The agencies have identified three groups of banks: (i) large or internationally active banks that would be required to adopt the advanced approaches in the proposed rule (core banks); (ii) banks that voluntarily decide to adopt the advanced approaches (opt-in banks); and (iii) banks that do not adopt the advanced approaches (general banks). Each core and opt-in bank would be required to meet certain qualification requirements to the satisfaction of its primary Federal supervisor, in consultation with other relevant supervisors, before the bank may use the advanced approaches for risk-based capital purposes.

A DI is a core bank if it meets either of two independent threshold criteria: (i) consolidated total assets of $250 billion or more, as reported on the most recent year-end regulatory reports; or (ii) consolidated total on-balance sheet foreign exposure of $10 billion or more at the most recent year-end. To determine total on-balance sheet foreign exposure, a bank would sum its adjusted cross-border claims, local country claims, and cross-border revaluation gains (calculated in accordance with the Federal Financial Institutions Examination Council (FFIEC) Country Exposure Report (FFIEC 009)). Adjusted cross-border claims would equal total cross-border claims less claims with the head office/guarantor located in another country, plus redistributed guaranteed amounts to the country of head office/guarantor. A DI also is a core bank if it is a subsidiary of another DI or BHC that uses the advanced approaches.

Under the proposed rule, a U.S.-chartered BHC²⁰ is a core bank if the BHC has: (i) consolidated total assets (excluding assets held by an insurance underwriting subsidiary) of $250 billion or more, as reported on the most recent year-end regulatory reports; (ii) consolidated total on-balance sheet foreign exposure of $10 billion or more at the most recent year-end; or (iii) a subsidiary DI that is a core bank or opt-in bank. Currently 11 top-tier banking organizations meet these criteria. The agencies note that, using this approach to define whether a BHC is a core bank, it is possible that no single DI under a BHC would meet the threshold criteria, but that all of the BHC's subsidiary DIs would be core banks.

The proposed BHC consolidated asset threshold is different from the threshold in the ANPR, which applied to the total consolidated DI assets of a BHC. The proposed shift to total consolidated assets (excluding assets held by an insurance underwriting subsidiary) recognizes that BHCs can hold similar assets within and outside of DIs and reduces potential incentives to structure BHC assets and activities to arbitrage capital regulations. The proposed rule excludes assets held in an insurance underwriting subsidiary of a BHC because the New Accord was not designed to address insurance company exposures. Question 7: The Board seeks comment on the proposed BHC consolidated non-insurance assets threshold relative to the consolidated DI assets threshold in the ANPR.

A bank that is subject to the proposed rule either as a core bank or as an opt-in bank would be required to apply the rule unless its primary Federal supervisor determines in writing that application of the rule is not appropriate in light of the bank's asset size, level of complexity, risk profile, or scope of operations. Question 8: The agencies seek comment on the proposed scope of application. In particular, the agencies seek comment on the regulatory burden of a framework that requires the advanced approaches to be implemented by each subsidiary DI of a BHC or bank that uses the advanced approaches.

Any U.S.-chartered DI that is a subsidiary of a foreign banking organization is subject to the U.S. regulatory capital requirements applied to domestically-owned U.S. DIs. Thus, if the U.S. DI subsidiary of a foreign banking organization meets any of the threshold criteria, it would be a core bank and would be subject to the advanced approaches. If it does not meet any of the criteria, the U.S. DI may remain a general bank or may opt-in to the advanced approaches, subject to the same qualification process and requirements as a domestically-owned U.S. DI. A top-tier U.S. BHC, and its subsidiary DIs, that is owned by a foreign banking organization also would be subject to the same threshold levels for core bank determination as would a top-tier BHC that is not owned by a foreign banking organization. A U.S. BHC that meets the conditions in Federal Reserve SR letter 01-01²¹ and is a core bank would not be required to meet the minimum capital ratios in the Board's capital adequacy guidelines, although it would be required to adopt the advanced approaches, compute and report its capital ratios in accordance with the advanced approaches, and make the required public and regulatory disclosures.

A DI subsidiary of such a U.S. BHC would be a core bank and would be required to adopt the advanced approaches (unless specifically exempted from the advanced approaches by its primary Federal supervisor) and meet the minimum capital ratio requirements. In addition, the Board retains its supervisory authority to require any BHC, including a U.S. BHC owned or controlled by a foreign banking organization that is or is treated as a financial holding company (FHC), to maintain capital levels above the regulatory minimums. Question 9: The agencies seek comment on the application of the proposed rule to DI subsidiaries of a U.S. BHC that meets the conditions in Federal Reserve SR letter 01-01 and on the principle of national treatment in this context.

The proposed rule would restate the authority of a bank's primary Federal supervisor to require the bank to hold an overall amount of capital greater than would otherwise be required under the rule if the agency determines that the bank's risk-based capital requirements under the rule are not commensurate with the bank's credit, market, operational, or other risks. In addition, the agencies anticipate that there may be instances when the proposed rule generates a risk-weighted asset amount for specific exposures that is not commensurate with the risks posed by such exposures. In these cases, under the proposed rule, the bank's primary Federal supervisor would retain the authority to require the bank to use a different risk-weighted asset amount for the exposures or to use different risk parameters (for wholesale or retail exposures) or model assumptions (for modeled equity or securitization exposures) than those required in the proposed rule when calculating the risk-weighted asset amount for those exposures. Similarly, the proposed rule would provide authority for a bank's primary Federal supervisor to require the bank to assign a different risk-weighted asset amount for operational risk, to change elements of its operational risk analytical framework (including distributional and dependence assumptions), or to make other changes to the bank's operational risk management processes, data and assessment systems, or quantification systems if the supervisor finds that the risk-weighted asset amount for operational risk produced by the bank under the rule is not commensurate with the operational risks of the bank. Any agency that exercises this reservation of authority would notify each of the other agencies of its determination.

20. OTS does not currently impose any explicit capital requirements on savings and loan holding companies and does not propose to apply the Basel II proposal to these holding companies.  Return to text
21. SR 01-01, "Application of the Board's Capital Adequacy Guidelines to Bank Holding Companies Owned by Foreign Banking Organizations," January 5, 2001.  Return to text