[Federal Register Volume 77, Number 201 (Wednesday, October 17, 2012)]
[Proposed Rules]
[Pages 63763-63766]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-25495]


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 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 77, No. 201 / Wednesday, October 17, 2012 / 
Proposed Rules  

[[Page 63763]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 324

RIN 3064-AD96


Regulatory Capital Rules: Standardized Approach for Risk-Weighted 
Assets; Market Discipline and Disclosure Requirements; Initial 
Regulatory Flexibility Analysis

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Initial regulatory flexibility analysis.

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SUMMARY: On August 30, 2012, the Federal Deposit Insurance Corporation 
(FDIC), together with the Board of Governors of the Federal Reserve 
System (FRB) and Office of the Comptroller of the Currency (OCC) 
(together, the agencies) published in the Federal Register a joint 
notice of proposed rulemaking, titled, ``Regulatory Capital Rules: 
Standardized Approach for Risk-Weighted Assets; Market Discipline and 
Disclosure Requirements'' (Standardized Approach NPR or Proposed Rule). 
The Proposed Rule would revise and harmonize the agencies' rules for 
calculating risk-weighted assets to enhance risk-sensitivity and 
address weaknesses identified over recent years, including by 
incorporating certain international capital standards of the Basel 
Committee on Banking Supervision (BCBS) set forth in the standardized 
approach of the international accord titled, ``International 
Convergency of Capital Measurement and Capital Standards: A Revised 
Framework'', as revised by the BCBS in 2006 and 2009, as well as other 
proposals set forth in consultative papers of the BCBS.
    Section 3(a) of the Regulatory Flexibility Act (RFA) directs all 
federal agencies to publish an initial regulatory flexibility analysis 
(IRFA), or a summary thereof, describing the impact of a proposed rule 
on small entities anytime an agency is required to publish a notice of 
proposed rulemaking in the Federal Register. As provided in the 
Standardized Approach NPR, the agencies are separately publishing 
initial regulatory flexibility analyses for the Proposed Rule. 
Accordingly, the FDIC is seeking comment on the IRFA provided in this 
Federal Register document, which describes the economic impact of the 
Standardized Approach NPR, in accordance with the requirements of the 
RFA. Comments received in connection with this IRFA will be considered 
for purposes of the development of any final rule to implement the 
Standardized Approach NPR.

DATES: Comments on this initial regulatory flexibility analysis must be 
submitted on or before November 16, 2012.

ADDRESSES: You may submit comments by any of the following methods:
     Federal eRulemaking Portal: http://www.regulations.gov. 
Follow instructions for submitting comments.
     Agency Web site: http://www.fdic.gov/regulations/laws/federal/propose.html.
     Mail: Robert E. Feldman, Executive Secretary, Attention: 
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th 
Street NW., Washington, DC 20429.
     Hand Delivered/Courier: The guard station at the rear of 
the 550 17th Street Building (located on F Street), on business days 
between 7:00 a.m. and 5:00 p.m.
     Instructions: Comments submitted must include ``FDIC'' and 
``RIN 3064-AD96''. Comments received will be posted without change to 
http://www.fdic.gov/regulations/law/federal/propose.html, including any 
personal information provided.

FOR FURTHER INFORMATION CONTACT: Bobby R. Bean, Associate Director, 
[email protected]; Ryan Billingsley, Chief, Capital Policy Section, 
[email protected]; Karl Reitz, Chief, Capital Markets Strategies 
Section, [email protected], Division of Risk Management Supervision; 
Capital Markets Branch, Division of Risk Management Supervision, (202) 
898-6888; or Mark Handzlik, Counsel, [email protected], Michael 
Phillips, Counsel, [email protected] Branch, Legal 
Division, Federal Deposit Insurance Corporation, 550 17th Street NW., 
Washington, DC 20429.

SUPPLEMENTARY INFORMATION: On August 30, 2012, the agencies published 
in the Federal Register the Standardized Approach NPR to revise the 
agencies' general risk-based capital requirements for determining risk-
weighted assets (that is, the calculation of the denominator of a 
banking organization's risk-based capital ratios).\1\ The Proposed Rule 
would revise and harmonize the agencies' rules for calculating risk-
weighted assets to enhance risk-sensitivity and address weaknesses 
identified over recent years, including by incorporating certain 
international capital standards of the Basel Committee on Banking 
Supervision (BCBS) set forth in the standardized approach of the 
international accord titled, ``International Convergence of Capital 
Measurement and Capital Standards: A Revised Framework'' (Basel II), as 
revised by the BCBS between 2006 and 2009, as well as other proposals 
addressed in recent consultative papers of the BCBS.\2\ In the 
Standardized Approach NPR, the agencies also proposed alternatives to 
credit ratings for calculating risk-weighted assets for certain assets, 
consistent with section 939A of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (Dodd-Frank Act). The revisions include 
methodologies for determining risk-weighted assets for residential 
mortgages, securitization exposures, and counterparty credit risk. The 
changes in the Standardized Approach NPR are proposed to take effect on 
January 1, 2015, with an option for early adoption. The Standardized 
Approach NPR also introduces disclosure requirements that would apply 
to top-tier banking organizations domiciled in the United States with 
$50 billion or more in total assets, including disclosures related to 
regulatory capital instruments.
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    \1\ 77 FR 52888 (Aug. 30, 2012).
    \2\ Subsequent to the issuance of Basel II, in December, 2010, 
the BCBS issued ``Basel III: A Global Regulatory Framework for More 
Resilient Banks and Banking Systems'' (Basel III). The U.S. 
implementation of Basel III has been proposed by the agencies in a 
separate notice of proposed rulemaking that is discussed later in 
this document.
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    Section 3(a) of the RFA \3\ requires an agency to publish in the 
Federal Register an IRFA or a summary of its IRFA, or to certify that 
the proposed rule will not have a significant economic impact on a 
substantial

[[Page 63764]]

number of small entities. For purposes of the IRFA, a small entity 
includes a banking organization with total assets of $175 million or 
less.
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    \3\ 5 U.S.C. 601 et seq.
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    As provided in the Standardized Approach NPR, the agencies are 
separately publishing their respective IRFA. Accordingly, the FDIC is 
seeking comment on the IRFA provided in this Federal Register document, 
which describes the economic impact of the Standardized Approach NPR, 
in accordance with the requirements of the RFA. Comments received in 
connection with this IRFA will be considered for purposes of the 
development of any final rule to implement the Standardized Approach 
NPR. A summary of the FDIC's IRFA for the Standardized Approach NPR is 
set forth below.

Summary of the FDIC's IRFA

    In accordance with the requirements of the RFA, the FDIC is 
publishing this summary of the IRFA for the Standardized Approach 
NPR.\4\ For purposes of this IRFA, the FDIC analyzed the potential 
economic impact of the Standardized Approach NPR on the small entities 
that it regulates.
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    \4\ 77 FR 52888.
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    The FDIC welcomes comment on all aspects of the summary of its 
IRFA. Comments received in response to this IRFA will be considered by 
the FDIC for purposes of any final rule implementing the Standardized 
Approach NPR. The FDIC will conduct a final regulatory flexibility 
analysis after consideration of comments received during the public 
comment period.

A. Reasons Why the Proposed Rule Is Being Considered by the Agencies; 
Statement of the Objectives of the Proposed Rule; and Legal Basis

    As discussed in the Standardized Approach NPR, the agencies are 
proposing to revise their capital requirements to promote safe and 
sound banking practices, implement Basel II (as later revised), and 
harmonize capital requirements across charter type. The NPR also 
proposes alternatives to the use of credit ratings consistent with 
section 939A of the Dodd-Frank Act by revising regulatory capital 
requirements to remove all references to, and requirements of reliance 
on, credit ratings. Federal law authorizes each of the agencies to 
prescribe capital standards for the banking organizations it regulates.

B. Small Entities Affected by the Proposal

    Under regulations issued by the Small Business Administration,\5\ a 
small entity includes a depository institution or bank holding company 
with total assets of $175 million or less. As of March 31, 2012, the 
FDIC was the primary Federal regulator for approximately 2,433 small 
state nonmember banks, 115 small savings banks, and 45 small state 
savings associations (collectively, small banks and savings 
associations).
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    \5\ See 13 CFR 121.201.
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C. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    The Standardized Approach NPR includes changes to the general risk-
based capital requirements that address the calculation of risk-
weighted assets and affect small banks and savings associations. The 
Proposed Rule would affect small banks and savings associations, 
including:
    1. Changing the denominator of the risk-based capital ratios by 
revising the asset risk weights;
    2. Revising the treatment of counterparty credit risk;
    3. Replacing references to credit ratings with alternative measures 
of creditworthiness;
    4. Providing more comprehensive recognition of collateral and 
guarantees; and
    5. Providing a more favorable capital treatment for transactions 
cleared through qualifying central counterparties.
    These changes are designed to enhance the risk-sensitivity of the 
calculation of risk-weighted assets. Therefore, capital requirements 
may go down for some assets and up for others. For those assets with a 
higher risk weight under the NPR, that increase may be large in some 
instances, for example, the equivalent of a dollar-for-dollar capital 
charge for some securitization exposures.
    In order to estimate the impact of the Standardized Approach NPR on 
small banks and savings associations, the FDIC used currently available 
data from the quarterly Consolidated Report of Condition and Income 
(Call Reports) filed by small banks and savings associations to 
approximate the change in capital under the proposed rule. After 
comparing the existing risk-based capital rules with the proposed rule, 
the FDIC estimates that risk-weighted assets may increase by 10 percent 
under the proposed rule. Using this assumption, the FDIC estimates that 
a total of 76 small banks and savings associations will need to raise 
additional capital to meet their regulatory minimums. The FDIC 
estimates that this total projected shortfall will be $34 million and 
that the cost of lost tax benefits associated with increasing total 
capital by $34 million will be approximately $0.2 million per year. 
Averaged across the 76 affected institutions, the cost is approximately 
$2,500 per institution per year.
    To comply with the requirements of the Proposed Rule, small banks 
and savings associations would be required to change their internal 
reporting processes. These changes would require some additional 
personnel training and expenses related to new systems (or modification 
of existing systems) for calculating regulatory capital ratios.
    Additionally, small banks and savings associations that hold 
certain exposures would be required to obtain additional information 
under the proposed rules in order to determine the applicable risk 
weights. For example, small banks and savings associations that hold 
exposures to sovereign entities other than the United States, foreign 
depository institutions, or foreign public sector entities would have 
to acquire Country Risk Classification ratings produced by the 
Organization for Economic Co-Operation and Development (OECD) to 
determine the applicable risk weights. Small banks and savings 
associations that hold residential mortgage exposures would be required 
to have and maintain information about certain underwriting features of 
the mortgage as well as the loan-to-value (LTV) ratio in order to 
determine the applicable risk weight. Generally, small banks and 
savings associations that hold securitization exposures would need to 
obtain sufficient information about the underlying exposures to satisfy 
due diligence requirements and apply either the simplified supervisory 
formula approach (SSFA) or the gross-up approach described in section 
--.43 of the Proposed Rule to calculate the appropriate risk weight, or 
be required to assign a 1,250 percent risk weight to the exposure.
    Small banks and savings associations typically do not hold 
significant exposures to foreign entities or securitization exposures, 
and the agencies expect any additional burden related to calculating 
risk weights for these exposures, or holding capital against these 
exposures, would be relatively modest. The FDIC estimates that, for 
small banks and savings associations, the cost of implementing the 
alternative measures of creditworthiness will be approximately $39,000 
per institution.

[[Page 63765]]

    Some small banks and savings associations may hold significant 
residential mortgage exposures. If a small bank or savings association 
originates the exposure, it should have sufficient information to 
determine the applicable risk weight under the proposed rule. However, 
if the exposure is acquired from another institution, the information 
needed to determine the applicable risk weight should normally be 
collected for portfolio monitoring purposes and internal risk 
management.
    Small banks and savings associations would not be subject to the 
disclosure requirements in the Proposed Rule. However, the agencies 
expect to modify regulatory reporting requirements that apply to small 
banks and savings associations to reflect the changes made to the 
agencies' capital requirements in the Proposed Rule. The agencies 
expect to propose these changes to the relevant reporting forms in a 
separate notice.
    To determine if the Proposed Rule has a significant economic impact 
on small banks and savings associations we compared the estimated 
annual cost with annual noninterest expense and annual salaries and 
employee benefits for each institution. If the estimated annual cost 
was greater than or equal to 2.5 percent of total noninterest expense 
or 5 percent of annual salaries and employee benefits we classified the 
impact as significant. The FDIC has concluded that the proposals 
included in the NPR would exceed this threshold for 2,413 small state 
nonmember banks, 114 small savings banks, and 45 small state savings 
institutions. Accordingly, for the purposes of this IRFA, the FDIC has 
concluded that the changes proposed in the Standardized Approach NPR, 
when considered without regard to other changes to the capital 
requirements that the agencies simultaneously are proposing, would have 
a significant economic impact on a substantial number of small banks 
and savings associations.
    Additionally, it may be informative to consider the changes 
proposed in the Standardized Approach NPR together with changes 
proposed in the separate notice of proposed rulemaking published 
jointly by the agencies in the Federal Register on August 30, 2012, 
titled, ``Regulatory Capital Rules: Regulatory Capital, Implementation 
of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, 
Transition Provisions, and Prompt Corrective Action; Proposed Rule'' 
(Basel III NPR).\6\ The changes described in the Basel III NPR include 
changes to minimum capital requirements that would impact small banks 
and savings associations. These include a more conservative definition 
of regulatory capital, a new common equity tier 1 capital ratio, a 
higher minimum tier 1 capital ratio, new thresholds for prompt 
corrective action purposes, and a new capital conservation buffer.
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    \6\ 77 FR 52792.
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    To estimate the impact of the Basel III NPR on the capital needs of 
small banks and savings associations, the FDIC estimated the amount of 
capital such institutions will need to raise to meet the new minimum 
standards relative to the amount of capital they currently hold. To 
estimate new capital ratios and requirements, the FDIC used currently 
available data from the quarterly Call Report submitted by small banks 
and savings associations to approximate capital under the Basel III 
NPR. The Call Reports show that most small banks and savings 
associations have capital levels well above the existing minimum 
requirements.
    After comparing existing levels with the proposed new requirements 
under the Basel III NPR, the FDIC determined that 62 small banks and 
savings associations that it regulates would fall short of the proposed 
increased capital requirements. Together, those institutions would need 
to raise approximately $164 million in regulatory capital to meet the 
proposed minimum requirements set forth in the Basel III NPR. The FDIC 
estimates that the cost of lost tax benefits associated with increasing 
total capital by $164 million will be approximately $0.9 million per 
year. Averaged across such institutions, the cost attributed to the 
Basel III NPR is approximately $15,000 per institution per year.
    The FDIC concluded for purposes of its IRFA for the Basel III NPR 
\7\ that the changes described in the Basel III NPR, when considered 
without regard to changes in this NPR, would not result in a 
significant economic impact on a substantial number of small banks and 
savings associations, given the nominal compliance requirements that 
likely would result from the future adoption by the agencies of the 
Basel III NPR.
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    \7\ Id. at 52836.
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    As noted above, the FDIC has concluded that the proposed changes in 
the Standardized Approach NPR would result in a significant economic 
impact on a substantial number of small banks and savings associations. 
Further, if both the Standardized Approach NPR and the Basel III NPR 
were adopted, there would be a significant economic impact on a 
substantial number of small banks and savings associations.

D. Identification of Duplicative, Overlapping, or Conflicting Federal 
Rules

    The FDIC is unaware of any duplicative, overlapping, or conflicting 
federal rules. As noted previously, the FDIC anticipates issuing a 
separate proposal to implement reporting requirements that are tied to 
(but do not overlap or duplicate) the requirements of the proposed 
rules. The FDIC seeks comments and information regarding any such 
federal rules that are duplicative, overlapping, or otherwise in 
conflict with the Proposed Rule.

E. Discussion of Significant Alternatives to the Proposed Rule

    The agencies have sought to incorporate flexibility into the 
Proposed Rule and lessen burden and complexity for small banks and 
savings associations wherever possible, consistent with safety and 
soundness and applicable law, including the Dodd-Frank Act. The 
agencies are requesting comment on potential options for simplifying 
the Proposed Rule and reducing burden, including whether to permit 
certain small banks and savings associations to continue using portions 
of the current general risk-based capital rules to calculate risk-
weighted assets. Additionally, the agencies proposed the following 
alternatives and flexibility features:
     Small banks and savings associations are not subject to 
the enhanced disclosure requirements of the Proposed Rule.
     Small banks and savings associations would continue to 
apply a 100 percent risk weight to corporate exposures (as described in 
section --.32 of the Proposed Rule).
     Small banks and savings associations may choose to apply 
the simpler gross-up method for securitization exposures rather than 
the SSFA (as described in section --.43 of the Proposed Rule).
     The proposed rule offers small banks and savings 
associations a choice between a simpler and more complex methods of 
risk weighting equity exposures to investment funds (as described in 
section --.53 of the Proposed Rule).
    The FDIC welcomes comment on any significant alternatives to the 
Standardized Approach NPR applicable to small banks and savings 
associations that would minimize their impact on those entities.

    Dated at Washington, DC, this 12th day of October, 2012.


[[Page 63766]]


Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2012-25495 Filed 10-16-12; 8:45 am]
BILLING CODE 6714-01-P