Federal Reserve Board's Proposed Risk-Based Capital Guidelines

American Banker, February 3, 1986 | Go to article overview

Federal Reserve Board's Proposed Risk-Based Capital Guidelines


AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed Rulemaking.

SUMMARY: Capital adequacy is one of the critical factors the Board of Governors of the Federal Reserve System is required to analyze in taking action on various types of applications, such as mergers and acquisitions by bank holding companies, and in the conduct of the Board's various supervisory activities related to safety and soundness of individual banks and bank holding companies and the banking system. In April 1985, the Board announced revised Guidelines for minimum and appropriate levels of capital for bank holding companies and state chartered banks that are members of the Federal Reserve System. (50 Fed. Reg. 16057 (1985)) These revised Guidelines, contained in Appendix A to the Board's Regulation Y, 12 C.F.R. part 225, were designed to establish, in conjunction with other federal bank regulatory agencies, uniform capital standards for all federally regulated banking organizations regardless of size. These uniform capital standards were based on ratios of primary and total capital to total assets.

The Board historically, has takne account of risk factors in addition to relying on capital-to-total-assets ratios, and the nature and degree of risk exposure have always been important subjective factors in assessing capital adequacy. The Board believes that there is a need to modify its capital policies to be more explicitly and systematically sensitive to the risk exposure of individual banking organizations. Consequently, the Board is proposing the following Risk-Based Capital Guidelines that would supplement the current Capital Guidelines by working in tandem with existing minimum primary and total capital-to-total-assets ratios.

DATE: Comments must be received by April 18, 1986.

ADDRESS: All comment should be mailed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, 20th and Constitution Avenue, N.W., Washington, D.C. 20551, or should be delivered to the Office of the Secretary, Room 2200, Eccles Building, 20th and Constitution Avenue, N.W., between the hours of 8:45 a.m. and 5:15 p.m. weekdays. Comments may be inspected in Room 1122, Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays.

FOR FURTHER INFORMATION CONTACT: Richard Spillenkothen, Deputy Associate Director, Division of Banking Supervision and Regulation (202/452-2594), Catherine Piche, Financial Analyst, Division of Banking Supervision and Regulation (202/728-5871), or James E. Scott, Senior Attorney, Legal Division (202/452-3513) of the Board's staff; or Andrew Spindler, Vice President, Federal Reserve Bank of New York (212/791-5846).

SUPPLEMENTARY INFORMATION:

1. BACKGROUND

The Need for Risk-Based Capital Standards

In announcing its revised Capital Adequacy Guidelines in April 1985, 50 Fed. Reg. 16057, the Board expressed its continuing concern that the emphasis in the Guidelines on ratios based on the total amount of assets should not be interpreted to exclude considerations of risk. The Board proposed to deal with the issue of risk on a case-by-case basis, stating: (1) that it would assess the overall capital position of a banking organization by taking account not only of the volume of the organization's risk assets but also its off-balance-sheet risks (although) such risks were not explicitly included in the capital ratios); (2) that the Guideline ratios were minimums and banking organizations with high levels of on- or off-balance-sheet risk would be expected to operate above the minimum ratios, and (3) that the banking organizations would be expected to avoid the practice of attempting to meet the minimum ratios by decreasing the level of liquid assets relative to total assets. The Board also indicated that it would continue to review the need for more explicit procedures for factoring on- and off-balance-sheet risks into the assessment of capital adequacy. …

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