The FDIC Board today finalized a new rule requiring banks with relatively large trading activity to project the maximum amount of trading gains or losses and to hold capital based on their market risk exposure.

Affected banks will measure market risk using their own internal "value-at-risk" (VAR) models. This internal model approach--which has drawn broad support from the banking industry--gives banks incentives for addressing and understanding market risks, without creating undue regulatory burdens. An institution's internal model must address risk factors for interest rates, equity prices, foreign exchange rates, and commodity prices. Banks are required to hold capital on a daily basis sufficient to effectively cover peak levels of market volatility.

Through a process called "backtesting," banks will compare past estimates of market risk with actual results. Banks using models that produce poor backtesting results will be required to increase their capital for market risk.

Banks whose trading activity equals ten percent or more of their total assets, or whose trading activity equals $1 billion or more, are affected by the rule. The FDIC may require an institution not meeting this criteria to comply with the rule for safety and soundness purposes. The FDIC may also exclude an institution that meets the criteria. A small number of FDIC-supervised banks are affected by the rule.

The final rule implements an amendment to the Basle Capital Accord that sets forth a supervisory framework for measuring market risk. The rule will be incorporated into the FDIC's risk-based capital standards.

The Federal Reserve Board and the Office of the Comptroller of the Currency have recently approved final rules on market risk for the banks they regulate.

Banks must comply with the final rule by January 1, 1998, but may voluntarily begin compliance as early as January 1, 1997.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation's banking system. The FDIC insures deposits at the nation's 12,000 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed.

FDIC press releases and other documents are available on the Internet via the World Wide Web at www.fdic.gov or through Gopher at gopher.fdic.gov. They may also be obtained through the FDIC's Public Information Center, 801 17th St., NW, Washington, DC ((703) 562-2200).