OCC 2006-50 OCC Bulletin Subject: Risk-Based Capital: Domestic Capital Modifications Description: Notice of Proposed Rulemaking Date: December 28, 2006 TO: Chief Executive Officers of National Banks, Department and Division Heads, All Examining Personnel, and Other Interested Parties The Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision (the agencies) have jointly issued the attached Notice of Proposed Rulemaking (the Basel IA NPR), which seeks comment on proposed changes to risk- based capital rules. This proposal would be applicable to banking organizations that are not subject to the Basel II NPR that was separately proposed on September 25, 2006. (1) SUMMARY The agencies' existing risk-based capital rules are based on the 1988 Basel Accord (Basel I). The proposals in the Basel IA NPR are intended to: (1) promote safe and sound banking practices and a prudent level of regulatory capital; (2) maintain a balance between risk sensitivity and operational feasibility; (3) avoid undue regulatory burden; (4) create appropriate incentives for banking organizations; and (5) mitigate material distortions in the risk-based capital requirements for large and small banking organizations. In developing the Basel IA NPR, the agencies considered the substantial input provided by the banking industry and other interested parties in response to a related advance notice of proposed rulemaking issued on October 20, 2005. The Basel IA NPR seeks comment from banking organizations, trade associations, and others on proposed modifications that would: * Allow non-Basel II banking organizations the choice of adopting all of the revisions in this proposal or continuing to use the existing risk-based capital rules. * Increase the number of risk weight categories to which credit exposures may be assigned. * Use external credit ratings to risk weight certain exposures. * Expand the range of recognized collateral and eligible guarantors. * Use loan-to-value ratios to risk weight most residential mortgages. * Increase the credit conversion factor for various commitments with an original maturity of one year or less. * Assess a risk-based capital charge for early amortizations in securitizations of revolving exposures. * Remove the 50 percent limit on the risk weight for certain derivative transactions. The Basel IA NPR also seeks comment on possible alternative approaches to risk weighting certain retail exposures and small loans to businesses, and poses several questions related to possible alternative approaches in the implementation of Basel II in the United States. The agencies have also extended the due date for comments on the Basel II NPR and related reporting templates to match the due date for comments on the Basel IA NPR. The comment period on all these proposals will run through March 26, 2007. Questions about the NPR may be directed to: Nancy Hunt, Risk Expert, (202) 874-4923, or Kristin Bogue, Risk Expert, (202) 874-5411, Capital Policy Division; Ron Shimabukuro, Special Counsel, or Carl Kaminski, Attorney, Legislative and Regulatory Activities Division, (202) 874-5090. /signed/ Emory W. Rushton Senior Deputy Comptroller and Chief National Bank Examiner Attachments: * 71FR77446 [http://www.occ.treas.gov/fr/fedregister/71fr77446.pdf] * 71FR77518 [http://www.occ.treas.gov/fr/fedregister/71fr77518.pdf] * 71FR77520 [http://www.occ.treas.gov/fr/fedregister/71fr77520.pdf] Footnote 1--The Basel II NPR defines banking organizations for which the application of the proposed rules would be mandatory as those organizations that have consolidated total assets of $250 billion or more or consolidated on-balance sheet foreign exposure of $10 billion or more, or that is a subsidiary of a Basel II banking organization. The Basel II NPR also proposes to permit non-mandatory banking organizations to voluntarily apply the rules.