OCC 96-49
Subject: Risk-based Capital; Market Risk               Description: Final Rule

TO:  Chief Executive Officers of all National Banks, Department
     and Division Heads, and all Examining Personnel


The attached final rule on market risk was published in the
Federal Register on September 6, 1996.  The rule was issued
jointly by the OCC, the Board of Governors of the Federal Reserve
System, and the Federal Deposit Insurance Corporation (agencies). 
 The final rule amends the risk-based capital guidelines to
incorporate a measure for market risk.  A bank subject to this
rule must measure the market risk of the debt and equity
positions located in its trading account and of the foreign
exchange and commodity positions throughout the bank.  The rule
is consistent with the amendment to the Capital Accord adopted by
the Basle Committee on Banking Supervision.  If a bank is subject
to this rule, its trading account debt and equity positions and
its commodity positions will no longer be included in the capital
calculation for credit risk.  The existing counterparty credit
risk-based capital requirements for off-balance sheet
transactions will, however,  continue to apply to all banks.

The OCC intends to apply the rule to a limited group of national
banks with significant trading activity.  Specifically, the rule
will apply to banks that meet one of the following two criteria:

o    The sum of the bank's trading assets and liabilities is at
     least 10 percent of total assets, or

o    The sum of the bank's trading assets and liabilities exceeds
     $1 billion.

Additionally, the final rule provides the agencies with
flexibility to exempt from the rule banks that meet either of
these two criteria.  It also allows the agencies to apply the
rule on a case-by-case basis to any bank with significant market
risk exposure but which is not captured by the above criteria.

Identified banks must comply with the rule by January 1, 1998;
however, a bank may choose to comply on January 1, 1997, with
prior approval from the OCC.  

Measure for Market Risk

The rule requires an identified bank to measure its market risk
using its own internal value-at-risk (VAR) model and hold capital
for that risk.  The VAR model must incorporate risk factors that


address the potential change in value due to movements in
interest rates, equity and commodity prices and foreign exchange
rates.  The VAR measure must be calculated daily based on a 99
percent confidence level, a 10-day price shock, and a minimum
historical observation period of one year.  A bank's measure for
market risk exposure will be a VAR measure plus a specific risk
add-on.    The VAR measure is calculated as the larger of the
previous day's VAR measure or the average daily VAR for the
preceding 60 business days multiplied by a factor of 3.  The
specific risk add-on is described below.

Specific Risk

Specific risk refers to the changes in the market value of
individual positions due to factors other than broad market
movements.  The final rule requires that a bank's market risk
measure include the amount of specific risk associated with
individual trading account debt and equity positions.  A bank can
determine the specific risk add-on either from its internal model
or the specific risk weighting factors contained in the rule
(standard specific risk charge).  A bank may use the specific
risk amount calculated by its VAR model as long as that amount is
at least 50 percent of the standard specific risk charge.  If the
internal model generated figure is less than 50 percent of the
standard specific risk charge, the bank must add to its VAR
measure so that its total specific risk amount is 50 percent of
the standard specific risk charge.  If a bank's internal model
does not measure specific risk, than 100 percent of the standard
specific risk charge must be added to the VAR measure. 

Capital Calculation

An institution subject to this rule must hold capital on a daily
basis to maintain an overall minimum 8.0 percent ratio of total
qualifying capital to risk-weighted assets adjusted for market
risk.  The rule permits banks to use a new category of capital,
Tier 3 capital, for a portion of its market risk requirement. 
Tier 3 capital  is subordinated debt that meets certain
conditions.  It must have an original maturity of at least two
years and be unsecured and fully paid up.  Additionally, to
qualify as Tier 3 capital, the subordinated debt must be subject
to a lock-in clause which prohibits repayment even at maturity if
the bank's resulting capital ratio would fall below the 8.0
percent minimum.  The preamble to the rule outlines in detail the
capital calculation.

Backtesting

The rule requires banks to conduct quarterly backtesting of their
VAR models.  A bank must compare its daily VAR measure calibrated
to a one-day holding period and a 99 percent confidence level to
its actual daily trading profit or loss for the preceding 250
business days.  The bank must count the number of times during
that period that its actual trading loss exceeds the VAR measure;
each occurrence is called an "exception."  If the number of
exceptions during the 250 day period is five or more, the bank
must increase its multiplication factor according to the table
contained in the rule.  However, exceptions may be excluded if
they are the result of such occurrences as sudden abnormal
changes in interest rates or exchange rates, major political
events or natural disasters.  

Qualitative Requirements

The final rule outlines qualitative requirements that a bank's
internal model and risk management process must meet.  The bank
must have a risk control unit that is independent from its
trading unit and conduct appropriate stress tests of its internal
model.  The bank also must conduct independent reviews of its
model at least annually.

Implementation of the Market Risk Rule

In the coming months, the Office of the Chief National Bank
Examiner will provide guidance on the many implementation issues
of this rule including determination of a bank's status with
respect to the requirements of the rule, evaluation of a bank's
internal model and its risk management process, and exclusion of
a backtesting exception.

For further information about the final rule, contact the Office
of the Chief National Bank Examiner at (202) 874-5070.



                  
Jimmy F. Barton
Chief National Bank Examiner
Date: September 6, 1996
Attachment    61 FR 47358