be reported in Item 7, Column A. Note that 50 bp 
added to the 8.5% rate results in a 9% estimated weighted average 
coupon rate of the underlying collateral.
    For purposes of this supplemental schedule the following 
definitions apply:
    A fixed interest rate is a rate that is specified at the 
origination of the transaction, is fixed and invariable during the term 
of the loan or security, and is known to both the borrower and the 
lender. Also treated as a fixed interest rate is a predetermined 
interest rate which is a rate that changes during the term of the loan 
or security on a predetermined basis, with the exact rate of interest 
over the life of the instrument known with certainty to both the 
borrower and the lender at loan origination or when the debt security 
is acquired.
    Remaining maturity is the amount of time remaining from the report 
date until the final contractual maturity of a loan or debt security.
    The carrying value of a held-to-maturity pass-through security is 
its amortized cost, while the carrying value of an available-for-sale 
pass-through security is its fair value.
    All loans are to be reported net of unearned income to the extent 
that the loans have been reported net of unearned income in Schedule 
RC-C, Item 1(c)(2)(a).
    Include as fixed interest rate residential mortgage holdings the 
following instruments:
    (1) All permanent loans secured by first liens on 1-4 family 
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a), that 
have fixed interest rates regardless of whether they are current or are 
reported as ``past due and still accruing'' in Schedule RC-N, Columns A 
and B.
    (2) The carrying value of all pass-through securities which have 
fixed interest rates and are included in Schedule RC-B, Items 4(a)(1) 
through 4(a)(3), Columns A and D.
    Exclude from this schedule
    (1) Fixed-rate residential mortgage loans held for sale and 
delivery to secondary market participants, such as FNMA and FHLMC, 
under terms of a binding commitment.
    (2) Fixed-rate residential mortgage holdings that are on nonaccrual 
status.
    (3) All collateralized mortgage obligations (CMOs), real estate 
mortgage investment conduits (REMICs), and stripped mortgage-backed 
securities.
    (4) All pass-through securities held for trading.
Column Instructions
    Distribute the carrying value of selected assets in accordance with 
the procedures described for Columns A through D below.
    Report in Column A the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of 5 years 
or less.
    Report in Column B the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 5 
years through 10 years.
    Report in Column C the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 10 
years through 20 years.
    Report in Column D the entire carrying value of the bank's fixed-
rate residential mortgage holdings with remaining maturities of over 20 
years.
Item Instructions
    Item 1: Test for determining whether Schedule 2 should be 
completed. Either repeat the instruction on page 1 of the General 
Instructions or cross-reference it. In Items 2 through 9, distribute, 
in accordance with Column instructions, the carrying value of the 
bank's fixed-rate residential mortgage holdings.
    Item 2: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of less than or equal to 6.75%.
    Item 3: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 6.76% through 7.25%.
    Item 4: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 7.26% through 7.75%.
    Item 5: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 7.76% through 8.25%.
    Item 6: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 8.26% through 8.75%.
    Item 7: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 8.76% through 9.25%.

[[Page 39553]]

    Item 8: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of 9.26% through 9.75%.
    Item 9: Report the bank's fixed-rate residential mortgage holdings 
with a coupon rate of greater than or equal to 9.76%.
V. Reporting Instructions--Schedule 3
General Instructions
    This supplemental schedule primarily requests information related 
to the interest rate sensitivity of adjustable-rate mortgage (ARM) 
holdings. The information required in this supplemental schedule 
represents the categorization of the reporting bank's ARM holdings 
according to the distinct characteristics of each loan or security. The 
defining ARM characteristics requested for this schedule include:
    (1) Reset frequency. The reset frequency is how often the contract 
permits the interest rate on a loan to be changed (e.g., daily, 
monthly, quarterly, semiannually, annually) without regard to the 
length of time between the report date and the date the rate can next 
change.
    (2) Lifetime interest rate cap. The lifetime cap is the upper limit 
on the mortgage rate that can be charged over the life of a loan. This 
lifetime loan cap is expressed in terms of the initial rate. For 
example, if the initial mortgage rate is 7% and the lifetime cap is 5%, 
the maximum interest rate that the bank can charge over the life of the 
loan is 12%.
    (3) Periodic cap. A periodic cap limits the amount that the 
interest rate may increase at the reset (repricing) date. The periodic 
cap is expressed in basis points (bp). For example, the bank owns a 7% 
adjustable-rate mortgage loan. If the periodic cap is 100 bp, then the 
maximum rate the bank can charge at the next reset date is 8%. If the 
indexing rate rose by 150 bp, making the fully indexed mortgage rate 
8.5%, the bank could only charge 8% at the next reset date.
    Schedule 3, Columns A through G, list three reset frequency Columns 
which are divided by the presence of a periodic cap, and, in the over 
``6 months through 1 year'' Column only, by the size of the periodic 
cap. Items 2 through 5 list four basis point ranges for how far the 
ARM's current rate is from the instrument's lifetime interest rate cap. 
In terms of ARM pass-through securities, the information required 
pertains to the relationship between the current interest rates and 
caps of the underlying mortgages. If the loans in the mortgage pool are 
not uniform in terms of periodic caps and lifetime caps, the weighted 
cap information is required.
    In the distribution of Schedule 3 items, the entire carrying value 
of all ARM holdings should be reported on the basis of the reset 
frequency.
Examples
    An adjustable-rate permanent loan secured by a first lien on a 1-4 
family residence whose current rate is 7.5% and that has a lifetime cap 
of 12% and a periodic cap of 200 bp which reprices annually would be 
reported to Item 4, Column E.
    An adjustable-rate pass-through security whose current coupon is 8% 
and has a lifetime cap of 10.5% and a periodic cap of 100 bp which 
reprices semiannually would be reported to Item 3, Column B.
    For purposes of this supplemental schedule the following 
definitions apply:
    A floating or adjustable rate is a rate that varies, or can vary, 
in relation to an index, to some other interest rate such as the rate 
on certain U.S. Government securities or the bank's ``prime rate,'' or 
to some other variable criterion the exact value of which cannot be 
known in advance. Therefore, the exact rate the loan or security 
carries at any subsequent time cannot be known at the time of 
origination or acquisition.
    All loans are to be reported net of unearned income to the extent 
that the loans have been reported net of unearned income on RC-C, Item 
1(c)(2)(a).
    Include as adjustable-rate residential mortgage holdings the 
following instruments:
    (1) All permanent loans secured by first liens on 1-4 family 
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a), that 
have adjustable interest rates, regardless of whether they are current 
or are reported as ``past due and still accruing'' in Schedule RC-N 
Columns A and B.
    (2) The carrying values 15 of all pass-through securities 
which have adjustable interest rates and are included in RC-B, Items 
4(a)(1) through 4(a)(3), Columns A and D.

    \15\ For purposes of this schedule, available-for-sale debt 
securities are to be reported on the basis of their fair value, 
while held-to-maturity debt securities are to be reported on the 
basis of their amortized cost. Therefore, throughout the 
instructions to this schedule, references to the carrying value 
should be read as such.
---------------------------------------------------------------------------

Exclude from this schedule
    (1) Adjustable-rate residential mortgage loans held for sale and 
delivery to secondary market participants such as FNMA and FHLMC under 
terms of a binding commitment.
    (2) All adjustable-rate mortgage holdings that are on nonaccrual 
status.
    (3) All collateralized mortgage obligations (CMOs) and real estate 
mortgage investment conduits (REMICs), and stripped mortgage-backed 
securities.
    (4) All pass-through securities held for trading.
Column Instructions
    Distribute the carrying value of selected assets in accordance with 
the procedures described for Columns A though G below.
    Report in Column A the carrying value of the bank's ARM holdings 
which reprice in 6 months or less and have no periodic cap.
    Report in Column B the carrying value of the bank's ARM holdings 
which reprice in 6 months or less and have a periodic cap.
    Report in Column C the carrying value of the bank's ARM holdings 
which reprice over 6 months through 1 year and have no periodic cap.
    Report in Column D the carrying value of the bank's ARM holdings 
which reprice over 6 months through 1 year and have a periodic cap 
equal to or less than 150 bp.
    Report in Column E the carrying value of the bank's ARM holdings 
which reprice over 6 months through 1 year and have a periodic cap 
greater than 150 bp.
    Report in Column F the carrying value of the bank's ARM holdings 
which reprice over 1 year and have no periodic cap.
    Report in Column G the carrying value of the bank's ARM holdings 
which reprice over 1 year and have a periodic cap.
Item Instructions
    In Items 2 through 5, distribute, in accordance with column 
instructions, the carrying value of the bank's ARM holdings.
    Item 1: Test for determining whether Schedule 3 should be 
completed. Either repeat the instruction on page 1 of the General 
Instructions or cross-reference it.
    Item 2: Report the bank's ARM holdings that are within 200 bp of 
their lifetime cap.
    Item 3: Report the bank's ARM holdings that are 201-400 bp from 
their lifetime cap.
    Item 4: Report the bank's ARM holdings that are 401-600 bp from 
their lifetime cap.
    Item 5: Report the bank's ARM holdings that are greater than 600 bp 
from their lifetime cap. 

[[Page 39554]]

VIII. Reporting Instructions--Schedule 4
General Instructions
    This supplemental schedule primarily requests information related 
to the interest rate sensitivity of adjustable-rate mortgage (ARM) 
holdings. The information required in this supplemental schedule 
represents the categorization of the reporting bank's ARMs according to 
the distinct characteristics of each loan or security. The 
characteristics of an ARM include:
    (1) Underlying Index. The underlying index of an ARM represents the 
base or reference point for calculating the mortgage rate of an ARM 
loan. There are two main categories of indices: (1) those based on a 
current market index, and (2) those derived from a lagging market 
index. A current market index is one that adjusts quickly to changes in 
market interest rates. Examples include rates on Treasury securities, 
and the London Interbank Offered Rate (LIBOR). A lagging market index 
is one that adjusts to changes in market interest rates more slowly 
than the current market indexes such as rates on Treasury securities, 
the London Interbank Offered Rate (LIBOR), etc. Examples of lagging 
market indexes are the various published FHLB cost-of-funds indexes and 
the National Average Contract Rate for the Purchase of Previously 
Occupied Homes.
    (2) Lifetime Interest Rate Cap. The lifetime cap is the upper limit 
on the mortgage rate that can be charged over the life of a loan. This 
lifetime loan cap is expressed in terms of the initial rate. For 
example, if the initial mortgage rate is 7% and the lifetime cap is 5%, 
the maximum interest rate that the bank can charge over the life of the 
loan is 12%.
    (3) Periodic Cap. A periodic cap limits the amount that the 
interest rate may increase or decrease at the reset (repricing) date. 
The periodic cap is expressed in basis points (bp). For example, the 
bank owns a 7% adjustable-rate mortgage loan. If the periodic cap is 
100 bp, then the maximum rate the bank can charge at the next reset 
date is 8%. Even if the indexing rate rose by 150 bp, making the fully 
indexed mortgage rate 8.5%, the bank could only charge 8% at the next 
reset date.
    (4) Reset Frequency. The reset or repricing frequency is how often 
the contract permits the interest rate on a loan to be changed (e.g., 
daily, monthly, quarterly, semiannually, annually) without regard to 
the length of time between the report date and the date the rate can 
next change.
    Columns A through I on Schedule 4 list the two major indices, 
current and lagging, each of which is divided by reset frequencies. The 
current market index columns are further divided by the presence of a 
periodic cap, and, in the Over 6 months through 1 year columns only, 
by the size of the periodic cap. Items 2 through 9 cover four distance 
groups, in terms of basis point ranges, of current ARM rates in 
relation to the instruments lifetime interest rate cap. For each 
distance group, both the ARM balances and the associated weighted 
average coupon (WAC) rates must be reported. The weighted average 
coupon rate for this schedule is determined by multiplying the balance 
of each ARM loan by the applicable annual interest rate (i.e., the 
annualized rate in effect for the asset as of the report date) and by 
dividing the sum of all such calculated amounts by the total carrying 
value of the category. The WAC required for ARM securities in this 
schedule is that of the underlying mortgages, which should be estimated 
by adding 75 bp to the bank's pass-through rate. The 75 bp represents 
the deduction of servicing fees and any applicable guarantee fees. As a 
consequence of these fees, the coupon rate of the pass-through is lower 
than that of the WAC of the underlying mortgages. Therefore, to 
estimate the WAC of the mortgage pool, the fees should be added back to 
the coupon rate.
Examples
    An adjustable-rate permanent loan secured by a first lien on a 1-4 
family residence repricing quarterly whose current rate is 7.25% and 
has a lifetime cap of 10%, no periodic cap, and based on the COFI index 
would be reported in Items 4 and 5, Column I.
    An ARM pass-through security, repricing annually whose current 
coupon is 7.75% and has a lifetime cap of 14.25%, periodic cap of 200 
bp, and based on the Treasury index would be reported in Items 6a and 
7, Column E. Note the WAC of the underlying mortgages in this case is 
estimated to be 8.5%, which is the pass-through rate of 7.75% plus 75 
bp.
    For purposes of this supplemental schedule the following 
definitions apply:
    A floating or adjustable rate is a rate that varies, or can vary, 
in relation to an index, to some other interest rate such as the rate 
on certain U.S. Government securities or the bank's ``prime rate,'' or 
to some other variable criterion the exact value of which cannot be 
known in advance. Therefore, the exact rate the loan or security 
carries at any subsequent time cannot be known at the time of 
origination or acquisition.
    All loans are to be reported net of unearned income to the extent 
that the loans have been reported net of unearned income on RC-C, Item 
1(c)(2)(a).
    Adjustable-rate residential mortgage loans that are held by the 
bank for sale and delivery to a secondary market participant under the 
terms of a binding contract should be reported according to their 
repricing frequency regardless of the delivery date specified in the 
commitment.
    Include as adjustable-rate residential mortgage holdings the 
following instruments:
    (1) All permanent loans secured by first liens on 1-4 family 
residential mortgages included in Schedule RC-C, Item 1(c)(2)(a) that 
have adjustable interest rates, regardless of whether they are current 
or are reported as ``past due and still accruing'' in Schedule RC-N, 
Columns A and B.
    (2) The carrying values \16\ of all pass-through securities which 
have adjustable interest rates and are included in RC-B, Items 4(a)(1) 
through 4(a)(3), Columns A and D.

    \16\ For purposes of this schedule, available-for-sale debt 
securities are to be reported on the basis of their fair value, 
while held-to-maturity debt securities are to be reported on the 
basis of their amortized cost. Therefore, throughout the 
instructions to this schedule, references to the carrying value 
should be read as such.
---------------------------------------------------------------------------

    Exclude from this schedule:
    (1) All adjustable-rate mortgage holdings that are on nonaccrual 
status.
    (2) All collateralized mortgage obligations (CMOs) and real estate 
mortgage investment conduits.
Column Instructions
    Distribute the balance of selected assets in accordance with the 
procedures described for Columns A through I below.
    Report in Column A the balance of the bank's ARM holdings which are 
based on the current market index, reprice 6 months or less, and have 
no periodic cap.
    Report in Column B the balance of the bank's ARM holdings which are 
based on the current market index, reprice 6 months or less, and have a 
periodic cap.
    Report in Column C the balance of the bank's ARM holdings which are 
based on the current market index, reprice, over 6 months through 1 
year, and have no periodic cap.
    Report in Column D the balance of the bank's ARM holdings which are 
based on the current market index, reprice over 6 months through 1 
year,, and have a periodic cap equal to or less than 150 bp.
    Report in Column E the balance of the bank's ARM holdings which are 
based 

[[Page 39555]]
on the current market index, reprice over 6 months through 1 year, and 
have a periodic cap greater than 150 bp.
    Report in Column F the balance of the bank's ARM holdings which are 
based on the current market index, reprice over 1 year, and have no 
periodic cap.
    Report in Column G the balance of the bank's ARM holdings which are 
based on the current market index, reprice over 1 year, and have a 
periodic cap.
    Report in Column H the balance of the bank's ARM holdings which are 
based on the lagging market index and reprice1 month or less.
    Report in Column I the balance of the bank's ARM holdings which are 
based on the lagging market index and reprice over 1 month.
Item Instructions
    In Items 2 through 9, distribute, in accordance with column 
instructions, the carrying value as well as the weighted average coupon 
rate of the bank's ARM holdings.
    Items 2 and 3: Report the bank's ARM holdings which are within 200 
bp of their lifetime cap.
    Items 4 and 5: Report the bank's ARM holdings which are 201-400 bp 
from their lifetime cap.
    Items 6 and 7: Report the bank's ARM holdings which are 401-600 bp 
from their lifetime cap.
    Items 8 and 9: Report the bank's ARM holdings which are greater 
than 600 bp from their lifetime cap.
Appendix 3--Risk Weight Tables

    This appendix contains the risk weights that would be used in the 
proposed supervisory model. Table 1 provides the risk weights used for 
the baseline module and reporting Schedule 1. Table 2 provides the risk 
weights used for the fixed-rate mortgage supplemental module and 
Schedule 2 while Table 3 provides the risk weights used for adjustable-
rate mortgages reported in Schedule 3. Table 4 provides the risk 
weights used for adjustable-rate mortgages reported in Schedule 4.


[[Page 39556]]
[GRAPHIC][TIFF OMITTED]TP02AU95.099



[[Page 39557]]
[GRAPHIC][TIFF OMITTED]TP02AU95.026



[[Page 39558]]
[GRAPHIC][TIFF OMITTED]TP02AU95.027


BILLING CODE 6714-01-C

[[Page 39559]]
[GRAPHIC][TIFF OMITTED]TP02AU95.099



[[Page 39560]]
[GRAPHIC][TIFF OMITTED]TP02AU95.028



[[Page 39561]]
[GRAPHIC][TIFF OMITTED]TP02AU95.029



[[Page 39562]]
[GRAPHIC][TIFF OMITTED]TP02AU95.030



[[Page 39563]]
[GRAPHIC][TIFF OMITTED]TP02AU95.031



[[Page 39564]]
[GRAPHIC][TIFF OMITTED]TP02AU95.032



[[Page 39565]]
[GRAPHIC][TIFF OMITTED]TP02AU95.033


BILLING CODE 6714-01-C

[[Page 39566]]


Appendix 4--Technical Description of Supplemental Modules and Risk 
Weights

    This appendix is intended to provide detailed information on the 
methods used to derive the risk weights used in the supervisory 
measurement system. Descriptions of the derivation of non-mortgage risk 
weights are provided, followed by the descriptions for fixed and 
adjustable-rate mortgage risk weights. Titles and locations of 
reference documents are also provided.

I. Non-Mortgage Risk Weights

    The non-mortgage risk weights were derived using hypothetical 
market instruments that are representative of the asset or liability 
category that is measured. Each weight approximates the percentage 
change in the price of the benchmark instruments given a 200 basis 
point, instantaneous and uniform shift in market interest rates. 
Separate risk weights are constructed for the rising and falling 
interest rate scenarios for the following categories:
    (1) Other amortizing assets;
    (2) Zero or low coupon assets;
    (3) All other assets;
    (4) Liabilities; and
    (5) Off-balance sheet.
A. Benchmark Instruments for Non-Mortgage Risk Weights
    The benchmark instruments for each category of assets and 
liabilities, corresponding maturities, coupons and bond-equivalent 
yields are listed below.
    (1) Other Amortizing Assets: For other (non-mortgage) amortizing 
assets, a benchmark monthly amortizing instrument with an original 
maturity equal to the end point of the specific time band; a remaining 
maturity equal to the midpoint of the time band; and a coupon and bond-
equivalent yield equal to 7.50% was used.\17\ No prepayments are 
assumed for this category of instruments.

    \17\ For the third quarter of 1994, the average effective yield 
on earning assets at all commercial banks was approximately 7.50% on 
an annualized basis.
---------------------------------------------------------------------------

    (2) Zero- or Low-Coupon Assets: The risk weights for zero- or low-
coupon instruments were calculated using the percentage change in the 
price of a zero-coupon instrument with an assumed maturity equal to the 
mid-point of each time band and a bond-equivalent yield of 7.50%.
    (3) All Other Assets: The risk weights for the ``All Other'' 
category were calculated assuming semi-annual interest payments, a 
maturity equal to the mid-point of each time band, and an assumed 
coupon and yield equal to 7.50%.
    (4) Liabilities: The only set of risk weights used for liabilities 
is represented by the percentage price change for a semi-annual 
interest-bearing instrument with an assumed coupon and yield equal to 
3.75%.\18\

    \18\ The 3.75% coupon approximates the effective cost of 
interest-bearing liabilities at all commercial banks for the third 
quarter of 1994 on an annualized basis.
---------------------------------------------------------------------------

    (5) Off-Balance Sheet Positions: The risk weights for interest rate 
futures, forwards and swaps are the same as those applied to the ``All 
Other'' category. Off-balance sheet positions with amortizing features 
are assigned the same risk weights as the ``Other Amortizing'' 
category.
B. Derivation of Non-Mortgage Risk Weights
    The prices and risk weights for each rate scenario were calculated 
in the following manner:
    (1) The benchmark instruments were priced at par in the base case, 
or current interest rate environment. Using the coupon and maturity of 
the instruments and static discounted cash flow analysis, the bond-
equivalent yields were calculated.
    (2) Prices for the benchmark instruments were then calculated for 
the rising and declining rate scenarios by shifting the bond-equivalent 
yields up and down by 200 basis points. The present values of the 
expected cash flows in each scenario were then determined to arrive at 
the new price for each instrument.
    (3) The percentage change in the price from the base case price of 
par represents the risk weight for the benchmark instrument in the 
corresponding rate scenarios. If the risk weight was determined to be 
less than 1 percentage point, it was expanded to the nearest 5 basis 
points interval. If the risk weight was greater than 1 percentage 
point, it was rounded to the nearest 10 basis points interval.

II. Treatment of Fixed-rate Mortgages and Derivation of Risk Weights

Office of Thrift Supervision Pricing Information
    Representative benchmark mortgage instruments used in the 
calculation of risk weights for Schedules 1 through 4 were based on 
instruments available in the Office of Thrift Supervision (OTS) Asset 
and Liability Price Tables as of September 30, 1994. Publicly available 
data on certain coupon ranges and weighted average remaining maturities 
(WARM) not specifically presented in the OTS Asset and Liability Price 
Tables were obtained from the OTS as part of a separate data request by 
the agencies.
    Representative benchmark fixed-rate mortgage instruments for 
Schedule 1 were drawn from a combination of hypothetical mortgage pass-
through instruments and mortgage pool securities listed in the OTS 
Asset and Liability Price Tables. The mortgage pool security price 
information contained in the OTS Asset and Liability Price Tables were 
calculated using the OTS Net Portfolio Value Model. A brief overview of 
the pricing methodology in The OTS Net Portfolio Value Model Manual, 
published in November 1994, states that ``the model uses the options-
based approach to determine the market value of 1 to 4 family 
mortgages. Cash flows consist of scheduled principal payments, 
interest, and prepaid principal. Prepayments are modeled using a 
prepayment equation that relates the prepayment rate for a particular 
period to, among other factors, the difference between the mortgage 
coupon rate and the current market interest rate. Scheduled principal 
and interest cash flows are estimated by amortizing the remaining 
balance in each period over its remaining term. To calculate market 
values in each of the alternate interest rate scenarios, cash flows for 
that scenario are discounted by the simulated Treasury rates for that 
scenario plus the option-adjusted spread.'' For additional detail and 
model specifications, refer to The OTS Net Portfolio Value Model, 
published by the OTS, Risk Management Division, Washington, District of 
Columbia. Copies of the aforementioned publication are available for 
review in the FDIC Reading Room, 550 North 17th Street, N.W., 
Washington, District of Columbia, and the in the OCC Library at 250 E 
Street SW., Washington, District of Columbia.
    The OTS model projects prices for numerous fixed-rate and 
adjustable-rate mortgage securities with various weighted average 
coupons (WAC) and WARM given different interest rate scenarios. Price 
tables are provided for different types of mortgage pool securities. 
Each table contains mortgage pool security prices as a percentage of 
the underlying mortgage balance in the base case (current interest 
rates) as well as price projections for interest rate movements up and 
down 400 basis points in 100 basis point increments.
    Fixed-rate residential mortgage assets have embedded options that 
make the value of the instrument more sensitive to interest rate 
changes than fixed maturity instruments. In order to more effectively 
analyze the impact of 

[[Page 39567]]
embedded options on the value of this asset class, additional reporting 
schedules are required depending on the amount of an institution's 
mortgage holdings in relation to its total assets. Both one-to-four 
family residential mortgage loans and pass-through securities are 
considered mortgage holdings for the purposes of these schedules. CMOs 
and other mortgage derivative securities are accorded separate 
treatment as described in the body of the Policy Statement.

A. Benchmark Instruments

    Risk weights have been derived from a group of benchmark fixed-rate 
mortgages with attributes most representative of the mortgage market as 
of September 30, 1994. Balances reported by banks would be assigned 
risk weights corresponding to these benchmark instruments. It is 
believed that the benchmark risk weights will provide reasonable 
approximations of the price sensitivity of an institution's actual 
holdings.
1. Benchmark Instruments for Schedule 1
    For Schedule 1, outstanding balances would be reported according to 
their remaining maturity in one of seven time bands represented by 
Columns B through H of Schedule 1 as shown in Table 1. The balances in 
each time band would be assigned risk weights equal to the price 
sensitivity of the benchmark instruments chosen for that specific time 
band. The benchmark instrument for the first three time bands (Columns 
B, C, and D) on Schedule 1 are monthly amortizing instruments with 
original maturities equal to the end point of the specific time band; 
remaining maturities equal to the midpoint of each time band; and a 
coupon and bond-equivalent yield equal to 7.50%. No prepayments are 
assumed for those time bands.

                                          Table 1.--Fixed-Rate Mortgages Risk Weight Derivations For Schedule 1                                         
--------------------------------------------------------------------------------------------------------------------------------------------------------
                             B                                     D                  E                  F                  G                  H        
                   --------------------  C 3 Months to 1  ----------------------------------------------------------------------------------------------
      Column            3           year                                                                                                     
                          months                              1 to 3 years       3 to 5 years      5 to 10 years      10 to 20 years       > 20 years   
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source............  Discounted Cash     Discounted Cash    Discounted Cash    OTS Data.........  OTS Data.........  OTS Data.........  OTS Data.        
                     Flow.               Flow.              Flow.                                                                                       
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The benchmark mortgage instruments for the remaining four time 
bands are as follows:
    (1) Column E (3 to 5 years): 7-year fixed-rate balloon mortgage 
pool security with a 48-month WARM and a 7.50% WAC;
    (2) Column F (over 5 to 10 years): 7-year fixed-rate balloon 
mortgage pool security with a 72-month WARM and a 7.50% WAC;
    (3) Column G (over 10 to 20 years): 15-year fixed-rate mortgage 
pool security with a 160-month WARM and a 7.50% WAC;
    (4) Column H (over 20 years): FHLMC/FNMA 30-year fixed-rate 
mortgage pool security with a 330-month WARM and a 7.50% WAC.
    The coupon rate of 7.50 percent was chosen for consistency with the 
average effective annualized yield on earning assets at all commercial 
banks as of September 30, 1994. Consideration was also given to the 
average dollar amount of outstanding 30 year Federal National Mortgage 
Association (FNMA) mortgage pass-through securities in September 1994.
2. Benchmark Instruments for Schedule 2
    The benchmark instruments used to derive the risk weights for 
Schedule 2 include the following:
    (1) Column A (0-5 years): 7-year fixed-rate balloon mortgage pool 
security with a 48 month WARM;
    (2) Column B (Over 5 to 10 years): 7-year fixed-rate balloon 
mortgage pool security with a 72 month WARM;
    (3) Column C (Over 10 to 20 years): 15-year fixed-rate mortgage 
pool security with a 160 month WARM;
    (4) Column D ( Over 20 years): FHLMC/FNMA 30-year fixed-rate 
mortgage pool security with a 330 month WARM.
    The weighted average coupon rates of the benchmark instruments were 
the midpoints of the coupon ranges with the exception of those coupons 
equal to or less than 6.75 percent and equal to or greater than 9.76 
percent. For those coupon ranges, the WACs used were 6.50 percent and 
10.50 percent respectively.

B. Derivation of Fixed-rate Mortgage Risk Weights

    The following examples have been taken directly from the 
information contained in the OTS Asset and Liability Price Tables as of 
9/30/94 as well as data obtained from the OTS in a separate request by 
the agencies. As previously noted, the OTS price tables present prices 
of mortgage pool securities based on bond-equivalent yields, given an 
increase and decrease in interest rates from 100 to 400 basis points in 
100 basis point increments. The supervisory measurement system risk 
weights are derived using the 200 basis point increase and decrease 
scenarios.
    Table 2 includes prices for the representative mortgage instrument 
chosen for the first column of Schedule 2, which is a 7-year fixed-rate 
balloon with a 48-month WARM. All mortgage holding balances reported in 
the 0-5 year column would receive a risk weight equal to the percentage 
change in price for this instrument given 200 basis point 
rate shifts. Price changes for each benchmark vary depending on the 
particular WAC as depicted in the table. The midpoint of each WAC range 
was selected to determine which benchmark instrument to use from the 
OTS price table.

 Table 2.--7-Year Fixed-Rate Balloon With a 48-Month WARM Prices as a Percent of the Underlying Mortgage Balance
                                            As of September 30, 1994                                            
----------------------------------------------------------------------------------------------------------------
                                          0-5 Year time band benchmark                                          
-----------------------------------------------------------------------------------------------------------------
                                             Interest rate scenario                                             
-----------------------------------------------------------------------------------------------------------------
                             Coupon                                   -200 bp          0 bp           +200 bp   
----------------------------------------------------------------------------------------------------------------
6.75%................................................          101.57           96.01           90.26

[[Page 39568]]
                                                                                                                
6.76%-7.25%..........................................          102.54           97.50           91.77
7.26%-7.75%..........................................          103.17           98.76           93.10
7.76%-8.25%..........................................          103.74          100.01           94.49
8.26%-8.75%..........................................          104.33          101.23           96.00
8.76%-9.25%..........................................          104.89          102.26           97.47
9.26%-9.75%..........................................          105.34          102.99           98.74
>9.75%..........................................................          106.30          104.12          100.98
----------------------------------------------------------------------------------------------------------------


    Example of a Risk Weight Calculation:
    The risk weights for the 7.26%-7.75% coupon range are calculated as 
follows: Using 7.50 percent as the midpoint of the coupon range, the 
base case price as of September 30, 1994, for a 7.50 percent, 7-year 
fixed-rate balloon mortgage, with a 48 month WARM is 98.76. In the +200 
bp scenario, the base price of 98.76 is subtracted from +200 bp price 
of 93.10: (93.10-98.76= -5.66). The absolute change is -5.66 
representing a percentage decrease in price of -5.7% (-5.66/
98.76=-0.057 or -5.7%.) Negative 5.7% serves as the risk weight for the 
benchmark mortgage in the +200 bp scenario. As a result, all balances 
reported on Schedule 2, in the 0-5 year remaining maturity column, and 
the 7.26%-7.75% coupon row would receive a risk weight of -5.7 in the 
rising rate analysis.
    In the -200 bp scenario, the base price of 98.76 is subtracted from 
the -200 bp price of 103.17: (103.17-98.76=4.41). The absolute change 
is 4.41 representing a percentage increase in price of 4.5% (4.41/
98.76=0.0446 or 4.5%). The risk weight for this benchmark mortgage 
becomes 4.5% in the -200 bp scenario. Consequently, all balances in 
this item receive the 4.5% risk weight in the declining rate analysis. 
The aforementioned method for calculating the risk weights is used to 
determine the risk weights for the other mortgage instruments. Tables 
3, 4, and 5 are the price tables for the other three fixed-rate 
benchmark instruments used in the supervisory measurement system.

 Table 3.--7-Year Fixed-Rate Balloon With a 72-Month WARM Prices as a Percent of the Underlying Mortgage Balance
                                            As of September 30, 1994                                            
----------------------------------------------------------------------------------------------------------------
                                                                                      Coupon                    
                                                                 -----------------------------------------------
                 >5-10 year time band benchmark                               Interest rate scenario            
                                                                 -----------------------------------------------
                                                                      -200 bp          0 bp           +200 bp   
----------------------------------------------------------------------------------------------------------------
6.75%................................................          101.24           93.90           86.47
6.76%-7.25%..........................................          102.48           95.89           88.44
7.26%-7.75%..........................................          103.25           97.57           90.19
7.76%-8.25%..........................................          103.94          99.211           92.02
8.26%-8.75%..........................................          104.63          100.79           93.98
8.76%-9.25%..........................................          105.30          102.14           95.89
9.26%-9.75%..........................................          105.87          103.10           97.55
9.75%................................................          107.09          104.57          100.53
----------------------------------------------------------------------------------------------------------------


 Table 4.--15-Year Fixed-Rate Pool With a 160-Month WARM Prices as a Percent of the Underlying Mortgage Balance 
                                            As of September 30, 1994                                            
----------------------------------------------------------------------------------------------------------------
                                         >10-20 year time band benchmark                                        
-----------------------------------------------------------------------------------------------------------------
                                                                              Interest rate scenario            
                             Coupon                              -----------------------------------------------
                                                                      -200 bp          0 bp           +200 bp   
----------------------------------------------------------------------------------------------------------------
6.75%................................................           99.74           91.29           83.12
6.76%-7.25%..........................................          101.39           93.48           85.28
7.26%-7.75%..........................................          102.74           95.55           87.40
7.76%-8.25%..........................................          103.93           97.59           89.59
8.26%-8.75%..........................................          105.09           99.64           91.93
8.76%-9.25%..........................................          106.31          101.70           94.45
9.26%-9.75%..........................................          107.53          103.63           96.99
9.75%................................................          109.79          106.72          101.53
----------------------------------------------------------------------------------------------------------------


                                                                                                                

[[Page 39569]]
 Table 5 30-Year Fixed-Rate Pool with a 330-Month WARM Prices as a Percent of the Underlying Mortgage Balance As
                                              of September 30, 1994                                             
----------------------------------------------------------------------------------------------------------------
                                           20 year time band benchmark                                          
-----------------------------------------------------------------------------------------------------------------
                                                                              Interest rate scenario            
                             Coupon                              -----------------------------------------------
                                                                      -200 bp          0 bp           +200 bp   
----------------------------------------------------------------------------------------------------------------
6.75%................................................           97.78           86.20           75.61
6.76%-7.25%..........................................          100.13           89.33           78.66
7.26%-7.75%..........................................          101.87           92.07           81.46
7.76%-8.25%..........................................          103.36           94.73           84.33
8.26%-8.75%..........................................          104.77           97.36           87.33
8.76%-9.25%..........................................          106.20           99.97           90.52
9.26%-9.75%..........................................          107.67          102.49           93.80
9.75%................................................          110.67          106.91          100.15
----------------------------------------------------------------------------------------------------------------



III. Treatment of Adjustable-Rate Mortgages and Derivation of Risk 
Weights

    Adjustable-rate mortgage loans and securities (ARMS) have price 
sensitivities that are substantially different than fixed-rate mortgage 
assets primarily due to their coupon reset features. The coupon 
adjustments are generally limited by caps and floors both for the life 
of the mortgage and also at their reset period. These caps are known as 
lifetime caps and periodic caps. In general, there are three factors 
that most influence the price sensitivity of an ARM: the reset 
frequency, the periodic cap, and the lifetime cap.
    A review of ARM price behavior reveals that the relationship 
between the periodic and lifetime caps and the effect of that 
relationship on ARM prices is complex and varies based upon the 
likelihood that either cap will become binding. Consequently, 
information on both the periodic cap and the lifetime cap would be 
reported by institutions with significant ARM holdings. Benchmark 
mortgages representative of the ARM market have been identified and are 
used to assign risk weights. Supplemental reporting schedules were also 
developed to capture the effect of these characteristics on the price 
of ARMs.

A. Benchmark ARM Instruments

    The coupon ranges provided in Schedule 4 were chosen to be 
representative of the ARM securities outstanding. In an effort to 
maintain consistency with the risk weights applied to the non-mortgage 
products and FRM holdings in Schedule 1, a 7.5% WAC was selected for 
all of the benchmark ARM instruments in Schedule 1 as well as for 
Schedule 3.
1. Benchmark Instruments for Schedule 1
    The benchmark instruments for Schedules 1, 3, and 4 represent the 
characteristics of the ARM mortgages most prevalent in the market place 
according to reported index, margin, periodic cap, and distance to 
lifetime cap. Schedules 1 and 3 are based on instruments with 7.5% WACs 
and share other common characteristics, hence, all of the benchmark 
instruments and risk weights used for Schedule 1 may be found in 
Schedule 3. However, the benchmark WACs in Schedule 4 do not 
necessarily fall precisely on a 7.5 percent WAC. To obtain the 7.5 
percent WAC sensitivity for Schedules 1 and 3 an additional 
interpolation was used. The interpolation used was the following:
    (1) for the 6-month and 1-year ARMs: P7.5=1/3[P8.5-
P7.0]+P7.0;
    (2) for the 3-year ARMs: P7.5=1/3[P9.5-
P7.5]+P6.5.
    Where as Px=PriceWAC(X)
    The benchmark instruments for Schedule 1 are as follows:
    (1) Reset Frequency--0 to 6 Months: Six month Constant Maturity 
Treasury (CMT) index, 275 basis point margin, four month reset period, 
100 basis point periodic cap and 500 basis points to the lifetime cap;
    (2) Reset Frequency--6 Months to 1 Year: One year CMT, 275 basis 
point margin, six month reset period, 200 basis point periodic cap and 
500 basis points to the lifetime cap;
    (3) Reset Frequency--Greater than 1 Year: Three year CMT, 275 basis 
point margin, 18 month reset period, 200 basis point periodic cap and 
500 basis points to the lifetime cap;
    (4) Reset Frequency--Near Lifetime Cap: One year CMT, 275 basis 
point margin, six month reset period, no periodic cap and 200 basis 
points from the lifetime cap.
2. Benchmark Instruments for Schedule 3
    The benchmark instruments for Schedule 3 represent the 
characteristics of the ARM mortgages most prevalent in the market place 
according to reported index, margin, periodic cap, and distance to 
lifetime cap. Banks are required to report their ARM holdings by reset 
frequency, periodic interest rate cap levels, and distance from the 
lifetime cap in Schedule 3. The benchmark instruments for each reset 
frequency and lifetime cap are summarized in Table 6.

                                                                                                                

[[Page 39570]]
                                                     Table 6.--Benchmark Instruments for Schedule 3                                                     
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                     RESET frequency                                                                    
---------------------------------------------------------------------------------------------------------------------------------------------------------
  6 Months or less: 6 Month treasury 275      Over 6 months to 1 year: 1 Year treasury 275 margin 330 month     Over 1 year: 3 Year treasury 275 margin 
      margin 330 month WARM 7.50% WAC                                WARM 7.50% WAC                                    330 month WARM 7.50% WAC         
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                   Cap <150bp: 100 bp    Cap > 150bp: 200 bp                                            
 No Cap: No periodic  Cap: 100 bp periodic   No Cap: No periodic    periodic cap and      periodic cap and     No Cap: No periodic  Cap: 200 bp periodic
         cap              cap and floor              cap                  floor                 floor                  cap                   cap        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                               DISTANCE FROM LIFETIME CAP                                                               
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
Instruments 200 basis points or less from lifetime cap: 200 basis points                                                                                
Instruments 201 to 400 basis points from lifetime cap: 300 basis points.                                                                                
Instruments 401 to 600 basis points from lifetime cap: 500 basis points.                                                                                
Instruments more than 600 basis points from lifetime cap: 700 basis points.                                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------


3. Benchmark Instruments for Schedule 4
    Schedule 4 collects information on an ARM's rate index, reset 
frequency, periodic and lifetime caps as shown in Table 7.

                                              Table 7.--Adjustable-Rate Mortgage Information for Schedule 4                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                        Current market index by reset frequency                                           Lagging market index by reset 
-----------------------------------------------------------------------------------------------------------------------             frequency           
         6 Months or less                       Over 6 months to 1 year                          Over 1 year           ---------------------------------
-----------------------------------------------------------------------------------------------------------------------                                 
                                                     Cap of 150 bp     Cap of more                                      1 Month or less    Over 1 month 
     No cap             Cap             No Cap          or less          than 150          No Cap            Cap                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                        
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Treasury ARM securities were used as the benchmark for the class of 
mortgages labeled Current Market Index. COFI ARM securities were used 
as the benchmark for the class of mortgages labeled as Lagging Market 
Index. Within each reset frequency and cap range for the Current Market 
Index and Lagging Market Index mortgage classes, benchmark instruments 
were used. The WAC and cap benchmarks for the instruments used for 
Schedule 4 are as follows:
a. Current Market Index By Reset Frequency
    (1) 6 Months or Less, No Cap: 6-month Treasury ARM securities, as 
published in the OTS price tables as of September 30, 1994, subject to 
the aforementioned linear interpolation were used for this category. 
OTS price tables provide price data on 7.00 percent WAC and 8.50 
percent WAC 6-Month Treasury ARM securities. The benchmark weighted 
average coupons for each WAC range are provided in Table 8.

           Table 8.--Benchmark WACs for 6 Month Treasury ARMs           
------------------------------------------------------------------------
                                                               Benchmark
                   Weighted average coupon                        WAC   
                                                               (percent)
------------------------------------------------------------------------
4.75% and under..............................................       4.00
4.76% to 6.25%...............................................       5.50
6.26% to 7.75%...............................................       7.00
Over 7.75%...................................................       8.50
------------------------------------------------------------------------

    (2) 6 Months or Less, Cap: The same benchmark WAC's as those listed 
in Table 7 were used for the benchmark instruments in this category, 
subject to a 100 basis point periodic cap and floor.
    (3) Over 6 Months to 1 year, No Cap: 12-Month Treasury ARM 
securities, as published in the OTS price tables as of September 30, 
1994, were used for this category. Because the WAC ranges provided in 
the OTS price tables vary based on the underlying index, the WAC ranges 
developed for the supervisory measurement system also vary with the 
underlying index. OTS price tables provide price information on 7.00 
percent WAC and 8.50 WAC 12-Month Treasury ARM securities. The 
benchmark weighted average coupon used for the WAC ranges are provided 
in Table 9.

           Table 9.--Benchmark WACs for 12-Month Treasury ARMs          
------------------------------------------------------------------------
                                                               Benchmark
                   Weighted average coupon                        WAC   
                                                               (percent)
------------------------------------------------------------------------
4.75% and under..............................................       4.00
4.76% to 6.25%...............................................       5.50
6.26% to 7.75%...............................................       7.00
Over 7.75%...................................................       8.50
------------------------------------------------------------------------

    (4) Over 6 Months to 1 Year, Cap of 150 Basis Points of Less: The 
same benchmark WAC's as those listed in Table 10 were used for the 
benchmark instruments in this category, subject to a 100 basis point 
periodic cap and floor.
    (5) Over 6 Months to 1 Year, Cap of More Than 150 Basis Points: The 
same benchmark WAC's as those listed in Table 10 were used for the 
benchmark instruments in this category, subject to a 200 basis point 
periodic cap and floor.
    (6) Over 1 Year, No Cap: 36-Month Treasury ARM securities, as 
published in the OTS price tables as of September 30, 1994, were used 
for this category. Because the WAC ranges provided in the OTS price 
tables vary based on the underlying index, the WAC ranges developed for 
the supervisory measurement system also vary with the underlying index. 
OTS price tables 

[[Page 39571]]
provide price information on 6.50 percent WAC and 9.50 WAC 36-Month 
Treasury ARM securities. The benchmark weighted average coupons used 
for the WAC ranges are provided in Table 10.

          Table 10.--Benchmark WACs for 36 Month Treasury ARMs          
------------------------------------------------------------------------
                                                               Benchmark
                   Weighted average coupon                        WAC   
                                                               (percent)
------------------------------------------------------------------------
5.50% and under..............................................       4.50
5.51% to 8.00%...............................................       6.50
8.01% to 10.50%..............................................       9.50
Over 10.50%..................................................      11.50
------------------------------------------------------------------------

    (7) Over 1 Year, Cap: The same benchmark WAC's as those listed in 
Table 11 were used for the benchmark instruments in this category, 
subject to a 200 basis point periodic cap and floor.
b. Lagging Market Index By Reset Frequency
    (1) 1 Month or Less: 1 Month COFI ARM securities, as published in 
the OTS price tables as of September 30, 1994, were used for this 
category. Because the WAC ranges provided in the OTS price tables vary 
based on the underlying index, the WAC ranges developed for the 
supervisory measurement system also vary with the underlying index. OTS 
price tables provide price information on 6.00 percent WAC and 7.00 WAC 
1 Month COFI ARM securities. No periodic cap or floor were used for the 
benchmark instrument in this category. Table 11 provides the benchmark 
weighted average coupons used for each WAC range.

             Table 11.--Benchmark WACs for 1 Month COFI ARMs            
------------------------------------------------------------------------
                                                               Benchmark
                   Weighted average coupon                        WAC   
                                                               (percent)
------------------------------------------------------------------------
5.00% and under..............................................       4.00
5.01% to 6.50%...............................................       6.00
6.51% to 8.00%...............................................       7.00
Over 8.00%...................................................       9.00
------------------------------------------------------------------------

    (2) Over 1 Month: The same benchmark WAC's as those listed in Table 
12 were used for the benchmark instruments in this category, subject to 
a 200 basis point periodic cap and floor.

B. Derivation of Benchmark Instrument Prices and Risk Weights

    Benchmark ARM instruments used in the calculation of risk weights 
for Schedules 1,3, and 4 were based on ARM securities available in the 
OTS Asset and Liability Price Tables as of September 30, 1994 and 
industry data. The OTS price tables do not contain prices for the 
benchmark instruments used in the supervisory measurement system.
    Using the OTS price tables, a series of linear interpolations was 
performed to generate prices for the benchmark instruments, using bond-
equivalent yields, selected for the supervisory measurement system. 
Prices were calculated for each WAC underlying a benchmark instrument 
(e.g., for benchmark instruments tied to the 6-month CMT-based ARM, 
WACs of 4.00 percent, 5.50 percent, 7.00 percent, 7.50 percent and 8.50 
percent were calculated). Prices for the benchmark instruments for each 
of the selected WACs were interpolated for selected loan 
characteristics (i.e., margin, lifetime cap, and reset frequency) in 
each of the three interest rate scenarios used in the supervisory 
measurement system (i.e., +200 basis points, base case, and -200 basis 
points). Table 12 presents the OTS price table for a 6 month CMT-based 
ARM with a 7.0 percent WAC.

           Table 12.--6-Month Treasury ARM Security Prices As of September 30, 1994 (WAC 7.00 Percent)          
----------------------------------------------------------------------------------------------------------------
                              ARM parameters                                Interest rate scenario              
----------------------------------------------------------------------------------------------------            
                                                   Lifetime                                           +200 Price
                     Margin                          cap       Months to    -200 Price     0 Base               
                                                  (percent)      reset                                          
----------------------------------------------------------------------------------------------------------------
200 basis points...............................         11.0            2       100.85        99.64        95.13
200 basis points...............................         11.0            6       101.34        99.42        94.03
200 basis points...............................         15.0            2       100.86       100.07        97.58
200 basis points...............................         15.0            6       101.35        99.85        96.32
350 basis points...............................         11.0            2       104.30       101.68        95.29
350 basis points...............................         11.0            6       104.52       100.73        94.18
350 basis points...............................         15.0            2       104.39       103.02        99.02
350 basis points...............................         15.0            6       104.61       102.02        97.60
----------------------------------------------------------------------------------------------------------------

    In addition to the criteria established in the OTS price table 
presented above, the ARM securities have the following characteristics:
    (1) WARM of 330 months;
    (2) Lifetime floor 1200 basis points below the lifetime cap; and
    (3) Periodic cap and floor of 100 basis points.
    The OTS price table provides the data for the linear interpolation 
process. As stated above, an interpolated price for each property of 
the benchmark instrument is derived through this process.
    For each value of a selected variable, a linear interpolation was 
performed to generate a particular price of the benchmark instrument. 
With each layer of interpolation, a new set of prices was produced. At 
the completion of the requisite number of interpolations needed to 
generate a price estimate given the set of criterion for the variables 
underlying a benchmark instrument, the resulting price table was used 
to calculate the risk weights for that particular instrument. Once the 
interpolated price table was developed, the risk weights were 
calculated in the same manner as those for fixed-rate mortgages.

Office of the Comptroller of the Currency

    Dated: June 29, 1995.
Eugene A. Ludwig,
Comptroller of the Currency.

    By Order of the Board of Governors of the Federal Reserve 
System.

    Dated: July 7, 1995.
William Wiles,
Secretary of the Board.

    By order of the Board of Directors.

    Dated at Washington, DC this 27th day of June, 1995.


[[Page 39572]]

    Federal Deposit Insurance Corporation.
Jerry L. Langley,
Executive Secretary.
[FR Doc. 95-18099 Filed 8-1-95; 8:45 am]
BILLING CODE 4810-33-P, 6210-01-P, 6714-01-P