Federal Banking Agencies Publish Federal Register Versions of Capital NPRs

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by Andrew Gladin and Mark Welshimer.

On August 30, 2012, the Board of Governors of the Federal Reserve System (the “FRB”), the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (the “Agencies”) published in the Federal Register three notices of proposed rulemaking (the “NPRs”, and the rules proposed by the NPRs, the “Proposed Rules”) [1] that seek to amend the U.S. risk-based capital rules for banks [2] and implement final amendments to the market risk rules (the “Market Risk Amendments”). Initial versions of the NPRs and the Market Risk Amendments were first issued by the FRB on June 7, 2012 (such initial version of the NPRs, the “Initial NPRs”). [3]

Based on a preliminary review of the NPRs as published in the Federal Register, the Agencies appear to have made few noteworthy changes to the Initial NPRs from June. The changes include:

  • The preamble of the Standardized Approach NPR added language providing that the definition of category 1 residential mortgage exposures generally exclude mortgage products that include terms or other characteristics that the Agencies have found to be indicative of higher risk. [4]
  • Section __.61 of the Proposed Rules clarifies that the public disclosure requirements set forth in Sections __.61 [5] through __.63 apply to a bank with total consolidated assets of $50 billion or more that is not an advanced approaches bank otherwise “making public disclosures pursuant to Section __.172”.
  • The Agencies added a new question number 11 related to the countercyclical capital buffer description in the preamble of the Basel III NPR soliciting comments on whether position-specific or portfolio-specific methodologies should be used for covered positions with specific risk and particularly those for which a bank uses models to measure specific risk. [6]
  • Section __.300 was revised to provide a more detailed treatment of minority interests, including a new Table 11 setting forth a phase-out schedule for surplus or non-qualifying minority interests. [7]
  • The fourth clause of the definition of “cleared transaction” (which pertains to a transaction between a clearing member client and a central counterparty (“CCP”) where a clearing member guarantees the performance of the clearing member client to the CCP) was amended to provide that the relevant transaction must also meet the requirements of clause (3)(ii) and (iii) of the definition of cleared transaction. [8]
  • The phrase “for a counterparty” was deleted from the first sentence of Section __.132(e)(6)(C)(ii), which relates to the calculation of the credit valuation adjustment capital requirement. It appears this change was made to clarify that a bank did not have to make value-at-risk and stressed value-at-risk calculations based on potential credit spread changes for each counterparty, but rather could make these calculations for all counterparties.
  • The phrase “and that has successfully completed its parallel run” was added to Section __.172(c)(1). The Agencies appear to have made this change to clarify that “advanced approaches [bank]” refers to banks that have completed their parallel run. The Agencies, however, did not update the definition of “advanced approaches [bank]” more generally to clarify that this term only refers to banks that have exited their parallel runs.

As previously announced, the deadline for comments on the Proposed Rules has been extended to October 22, 2012, from September 7, 2012.


[1] Agencies, Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III — Minimum Regulatory Capital Ratios, Capital Adequacy, Transition Provisions, and Prompt Corrective Action, 77 F.R. 52792 (Aug. 30, 2012) (the “Basel III NPR”); Agencies, Regulatory Capital Rules — Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements, 77 F.R. 52888 (Aug. 30, 2012) (the “Standardized Approach NPR”); Agencies, Regulatory Capital Rule: Advanced Approaches Risk-Based Capital Rules; Market Risk Capital Rule, 77 F.R. 52978 (Aug. 30, 2012).
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[2] We are using the term “bank” to include U.S. bank holding companies, savings and loan holding companies and depository institutions (both banks and thrifts).
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[3] See Sullivan & Cromwell LLP, Bank Capital Rules: Federal Reserve Approves NPRs Addressing Basel III Implementation and Substantial Revisions to Basel I-Based Rules for All Banks and Finalized Amendments to Market Risk Rules (June 8, 2012) (discussing key provisions in the NPRs).
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[4] See Standardized Approach NPR, at 52898.
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[5] References to “Sections” are to the Proposed Rules unless otherwise noted.
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[6] See Basel III NPR, at 52806.
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[7] See Proposed Rules, § __.300(3), Table 11 to § __.300.
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[8] See Proposed Rules, § 2.
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