WASHINGTON (MNI) – The Federal Reserve, U.S. Treasury and Federal
Deposit Insurance Corp. Thursday unveiled the wide ranging market risk
capital rule for banks that is in the process of being adopted and a
90-day comment period is expected to be approved shortly. The final rule
is intended to accomplish the following goals:

–makes required regulatory capital more sensitive to market risk,

–enhances modeling requirements consistent with advances in risk
management,

–better captures trading positions for which market risk capital
treatment is appropriate,

–increases transparency through enhanced market disclosures.

–increased market risk capital should lower the probability of
catastrophic losses to the bank occurring because of market risk,

–modified requirements should reduce the procyclicality of market
risk capital.

The new rule also requires banks to develop alternatives to credit
rating firm products, but allows the use of credit ratings as a partial
determination of risk.

The regulators said:

The final rule changes covered positions, disclosure requirements,
and methods relating to calculating the market risk measure. These
changes achieve the important objectives of making required regulatory
capital more sensitive to market risk, increases transparency of the
trading book and market risk, and better captures trading positions for
which market risk capital treatment is appropriate. The final rule
carries over the current thresholds used to determine the applicability
of the market risk rule. The banking agencies have determined that these
size thresholds capture the appropriate institutions; those most exposed
to market risk.

The large increase in required market risk capital, which we
estimate to be approximately $31.6 billion under the final rule, will
provide a considerable buttress to the capital position of institutions
subject to the market risk rule. This additional capital should
dramatically lower the likelihood of catastrophic losses from market
risk occurring at these institutions, which will enhance the safety and
soundness of these institutions, the banking system, and world financial
markets. Although there is some concern regarding the burden of the
proposed increase in market risk capital and the effect this could have
on bank lending,in the OCC’s opinion, the final rule offers a better
balance between costs and benefits than either the baseline or the
alternatives.

—

Text excerpt of agencies’ request for comment:

The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), and the Federal Deposit
Insurance Corporation (FDIC) (collectively, the agencies) are seeking
comment on three notices of proposed rulemaking (NPRs) that would revise
and replace the agencies’ current capital rules.

In this NPR, the agencies are proposing to revise their risk-based
and leverage capital requirements consistent with agreements reached by
the Basel Committee on Banking Supervision (BCBS) in Basel III: A
Global Regulatory Framework for More Resilient Banks and Banking
Systems (Basel III). The proposed revisions would include
implementation of a new common equity tier 1 minimum capital
requirement, a higher minimum tier 1 capital requirement, and, for
banking organizations subject to the advanced approaches capital rules,
a supplementary leverage ratio that incorporates a broader set of
exposures in the denominator measure. Additionally, consistent with
Basel III, the agencies are proposing to apply limits on a banking
organizations capital distributions and certain discretionary bonus
payments if the banking organization does not hold a specified amount of
common equity tier 1 capital in addition to the amount necessary to meet
its minimum risk-based capital requirements. This NPR also would
establish more conservative standards for including an instrument in
regulatory capital. As discussed in the proposal, the revisions set
forth in this NPR are consistent with section 171 of the Dodd-Frank Act,
which requires the agencies to establish minimum risk-based and leverage
capital requirements.

** MNI Washington Bureau: 202-371-2121 **

[TOPICS: MK$$$$,M$U$$$,MMUFE$,MGU$$$,MFU$$$]