[Federal Register Volume 65, Number 214 (Friday, November 3, 2000)]
[Proposed Rules]
[Pages 66193-66197]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-28270]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket No. 00-24]
RIN 1557--AB14

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

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

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AC44

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[Docket No. 2000-90]
RIN 1550-AB11


Simplified Capital Framework for Non-Complex Institutions

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of 
Governors of the Federal Reserve System; Federal Deposit Insurance 
Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board 
of Governors of the Federal Reserve System (Board), the Federal Deposit 
Insurance Corporation (FDIC), and the Office of Thrift Supervision 
(OTS) (collectively, the Agencies) are considering developing a 
simplified regulatory capital framework applicable to non-complex banks 
and thrifts (non-complex institutions). The Agencies believe that the 
size, structure, complexity, and risk profile of many banking and 
thrift institutions (banking organizations or institutions) may warrant 
the application of a simplified capital framework that could relieve 
regulatory burden associated with the existing capital rules.
    The Agencies are considering the advantages and disadvantages 
associated with developing a regulatory capital framework specifically 
for non-complex institutions. The main objective of this advance notice 
of proposed rulemaking is to obtain preliminary views from the industry 
and the public regarding such a framework. The information gathered as 
a result of this advance notice of proposed rulemaking will assist the 
Agencies in determining whether to propose a simplified capital 
framework and, if so, how the framework should be structured and 
implemented.
    In considering the development of a less burdensome regulatory 
framework, the Agencies would not lower capital standards or encourage 
a reduction in existing capital levels. Rather, a simplified, less 
burdensome framework may result in higher minimum regulatory capital 
requirements for certain institutions than required under current 
capital standards. Many non-complex institutions currently maintain 
levels of capital in excess of the regulatory minimum requirements, and 
the Agencies would therefore expect that most banking organizations 
subject to a simplified framework would not have to increase capital 
levels.
    This advance notice of proposed rulemaking sets forth broad options 
for a simplified framework. The options advanced for comment include 
adopting a simplified risk-based framework (and maintaining the 
leverage ratio requirement) or adopting a leverage-based approach. The 
leverage-based approach may include either a traditional leverage 
framework or one that is modified to address off-balance sheet risks.

DATES: Comments must be received by no later than February 1, 2001.

ADDRESSES: Comments should be directed to:

OCC: Comments may be submitted to Docket No. 00-24, Communications 
Division, Third Floor, Office of the Comptroller of the Currency, 250 E 
Street, SW., Washington, DC 20219. Comments will be available for 
inspection and photocopying at that address. In addition, comments may 
be sent by facsimile transmission to (202) 874-5274, or by electronic 
mail to [email protected]. You can make an appointment to 
inspect the comments by calling (202) 874-5043.
Board: Comments, which should refer to Docket No. R-1084, may be mailed 
to Ms. Jennifer J. Johnson, Secretary, the Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW., Washington, DC 20551, 
or mailed electronically to [email protected]. Comments 
addressed to Ms. Johnson may be delivered to the Board's mailroom 
between 8:45 a.m. and 5:15 p.m., and to the security control room 
outside of those hours. Both the mailroom and the security control room 
are accessible from the courtyard entrance on 20th Street between 
Constitution Avenue and C Street, NW.. Comments may be inspected in 
Room MP-500 between 9 a.m. and 5 p.m. weekdays pursuant to Sec. 261.12, 
except as provided in Sec. 261.14 of the Board's Rules Regarding 
Availability of Information, 12 CFR 261.12 and 261.14.
FDIC: Send written comments to Robert E. Feldman, Executive Secretary, 
Attention: Comments/OES, Federal Deposit Insurance Corporation, 550 
17th Street, NW, Washington, DC 20429. Comments may be hand-delivered 
to the guard station at the rear of the 550 17th Street Building 
(located on F Street), on business days between 7 a.m. and 5 p.m. 
(facsimile number (202) 898-3838; Internet address: [email protected]). 
Comments may be inspected and photocopied in the FDIC Public 
Information Center, Room 100, 801 17th Street, NW, Washington, DC 
20429, between 9 a.m. and 4:30 p.m. on business days.
OTS: Send comments to Manager, Dissemination Branch, Information 
Management & Services Division, Office of Thrift Supervision, 1700 G 
Street, NW, Washington, DC 20552, Attention Docket No. 2000-90. Hand 
deliver comments to Public Reference Room, 1700 G Street, NW, lower 
level, from 9 a.m. to 4 p.m. on business days. Send facsimile 
transmissions to FAX number (202) 906-7755 or (202) 906-6956 (if the 
comment is over 25 pages). Send e-mails to public.info@ots.treas.gov">public.info@ots.treas.gov 
and include your name and telephone number. Interested persons may 
inspect comments at 1700 G Street, NW, from 10 a.m. until 4 p.m. on 
Tuesdays and Thursdays, or obtain comments or an index of comments by 
facsimile by telephoning the Public Reference Room at (202) 906-5900 
from 9 a.m. until 5 p.m. on business days. Comments and the related 
index will also be posted on the OTS Internet Site at 
``www.ots.treas.gov.''

FOR FURTHER INFORMATION CONTACT:

OCC: Amrit Sekhon, Risk Specialist, Capital Policy Division, (202) 874-
5211; or Ron Shimabukuro, Senior Attorney, Legislative and Regulatory

[[Page 66194]]

Activities Division, (202) 874-5090, Office of the Comptroller of the 
Currency, 250 E Street SW, Washington, DC 20219.
Board: Norah Barger, Assistant Director (202/452-2402), Barbara 
Bouchard, Manager (202/452-3072), Division of Banking Supervision and 
Regulation, or David Adkins, Supervisory Financial Analyst (202/452-
5259). For the hearing impaired only, Telecommunication Device for the 
Deaf (TDD), Janice Simms (202/872-4984), Board of Governors of the 
Federal Reserve System, 20th and C Streets, NW, Washington, DC 20551.
FDIC: Mark S. Schmidt, Associate Director, (202/898-6918), Division of 
Supervision, William A. Stark, Assistant Director, (202/898-6972), 
Division of Supervision, or Keith A. Ligon, Chief, Policy Unit, (202/
898-3618), Division of Supervision.
    OTS: Michael D. Solomon, Senior Program Manager for Capital Policy 
(202/906-5654), or Teresa A. Scott, Counsel (Banking and Finance) (202/
906-6478), Office of Thrift Supervision, 1700 G Street, NW, Washington, 
DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

    In 1989, the Agencies each adopted regulatory capital standards 
based on the Basel Capital Accord (1988 Accord).\1\ The 1988 Accord 
sets forth a general framework for measuring the capital adequacy of 
internationally active banks under which assets and off-balance-sheet 
items are ``risk-weighted'' based on their perceived credit risk using 
four broad risk categories.\2\ Institutions subject to the 1988 Accord 
are required to maintain a minimum ratio of regulatory capital \3\ to 
total risk-weighted assets of 8 percent.\4\
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    \1\ The 1998 Accord was developed by the supervisory authorities 
represented on the Basel Committee on Banking Supervision and 
endorsed by the G-10 Central Bank Governors. The framework is 
described in a document entitled ``International Convergence of 
Capital Measurement'' issued in July 1998 (with subsequent 
amendments). The Basel Committee on Banking Supervision is comprised 
of representatives of the central banks and supervisory authorities 
from the G-10 countries (Belgium, Canada, France, Germany, Italy, 
Japan, Netherlands, Sweden, Switzerland, the United Kingdom, and the 
United States) and Luxembourg. The Agencies' risk-based capital 
standards implementing the 1988 Accord are set forth in 12 CFR part 
3 (OCC), 12 CFR parts 208 and 225, Appendices A and E (Board), 12 
CFR part 325 (FDIC) and 12 CFR part 567 (OTS).
    \2\ The categories are 100 percent (the standard risk weight for 
most claims); 50 percent (primarily for residential mortgages); 20 
percent for claims on, or guarantees provided by, certain entities 
(for example, qualifying depository institutions); and zero percent 
for very low risk assets (such as claims on, or guarantees provided 
by, qualifying governments).
    \3\ Regulatory capital may be comprised of three components. In 
general terms, Tier 1 capital includes common stockholder's equity, 
qualifying noncumulative perpetual preferred stock (and for bank 
holding companies limited amounts of cumulative perpetual preferred 
stock), and minority interests in the equity accounts of 
consolidated subsidiaries. Tier 2 capital includes limited amounts 
of the allowance for loan and lease losses, perpetual preferred 
stock, hybrid capital instruments and mandatory convertible debt, 
and term subordinated debt. Tier 3 capital (available only for 
certain institutions that apply specific rules for market risk) 
consists of short-term subordinated debt subject to certain 
restrictions on repayment. Items deducted from regulatory capital 
include goodwill and certain other intangible assets, investments in 
unconsolidated subsidiaries, reciprocal holdings of other banking 
institutions' capital instruments and some deferred tax assets. At 
least 50 percent of regulatory capital must be Tier 1. See each 
agency's capital rules referenced in footnote 1 for a more complete 
discussion.
    \4\ The 1988 Accord and the implementing United States standards 
addressed capital in relation to credit risk. In January 1996, the 
1988 Accord was amended to include a measure for market risk. The 
amendment was incorporated into FRB, FDIC, and OCC standards in 
September 1996.
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    In addition to risk-based capital requirements, United States 
banking organizations must comply with a minimum leverage ratio 
requirement. \5\ Generally, strong banking organizations (e.g., 
institutions assigned a composite rating of 1 under the Uniform 
Financial Institutions Ratings System) must maintain a minimum ratio of 
Tier 1 capital to average total consolidated on-balance sheet assets of 
3 percent. For other banking organizations, the minimum leverage ratio 
is 4 percent. The Agencies view the risk-based and leverage capital 
requirements as minimums. Institutions should hold capital at a level 
that is commensurate with their individual risk profile.
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    \5\ Leverage guidlines for each agency are located at 12 CFR 
part 3 (OCC); 12 CFR part 208, Appendix B and 12 CFR part 225, 
Appendix D (Board); 12 CFR part 325 (FDIC); and 12 CFR part 567 
(OTS).
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    United States banking organizations are also subject to Prompt 
Corrective Action (PCA) regulations. Generally, under these rules an 
institution's regulatory capital ratios are used to classify the 
institution into a PCA category. Institutions with the highest capital 
ratios (i.e., at or above a 10 percent total risk-based capital ratio, 
at or above a 6 percent Tier 1 risk-based capital ratio, and at or 
above a 5 percent leverage capital ratio) are usually categorized as 
``well capitalized.'' Institutions with lower capital ratios are 
assigned to lower capital categories. Institutions that are less than 
well capitalized have restrictions or conditions on certain activities 
and may also be subject to mandatory or discretionary supervisory 
action.
    Although the 1988 Accord was developed for large and 
internationally active banking organizations, when the Agencies adopted 
the risk-based capital standards domestically, the standards were 
applied to all banking organizations regardless of size, structure, 
complexity, and risk profile. The four broad risk-weight categories, 
while imperfect, were viewed as a significant improvement over the 
previous domestic capital framework that did not take into account 
asset credit quality and discouraged banking organizations from holding 
low-risk assets. In addition, the capital adequacy framework 
incorporated off-balance sheet items into the risk-based capital 
formula. The consistent application of an international regulatory 
capital regime was also expected to minimize competitive equity 
concerns.
    The 1988 Accord has had a stabilizing effect on the international 
banking system. Since its inception, capital levels have risen and 
competitive equity has been enhanced. Over the past decade, however, 
the world financial system has become more complex and challenging. The 
Basel Committee on Banking Supervision (Basel Committee) recognizes 
that the 1988 Accord needs to evolve along with recent financial 
innovations and changes in the financial marketplace. Accordingly, the 
Basel Committee is working to develop a new capital adequacy framework 
that would enhance the 1988 Accord.
    As outlined in its June 1999 consultative paper, A New Capital 
Adequacy Framework, the Basel Committee is contemplating substantial 
revisions to the 1988 Accord. \6\ Among other things, the Basel 
Committee is exploring the concept of using sophisticated internal risk 
measurement systems in the development of minimum capital standards. 
The Basel Committee is also developing a standardized approach that 
proposes revisions to the risk-weight framework of the 1988 Accord 
which might incorporate external ratings in the assessment of a minimum 
capital requirement.
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    \6\ The Basel Committee consultative document was issued on June 
3, 1999. Comment was requeted through March 2000. The document is 
available through the Bank for International Settlements website at 
www.bis.org.
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    While the approaches contemplated in the proposed revisions to the 
1988 Accord may be appropriate for some large, complex, internationally 
active banks, many small domestic banking organizations may not have or 
need the infrastructure to implement a sophisticated internal ratings-
based approach to regulatory capital.

[[Page 66195]]

Regardless of what revisions are made to the 1988 Accord, however, 
given the complexity of existing regulatory capital rules, a simplified 
capital framework could reduce regulatory burden for many institutions 
without compromising the principles of prudential supervision.
    The Agencies wish to explore all options in the development of a 
regulatory framework for non-complex institutions. The following 
discussion outlines the Agencies' preliminary views on ways to simplify 
the regulatory capital framework for such institutions. The Agencies 
encourage comments from the industry and the public on all aspects of 
this advance notice of proposed rulemaking.

II. Discussion

A. Overview

    This advance notice of proposed rulemaking discusses how non-
complex institutions could be defined and presents three possible 
alternatives for measuring the regulatory capital of non-complex 
institutions. The Agencies believe that three key factors could serve 
to define a non-complex institution. These are the nature of the 
institution's activities, its asset size, and its risk profile. Broadly 
stated, a relatively small institution engaged in non-complex 
activities that presents a low-risk profile could be subject to a more 
simplified capital framework without compromising the safety and 
soundness of the institution or the banking system. The three broad 
alternatives for a simplified framework are a simple leverage ratio, a 
modified leverage ratio and a risk-based framework.
    Question 1: Do institutions view maintenance of the current risk-
based capital standards as posing undue burden for small institutions? 
If so, how? Would views change if the current standards were revised to 
make them more risk-sensitive, in line with the contemplated revisions 
to the 1988 Basel Accord as set forth in the June 1999 consultative 
paper?
    Question 2: For non-complex institutions, should the Agencies 
maintain the current risk-based capital standards or develop a 
simplified capital adequacy framework? What are the advantages and 
disadvantages of adopting a separate framework?

B. Defining a Non-Complex Institution

    The Agencies are considering the nature of a non-complex 
institution's activities, its asset size, and its risk profile as 
determinants of eligibility for the simplified capital framework. In 
general, the Agencies believe that a ``non-complex institution'' would 
possess the following characteristics:

--A relatively small asset size (e.g., consolidated assets of less than 
$5 billion).
--A relatively simple and low-risk balance sheet (e.g., primarily 
traditional, nonvolatile assets and liabilities).
--A moderate level of off-balance sheet activity that is compatible 
with core business activities (e.g., commitments, in the case of 
residential lenders).
--A minimal use of financial derivatives (i.e., institution uses 
financial derivatives solely for risk management purposes.)
--A relatively simple scope of operations and relatively little 
involvement in nontraditional activities as a source of income.

    In this section, the Agencies describe possible criteria that could 
be used to determine whether an institution could be considered a non-
complex institution.
Nature of Activities
    Objective criteria could be used to measure the level of complexity 
associated with the activities conducted by domestic banking 
organizations. The Consolidated Reports of Condition and Income and 
Thrift Financial Reports (regulatory reports) provide the Agencies with 
information on the structure and operations of an institution. While 
subject to certain limitations, these data elements could provide 
objective support for defining a set of non-complex institutions.
    The Agencies are considering using various data elements as an 
initial screen for determining whether a particular institution 
exhibits a ``complex'' profile. That is, where an institution reports a 
significant amount of certain data elements, the Agencies may consider 
the institution to be complex. Items collected within regulatory 
reports that could be used include: Trading assets and liabilities; 
interest only strips; credit derivatives--guarantor and beneficiary; 
foreign exchange spot contracts; other off-balance sheet assets and 
liabilities; foreign exchange, equity, commodity, and other 
derivatives; purchased mortgage servicing rights; purchased credit card 
relationships; structured notes; performance standby letters of credit; 
and interest rate derivatives. Data elements such as these could 
provide an initial screen for determining whether a particular 
institution exhibits a ``complex'' profile.
    The Agencies envision using additional data elements that might 
become available due to revisions to regulatory reporting requirements. 
A concern about such screening criteria is setting an appropriate 
threshold level for reported activities. The number of institutions 
that may qualify as non-complex depends upon the threshold level set in 
establishing the screening criteria.
    Question 3: What specific data elements should be considered in 
determining whether an institution is non-complex? At what level should 
the thresholds be set for such elements to qualify for the non-complex 
framework?
    Question 4: What information sources other than regulatory reports 
are available for measuring the level of complexity of domestic banking 
organizations (e.g., examination reports or other supervisory 
information or ratings)?
Asset Size
    The Agencies believe that a strong relationship exists between the 
asset size of an institution and its relative complexity. In general, 
banking organizations of larger asset size exhibit greater levels of 
complexity. The strength of this correlation changes with the size of 
the institution. For example, banking organizations with assets of less 
than $5 billion generally engage in less complex activities than larger 
banking organizations. This effect is generally more pronounced for 
institutions with less than $1 billion in assets. However, some smaller 
banking organizations are engaged in activities reflecting a high level 
of complexity. The Agencies are considering the extent to which asset 
size alone might be sufficient to determine which banking organizations 
may be eligible for the non-complex capital framework.
    Question 5: What are the advantages and disadvantages of using 
asset size to determine ``complexity''? What would be a reasonable and 
appropriate asset size limit for banking organizations to qualify for 
the non-complex framework?
    Question 6: Should banking organizations within a holding company 
be subject to an asset size limit based on an aggregate or individual 
institution basis?
    Question 7: Should the Agencies apply a simplified framework to all 
non-complex institutions regardless of size?
    Question 8 :Should off-balance sheet assets (e.g., securitized 
assets) be considered within the asset size limit? If not, why not?
Risk Profile
    The Agencies are considering whether banking organizations of any 
size that present a higher risk profile should be

[[Page 66196]]

required to comply with a more sophisticated risk measurement and 
capital adequacy framework. A small asset size and lack of complexity 
do not necessarily equate to lower risk. There can be instances where a 
small and otherwise non-complex banking organization may be exposed to 
risks that warrant excluding the institution from the simplified 
framework.
    Factors considered when assessing an institution's overall risk 
profile should include the level of involvement in activities that 
present greater degrees of credit, liquidity, market, or other risks, 
such as sub-prime lending activities, significant asset securitization 
activities, or trading activities. The issues encountered in trying to 
define ``high-risk'' are similar to those encountered in trying to 
define ``non-complex.'' Approaches could include objective measures 
derived from regulatory reporting data (as discussed previously) or 
more subjective alternatives that incorporate assessments made by 
supervisors in reports of examination, or some combination of objective 
measures and subjective assessments.
    Question 9: What methods for determining a ``low-risk'' institution 
are reasonable and appropriate?

C. Setting a Minimum Capital Threshold for Non-Complex Institutions

    While a simplified capital framework for non-complex institutions 
might be less burdensome, such a framework might also be less risk 
sensitive and flexible. For this reason, the Agencies believe that the 
minimum capital standard should be set at a level that more than 
adequately addresses the risks that may not precisely or specifically 
be measured and identified by the simplified framework. The minimum 
capital level in such a framework should be a relatively high threshold 
above which supervisory concerns regarding capital adequacy are 
minimized. Therefore, a higher minimum capital requirement may ensure 
that banking organizations that are exempted from the risk-sensitive 
measures continue to hold sufficient capital.
    Setting a higher minimum capital threshold for non-complex 
institutions raises issues and concerns. To the greatest extent 
possible, the simplified framework should avoid creating regulatory 
arbitrage incentives vis-a-vis the risk-based capital standards. 
However, the minimum capital level for non-complex institutions must 
continue to promote safety and soundness. A higher minimum threshold in 
exchange for simpler standards, therefore, may be an appropriate trade-
off.
    One method to address these concerns is to establish a system that 
allows a degree of flexibility in designating an institution non-
complex and subject to the simplified capital framework. For example, a 
non-complex institution could be allowed, but not required, to 
calculate its capital under the simplified framework. A non-complex 
institution could instead elect to use the more sophisticated, risk-
based framework applicable to international or ``complex'' banking 
organizations. The trade-off between burden and benefit could be a 
determination reached by the individual institution, with appropriate 
supervisory oversight.
    Question 10: What factors should be considered in the determination 
of a minimum threshold capital level for non-complex institutions? 
Should additional or different elements be included in the definition 
of capital under a non-complex framework?
    Question 11: Should the institution have the option to decide 
whether to use the simplified framework?

D. Options for Measuring the Capital Adequacy of Non-Complex 
Institutions

    Each option should promote safety and soundness while minimizing 
regulatory burden. In addition, any alternative to the existing 
framework would have to be compatible with PCA mandates. The Agencies 
have some flexibility in establishing a relevant capital measure for 
non-complex institutions for PCA purposes.\7\ The Agencies do not 
foresee eliminating the leverage requirements established under the 
Prompt Corrective Action standards.
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    \7\ Section 38 of the Federal Deposit Insurance Act (12 U.S.C. 
1831o) establishes PCA guidelines as they relate to capital 
standards. In general, the capital standards prescribed by each 
appropriate Federal banking agency shall include a leverage limit 
and a risk-based capital requirement. However, the section also 
states that an appropriate Federal banking agency may, by 
regulation, establish any additional relevant capital measures to 
carry out the purpose of this section, or rescind any relevant 
capital measure upon determining that the measure is no longer an 
appropriate means for carrying out the purpose of this section.
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    The alternatives set out in the following paragraphs are: (1) A 
risk-based ratio (that maintains a leverage requirement); (2) a 
leverage ratio; and (3) a modified leverage ratio that incorporates 
certain off-balance sheet exposures. The Agencies also recognize that 
the risk-based capital framework remains a viable option for non-
complex institutions. The Agencies are seeking input on these and any 
other alternatives to measure regulatory capital commensurate with the 
size, structure, complexity, and risk profile of non-complex 
institutions. Comment is requested on the benefits and drawbacks and 
potential impact on banking organizations of each approach.
A Risk-Based Ratio
    One alternative for a non-complex framework is a risk-based capital 
standard. Such a risk-based capital standard would be consistent with 
the principles underlying the evolving risk-based standards under 
discussion by the Basel Committee, but could be tailored to the size, 
structure, and risk profile of less complex banking organizations. For 
example, the risk-based approach could be based upon a modified risk-
weight system that is consistent with the structure of non-complex 
institutions.
    Potentially, such a risk-based standard for non-complex 
institutions could both reduce burden and set capital requirements in 
relation to risk. Implementation of such a system could also prove 
advantageous because it would not require a structural overhaul to the 
way banking organizations currently compute capital requirements.
    A potential weakness of such an approach could be that, while 
striving for the dual purposes of greater simplicity and a better match 
between capital requirements and risk, the approach might fall short of 
attaining either goal. In effect, it may turn out that greater 
simplicity in risk-based capital measures means requirements that are 
less closely aligned to risk (and closer to a leverage measure).
    Alternatively, finer and more accurate measurements of risk that 
require greater computational complexity in the determination of 
regulatory capital means greater regulatory burden. A key consideration 
in the development of a simplified framework is to strike an 
appropriate balance between these potentially conflicting goals.
A Leverage Ratio
    Another option for a capital adequacy measure for non-complex 
institutions is to use only a leverage ratio. Under this alternative, 
non-complex institutions would no longer be required to comply with the 
risk-based capital framework. The leverage ratio provides a simple, 
straightforward measure of capital relative to total assets.
    A concern is that the leverage ratio does not adequately account 
for off-balance sheet exposures and that a minimum capital requirement 
should accommodate this expanding area of banking risk. Even non-
complex institutions can generate significant off-balance sheet 
exposures (e.g., by issuing standby letters of credit, selling loans 
with recourse, or extending short-term loan commitments). Another 
weakness

[[Page 66197]]

of the leverage ratio is that it does not account for the wide spectrum 
of credit risk and creates an incentive for the institution to avoid 
investing in low-risk assets.
A Modified Leverage Ratio
    To address some of the concerns with the leverage ratio discussed 
above, it might be appropriate to consider modifying the measure to 
account for off-balance sheet exposures. A modified leverage ratio 
could incorporate the simplicity of the leverage ratio while seeking to 
remedy its main weaknesses. A modified leverage ratio would be a 
relatively simple measure--a major objective of the non-complex 
framework. A disadvantage of the modified leverage ratio is that, 
unlike the risk-based approach, it would provide no capital benefit to 
banking organizations that maintain a low-risk profile and might 
encourage institutions to invest in higher-risk assets.
    The appropriate capital framework for a non-complex institution 
depends partly on the screening criteria chosen to assess complexity or 
risk. If complex or high-risk banking organizations can be effectively 
screened out of the non-complex category, then the benefits of a 
leverage-based approach will likely be enhanced. Similarly, if banking 
organizations with significant off-balance sheet items are screened out 
of the non-complex framework, then use of a modified leverage ratio 
(that incorporates off-balance sheet items) might be unnecessary to 
assure sufficient levels of regulatory capital.
    Question 12: What elements of the current risk-based framework 
should be retained within a simplified risk-based framework? What 
elements should not be included?
    Question 13: Should classes of assets be re-assigned to other and 
potentially new risk weights, based on relative comparisons of 
historical charge-off data or other empirical sources, including but 
not limited to credit ratings?
    Question 14: Is a leverage ratio a sufficient method for 
determining capital adequacy of non-complex institutions in a range of 
economic conditions?
    Question 15: If off-balance sheet items are incorporated into a 
modified leverage ratio, what items should be incorporated, and how?
    Question 16: What degree of burden reduction is foreseeable 
regarding any of the alternatives? Do the foreseeable benefits of 
burden reduction outweigh any concerns about establishing a non-complex 
domestic framework?

E. Implementation Issues

    The establishment of a simplified capital framework presents a host 
of implementation issues. How would banking organizations be placed 
within the simplified framework? Once subjected to the simplified 
framework, how would the institution transition to a more complex 
framework, if needed? Would there be a transition or adjustment period? 
These implementation issues can be foreseen, but not fully addressed, 
until a framework is determined.
    Moreover, the Agencies must determine the least burdensome and most 
efficient manner to collect data necessary to identify the universe of 
non-complex institutions and to provide this information to banking 
organizations in a timely manner. Options include requiring the 
Agencies to determine which banking organizations are subject to the 
non-complex framework using current regulatory reports, or requiring a 
banking organization to seek entry into the non-complex framework by 
filing an application.
    On an ongoing basis, a change in size, structure, complexity, or 
risk profile of a non-complex institution could impact its continued 
eligibility for the simplified framework. Institutions that were no 
longer deemed ``non-complex'' could be required to comply with the 
standards applicable to complex banking organizations or to take other 
remedial steps. For an institution transitioning from the non-complex 
framework to the complex regime, an adjustment period might be 
necessary to meet reporting and capital requirements.
    Establishment of a process for monitoring on-going eligibility for 
the simplified framework should also be considered. The process used to 
collect and report data should not undermine burden reduction, one of 
the primary objectives of a non-complex framework.
    Question 17: How could the non-complex capital adequacy framework 
be initially implemented and thereafter applied on an ongoing basis?
    Question 18: Should banking organizations no longer deemed ``non-
complex'' be required to comply with the otherwise applicable capital 
standards? What other alternatives could be made available for these 
banking organizations? What types of transition would be most 
appropriate?

III. OCC and OTS Executive Order 12866 Determination

    The Comptroller of the Currency and the Director of the Office of 
Thrift Supervision have determined that this advance notice of proposed 
rulemaking does not constitute a significant regulatory action under 
Executive Order 12866.

    Dated: October 26, 2000.
John D. Hawke, Jr.,
Comptroller of the Currency.
    By order of the Board of Governors of the Federal Reserve 
System, October 23, 2000.
Jennifer J. Johnson,
Secretary of the Board.
    By order of the Board of Directors.

    Dated at Washington, DC, this 17th day of October, 2000.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
    Dated: October 19, 2000.

    By the Office of Thrift Supervision.
Ellen Seidman,
Director.
[FR Doc. 00-28270 Filed 11-2-00; 8:45 am]
BILLING CODE 4810-33-P; 6210-01-P; 6714-01-P; 6720-01-P