TO:  Chief Executive Officers of National Banks, Department and Division Heads, Examining
     Personnel, and Other Interested Parties

PURPOSE

In August 1992, the Office of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, and the Federal Reserve published an interagency advance notice of proposed
rulemaking to implement section 305 of the Federal Deposit Insurance Improvement Act of 1991. 
The law required the agencies to revise their risk-based capital standards to take adequate account
of the risks involved in credit concentrations and nontraditional activities.  The OTS sought
comment in a separate notice in October 1992.

BACKGROUND

The agencies have carefully considered the comments received.  The proposed rule would amend
the risk-based capital standards by citing the risks associated with concentrations of credit and
nontraditional activities Ä and a bank's ability to manage those risks Ä as important factors in
assessing a bank's capital adequacy.

Concentrations of Credit

Comments received highlighted the fact that there is no generally accepted way to identify and
quantify the risks associated with concentrations.  Thus, the agencies do not believe that it is
feasible at this time, given the variables, to quantify risk using a formula-based capital calculation. 
Techniques do exist, however, to identify broad classes of concentrations and recognize significant
exposures.

Nontraditional Activities

Comments addressing the risks of nontraditional activities said it was difficult to identify activities
that should be considered nontraditional.  Comments suggested that the risks depend on the nature
of the activity and the nature of the particular bank.  And so, the comments concluded that each
bank should be treated on a case-by-case basis.


The agencies propose to take account of the risks by promptly analyzing new activities and by
incorporating them into risk-based capital calculations.  The agencies also propose to amend their
capital standards to explicitly identify management of nontraditional activities as an important
factor in assessing a bank's capital adequacy.

Comments on Proposal

The OCC encourages all interested parties to carefully review and comment on the attached
proposal.  All comments should be forwarded to: Communications Division, 250 E Street SW,
Washington, DC 20219, Attention Docket No 94-01.  Comments must be received by March 24,
1994.

FOR FURTHER INFORMATION CONTACT

Roger Tufts, Senior Economic Advisor, or Tom Rollo, National Bank Examiner, Office of the
Chief National Bank Examiner (202) 874-5070.  Questions may also be addressed to: Elizabeth
Milor, Financial Economist, Regulatory and Statistical Analysis (202) 874-5240; or Ron
Shimabukuro, Senior Attorney, Bank Operations and Assets Division (202) 874-4460.




                                        

Donald G. Coonley
Chief National Bank Examiner

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