Notice of Proposed Rulemaking: Proposal on the Standardized Approach for Risk- Weighted Assets

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1 Notice of Proposed Rulemaking: Proposal on the Standardized Approach for Risk- Weighted Assets The Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB) and the Federal Deposit Insurance Corporation (FDIC) collectively, the agencies published three notices of proposed rulemaking (NPRs) on August 30, 2012, 1 that would revise and replace the agencies current regulatory capital framework. The NPR on the Standardized Approach for Risk-Weighted Assets (RWA): Describes proposed changes to the agencies general risk-based capital requirements for determining risk-weighted assets. These changes would enhance overall risk sensitivity and address weaknesses identified over recent years Proposes, consistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (DFA), alternatives to credit ratings for calculating risk-weighted assets for certain assets Incorporates some elements of the Basel II standardized approach as modified by the 2009 Enhancements to Basel II Framework and recent consultative papers published by the Basel Committee on Banking Supervision (BCBS) Proposes disclosure requirements that would apply to top-tier banking organizations domiciled in the United States, with US$50 billion or more in total assets The NPR would apply to all banking organizations currently subject to minimum capital requirements, including national banks; state member banks; state nonmember banks; state and federal savings associations; top-tier bank holding companies domiciled in the United States not subject to the FRB s Small Bank Holding Company Policy Statement; and top-tier savings and loan holding companies domiciled in the United States. The changes in this NPR are proposed to take effect according to the following table, with an option for early adoption. 1 Federal Register, Vol. 77, No. 169, Thursday, August 30, 2012.

2 Change Phase-in Schedule 2 (All Increases Will Be Observed on January 1 of the Associated Year) Year Conservation Buffer 0.625% 1.25% 1.875% 2.5% Countercyclical Buffer 0.625% 1.25% 1.875% 2.5% Minimum Common Equity Ratio Minimum Tier 1 Minimum Total 2.0% 3.5% 4.0% 4.5% 4.5% 4.5% 4.5% 4.5% 4.0% 4.5% 5.5% 6.0% 6.0% 6.0% 6.0% 6.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% 8.0% Impact on Banks Banking organizations face multiple challenges and opportunities in incorporating the agencies proposed NPR: Public disclosure requirements Higher risk-weighting for certain commercial real estate exposures (e.g., high-volatility commercial real estate exposures) that typically have higher credit risk A more restrictive risk-weighted framework for residential mortgage exposures that is different from both general risk-based capital rules and the Basel II capital framework Covered small banking organizations would have to raise additional capital and change their internal processes to comply with requirements Additional recordkeeping and compliance requirements Additional categories of over-the-counter derivative contracts may increase risk-based capital requirements a significant issue for banks Revision to recognition of credit risk mitigation (i.e., wider range of financial collateral and eligible guarantors) Comments on this NPR must be submitted by October 22, Affected financial Institutions should estimate the impact of this NPR on their organization and write a comment letter about their concerns to the regulatory agencies, if appropriate. 2 Federal Register, Vol. 77, No. 169, Thursday, August 30, 2012, pp and Protiviti 2

3 Our Point of View The impacts of this NPR can vary according to the size and complexity of banking organizations. The changes proposed in this NPR may increase capital requirements for some asset classes and decrease them for others, but the increase may be sufficiently large in some cases (e.g., equivalent dollar-for-dollar capital charge for some securitization exposures) to force some banks to reduce or completely exit some businesses. Banking organizations should take the following steps to incorporate the changes proposed by the agencies: Establish a formal qualitative and quantitative disclosure policy approved by the board of directors; the policy should address associated internal controls, disclosure controls and procedures. Update computation tools to incorporate a new framework to compute risk-weights (residential mortgage and high-volatility commercial real estate exposures). Identify and simulate impact on balance sheet and growth strategies to determine strategic choices around RWA and capital adequacy, and then devise a strategy to address additional capital requirements for exposures involving tranching of credit risk, exposure to a central counterparty and other requirements in this NPR. Leverage a wider range of eligible guarantors and financial collateral for credit risk mitigation. Protiviti 3

4 About Protiviti Protiviti ( is a global consulting firm that helps companies solve problems in finance, technology, operations, governance, risk and internal audit. Through our network of more than 70 offices in over 20 countries, we have served more than 35 percent of FORTUNE 1000 and Global 500 companies. We also work with smaller, growing companies, including those looking to go public, as well as with government agencies. Protiviti is a wholly owned subsidiary of Robert Half International Inc. (NYSE: RHI). Founded in 1948, Robert Half International is a member of the S&P 500 index. How We Help Companies Succeed Our Risk and Compliance professionals can help your institution meet key challenges, including those in the following tasks: Evaluating and assisting companies options to minimize costs with respect to regulatory burdens and maximize revenue potentials Developing new models or reviewing and assessing current models in relation to the requirements Evaluating the conceptual framework, assumptions and governance of all Basel Pillar I and Pillar II models Evaluating compliance with the standardized approach for RWA Assisting internal audit departments with monitoring and reviewing an institution s efforts in addressing the requirements of the NPR Our Expertise at Work Protiviti assisted a global financial institution to undertake a review of its compliance audit capabilities in light of new Basel regulatory requirements. We performed a detailed review of the organization s approach to performing a Basel compliance risk assessment and its existing policies and systems for Basel qualification review and assessment. We made recommendations for Basel process reviews, determining risk-weighted assets, Basel data quality assurance procedures and model key risk process reviews. Protiviti 4

5 Contacts Cory Gunderson Managing Director U.S. Financial Services Practice Leader Global Leader Risk and Compliance Solutions Matthew Moore Managing Director Risk and Compliance Solutions Shaheen Dil, Ph.D. Managing Director Model Risk and Management Practice Yimin Yang, Ph.D. Director Model Risk and Management Practice Protiviti Inc. An Equal Opportunity Employer. Protiviti is not licensed or registered as a public accounting firm and does not issue opinions on financial statements or offer attestation services.