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Daily Rules, Proposed Rules, and Notices of the Federal Government

FEDERAL DEPOSIT INSURANCE CORPORATION

Office of the Comptroller of the Currency

12 CFR Part 324

[Regulations H, Q, and Y; Docket No. R-1442]

RIN 3064-AD96

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

AGENCY: Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; and the Federal Deposit Insurance Corporation.
ACTION: Joint notice of proposed rulemaking.
SUMMARY: This NPR (Standardized Approach NPR) includes proposed changes to 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). The proposed changes 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 Convergence of Capital Measurement and Capital Standards: A Revised Framework" (Basel II), as revised by the BCBS between 2006 and 2009, and other proposals addressed in recent consultative papers of the BCBS.

In this NPR, the agencies also propose 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 would introduce 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. In connection with the proposed changes to the agencies' capital rules in this NPR, the agencies are also seeking comment on the two related NPRs published elsewhere in today'sFederal Register.The two related NPR's are discussed further in theSUPPLEMENTARY INFORMATION.

DATES: Comments must be submitted on or before October 22, 2012.
ADDRESSES: OCC:Because paper mail in the Washington, DC area and at the OCC is subject to delay, commenters are encouraged to submit comments by the Federal eRulemaking Portal or email, if possible. Please use the title "Regulatory Capital Rules: Standardized Approach for Risk-weighted Assets; Market Discipline and Disclosure Requirements" to facilitate the organization and distribution of the comments. You may submit comments by any of the following methods:

*Federal eRulemaking Portal--"regulations.gov":Go tohttp://www.regulations.gov. Click "Advanced Search." Select "Document Type" of "Proposed Rule," and in "By Keyword or ID" box, enter Docket ID "OCC-2012-0009,"and click "Search." If proposed rules for more than one agency are listed, in the "Agency" column, locate the notice of proposed rulemaking for the OCC. Comments can be filtered by Agency using the filtering tools on the left side of the screen. In the "Actions" column, click on "Submit a Comment" or "Open Docket Folder" to submit or view public comments and to view supporting and related materials for this rulemaking action.

* Click on the "Help" tab on the Regulations.gov home page to get information on using Regulations.gov, including instructions for submitting or viewing public comments, viewing other supporting and related materials, and viewing the docket after the close of the comment period.

*Email: regs.comments@occ.treas.gov.

*Mail:Office of the Comptroller of the Currency, 250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

*Fax:(202) 874-5274.

*Hand Delivery/Courier:250 E Street SW., Mail Stop 2-3, Washington, DC 20219.

Instructions:You must include "OCC" as the agency name and "Docket ID OCC-2012-0009." In general, OCC will enter all comments received into the docket and publish them on the Regulations.gov Web site without change, including any business or personal information that you provide such as name and address information, email addresses, or phone numbers. Comments received, including attachments and other supporting materials, are part of the public record and subject to public disclosure. Do not enclose any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

You may review comments and other related materials that pertain to this notice by any of the following methods:

*Viewing Comments Electronically:Go tohttp://www.regulations.gov. Click "Advanced search." Select "Document Type" of "Public Submission" and in "By Keyword or ID" box enter Docket ID "OCC-2012-0009," and click "Search." If comments from more than one agency are listed, the "Agency" column will indicate which comments were received by the OCC. Comments can be filtered by Agency using the filtering tools on the left side of the screen.

*Viewing Comments Personally:You may personally inspect and photocopy comments at the OCC, 250 E Street SW., Washington, DC 20219. For security reasons, the OCC requires that visitors make an appointment to inspect comments. You may do so by calling (202) 874-4700. Upon arrival, visitors will be required to present valid government-issued photo identification and to submit to security screening in order to inspect and photocopy comments.

*Docket:You may also view or request available background documents and project summaries using the methods described above.

Board:When submitting comments, please consider submitting your comments by email or fax because paper mail in the Washington, DC area and at the Board may be subject to delay. You may submit comments, identified byDocket No. R-1442; RIN No. 7100 AD 87, by any of the following methods:

*Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

*Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

*Email: regs.comments@federalreserve.gov. Include docket number in the subject line of the message.

*Fax:(202) 452-3819 or (202) 452-3102.

*Mail:Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue NW., Washington, DC 20551.

All public comments are available from the Board's Web site athttp://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfmas submitted, unless modified for technical reasons. Accordingly, your comments will not be edited to remove any identifying or contact information. Public comments may also be viewed electronically or in paper form in Room MP-500 of the Board's Martin Building (20th and C Street NW., Washington, DC 20551) between 9 a.m. and 5 p.m. on weekdays.

FDIC:You may submit comments by any of the following methods:

*Federal eRulemaking Portal: http://www.regulations.gov. Follow the 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.

*Email: comments@FDIC.gov.

*Instructions:Comments submitted must include "FDIC" and "RIN 3064-AD 96." Comments received will be posted without change tohttp://www.FDIC.gov/regulations/laws/federal/propose.html, including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Board:Anna Lee Hewko, Assistant Director, (202) 530-6260, Thomas Boemio, Manager, (202) 452-2982, or Constance M. Horsley, Manager, (202) 452-5239, Capital and Regulatory Policy, Division of Banking Supervision and Regulation; or Benjamin McDonough, Senior Counsel, (202) 452-2036, April C. Snyder, Senior Counsel, (202) 452-3099, or Christine Graham, Senior Attorney, (202) 452-3005, Legal Division, Board of Governors of the Federal Reserve System, 20th and C Streets NW., Washington, DC 20551. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263-4869.

FDIC:Bobby R. Bean, Associate Director,bbean@fdic.gov; Ryan Billingsley, Chief, Capital Policy Section,rbillingsley@fdic.gov; Karl Reitz, Chief, Capital Markets Strategies Section,kreitz@fdic.gov, Division of Risk Management Supervision; David Riley, Senior Policy Analyst,dariley@fdic.gov, Capital Markets Branch, Division of Risk Management Supervision, (202) 898-6888; or Mark Handzlik, Counsel,mhandzlik@fdic.gov, Michael Phillips, Counsel,mphillips@fdic.gov, Greg Feder, Counsel,gfeder@fdic.gov, or Ryan Clougherty, Senior Attorney,rclougherty@fdic.gov; Supervision Branch, Legal Division, Federal Deposit Insurance Corporation, 550 17th Street NW., Washington, DC 20429. SUPPLEMENTARY INFORMATION:

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) are seeking comment on three notices of proposed rulemaking (NPRs) that would revise and replace the agencies' current capital rules.

This NPR (Standardized Approach NPR) includes proposed changes to 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). The proposed changes 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 Convergence of Capital Measurement and Capital Standards: A Revised Framework” (Basel II), as revised by the BCBS between 2006 and 2009, and other proposals addressed in recent consultative papers of the BCBS.

In this NPR, the agencies also propose 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 this Standardized Approach NPR are proposed to take effect on January 1, 2015, with an option for early adoption. The Standardized Approach NPR also would introduce 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.

In connection with the proposed changes to the agencies' capital rules in this NPR, the agencies are also seeking comment on the two related NPRs published elsewhere in today'sFederal Register. In the notice titled “Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, Prompt Corrective Action, and Transition Provisions” (Basel III NPR), the agencies are proposing to revise their minimum risk-based capital requirements and criteria for regulatory capital, as well as establish a capital conservation buffer framework, consistent with Basel III.

The proposals in this NPR and the Basel III NPR would apply to all banking organizations that are currently subject to minimum capital requirements (including national banks, state member banks, state nonmember banks, state and federal savings associations, and top-tier bank holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company Policy Statement), as well as top-tier savings and loan holding companies domiciled in the United States (together, banking organizations).

In the notice titled “Regulatory Capital Rules: Advanced Approaches Risk-Based Capital Rule; Market Risk Capital Rule,” (Advanced Approaches and Market Risk NPR) the agencies are proposing to revise the advanced approaches risk-based capital rules, which are applicable only to the largest internationally active banking organizations, consistent with Basel IIIand other changes to the BCBS's capital standards.

Table of Contents1

1Sections marked with an asterisk generally would not apply to less complex banking organizations.

I. Introduction and Overview. Overview of the proposed standardized approach for calculation of risk-weighted assets and summary of proposals contained in two other NPRs. II. Standardized Approach for Risk-Weighted Assets A. Calculation of Standardized Total Risk-weighted Assets. A discussion of how a banking organization would determine risk-weighted asset amounts. B. Risk-weighted Assets for General Credit Risk. A description of general credit risk exposures and the methodologies for calculating risk-weighted assets for such exposures. 1. Exposures to Sovereigns. A description of the treatment of exposures to the U.S. government and other sovereigns. 2. Exposures to Certain Supranational Entities and Multilateral Development Banks. A description of the treatment of exposures to Multilateral Development Banks and other supranational entities. 3. Exposures to Government-sponsored Entities. A description of the treatment of exposures to government-sponsored entities (such as the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation). 4. Exposures to Depository Institutions, Foreign Banks, and Credit Unions. A description of the treatment for exposures to U.S. depository institutions, foreign banks, and credit unions. 5. Exposures to Public Sector Entities. A description of the treatment for exposures to Public Sector Entities, general obligation and revenue bonds. 6. Corporate Exposures. A description of the treatment for corporate exposures. 7. Residential Mortgage Exposures. A description of the more risk-sensitive treatment for first- and junior-lien residential mortgage exposures. 8. Pre-sold Construction Loans and Statutory Multifamily Mortgages. A description of the treatment for pre-sold construction loans and statutory multifamily mortgages. 9. High Volatility Commercial Real Estate Exposures. A description of the requirement to assign higher risk weights to certain commercial real estate exposures. 10. Past Due Exposures. A description of the requirement to assign higher risk weights to certain past due loans. 11. Other Assets. A description of the treatment for exposures that are not assigned to specific risk weight categories, including cash and gold bullion held by a banking organization. C. Off-balance Sheet Items. A discussion of the requirements for calculating the exposure amount of an off-balance sheet item. D. Over-the-Counter Derivative Contracts*. A discussion of the requirements for calculating risk-weighted asset amounts for exposures to over-the-counter (OTC) derivative contracts. E. Cleared Transactions. 1. Overview. A discussion of the requirements for calculating risk-weighted asset amounts for derivatives and repo-style transactions that are cleared through central counterparties and for default fund contributions to central counterparties. 2. Risk-weighted Asset Amount for Clearing Member Clients and Clearing Members. A description of the calculation of the trade exposure amount and the appropriate risk weight. 3. Default Fund Contribution*. A description of the risk-based capital requirement for default fund contributions of clearing members. F. Credit Risk Mitigation. 1. Guarantees and Credit Derivatives a. Eligibility Requirements. A description of the eligibility requirements for credit risk mitigation, including guarantees and credit derivatives. b. Substitution Approach. A description of the substitution approach for recognizing credit risk mitigation of guarantees and credit derivatives. c. Maturity Mismatch Haircut. An explanation of the requirement for adjusting the exposure amount of a credit risk mitigant to reflect any maturity mismatch between a hedged exposure and the credit risk mitigant. d. Adjustment for Credit Derivatives without Restructuring as a Credit Event*. A description of requirements to adjust the notional amount of a credit derivative that does not include restructuring as a credit event in its governing contracts. e. Currency Mismatch Adjustment*. A description of the requirement to adjust the notional amount of an eligible guarantee or eligible credit derivative that is denominated in a currency different from that in which the hedged exposure is denominated. f. Multiple Credit Risk Mitigants*. A description of the calculation of risk-weighted asset amounts when multiple credit risk mitigants cover a single exposure. 2. Collateralized Transactions. A discussion of options and requirements for recognizing collateral credit risk mitigation, including eligibility criteria, risk management requirements, and methodologies for calculating exposure amount of eligible collateral. a. Eligible Collateral. A description of eligible collateral, including the definition of financial collateral. b. Risk Management Guidance for Recognizing Collateral. A description of the steps a banking organization should take to ensure the eligibility of collateral prior to recognizing the collateral for credit risk mitigation purposes. c. Simple Approach. A description of the approach to assign a risk weight to the collateralized portion of the exposure. d. Collateral Haircut Approach*. A description of how a banking organization would be permitted to use a collateral haircut approach with supervisory haircuts to recognize the risk mitigating effect of collateral that secures certain types of transactions. e. Standard Supervisory Haircuts*. A description of the standard supervisory market price volatility haircuts based on residual maturity and exposure type. f. Own Estimates of Haircuts*. A description of the qualitative and quantitative standards and requirements for a banking organization to use internally estimated haircuts. g. Simple Value-at-risk*. A description of an alternative that the agencies may consider to permit a banking organization estimate the exposure amount for transactions subject to certain netting agreements using a value-at-risk model. h. Internal Models Methodology*. A description of an alternative that the agencies may consider to permit a banking organization to use the internal models methodology to calculate the exposure amount for the counterparty credit exposure for OTC derivatives, eligible margin loans, and repo-style transactions. G. Unsettled Transactions*. A description of the methodology for calculating the risk-weighted asset amount for unsettled delivery-versus-payment and payment-versus-payment transactions. H. Risk-weighted Assets for Securitization Exposures 1. Overview of the Securitization Framework and Definitions. A description of the securitization framework designed to address the credit risk of exposures that involve the tranching of the credit risk of one or more underlying financial exposures under the proposal. 2. Operational Requirements for Securitization Exposures. A description of operational and due diligence requirements for securitization exposures and eligibility of clean-up calls. a. Due Diligence Requirements. A description of the due diligence requirements that a banking organization would have to conduct and document prior to acquisition of exposures and periodically thereafter. b. Operational Requirements for Traditional Securitizations*. A description of the operational requirements for traditional securitizations. c. Operational Requirements for Synthetic Securitizations. A discussion of the operational requirements for synthetic securitizations. d. Clean-Up Calls. A discussion of the definition and eligibility of clean-up calls. 3. Risk-weighted Asset Amounts for Securitization Exposures a. Exposure Amount of a Securitization Exposure. A description of the proposed methodology for calculating the exposure amount of a securitization exposure. b. Gains-On-Sale and Credit-enhancing Interest-only Strips. A description of proposed deduction requirements for gains-on-sale and credit-enhancing interest-only strips. c. Exceptions under the Securitization Framework. A description of exceptions to certain requirements under the proposed securitization framework. d. Overlapping Exposures. A description of the provisions to limit the double counting of risks associated with securitization exposures. e. Servicer Cash Advances. A description of the treatment for servicer cash advances. f. Implicit Support. A discussion of regulatory consequences where a banking organization provides implicit (non-contractual) support to a securitization transaction. 4. Simplified Supervisory Formula Approach*. A discussion of the simplified supervisory formula methodology for calculating the risk-weighted asset amounts of securitization exposures. 5. Gross-up Approach. A description of the gross-up approach for calculating risk-weighted asset amounts for securitization exposures. 6. Alternative Treatments for Certain Types of Securitization Exposures*. A description of requirements related to exposures to asset-backed commercial paper programs. 7. Credit Risk Mitigation for Securitization Exposures. A discussion of the requirements for recognizing credit risk mitigation for securitization exposures. 8. Nth-to-default Credit Derivatives*. A description of the requirements for calculating risk-weighted asset amounts for nth-to-default credit derivatives. I. Equity Exposures. A description of the requirements for calculating risk-weighted asset amounts for equity exposures, including calculation of exposure amount, recognition of equity hedges, and methodologies for assigning risk weights to different categories of equity exposures. 1. Introduction. A description of the treatment for equity exposures. 2. Exposure Measurement. A description of how a banking organization would determine the adjusted carrying value for equity exposures. 3. Equity Exposure Risk Weights. A description of how a banking organization would determine the risk-weighted asset amount for each equity exposure. 4. Non-significant Equity Exposures. A description of the proposed treatment for non-significant equity exposures. 5. Hedged Transactions*. A description of the proposed treatment for hedged transactions. 6. Measures of Hedge Effectiveness*. A description of the measures of hedge effectiveness. 7. Equity Exposures to Investment Funds a. Full Look-through Approach. A description of the proposed full look-through approach. b. Simple Modified Look-through Approach. A description of the simple modified look-through approach. c. Alternative Modified Look-through Approach. A description of the alternative modified look-through approach. III. Insurance-Related Activities*. A discussion of the proposed treatment for certain instruments and exposures unique to insurance underwriting activities. IV. Market Discipline and Disclosure Requirements*. A. Proposed Disclosure Requirements. A discussion of the proposed disclosure requirements for top-tier entities with $50 billion or more in total assets that are not subject to the advanced approaches rule. B. Frequency of Disclosures. Describes the proposed frequency of required disclosures. C. Location of Disclosures and Audit Requirements. A description of the location of disclosures and audit requirements. D. Proprietary and Confidential Information. Describes the treatment of proprietary and confidential information as part of the proposed disclosure requirements. E. Specific Public Disclosure Requirements. A description of the specific public disclosure requirements in tables 14.1-14.10 of the proposal. V. List of Acronyms That Appear in the Proposal VI. Regulatory Flexibility Act Analysis VII. Paperwork Reduction Act VIII. Plain Language IX. OCC Unfunded Mandates Reform Act of 1995 Determination Addendum 1: Summary of this NPR as it would Generally Apply to Community Banking Organizations Addendum 2: Definitions Used in the Proposal
I. Introduction and Overview

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 proposing comprehensive revisions to their regulatory capital framework through three concurrent notices of proposed rulemaking (NPRs). In this NPR (Standardized Approach NPR), the agencies are proposing to revise certain aspects of the general risk-based capital requirements that address the calculation of risk-weighted assets. The agencies believe the proposed changes included in this NPR would both enhance the overall risk-sensitivity of the calculation of a banking organization's total risk-weighted assets and be consistent with relevant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).2 Although many of the proposed changes included in this NPR are not specifically included in the Basel capital framework, the agencies believe that these proposed changes are generally consistent with the goals of the international framework.

2Public Law 111-203, 124 Stat. 1376 (2010).

This NPR contains a standardized approach for determining risk-weighted assets. This NPR would apply to all banking organizations currently subject to minimum capital requirements, including national banks, state member banks, state nonmember banks, state and federal savings associations, top-tier bank holding companies domiciled in the United States not subject to the Board's Small Bank Holding Company Policy Statement (12 CFR part 225, appendix C), as well as top-tier savings and loan holding companies domiciled in the United States (together, banking organizations).3 The proposed effective date for the provisions of this NPR is January 1, 2015, with an option for early adoption.

3Small bank holding companies would continue to be subject to the Small Bank Holding Company Policy Statement. The proposed rule's application to all savings and loan holding companies (including small savings and loan holding companies) is consistent with the transfer of supervisory responsibilities to the Board and the requirements of section 171 of the Dodd-Frank Act. Section 171 of the Dodd-Frank Act by its terms does not apply to small bank holding companies, but there is no exemption from the requirements of section 171 for small savings and loan holding companies.See12 U.S.C. 5371.

In a separate NPR (Basel III NPR), the agencies are proposing to revise their capital regulations to incorporate 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 Basel III NPR would revise the definition of regulatory capital and minimum capital ratios, establish capital buffers, create a supplementary leverage ratio for advanced approach banking organizations, and revise the agencies' Prompt Corrective Action (PCA) regulations.

The agencies are proposing in a third NPR (Advanced Approaches and Market Risk NPR) to incorporate additional aspects of the Basel III framework into the advanced approaches risk-based capital rule (advanced approaches rule). Additionally, in the Advanced Approaches and Market Risk NPR, the Board proposes to apply the advanced approaches rule to savings and loan holding companies, and the Board, FDIC, and OCC propose to apply the market risk capital rule (market risk rule) to savings and loan holding companies and to state and federalsavings associations that meet the scope requirements of these rules, respectively. Thus, the Advanced Approaches and Market Risk NPR is applicable only to banking organizations that are or would be subject to the advanced approaches rule (advanced approaches banking organizations) or the market risk rule, and to savings and loan holding companies and state and federal savings associations that would be subject to the advanced approaches rule or market risk rule.

All banking organizations, including organizations subject to the advanced approaches rule, should review both the Basel III NPR and the Standardized Approach NPR. The requirements proposed in the Basel III NPR and the Standardized Approach NPR are proposed to become the “generally applicable” capital requirements for purposes of section 171 of the Dodd-Frank Act because they would be the capital requirements for insured depository institutions under section 38 of the Federal Deposit Insurance Act, without regard to asset size or foreign financial exposure.4

412 U.S.C. 1831o; 12 CFR part 6, 12 CFR part 165 (OCC); 12 CFR 208.43 (Board), 12 CFR 325.105, 12 CFR 390.455 (FDIC).

The agencies believe that it is important to publish all of the proposed capital rules at the same time so that banking organizations can evaluate the overall potential impact of the proposals on their operations. The proposals are divided into three separate NPRs to reflect the distinct objectives of each proposal, to allow interested parties to better understand the various aspects of the overall capital framework, including which aspects of the proposals would apply to which banking organizations, and to help interested parties better focus their comments on areas of particular interest. Additionally, the agencies believe that separating the proposed requirements into three NPRs makes it easier for banking organizations of all sizes to more easily understand which proposed changes are related to the agencies' objective to improve the quality and increase the quantity of capital and which are related to the agencies' objective to enhance the overall risk-sensitivity of the calculation of a banking organization's total risk-weighted assets. The agencies believe that the proposed changes contained in the three NPRs will result in capital requirements that will improve institutions' ability to withstand periods of economic stress and better reflect their risk profiles. The agencies have carefully considered the potential impact of the three NPRs on all banking organizations, including community banking organizations, and sought to minimize the potential burden of these changes wherever possible.

This NPR proposes new methodologies for determining risk-weighted assets in the agencies' general capital rules, incorporating elements of the Basel II standardized approach5 as modified by the 2009 “Enhancements to the Basel II Framework” (2009 Enhancements)6 and recent consultative papers published by the BCBS. This NPR also proposes alternative standards of creditworthiness consistent with section 939A of the Dodd-Frank Act.7 The proposed revisions in this NPR include revisions to recognition of credit risk mitigation, including a greater recognition of financial collateral and a wider range of eligible guarantors. They also include risk weighting of equity exposures and past due loans, operational requirements for securitization exposures, more favorable capital treatment for derivatives and repo-style transactions cleared through central counterparties, and disclosure requirements that would apply to top-tier banking organizations with $50 billion or more in total assets that are not subject to the advanced approaches rule. In addition, the proposed risk weights for residential mortgage exposures in this NPR enhance risk-sensitivity for capital requirements associated with these exposures. Similarly, the proposals in this NPR would require a higher risk weighting for certain commercial real estate exposures that typically have higher credit risk. The agencies believe these proposals would more appropriately align capital requirements with these exposures and contribute to the resilience of both individual banking organizations and the banking system.

5 SeeBCBS, “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” (June 2006), available athttp://www.bis.org/publ/bcbs128.htm(Basel II).

6 SeeBCBS, “Enhancements to the Basel II Framework,” (July 2009), available athttp://www.bis.org/publ/bcbs157.htm.

7Dodd-Frank Act, section 939A (15 U.S.C. 78o-7, note).

Some of the proposed changes in this NPR are not specifically included in the Basel capital framework. However, the agencies believe that these proposed changes are generally consistent with the goals of that framework. For example, the Basel capital framework seeks to enhance the risk-sensitivity of the international risk-based capital requirements by mapping capital requirements for certain exposures to credit ratings provided by credit rating agencies. Instead of mapping risk weights to credit ratings, the agencies are proposing alternative standards of creditworthiness to assign risk weights to certain exposures, including exposures to sovereigns, companies, and securitization exposures, in a manner consistent with section 939A of the Dodd-Frank Act.8 These alternative creditworthiness standards and risk-based capital requirements have been designed to be consistent with safety and soundness while also exhibiting risk-sensitivity to the extent possible. Furthermore, these capital requirements are intended to be similar to those generated under the Basel framework.

8Section 939A of the Dodd-Frank Act provides that not later than 1 year after the date of enactment, each Federal agency shall review: (1) Any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument; and (2) any references to or requirements in such regulations regarding credit ratings. Section 939A further provides that each such agency “shall modify any such regulations identified by the review * * * to remove any reference to or requirement of reliance on credit ratings and to substitute in such regulations such standard of credit-worthiness as each respective agency shall determine as appropriate for such regulations.”See15 U.S.C. 78o-7 note.

Table 1 summarizes key proposed requirements in this NPR and illustrates how these changes compare to the agencies' general risk-based capital rules.9 The remaining sections of this notice describe in detail each element of the proposal, how the proposal would differ from the current general risk-based capital rules, and examples for how a banking organization would calculate risk-weighted asset amounts.

9Banking organizations should refer to the Basel III NPR to see a complete table of the key provisions of the proposal.

Table 1—Key Provisions of the Proposed Requirements as Compared to the General Risk-Based Capital Rules Aspect of proposed requirements Proposed treatment Risk-weighted Assets Credit exposures to: U.S. government and its agencies Unchanged. U.S. government-sponsored entities U.S. depository institutions and credit unions U.S. public sector entities, such as states and municipalities (section 32 of subpart D) Credit exposures to: Foreign sovereigns Introduces a more risk-sensitive treatment using the Country Risk Classification measure produced by the Organization for Economic Co-operation and Development. Foreign banks
  • Foreign public sector entities (section 32 of subpart D)
  • Corporate exposures (section 32 of subpart D) Assigns a 100 percent risk weight to corporate exposures, including exposures to securities firms. Residential mortgage exposures (section 32 of subpart D) Introduces a more risk-sensitive treatment based on several criteria, including certain loan characteristics and the loan-to-value-ratio of the exposure. High volatility commercial real estate exposures (section 32 of subpart D) Applies a 150 percent risk weight to certain credit facilities that finance the acquisition, development or construction of real property. Past due exposures (section 32 of subpart D) Applies a 150 percent risk weight to exposures that are not sovereign exposures or residential mortgage exposures and that are more than 90 days past due or on nonaccrual. Securitization exposures (sections 41-45 of subpart D) Maintains the gross-up approach for securitization exposures. Replaces the current ratings-based approach with a formula-based approach for determining a securitization exposure's risk weight based on the underlying assets and exposure's relative position in the securitization's structure. Equity exposures (sections 51-53 of subpart D) Introduces more risk-sensitive treatment for equity exposures. Off-balance Sheet Items (section 33 of subpart D) Revises the measure of the counterparty credit risk of repo-style transactions. Raises the credit conversion factor for most short-term commitments from zero percent to 20 percent. Derivative Contracts (section 34 of subpart D) Removes the 50 percent risk weight cap for derivative contracts. Cleared Transactions (section 35 of subpart D) Provides preferential capital requirements for cleared derivative and repo-style transactions (as compared to requirements for non-cleared transactions) with central counterparties that meet specified standards. Also requires that a clearing member of a central counterparty calculate a capital requirement for its default fund contributions to that central counterparty. Credit Risk Mitigation (section 36 of subpart D) Provides a more comprehensive recognition of collateral and guarantees. Disclosure Requirements (sections 61-63 of subpart D) Introduces qualitative and quantitative disclosure requirements, including regarding regulatory capital instruments, for banking organizations with total consolidated assets of $50 billion or more that are not subject to the separate advanced approaches disclosure requirements.

    This NPR proposes that, beginning on January 1, 2015, a banking organization would be required to calculate risk-weighted assets using the methodologies described herein. Until then, the banking organization may calculate risk-weighted assets using the methodologies in the current general risk-based capital rules.

    Some of the proposed requirements in this NPR are not applicable to smaller, less complex banking organizations. To assist these banking organizations in rapidly identifying the elements of these proposals that would apply to them, this NPR and the Basel III NPR provide, as addenda to the corresponding preambles, a summary of the proposed changes in those NPRs as they would generally apply to smaller, less complex banking organizations. This NPR also contains a second addendum to the preamble, which directs the reader to the definitions proposed under the Basel III NPR because they are applicable to the Standardized Approach NPR as well.

    Question 1:The agencies seek comment on the advantages and disadvantages of the proposed standardized approach rule as it would apply to smaller and less complex banking organizations (community banking organizations). What specific changes, if any, to the rule would accomplish the agencies' goals of establishing improved risk-sensitivity and quality of capital in an appropriate manner? For example, in which areas might the proposed standardized approach for calculating risk-weighted assets include simpler approaches for community banking organizations or longer transition periods? Provide specific suggestions.

    Question 2:The agencies also seek comment on the advantages and disadvantages of allowing certain community banking organizations to continue to calculate their risk-weighted assets based on the methodology in the current general risk-based capital rules, as modified to meet the new Basel III requirements and any changes required under U.S. law, and as incorporated into a comprehensive regulatory framework.

    For example, under this type of alternative approach, community banking organizations would be subject to the proposed new PCA thresholds, a capital conservation buffer, and other Basel III revisions to the capital framework including the definition of capital, as well as any changes related to section 939A of the Dodd-Frank Act.As modified with these revisions, community banking organizations would continue using most of the same risk weights as under the current general risk-based capital rules, including for commercial and residential mortgage exposures.

    Under this approach, banking organizations other than community banking organizations would use the proposed standardized approach risk weights to calculate the denominator of the risk-based capital ratio. The agencies request comment on the criteria they should consider when determining which banking organizations, if any, should be permitted to continue to calculate their risk-weighted assets using the methodology in the current general risk-based capital rules (revised as described above). Which banking organizations, consistent with section 171 of the Dodd-Frank Act, should be required to use the standardized approach?10 What factors should the agencies consider in making this determination?

    10Section 171 of the Dodd-Frank Act provides that all banking organizations must be subject to minimum capital requirements that cannot be less than the “generally applicable risk-based capital rules” established by the appropriate federal banking agency to apply to insured depository institutions under section 38 of the Federal Deposit Insurance Act, regardless of total consolidated asset size or foreign financial exposure; which shall serve as a floor for any capital requirements the agency may require.

    II. Standardized Approach for Risk-weighted Assets A. Calculation of Standardized Total Risk-weighted Assets

    Similar to the current general risk-based capital rules, under the proposal, a banking organization would calculate its total risk-weighted assets by adding together its on- and off-balance sheet risk-weighted asset amounts and making any relevant adjustments to incorporate required capital deductions.11 Banking organizations subject to the market risk rule would be required to supplement their total risk-weighted assets as provided by the market risk rule.12 Risk-weighted asset amounts generally would be determined by assigning on-balance sheet assets to broad risk-weight categories according to the counterparty, or, if relevant, the guarantor or collateral. Similarly, risk-weighted asset amounts for off-balance sheet items would be calculated using a two-step process: (1) Multiplying the amount of the off-balance sheet exposure by a credit conversion factor (CCF) to determine a credit equivalent amount, and (2) assigning the credit equivalent amount to a relevant risk-weight category.

    11 See generally12 CFR part 3, appendix A, section III; 12 CFR 167.6 (OCC); 12 CFR parts 208 and 225, appendix A, section III (Board); 12 CFR part 325, appendix A, sections II.C and II.D and 12 CFR 390.466 (FDIC).

    12The proposed rules would incorporate the market risk rule into the integrated regulatory framework as subpart F.Seethe Advanced Approaches and Market Risk NPR for further discussion.

    A banking organization would determine its standardized total risk-weighted assets by calculating the sum of: (1) Its risk-weighted assets for general credit risk, cleared transactions, default fund contributions, unsettled transactions, securitization exposures, and equity exposures, each as defined below,plus(ii) market risk-weighted assets, if applicable,less(iii) the banking organization's allowance for loan and lease losses (ALLL) that is not included in tier 2 capital (as described in section 20 of the proposal). The sections below describe in more detail how a banking organization would determine the risk-weighted asset amounts for its exposures.

    B. Risk-weighted Assets for General Credit Risk

    Under this NPR, total risk-weighted assets for general credit risk is the sum of the risk-weighted asset amounts as calculated under section 31(a) of the proposal. As proposed, general credit risk exposures would include a banking organization's on-balance sheet exposures, over-the-counter (OTC) derivative contracts, off-balance sheet commitments, trade and transaction-related contingencies, guarantees, repo-style transactions, financial standby letters of credit, forward agreements, or other similar transactions. General credit risk exposures would generally exclude unsettled transactions, cleared transactions, default fund contributions, securitization exposures, and equity exposures, each as the agencies propose to define. Section 32 describes the proposed risk weights that would apply to sovereign exposures; exposures to certain supranational entities and multilateral development banks (MDBs); exposures to government-sponsored entities (GSEs); exposures to depository institutions, foreign banks, and credit unions; exposures to public sector entities (PSEs); corporate exposures; residential mortgage exposures; pre-sold residential construction loans; statutory multifamily mortgages; high volatility commercial real estate (HVCRE) exposures; past due exposures; and other assets (including cash, gold bullion, certain mortgage servicing assets (MSAs) and deferred tax assets (DTAs)).

    Generally, the exposure amount for the on-balance sheet component of an exposure is the banking organization's carrying value for the exposure as determined under generally accepted accounting principles (GAAP). The exposure amount for an off-balance sheet component of an exposure is typically determined by multiplying the notional amount of the off-balance sheet component by the appropriate CCF as determined under section 33. The exposure amount for an OTC derivative contract or cleared transaction that is a derivative would be determined under section 34 while exposure amounts for collateralized OTC derivative contracts, collateralized cleared transactions that are derivatives, repo-style transactions, and eligible margin loans would be determined under section 37 of the proposal.

    1. Exposures to Sovereigns

    The agencies propose to retain the current rules' risk weights for exposures to and claims directly and unconditionally guaranteed by the U. S. government or its agencies.13 Accordingly, exposures to the U. S. government, its central bank, or a U.S. government agency and the portion of an exposure that is directly and unconditionally guaranteed by the U. S. government, the U.S. central bank, or a U.S. government agency would receive a zero percent risk weight.14 Consistent with the current risk-based capital rules, the portion of a deposit insured by the FDIC or the National Credit Union Administration also may be assigned a zero percent risk weight. An exposure conditionally guaranteed by the U.S. government, its central bank, or a U.S. government agency would receive a 20 percent risk weight.15

    13A U.S. government agency would be defined in the proposal as an instrumentality of the U.S. government whose obligations are fully and explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.

    14Similar to the current general risk-based capital rules, a claim would not be considered unconditionally guaranteed by a central government if the validity of the guarantee is dependent upon some affirmative action by the holder or a third party.See12 CFR part 3, appendix A, section 1(c)(11) and 12 CFR 167.6 (OCC); 12 CFR parts 208 and 225, appendix A, section III.C.1 (Board); 12 CFR part 325, appendix A, section II.C. (footnote 35) and 12 CFR 390.466 (FDIC).

    15Loss-sharing agreements entered into by the FDIC with acquirers of assets from failed institutions are considered conditional guarantees for risk-based capital purposes due to contractual conditions that acquirers must meet. The guaranteed portion of assets subject to a loss-sharing agreement may be assigned a 20 percent risk weight. Because the structural arrangements for these agreements vary depending on the specific terms of each agreement, institutions should consult with their primary federal supervisor todetermine the appropriate risk-based capital treatment for specific loss-sharing agreements.

    The agencies' general risk-based capital rules generally assign risk weights to direct exposures to sovereigns and exposures directly guaranteed by sovereigns based on whether the sovereign is a member of the Organization for Economic Co-operation and Development (OECD) and, as applicable, whether the exposure is unconditionally or conditionally guaranteed by the sovereign.16

    1612 CFR part 3, appendix A, section 3 and 12 CFR 167.6 (OCC); 12 CFR parts 208 and 225, appendix A, section III.C.1 (Board); 12 CFR part 325, appendix A, section II.C and 12 CFR 390.466 (FDIC).

    Under the proposal, a sovereign would be defined as a central government (including the U.S. government) or an agency, department, ministry, or central bank of a central government. The risk weight for a sovereign exposure would be determined using OECD Country Risk Classifications (CRCs) (the CRC methodology).17 The OECD's CRCs are an assessment of a country's credit risk, used to set interest rate charges for transactions covered by the OECD arrangement on export credits.

    17For more information on the OECD country risk classification methodology,seeOECD, “Country Risk Classification,” available athttp://www.oecd.org/document/49/0,3746,en_2649_34169_1901105_1_1_1_1,00.html.

    The agencies believe that use of CRCs in the proposal is permissible under section 939A of the Dodd-Frank Act and that section 939A was not intended to apply to assessments of creditworthiness of organizations such as the OECD. Section 939A is part of Subtitle C of Title IX of the Dodd-Frank Act, which, among other things, enhances regulation by the U.S. Securities and Exchange Commission (SEC) of credit rating agencies, including Nationally Recognized Statistical Rating Organizations (NRSROs) registered with the SEC. Section 939, in Subtitle C of Title IX, removes references to credit ratings and NRSROs from federal statutes. In the introductory “findings” section to Subtitle C, which is entitled “Improvements to the Regulation of Credit Ratings Agencies,” Congress characterized credit rating agencies as organizations that play a critical “gatekeeper” role in the debt markets and perform evaluative and analytical services on behalf of clients, and whose activities are fundamentally commercial in character.18 Furthermore, the legislative history of section 939A focuses on the conflicts of interest of credit rating agencies in providing credit ratings to their clients, and the problem of government “sanctioning” of the credit rating agencies' credit ratings by having them incorporated into federal regulations. The OECD is not a commercial entity that produces credit assessments for fee-paying clients, nor does it provide the sort of evaluative and analytical services as credit rating agencies. Additionally, the agencies note that the use of the CRCs is limited in the proposal.

    18 SeeDodd-Frank Act, section 931 (15 U.S.C. 78o-7 note).

    The CRC methodology, established in 1999, classifies countries into categories based on the application of two basic components: the country risk assessment model (CRAM), which is an econometric model that produces a quantitative assessment of country credit risk, and the qualitative assessment of the CRAM results, which integrates political risk and other risk factors not fully captured by the CRAM. The two components of the CRC methodology are combined and result in countries being classified into one of eight risk categories (0-7), with countries assigned to the zero category having the lowest possible risk assessment and countries assigned to the 7 category having the highest possible risk assessment.

    The OECD regularly updates CRCs for more than 150 countries and makes the assessments publicly available on its Web site.19 Accordingly, the agencies believe that the CRC approach should not represent undue burden to banking organizations. The use of the CRC methodology is consistent with the Basel II standardized approach, which, as an alternative to credit ratings, provides for risk weights to be assigned to sovereign exposures according to country risk scores provided by export credit agencies.

    19 See http://www.oecd.org/document/49/0,2340,en_2649_34171_1901105_1_1_1_1,00.html.

    The agencies recognize that CRCs have certain limitations. Although the OECD has published a general description of the methodology for CRC determinations, the methodology is largely principles-based and does not provide details regarding the specific information and data considered to support a CRC. Additionally, while the OECD reviews qualitative factors for each sovereign on a monthly basis, quantitative financial and economic information used to assign CRCs is available only annually in some cases, and payment performance is updated quarterly. Also, OECD-member sovereigns that are defined to be “high-income countries” by the World Bank are assigned a CRC of zero, the most favorable classification.20 Despite these limitations, the agencies consider CRCs to be a reasonable alternative to credit ratings for sovereign exposures and the proposed CRC methodology to be more granular and risk-sensitive than the current risk-weighting methodology based on OECD membership.

    20OECD, “Premium and Related Conditions: Explanation of the Premium Rules of the Arrangement on Officially Supported Export Credits (the Knaepen Package),” (July 6, 2004), available athttp://www.oecd.org/officialdocuments/publicdisplaydocumentpdf/?cote=TD/PG(2004)10/FINAL&docLanguage=En.

    The agencies also propose to require a banking organization to apply a 150 percent risk weight to sovereign exposures immediately upon determining that an event of sovereign default has occurred or if an event of sovereign default has occurred during the previous five years. Sovereign default would be defined as a noncompliance by a sovereign with its external debt service obligations or the inability or unwillingness of a sovereign government to service an existing loan according to its original terms, as evidenced by failure to pay principal and interest timely and fully, arrearages, or restructuring. A default would include a voluntary or involuntary restructuring that results in a sovereign not servicing an existing obligation in accordance with the obligation's original terms.

    The agencies are proposing to map risk weights to CRCs in a manner consistent with the Basel II standardized approach, which provides risk weights for foreign sovereigns based on country risk scores. The proposed risk weights for sovereign exposures are set forth in table 2.

    Table 2—Proposed Risk Weights for Sovereign Exposures Risk weight
  • (in percent)
  • Sovereign CRC: 0-1 0 2 20 3 50 4-6 100 7 150 No CRC 100 Sovereign Default 150

    If a banking supervisor in a sovereign jurisdiction allows banking organizations in that jurisdiction to apply a lower risk weight to an exposure to that sovereign than table 2 provides, a U.S. banking organization would be able to assign the lower risk weight to an exposure to that sovereign, providedthe exposure is denominated in the sovereign's currency and the U.S. banking organization has at least an equivalent amount of liabilities in that foreign currency.

    Question 3:The agencies solicit comment on the proposed methodology for risk weighting sovereign exposures. Are there other alternative methodologies for risk weighting sovereign exposures that would be more appropriate? Provide specific examples and supporting data.

    2. Exposures to Certain Supranational Entities and Multilateral Development Banks

    Under the general risk-based capital rules, exposures to certain supranational entities and multilateral development banks (MDB) receive a 20 percent risk weight. Consistent with the Basel framework's treatment of exposures to supranational entities, the agencies propose to apply a zero percent risk weight to exposures to the Bank for International Settlements, the European Central Bank, the European Commission, and the International Monetary Fund.

    Similarly, the agencies propose to apply a zero percent risk weight to exposures to an MDB in accordance with the Basel framework. The proposal would define an MDB to include the International Bank for Reconstruction and Development, the Multilateral Investment Guarantee Agency, the International Finance Corporation, the Inter-American Development Bank, the Asian Development Bank, the African Development Bank, the European Bank for Reconstruction and Development, the European Investment Bank, the European Investment Fund, the Nordic Investment Bank, the Caribbean Development Bank, the Islamic Development Bank, the Council of Europe Development Bank, and any other multilateral lending institution or regional development bank in which the U.S. government is a shareholder or contributing member or which the primary federal supervisor determines poses comparable credit risk.

    The agencies believe this treatment is appropriate in light of the generally high-credit quality of MDBs, their strong shareholder support, and a shareholder structure comprised of a significant proportion of sovereign entities with strong creditworthiness. Exposures to regional development banks and multilateral lending institutions that are not covered under the definition of MDB generally would be treated as corporate exposures.

    3. Exposures to Government-Sponsored Entities

    The agencies are proposing to assign a 20 percent risk weight to exposures to GSEs that are not equity exposures and a 100 percent risk weight to preferred stock issued by a GSE. While this is consistent with the current treatment under the FDIC and Board's rules, it would represent a change to the OCC's general risk-based capital rules for national banks, which currently allow a banking organization to apply a 20 percent risk weight to GSE preferred stock.21

    2112 CFR part 3, appendix A section 3(a)(2)(vii), and 2 CFR part 167.6(a)(1)(ii)(F) (OCC); 12 CFR part 208, and 225, appendix A, section III.C.2.b (Board); 12 CFR part 325, appendix A, section II.C, and 12 CFR part 390.466(a)(1)(ii)(F) (FDIC). GSEs include the Federal Home Loan Mortgage Corporation (FHLMC), the Federal National Mortgage Association (FNMA), the Farm Credit System, and the Federal Home Loan Bank System.

    Although the GSEs currently are in the conservatorship of the Federal Housing Finance Agency and receive capital support from the U.S. Treasury, they remain privately-owned corporations, and their obligations do not have the explicit guarantee of the full faith and credit of the United States. The agencies have long held the view that obligations of the GSEs should not be accorded the same treatment as obligations that carry the explicit guarantee of the U.S. government. Therefore, the agencies propose to continue to apply a 20 percent risk weight to debt exposures to GSEs.

    4. Exposures to Depository Institutions, Foreign Banks, and Credit Unions

    The general risk-based capital rules assign a 20 percent risk weight to all exposures to U.S. depository institutions and foreign banks incorporated in an OECD country. Short-term exposures to foreign banks incorporated in a non-OECD country receive a 20 percent risk weight and long-term exposures to such entities receive a 100 percent risk weight. The Basel II standardized approach allows for risk weights for a claim on a bank to be one risk weight category higher than the risk weight assigned to the sovereign exposures of a bank's home country. As described below, the agencies' propose treatment for depository institutions, foreign banks, and credit unions that is consistent with this approach.

    Under the proposal, exposures to U.S. depository institutions and credit unions would be assigned a 20 percent risk weight.22 For exposures to foreign banks, the proposal would include risk weights based on the CRC applicable to the entity's home country, in accordance with table 3.23 Specifically, an exposure to a foreign bank would receive a risk weight one category higher than the risk weight assigned to a direct exposure to the entity's home country, as illustrated in table 3. Exposures to a foreign bank in a country that does not have a CRC would receive a 100 percent risk weight. A banking organization would be required to assign a 150 percent risk weight to an exposure to a foreign bank immediately upon determining that an event of sovereign default has occurred in the bank's home country, or if an event of sovereign default has occurred in the foreign bank's home country during the previous five years.

    22A depository institution is defined in section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813(c)(1)). Under this proposal, a credit union refers to an insured credit union as defined under the Federal Credit Union Act (12 U.S.C. 1752(7)).

    23Foreign bank means a foreign bank as defined in section 211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2), that is not a depository institution. For purposes of this proposal, home country means the country where an entity is incorporated, chartered, or similarly established.

    Table 3—Proposed Risk Weights for Exposures to Foreign Banks Risk weight
  • (in percent)
  • Sovereign CRC: 0-1 20 2 50 3 100 4-7 150 No CRC 100 Sovereign Default 150

    Exposures to a depository institution or foreign bank that are includable in the regulatory capital of that entity would receive a risk weight of 100 percent, unless the exposure is (i) An equity exposure, (ii) a significant investment in the capital of an unconsolidated financial institution in the form of common stock under section 22 of the proposal, (iii) an exposure that is deducted from regulatory capital under section 22 of the proposal, or (iv) an exposure that is subject to the 150 percent risk weight under section 32 of the proposal.

    In 2011, the BCBS revised certain aspects of the Basel capital framework to address potential adverse effects of the framework on trade finance in low income countries.24 In particular, theframework was revised to remove the sovereign floor for trade finance-related claims on banking organizations under the Basel II standardized approach.25 The proposed requirements would incorporate this revision and permit a banking organization to assign a 20 percent risk weight to self-liquidating, trade-related contingent items that arise from the movement of goods and that have a maturity of three months or less.

    24 SeeBCBS, “Treatment of Trade Finance under the Basel Capital Framework,” (October 2011), available athttp://www.bis.org/publ/bcbs205.pdf.<