Guidance

44620

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

issued under sec. 184 (42 U.S.C. 2234) and
sec. 189, 68 Stat. 955 (42 U.S.C. 2239).
Appendix A also issued under sec. 6, Pub. L.
91–550, 84 Stat. 1473 (42 U.S.C. 2135).

2. In § 2.309, paragraph (b)(3)(ii) is
removed; paragraph (b)(3)(iii) is
redesignated as (b)(3)(ii), and paragraph
(b)(3)(i) is revised to read as follows:

■

§ 2.309 Hearing requests, petitions to
intervene, requirements for standing, and
contentions.

In determining whether a class 103
license will be issued to an applicant,
the Commission will, in addition to
applying the standards set forth in
§ 50.40, consider whether the proposed
activities will serve a useful purpose
proportionate to the quantities of special
nuclear material or source material to be
utilized.

*
*
*
*
(b) * * *
(3) * * *
(i) The time specified in any notice of
hearing or notice of proposed action or
as provided by the presiding officer or
the Atomic Safety and Licensing Board
designated to rule on the request and/
or petition, which may not be less than
sixty (60) days from the date of
publication of the notice in the Federal
Register; or
*
*
*
*
*

Dated at Rockville, Maryland, this 21st day
of July, 2008.
For the Nuclear Regulatory Commission.
R.W. Borchardt,
Executive Director for Operations.
[FR Doc. E8–17436 Filed 7–30–08; 8:45 am]

PART 50—DOMESTIC LICENSING OF
PRODUCTION AND UTILIZATION
FACILITIES

12 CFR Part 3

3. The authority citation for part 50
continues to read as follows:

FEDERAL RESERVE SYSTEM

*

■

Authority: Secs. 102, 103, 104, 161, 182,
183, 186, 189, 68 Stat. 936, 937, 938, 948,
953, 954, 955, 956, as amended, sec. 234, 83
Stat. 444, as amended (42 U.S.C. 2132, 2133,
2134, 2135, 2201, 2232, 2233, 2236, 2239,
2282); secs. 201, as amended, 202, 206, 88
Stat. 1242, as amended, 1244, 1246 (42 U.S.C.
5841, 5842, 5846); sec. 1704, 112 Stat. 2750
(44 U.S.C. 3504 note); sec. 651(e), Pub. L.
109–58, 119 Stat. 806–810 (42 U.S.C. 2014,
2021, 2021b, 2111). Section 50.7 also issued
under Pub. L. 95–601, sec. 10, 92 Stat. 2951
(42 U.S.C. 5841). Section 50.10 also issued
under secs. 101, 185, 68 Stat. 955, as
amended (42 U.S.C. 2131, 2235); sec. 102,
Pub. L. 91–190, 83 Stat. 853 (42 U.S.C. 4332).
Sections 50.13, 50.54(dd), and 50.103 also
issued under sec. 108, 68 Stat. 939, as
amended (42 U.S.C. 2138).
Sections 50.23, 50.35, 50.55, and 50.56 also
issued under sec. 185, 68 Stat. 955 (42 U.S.C.
2235). Sections 50.33a, 50.55a and Appendix
Q also issued under sec. 102, Pub. L. 91–190,
83 Stat. 853 (42 U.S.C. 4332). Sections 50.34
and 50.54 also issued under sec. 204, 88 Stat.
1245 (42 U.S.C. 5844). Sections 50.58, 50.91,
and 50.92 also issued under Pub. L. 97–415,
96 Stat. 2073 (42 U.S.C. 2239). Section 50.78
also issued under sec. 122, 68 Stat. 939 (42
U.S.C. 2152). Sections 50.80–50.81 also
issued under sec. 184, 68 Stat. 954, as
amended (42 U.S.C. 2234). Appendix F also
issued under sec. 187, 68 Stat. 955 (42 U.S.C.
2237).
yshivers on PROD1PC62 with RULES

§ 50.42 Additional standard for class 103
licenses.

§ 50.41

[Amended]

4. In § 50.41, paragraph (c) is removed
and reserved.
■ 5. Section 50.42 is revised to read as
follows:
■

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

BILLING CODE 7590–01–P

DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency

[Docket ID OCC–2008–0009]

12 CFR Parts 208 and 225
[Docket No. OP–1322]

FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[Docket No. 2008–0008]

Supervisory Guidance: Supervisory
Review Process of Capital Adequacy
(Pillar 2) Related to the Implementation
of the Basel II Advanced Capital
Framework
AGENCIES: Office of the Comptroller of
the Currency, Treasury (OCC); Board of
Governors of the Federal Reserve
System (Board); Federal Deposit
Insurance Corporation (FDIC); and
Office of Thrift Supervision, Treasury
(OTS) (collectively, the agencies).
ACTION: Final supervisory guidance.
SUMMARY: The agencies are publishing
guidance regarding the supervisory
review process for capital adequacy
(Pillar 2) provided in the Basel II
advanced approaches final rule, which
was published in the Federal Register
on December 7, 2007 (advanced

PO 00000

Frm 00006

Fmt 4700

Sfmt 4700

approaches final rule). The supervisory
review process described in this
guidance outlines the agencies’
standards for satisfying the qualification
requirements provided in the advanced
approaches final rule; addressing the
limitations of the minimum risk-based
capital requirements for credit risk and
operational risk; ensuring that each
institution has a rigorous process for
assessing its overall capital adequacy in
relation to its risk profile and a
comprehensive strategy for maintaining
appropriate capital levels; and
encouraging each institution to improve
its risk identification and measurement
techniques. This supervisory guidance
applies to any bank, savings association,
or bank holding company 1
implementing the advanced approaches
final rule.
DATES: This guidance is effective
September 2, 2008. Comments on the
Paperwork Reduction Act portion of this
document may be submitted on or
before September 2, 2008.
ADDRESSES: Comments on the
Paperwork Reduction Act portion of this
document should be addressed to:
OCC: Communications Division,
Office of the Comptroller of the
Currency, Public Information Room,
Mailstop 1–5, Attention: 1557–NEW,
250 E Street, SW., Washington, DC
20219. In addition, comments may be
sent by fax to (202) 874–4448, or by
electronic mail to
regs.comments@occ.treas.gov. You may
personally inspect and photocopy the
comments at the OCC’s Public
Information Room, 250 E Street, SW.,
Washington, DC 20219. For security
reasons, the OCC requires that visitors
make an appointment to inspect
comments. You may do so by calling
(202) 874–5043. Upon arrival, visitors
will be required to present valid
government-issued photo identification
and submit to security screening in
order to inspect and photocopy
comments.
Board: You may submit comments,
identified by OP–1322, by any of the
following methods:
• Agency Web Site: http://
www.federalreserve.gov. Follow the
instructions for submitting comments at
http://www.federalreserve.gov/.
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Fax: (202) 452–3819 or (202) 452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
1 Collectively referred to in the guidance as
‘‘banks’’.

E:\FR\FM\31JYR1.SGM

31JYR1

yshivers on PROD1PC62 with RULES

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available from
the Board’s Web site at http://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Streets, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FDIC: You may submit comments by
any of the following methods:
• Agency Web Site: http://
www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting
comments on the Agency Web Site.
• E-mail: Comments@FDIC.gov.
Include ‘‘Basel II Supervisory
Guidance’’ in the subject line of the
message.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments, Federal
Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
• Hand Delivery/Courier: Guard
station at the rear of the 550 17th Street
Building (located on F Street) on
business days between 7 a.m. and 5 p.m.
(EST).
• Federal eRulemaking Portal: http://
www.regulations.gov. Follow the
instructions for submitting comments.
• Public Inspection: All comments
received will be posted without change
to http://www.fdic.gov/regulations/laws/
federal including any personal
information provided. Comments may
be inspected and photocopied in the
FDIC Public Information Center, 3501
North Fairfax Drive, Room E–1002,
Arlington, VA 22226, between 9 a.m.
and 5 p.m. (EST) on business days.
Paper copies of public comments may
be ordered from the Public Information
Center by telephone at (877) 275–3342
or (703) 562–2200.
OTS: Information Collection
Comments, Chief Counsel’s Office,
Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552;
send a facsimile transmission to (202)
906–6518; or send an e-mail to
infocollection.comments@ots.treas.gov.
OTS will post comments and the related
index on the OTS Internet site at
http://www.ots.treas.gov. In addition,
interested persons may inspect the
comments at the Public Reading Room,
1700 G Street, NW., by appointment. To
make an appointment, call (202) 906–
5922, send an e-mail to
public.info@ots.treas.gov, or send a
facsimile transmission to (202) 906–

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

7755. A copy of the comments may also
be submitted to the OMB desk officer for
the Agencies: By mail to U.S. Office of
Management and Budget, 725 17th
Street, NW., Room 10235, Washington,
DC 20503 or by facsimile to 202–395–
6974, Attention: Federal Banking
Agency Desk Officer.
FOR FURTHER INFORMATION CONTACT:
OCC: Akhtarur Siddique, Lead Expert,
Risk Analysis, (202) 874–4665; or Ron
Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities
Division, (202) 874–5090; Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: David Palmer, Senior
Supervisory Financial Analyst, Credit
Risk Section, (202) 452–2904 or Sabeth
Siddique, Assistant Director, Credit Risk
Section, (202) 452–3861; Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, NW., Washington, DC 20551.
For the hearing impaired only,
Telecommunication Device for the Deaf
(TDD), (202) 263–4869.
FDIC: Gloria Ikosi, Senior
Quantitative Risk Analyst, (202) 898–
3997, or Ryan Sheller, Capital Markets
Specialist, (202) 898–6614; Capital
Markets Policy Section, Division of
Supervision and Consumer Protection;
or Mark L. Handzlik, Senior Attorney,
(202) 898–3990, or Michael B. Phillips,
Counsel, (202) 898–3581, Supervision
Branch, Legal Division, Federal Deposit
Insurance Corporation, 550 17th Street,
NW., Washington, DC 20429.
OTS: Sonja White, Senior Project
Manager, (202) 906–7857, Capital
Policy, or Jonathan Jones, Senior
Financial Economist, (202) 906–5729,
Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION: The
agencies issued a notice of proposed
rulemaking (NPR) on September 25,
2006,2 seeking comment on a new riskbased capital adequacy framework that
requires some and permits other
qualifying banks to use an internal
ratings-based (IRB) approach to
calculate regulatory capital
requirements for credit risk and certain
advanced measurement approaches
(AMA) to calculate regulatory capital
requirements for operational risk
(together, the IRB and the AMA are
referred to as the ‘‘advanced
approaches’’). On December 7, 2007, the
agencies published the advanced
approaches final rule.3 The advanced
approaches final rule is based largely on
a series of publications by the Basel

PO 00000

2 71
3 72

FR 55830.
FR 69288.

Frm 00007

Fmt 4700

Committee on Banking Supervision
(BCBS) that culminated in a
comprehensive release in June 2006,
titled, ‘‘International Convergence of
Capital Measurement and Capital
Standards: A Revised Framework’’ (New
Accord). The New Accord presents a
three-pillar framework for determining
risk-based capital requirements for
credit risk, market risk, and operational
risk (Pillar 1); supervisory review of
capital adequacy (Pillar 2); and market
discipline through enhanced public
disclosure (Pillar 3).
On February 28, 2007, the agencies
published in the Federal Register three
separate documents proposing
supervisory guidance related to the
implementation of the advanced
approaches.4 Two of those documents
provided guidance for certain aspects of
Pillar 1, that is, for the IRB systems for
determining the credit risk of retail and
wholesale exposures, and other systems
for equity and securitization exposures,
and for the AMA for determining
operational risk. The third document
proposed guidance for Pillar 2. This
final guidance document provides
supervisory guidance only for Pillar 2,
and it does not provide Pillar 1
guidance on the systems for determining
regulatory capital requirements for
credit risk or for determining regulatory
capital requirements for operational
risk. This document does not differ
significantly from the proposed Pillar 2
guidance.
The agencies recognize that a number
of institutions may need additional
guidance to implement the advanced
approaches final rule. Accordingly,
consistent with the proposed guidance
for Pillar 2, this guidance document
highlights certain aspects of existing
supervisory review that are being
augmented or clarified to support the
implementation of the supervisory
assessment of overall capital adequacy
under the advanced approaches final
rule. In making this assessment, the
agencies will consider, among other
items, whether each institution (i) has
satisfied the qualification requirements
for implementing the advanced
approaches; (ii) has a rigorous process
for assessing its overall capital adequacy
in relation to its risk profile and a
comprehensive strategy for maintaining
appropriate capital levels (internal
capital adequacy assessment process—
ICAAP); and (iii) maintains a
satisfactory risk management and
control structure, consistent with its
capital position and overall risk profile.
The agencies received ten public
comments on the proposed guidance
4 72

Sfmt 4700

44621

E:\FR\FM\31JYR1.SGM

FR 9084.

31JYR1

yshivers on PROD1PC62 with RULES

44622

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

from banking organizations, trade
associations representing the banking or
financial services industry, and other
interested parties. Overall, the
commenters supported the principlesbased orientation of the guidance.
However, some commenters
recommended revisions to certain
sections of the guidance that they
viewed as overly prescriptive. One
commenter expressed concern that the
guidance appeared to suggest that
increases in risk should result in greater
capital, even if an institution already
maintains a substantial capital buffer.
To address this concern, the agencies
have revised the guidance to clarify that
an increase in risk may not necessarily
require an increase in capital where the
bank already holds capital at a level
exceeding what its internal processes
and supervisors regard as adequate.
Other commenters expressed concern
regarding the agencies’ position that
liquidity risk should be addressed
within the ICAAP. However, the
proposed guidance was consistent with
the agencies’ view of liquidity risk as a
material risk that can affect capital
adequacy. The agencies clarified this
section of the guidance to indicate that,
within the ICAAP, institutions should
consider the capital adequacy
implications of liquidity risk. One
commenter expressed the concern that
each bank’s ICAAP measures would be
compared to (and reconciled with) Pillar
1 measures and to other institutions’
ICAAP results. The agencies
acknowledge that there may be limited
comparability to Pillar 1 measures
because a bank’s ICAAP under Pillar 2
should be tailored to its individual risk
profile, while Pillar 1 measures are
based on certain common assumptions
that may not apply to each individual
bank. Accordingly, there is likely to be
some limit to the comparisons that can
be made across institutions.
Some commenters expressed
confusion about the stress testing
requirement in Pillar 1 and stress testing
discussed in the Pillar 2 guidance. The
agencies regard stress testing as a
critical component in the identification
and measurement of material risks.
Although there are no prescriptive stress
testing requirements in Pillar 2,
institutions should use stress testing or
similar exercises in their ICAAP to
consider the consequences of unlikely
but severe events and outcomes as an
input to the capital adequacy
assessment process.
Finally, one commenter indicated that
it might not be practical to incorporate
the ICAAP into bank management’s
decision-making process. The agencies
believe that for the ICAAP to be

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

meaningful and relevant, it should be
consistent with the bank’s other risk
management practices.
Paperwork Reduction Act
A. Request for Comment on Proposed
Information Collection
In accordance with the requirements
of the Paperwork Reduction Act of 1995,
the Agencies may not conduct or
sponsor, and the respondent is not
required to respond to, an information
collection unless it displays a currently
valid Office of Management and Budget
(OMB) control number. The Agencies
are requesting comment on a proposed
information collection. The Agencies
are also giving notice that the proposed
collection of information has been
submitted to OMB for review and
approval.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the Agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or start up
costs and costs of operation,
maintenance, and purchase of services
to provide information.
B. Proposed Information Collection
Title of Information Collection: Basel
II Interagency Supervisory Guidance for
the Supervisory Review Process (Pillar
2).
Frequency of Response: Eventgenerated.
Affected Public:
OCC: National banks.
Board: State member banks and bank
holding companies.
FDIC: Insured state nonmember banks
and certain subsidiaries of these
entities.
OTS: Savings associations and certain
of their subsidiaries.
Abstract: The notice sets forth a
supervisory guidance document for
implementing the supervisory review
process (Pillar 2). The guidance was
issued for 60 days of comment on
February 28, 2007 (72 FR 9084). No
comments were received on the burden
estimates provided in that notice.

PO 00000

Frm 00008

Fmt 4700

Sfmt 4700

The Agencies believe that paragraphs
37, 41, 43, and 46 impose new
information collection requirements.
Section 37 states that banks should state
clearly the definition of capital used in
any aspect of ICAAP and document any
changes in the internal definition of
capital. Under section 41, banks should
maintain thorough documentation of
ICAAP. Section 43 specifies that boards
of directors should approve the bank’s
ICAAP, review it on a regular basis, and
approve any changes. Boards of
directors are also required under
Section 46 to periodically review the
assessment of overall capital adequacy
and to analyze how measures of internal
capital adequacy compare with other
capital measures (such as regulatory or
accounting).
The agencies burden estimates for
these information collection
requirements are summarized below.
Note that the estimated number of
respondents listed below include both
institutions for which the Basel II riskbased capital requirements are
mandatory and institutions that may be
considering opting-in to Basel II (despite
the lack of any formal commitment by
most of these latter institutions).
Estimated Burden:
OCC
Number of Respondents: 52.
Estimated Burden per Respondent:
140 hours.
Total Estimated Annual Burden:
7,280 hours.
Board
Number of Respondents: 15.
Estimated Burden per Respondent:
420 hours.
Total Estimated Annual Burden:
6,300 hours.
FDIC
Number of Respondents: 19.
Estimated Burden per Respondent:
420 hours.
Total Estimated Annual Burden:
7,980 hours.
OTS
Number of Respondents: 4.
Estimated Burden per Respondent:
420 hours.
Total Estimated Annual Burden:
1,680 hours.
The full text of the guidance follows:
Supervisory Review Process of Capital
Adequacy (Pillar 2) Related to the
Implementation of the Advanced
Approaches Final Rule
1. This guidance supplements the
final rule published jointly by the U.S.

E:\FR\FM\31JYR1.SGM

31JYR1

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

yshivers on PROD1PC62 with RULES

Federal banking agencies1 in the
Federal Register on December 7, 2007
(advanced approaches rule).2 The
advanced approaches rule implements a
new risk-based capital framework
encompassing three pillars:
• Minimum risk-based capital
requirements (Pillar 1);
• Supervisory review (Pillar 2); and
• Market discipline through
enhanced public disclosures (Pillar 3).
The minimum risk-based capital
requirements in Pillar 1 of the advanced
approaches rule apply to a bank’s
calculation of minimum risk-based
capital requirements for credit risk and
operational risk.3 If the bank is also
subject to the market risk rule,4 then the
minimum risk-based capital
requirements in that rule would apply.5
2. This document addresses the
process for supervisory review in the
advanced approaches rule. As described
in this guidance, supervisory review
covers three main areas:
• Comprehensive supervisory review
of capital adequacy;
• Compliance with regulatory capital
requirements; and
• Internal capital adequacy
assessment process (ICAAP).
3. The process of supervisory review
described in this guidance reflects a
continuation of the longstanding
approach employed by the agencies in
their supervision of banks. However,
because implementation of the
advanced approaches rule affects certain
aspects of supervisory review, this
guidance highlights areas of existing
1 The Federal banking agencies are the Board of
Governors of the Federal Reserve System; the
Federal Deposit Insurance Corporation; the Office of
the Comptroller of the Currency; and the Office of
Thrift Supervision; and are collectively referred to
as ‘‘the agencies,’’ ‘‘supervisors,’’ or ‘‘regulators’’ in
this guidance.
2 72 FR 69288. The advanced approaches rule as
codified at 12 CFR part 3, Appendix C (national
banks); 12 CFR part 208, Appendix F (state member
banks); 12 CFR part 225, Appendix G (bank holding
companies); 12 CFR part 325 Appendix D (state
nonmember banks); 12 CFR part 567, Appendix C
(savings associations).
3 The term ‘‘bank’’ as used in this guidance
includes banks, savings associations and bank
holding companies. The terms ‘‘bank holding
company’’ and ‘‘BHC’’ refer only to bank holding
companies regulated by the Federal Reserve Board
and do not include savings and loan holding
companies regulated by the Office of Thrift
Supervision.
4 12 CFR part 3, Appendix B (national banks), 12
CFR part 208, Appendix E (state member banks), 12
CFR part 225, Appendix E (bank holding
companies), 12 CFR part 325, Appendix C (state
nonmember banks). OTS intends to codify a market
risk capital rule for savings associations at 12 CFR
part 567, Appendix D.
5 If a bank is subject to both the advanced
approaches rule and the market risk rule, then the
bank is subject to this guidance. If a bank is subject
only to the market risk rule, it is not subject to this
guidance.

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

supervisory review that are being
augmented or more clearly defined to
support implementation of the
advanced approaches rule by U.S.
banks.
4. The supervisory review process
described in this document is intended
to help ensure overall capital adequacy
by:
• Confirming a bank’s compliance
with regulatory capital requirements;
• Addressing the limitations of
minimum risk-based capital
requirements as a measure of a bank’s
full risk profile—including risks not
covered or not adequately addressed or
quantified in Pillar 1;
• Ensuring that each bank is able to
assess its own capital adequacy (beyond
minimum risk-based capital
requirements) based on its risk profile
and business model; and
• Encouraging banks to develop and
use better techniques to identify and
measure risk.
5. This guidance neither supersedes
nor alters the functioning of the existing
Prompt Corrective Action
requirements.6 Similarly, this guidance
does not affect any other requirements
for compliance with existing regulations
and supervisory standards related to
risk-management practices or other
areas. The supervisory review process
described in this guidance supports the
supervisors’ existing ability to:
• Require an individual bank to take
measures to prevent its capital from
falling below the level needed to
adequately support its risks; or
• Otherwise intervene to ensure that
the bank’s capital levels are adequate.
Comprehensive Supervisory Review of
Capital Adequacy
6. Capital helps protect individual
banks from insolvency, thereby
promoting safety and soundness in the
overall U.S. banking system. Minimum
risk-based capital requirements
establish a threshold below which a
sound bank’s risk-based capital must
not fall. Risk-based capital ratios permit
some comparative analysis of capital
adequacy across banks because they are
based on certain common assumptions.
However, supervisors must perform a
more comprehensive review of capital
adequacy that considers the risks that
are specific to each individual bank,
including those not incorporated in riskbased capital requirements. In short,
supervisors must ensure that a bank’s
6 See 12 CFR part 6 (national banks); 12 CFR part
208 (state member banks); 12 CFR 325.103 (state
nonmember banks); 12 CFR part 565 (savings
associations). In addition, savings associations
remain subject to the tangible capital requirement
at 12 CFR 567.2(a)(3) and 567.9.

PO 00000

Frm 00009

Fmt 4700

Sfmt 4700

44623

overall capital does not fall below the
level required to support its entire risk
profile.
7. Supervisors generally expect banks
to hold capital above their minimum
risk-based capital levels, commensurate
with their individual risk profiles, to
account for all material risks. Going
forward under the advanced approaches
rule, supervisors will continue to review
the overall capital adequacy of any bank
through a comprehensive evaluation
that considers all relevant available
information. In determining the extent
to which banks should hold capital in
excess of risk-based capital minimums,
supervisors will consider: The
combined implications of a bank’s
compliance with qualification
requirements for regulatory capital
standards; the quality and results of a
bank’s own process for determining
whether capital is adequate (the
ICAAP); and the bank’s riskmanagement processes, control
structure, and other relevant
information relating to the bank’s risk
profile and capital level.7 This review is
consistent with current supervisory
practice, under which the agencies
assess a bank’s overall capital adequacy
through a comprehensive evaluation of
all relevant information.
8. The supervisory review process
assesses whether a bank has a
satisfactory process to determine that its
overall capital is adequate, and that the
bank maintains adequate capital on an
ongoing basis, as underlying conditions
change. For example, changes in a
bank’s risk profile or in relevant capital
measures are areas of particular focus
that are effectively addressed through
the supervisory review process.
Generally, a bank should hold more
capital for material increases in risk that
are not otherwise mitigated, unless the
bank already holds capital at a level
exceeding what its internal processes
and supervisors would regard as
adequate. Conversely, a bank may be
able to reduce overall capital (to a level
still above regulatory minimums) if the
supervisory review supports the
conclusion that the bank’s inherent risk
has materially declined or that it has
been appropriately mitigated.
9. As a result of its comprehensive
supervisory review, a bank’s primary
Federal supervisor may take action if it
is not satisfied that capital is adequate.
The primary Federal supervisor may
require the bank to take actions to
address identified supervisory concerns,
which may include requiring the bank
to hold additional capital to bring
7 See Part III, section 22(a)(1)–(3) of the advanced
approaches rule.

E:\FR\FM\31JYR1.SGM

31JYR1

44624

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

capital to levels that the supervisor
deems commensurate with the bank’s
risk profile. In addition, the primary
Federal supervisor may, under its
enforcement authority, require a bank to
modify or enhance risk-management
and internal-control processes, reduce
its exposure to risk, or take any action
deemed necessary to address identified
supervisory concerns.

yshivers on PROD1PC62 with RULES

Compliance With Regulatory Capital
Requirements
10. In order to use the advanced
approaches rule to calculate minimum
risk-based capital requirements, a bank
must meet certain process and systems
requirements. As part of the supervisory
review process, the agencies will ensure
that each bank meets these
requirements. The advanced approaches
rule provides an explanation of these
qualification requirements for any
systems and processes used.
11. A bank using the advanced
approaches rule must comply with the
rule’s qualification requirements for
both initial and ongoing qualification. A
bank that falls out of compliance with
the qualification requirements would be
required to establish a plan to return to
compliance that satisfies its primary
Federal supervisor.
12. Supervisors will ensure that each
bank using the advanced approaches
rule complies with the qualification
requirements both at the consolidated
level and at any subsidiary bank that
uses the advanced approaches rule.
Thus, each bank that applies the
advanced approaches rule must have
appropriate risk-measurement and riskmanagement processes and systems that
meet the rule’s qualification
requirements.
The ICAAP
13. The qualification requirements in
the advanced approaches rule state that
‘‘a bank must have a rigorous process for
assessing its overall capital adequacy in
relation to its risk profile and a
comprehensive strategy for maintaining
an appropriate level of capital.’’ 8
Because minimum risk-based capital
requirements are based on certain
assumptions and address only a subset
of risks faced by an individual bank,
each bank must conduct an internal
assessment of whether its capital is
adequate, given its risk profile. A bank
must conduct this assessment, using the
ICAAP, in addition to its calculation of
minimum risk-based capital
requirements.9 Accordingly, a bank’s
8 Part III, section 22(a) (1) of the advanced
approaches rule.
9 Should the primary Federal supervisor exempt
a bank from application of the advanced approaches

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

capital should exceed the level required
by its minimum risk-based capital
requirements, and also should be
adequate according to its own ICAAP.
14. The fundamental objectives of a
sound ICAAP are:
• Identifying and measuring material
risks;
• Setting and assessing internal
capital adequacy goals that relate
directly to risk; and
• Ensuring the integrity of internal
capital adequacy assessments.
15. Assessing overall capital adequacy
through the ICAAP requires thorough
identification of all material risks,
measurement of those that can be
reliably quantified, and systematic
assessment for the limitations of
minimum risk-based capital
requirements. The ICAAP should
address the capital implications arising
from both on- and off-balance sheet
positions, as well as from provisions of
explicit or implicit support. Material
risks include those that in isolation do
not appear to be material at first, but
when combined with other risks could
lead to material losses. In this manner,
the ICAAP should contribute broadly to
the development of better risk
management within the organization at
both the individual entity and
consolidated levels.
16. Each bank implementing the
advanced approaches rule should have
an ICAAP that is appropriate for its
unique risk characteristics and should
not rely solely upon the assessment of
capital adequacy at the parent company
level. This does not preclude the use of
a consolidated ICAAP as an important
input to a subsidiary bank’s own
ICAAP, provided that each entity’s
board and senior management ensure
that the ICAAP is appropriately
modified to address the unique
structural and operating characteristics
and risks of the subsidiary bank.
17. In general, the ICAAP will likely
go beyond the assumptions built into
minimum risk-based capital
requirements. However, in certain
instances a bank’s ICAAP—when
supported by proper justification and
evidence—may build upon and utilize
the methods, practices, and results it
uses to determine minimum risk-based
capital requirements. For example, in
developing the ICAAP, a bank may
rule based upon a written determination that the
application of the rule is not appropriate in light of
the bank’s asset size, level of complexity, risk
profile, or scope of operations, such exemption
would likewise apply to the advanced approaches
requirement that the bank have an ICAAP, but
would not automatically exempt the bank from
other regulatory requirements or supervisory
expectations to maintain a satisfactory internal
process to assess capital adequacy.

PO 00000

Frm 00010

Fmt 4700

Sfmt 4700

choose to use data, ratings, or estimates
from internal ratings-based approaches
for credit risk; or a bank may choose to
use the advanced measurement
approaches as the basis for its internal
assessment of operational risk.
Furthermore, although the ICAAP
should be a distinct and comprehensive
process that produces its own capital
measures, in some cases a bank may be
able to demonstrate that minimum riskbased capital measures appropriately
reflect certain aspects of a bank’s risk
profile and thus are appropriate for use
in its ICAAP.
18. The design and operation of any
systems used to meet the ICAAP
requirements will likely differ,
depending on the complexity of each
bank’s operations and risk profile. Many
banks employ ‘‘economic capital’’
measures for some elements of risk
management, such as limit setting, or for
evaluating performance or determining
aggregate capital needs.10 In some cases,
economic capital measures may relate
directly to a bank’s assessment of capital
adequacy under the ICAAP; however, in
other cases, a bank may be using
economic capital measures that are not
intended for capital adequacy
assessments. In the latter case, a bank
does not necessarily need to change its
existing process or systems, but it may
need to build upon or adjust its
economic capital measures for use in
the ICAAP and the bank would have to
demonstrate clearly how it does so.
Notably, economic capital is not the
only means to meet the ICAAP
requirement. Regardless of the specific
implementation method(s) chosen, the
bank’s ICAAP should address the three
ICAAP objectives listed in paragraph 14.
Identifying and Measuring Material
Risks
19. The first objective of the ICAAP is
to identify all material risks. Risks that
can be reliably measured and quantified
should be treated as rigorously as data
and methods allow. The appropriate
means and methods to measure and
quantify those material risks are likely
to vary across banks. The key point is
for a bank to be able to identify all
material risks and measure those that
can be reliably quantified in order to
determine how those risks affect the
bank’s overall capital adequacy.
20. Some of the risks to which a bank
may be exposed include credit risk,
10 The term ‘‘economic capital’’ generally refers to
the capital attributed to cover the economic effects
of a bank’s risk taking activities. Within the banking
industry, economic capital takes on a variety of
definitions and is applied in a number of ways at
the product, business-line, and consolidated
institution level.

E:\FR\FM\31JYR1.SGM

31JYR1

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

yshivers on PROD1PC62 with RULES

market risk, operational risk, interest
rate risk in the banking book, and
liquidity risk (as outlined below).11
Other risks, such as reputational risk,
business or strategic risk, and country
risk may also be material for a bank and,
in such cases, should be given equal
consideration to the more formally
defined risk types.12 Additionally, if a
bank employs risk mitigation techniques
it should understand the risk to be
mitigated and the potential effects of
that mitigation (including enforceability
and effectiveness).
• Credit risk: A bank should have the
ability to assess credit risk at the
portfolio level in addition to the
exposure or counterparty level. In
making this assessment, the bank
should be particularly attentive to
identifying any credit risk
concentrations and ensuring that their
effects are adequately assessed. The
bank should consider the various types
of dependence among exposures, and
the credit risk effects of extreme
outcomes, stress events, and shocks to
assumptions about portfolio and
exposure behavior. The bank also
should carefully assess concentrations
in counterparty credit exposures,
including those that result from trading
in less liquid markets, and determine
the effect that these exposures might
have on capital adequacy.
• Market risk: A bank should be able
to identify risks in trading and capital
markets activities resulting from a
movement in market prices and rates.
This determination should consider
factors such as illiquidity of
instruments, leverage, concentrated
positions, one-way markets, non-linear
or deep out-of-the money option
positions as well as embedded
optionality, and the potential for
significant shifts in correlations or other
types of dependence structures.
Assessments that incorporate extreme
events, idiosyncratic variations, credit
migrations or changes in credit spreads,
defaults, and shocks should also be
tailored to capture key portfolio
vulnerabilities.
11 Examination policies and procedures from each
agency provide extensive guidance on the major
risk categories. A bank’s risk management
processes, including its ICAAP, should be
consistent with each corresponding agency’s
existing body of guidance, as well as with relevant
interagency guidance.
12 For example, a bank may be engaged in
businesses for which periodic fluctuations in
activity levels, combined with relatively high fixed
costs, have the potential to create unanticipated
losses that must be supported by adequate capital.
Additionally, a bank might be involved in strategic
activities (such as expanding business lines or
engaging in acquisitions) that introduce significant
elements of risk and for which additional capital
would be appropriate.

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

44625

• Operational risk: A bank should be
able to assess the potential risks
resulting from inadequate or failed
internal processes, people, and systems,
as well as from events external to the
bank.13 This assessment should include
the effects of extreme events and shocks
relating to operational risk. Extreme
events could include a substantial or
sudden increase in failed processes
across business units or a significant
incidence of failed internal controls.
• Interest rate risk in the banking
book: A bank should incorporate
interest rate risk in the banking book
into its assessment of capital adequacy.
In making this assessment, the bank
should identify the risks associated with
changes in interest rates that impact
both on- and off-balance sheet
exposures in the banking book from a
short- and long-term perspective. This
might include the impact of changes
due to parallel yield curve shocks, yield
curve twists, yield curve inversions,
changes in the adjustment of rates
earned and paid on different financial
instruments with otherwise similar
repricing characteristics (basis risk), and
other relevant scenarios including some
that incorporate stress events, extreme
outcomes, and shocks to assumptions.
The bank should be able to support any
assumptions it has made with respect to
the behavioral characteristics of
servicing rights, non-maturity deposits,
positions subject to prepayment risk,
and other assets and liabilities,
especially for those exposures
characterized by embedded optionality.
• Liquidity risk: A bank should
incorporate liquidity risk into the
assessment of its capital adequacy. A
bank should evaluate whether capital is
adequate given its own funding
liquidity profile and given the liquidity
of the markets in which it operates. This
assessment should incorporate various
types of liquidity environments and
include an evaluation of the potential
for a material disruption in the sources
of liquidity typically relied on by the
bank as a result of bank-specific as well
as systemic events. A bank should
consider the capital adequacy
implications of lacking a welldiversified funding base, relying
predominantly on wholesale credit
markets for its funding, or relying
heavily on volatile funding sources. A
bank involved in securitization
activities should consider the capital
adequacy implications of relying on
market liquidity to distribute

warehoused assets, including the
potential for disruptions that would
cause a bank to bring certain items onto
its balance sheet. In its assessment of
the impact of liquidity risk on capital
adequacy, the bank should also
challenge assumptions built into its
definition of liquid products.
The risk factors discussed above are
not an exhaustive list of those affecting
any given bank. A well-developed
ICAAP should include an assessment of
all relevant factors that present a
material source of risk to capital, and
should account for concentrations
within each risk type.
21. A bank should assess whether its
capital is sufficient to absorb any losses
that may arise from activities that
expose the bank to multiple risks within
and across business lines or create
concentrations across risk types.14 A
bank should recognize that losses could
arise in several risk dimensions at the
same time, stemming from the same
event or a common set of factors. For
example, a localized natural disaster
could generate losses from credit,
market, and operational risks.
Additionally, the ICAAP should focus
on any complex activities that give rise
to multiple risks, and to their
interaction. These activities can involve
instruments that may be complex,
illiquid, or difficult to value. For
example, securitization activities expose
a bank to a variety of risks that can
affect capital adequacy at the same time,
including credit, market, liquidity, and
reputational risks; structured products
can have multiple embedded risks that
interact in complex ways and can
present losses in multiple risk areas
across different business lines at the
same time. In general, the ICAAP should
include an assessment of the potential
effects of convergence of risks within
and across business lines and their
combined impact on capital adequacy.
22. The ICAAP should take into
consideration the linkage between
capital adequacy and damage or
potential damage to a bank’s reputation.
A bank might incur losses affecting
capital adequacy because of damage to
its reputation, or the bank might incur
losses trying to prevent or mitigate
damage to its reputation. In assessing
the linkage between reputational risk
and capital adequacy, a bank should
assess risks associated with both onbalance sheet and off-balance sheet
exposures and activities, as well as risks
associated with affiliates, subsidiaries,

13 In many cases, a bank may capture legal risk
within operational risk. Regardless of whether it is
classified as its own risk type or included within
another risk type, a bank should understand the
impact of legal risk on capital adequacy.

14 Concentrations may include exposures or
groups of exposures that have the potential to
produce losses large enough to threaten an
institution’s health or materially change its risk
profile.

PO 00000

Frm 00011

Fmt 4700

Sfmt 4700

E:\FR\FM\31JYR1.SGM

31JYR1

yshivers on PROD1PC62 with RULES

44626

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

counterparties, clients, or other third
parties. The assessment should include
activities for which the bank acts as a
sponsor or advisor, and cases in which
the bank provides explicit or implicit
support. A bank should also assess the
risk of having to assume the losses of a
third party to prevent or mitigate
damage to the bank’s reputation.
23. The bank’s ICAAP should assess
risks associated with new products,
markets and activities. In making this
assessment, the bank should account for
any uncertainty in the valuation of new
products, whether by the bank or a third
party, which could be more challenging
if the new products are particularly
complex or do not have liquid markets.
The ICAAP should take into
consideration changing dynamics in
markets for new products and
uncertainty as to how new markets
might respond to stress conditions. The
ICAAP should also assess the challenges
presented by new business lines or
strategic acquisitions in terms of their
impact on capital adequacy.
24. All measurements of risk should
incorporate both quantitative and
qualitative elements. Generally, a
quantitative approach should form the
foundation of a bank’s measurement
framework. Quantitative approaches
that focus on most likely outcomes for
budgeting, forecasting, or performance
measurement purposes may not be fully
applicable for assessing capital
adequacy, which also should take less
likely outcomes into account.
25. In some cases, quantitative tools
can include the use of large historical
databases. These databases are most
applicable when they are fully reflective
of all relevant risk characteristics,
incorporate appropriate variability, and
have adequate granularity and history;
for example, they should include data
based not just on benign but also more
stressful economic periods or operating
environments. When internal data are
not available or do not reflect a bank’s
risk profile, a bank may rely on external
data for risk measurements, but should
ensure that external data have
applicability to the bank’s own activities
and risk profile.
26. The confidence a bank places in
the results of its ICAAP should depend
on the quality and robustness of the
associated risk assessments. When
measuring risks, a bank should
understand that estimation and
measurement errors are common, and in
many cases are themselves difficult to
quantify. In general, the bank’s ICAAP
should reflect an appropriate level of
conservatism to account for uncertainty
in risk identification, risk mitigation or
control, and risk quantification. In most

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

cases, appropriate conservatism will
result in greater capital needs.
27. In many cases, risk assessments
may rely to a significant degree on
models that use both qualitative and
quantitative inputs. The use of models
can enhance the ICAAP, but it can also
introduce challenges. Specifically,
models may fail to work as intended or
expected, or they may be used
inappropriately for purposes not
considered in their initial design. These
concerns apply to models purchased
from third-party vendors, as well as to
models that are internally developed. A
bank using models as part of the ICAAP
should recognize these possibilities and
ensure that appropriate controls, such as
rigorous initial and ongoing validation
and independent review, are in place to
mitigate and manage any risks related to
model use. A bank should apply
appropriate conservatism to compensate
for any risks associated with models.
Additional conservatism may be
necessary to account for any
uncertainties in the use of models to
value on- or off-balance sheet exposures
or for imperfections and volatility in
market-based valuations. Additional
conservatism may be necessary to
compensate for increased risk, for
example, when models or applications
are more complex, or when they have a
more significant influence on the
ICAAP’s results.
28. To gain a fuller understanding of
the risks beyond more typical
quantitative measures—such as those
based on certain parameter behavior or
distributional assumptions—a bank
should also rely on other types of
quantitative exercises. For example,
stress testing, including scenario
analysis and sensitivity analysis, is an
additional quantitative exercise that a
bank should regularly apply to
complement more typical quantitative
measures. A bank may need to rely more
heavily on such exercises when internal
or demonstrably relevant external data
are scarce. These exercises can help
gauge the consequences of outcomes
that are unlikely, but would have a
considerable impact on safety and
soundness.
29. In addition to quantitative
approaches for assessing risk, a bank
should also employ qualitative
approaches that incorporate
management experience and judgment.
Qualitative measures should be
employed not only for those cases in
which scarce data or unproven
quantitative methods limit a full
assessment of risk, but also more
generally to complement even
sophisticated quantitative estimates

PO 00000

Frm 00012

Fmt 4700

Sfmt 4700

based on extensive and high-quality
data.
30. A bank should be cognizant that
both quantitative and qualitative
approaches have their own inherent
biases and assumptions that affect risk
assessment. Accordingly, a bank should
recognize the biases and assumptions
embedded in, and the limitations of, the
approaches used.
31. An effective ICAAP is
comprehensive, assessing material risks
across the entire bank. Each bank
should have systems capable of
aggregating across risk types. A bank
should understand the challenges
presented by risk aggregation and the
inherent uncertainty in quantitative
estimates used to aggregate risks
(including the difficulty in estimating
concentrations across risk types as
noted in paragraph 21). For example, a
bank is encouraged to consider the
various interdependencies among risk
types, the different techniques used to
identify such interdependencies, and
the channels through which those
interdependencies might arise—across
risk types, within the same business
line, and across different business lines.
Consistent with paragraph 26, any
associated uncertainty in aggregating
capital estimates across risk types and
business lines should translate into
greater capital needs.
32. Management should be systematic
and rigorous in considering possible
effects of diversification. Assumptions
about diversification should be
identified at each level where
diversification is recognized, supported
by analysis and evidence, and remain
robust over time and under different
market environments, including
stressed market conditions. For
example, a bank calculating the
dependence structure within or among
risk types should consider data quality
and consistency, such as the volatility of
correlations over time and during
periods of market stress. In general, a
bank should consider a wide range of
possible adverse outcomes that have the
potential to affect multiple risks at the
same time and to limit expected
diversification benefits. Consistent with
paragraph 26, uncertainty in
diversification estimates should
translate into greater capital needs.
Setting and Assessing Capital Adequacy
Goals That Relate to Risk
33. The second objective of the ICAAP
is to set and assess capital adequacy
goals in relation to all material risks.
Under this objective, a bank should
have a well-defined process to translate
estimates of risk into an assessment of
capital adequacy. In practice, capital

E:\FR\FM\31JYR1.SGM

31JYR1

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

yshivers on PROD1PC62 with RULES

adequacy goals may be reflected in
various ways. A bank may choose to
hold capital in excess of the level
internal processes would regard as
adequate for any number of business or
strategic reasons. Excess capital may
fluctuate over time. Each bank should
recognize that minimum risk-based
capital requirements represent a floor
below which the bank’s overall capital
level must not fall, even if bank
management believes that there is
justification to maintain less capital.
34. A bank may establish its risktolerance level to reflect a desired level
of risk coverage and/or a certain degree
of creditworthiness, such as an explicit
solvency standard. Accordingly,
assessments of risk and capital
adequacy should reflect the chosen risk
tolerance of the bank. Because risk
profiles and choices of risk tolerance
may differ across banks, capital targets
may also differ. However, if for internal
capital adequacy purposes a bank were
to choose to apply a level of risk
coverage or a solvency standard that is
less than that implied by minimum riskbased capital requirements, the bank
would have to be able to: Identify and
support the rationale for a lower
solvency standard; demonstrate clearly
that its ICAAP adequately addresses
low-probability, high-severity events;
and ensure that there is sufficient
capital to absorb losses associated with
such extreme events. Regardless of the
solvency standard used, supervisors
expect banks to hold capital at a level
above that established by minimum
risk-based capital requirements.
35. A bank should consider external
conditions and other factors that
influence its overall capital adequacy,
including the potential impact of
contingent exposures and changing
economic and financial environments.
The ICAAP should address the potential
impact of broader market or systemic
events, which could cause risk to
increase beyond the bank’s chosen risktolerance level, and have appropriate
contingency plans for such outcomes.
Such exercises may include stress
testing, such as scenario and sensitivity
analysis; however, in all cases they
should incorporate both quantitative
and qualitative methods.15
15 The use of stress testing in identifying and
measuring risk exposures and assessing capital
adequacy in the ICAAP is not the same as the Pillar
1 stress testing requirement related to minimum
risk-based capital requirements and qualification
requirements (as described in the advanced
approaches rule). The stress testing encouraged in
the ICAAP guidance is intended to focus on overall
capital needs and their possible fluctuations, not
just fluctuations in minimum risk-based capital
requirements. However, work conducted to meet
the stress testing requirement under Pillar 1 may

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

36. Through the ICAAP, a bank
should ensure that adequate capital is
held against all material risks, and that
capital remains adequate not just at a
point in time, but over time, to account
for changes in a bank’s strategic
direction, evolving economic
conditions, and volatility in the
financial environment. A bank should
be cognizant of the impact of marketdriven valuations on the volatility of
capital. Moreover, recognizing the
sensitivity of capital to economic and
financial cycles should be a critical
component of a bank’s planning for
current and future capital needs. For
example, a bank should consider the
potential effects of a sudden, sustained
economic downturn. The level of capital
deemed adequate by a bank given its
ICAAP might also be influenced by the
bank’s intention to hold additional
capital to mitigate the impact of
volatility in capital requirements, its
need to support acquisition plans, or its
decision to accommodate market
perceptions of capital adequacy and
their impact on funding costs.
37. In analyzing capital adequacy, a
bank should evaluate the capacity of its
capital to absorb losses. Because various
definitions of capital are used within
the banking industry, each bank should
state clearly the definition of capital
used in any aspect of its ICAAP. Since
components of capital are not
necessarily alike and have varying
capacities to absorb losses, a bank
should be able to demonstrate the
relationship between its internal capital
definition and its assessment of capital
adequacy. If a bank’s definition of
capital differs from the regulatory
definition, the bank should reconcile
such differences and provide an
analysis to support the inclusion of any
capital instruments that are not
recognized under the regulatory
definition. Although common equity is
generally the predominant component
of a bank’s capital structure, a bank may
be able to support the inclusion of other
capital instruments in its internal
definition of capital if it can
demonstrate a similar capacity to absorb
losses. The bank should document any
changes in its internal definition of
capital, and the reason for those
changes.
38. An effective capital plan
recognizes a bank’s short- and long-term
capital needs and objectives.
Accordingly, a bank should evaluate
whether long-run capital targets are
consistent with short-run goals, based
have application to or may provide a starting point
for any stress testing banks decide to conduct as
part of the ICAAP.

PO 00000

Frm 00013

Fmt 4700

Sfmt 4700

44627

on current and planned changes in risk
profiles. In developing its capital plan,
the bank also should recognize that
accommodating additional capital needs
can require significant lead time, can be
costly, or can be quite difficult,
especially during downturns or other
times of stress. A bank should have
contingency plans to address
unexpected capital needs.
Ensuring Integrity of Internal Capital
Adequacy Assessments
39. A satisfactory ICAAP comprises a
complete process with proper oversight
and controls, and not just an ability to
carry out certain capital calculations.
The various elements of a bank’s ICAAP
should complement and reinforce one
another to achieve the overall objective
of assessing capital adequacy, taking
into account the bank’s risk profile.
40. A bank should maintain adequate
internal controls to ensure the integrity,
objectivity, and consistent application
of the ICAAP. Decisions regarding the
design and operation of the ICAAP
should reflect sound risk management,
and should not be unduly influenced by
competing business objectives. A bank
should identify any deficiencies in its
ICAAP and plan and take remedial
actions to address the deficiencies in a
timely manner. The principles
underlying a bank’s ICAAP should be
incorporated into policies that are
reviewed and approved at appropriate
levels within the organization.
41. A bank should maintain thorough
documentation of its ICAAP to ensure
transparency. At a minimum, this
should include a description of the
bank’s overall capital-management
process, including the committees and
individuals responsible for the ICAAP;
the frequency and distribution of
ICAAP-related reporting; and the
procedures for the periodic evaluation
of the appropriateness and adequacy of
the ICAAP. In addition, where
applicable, ICAAP documentation
should demonstrate the bank’s sound
use of quantitative methods (including
model selection and limitations) and
data-selection techniques, as well as
appropriate maintenance, controls, and
validation. A bank should document
and explain the role of third-party and
vendor products, services and
information—including methodologies,
model inputs, systems, data, and
ratings—and the extent to which they
are used within the ICAAP. A bank
should have a process to regularly
evaluate the performance of third-party
and vendor products, services and
information. As part of the ICAAP
documentation, a bank should
document the assumptions, methods,

E:\FR\FM\31JYR1.SGM

31JYR1

yshivers on PROD1PC62 with RULES

44628

Federal Register / Vol. 73, No. 148 / Thursday, July 31, 2008 / Rules and Regulations

data, information, and judgment used in
its quantitative and qualitative
approaches.
42. The ICAAP should be enhanced
and refined over time, with learning and
experience (both quantitative and
qualitative) contributing to its
improvement. The ICAAP should evolve
with changes in the risk profile and
activities of the bank, as well as with
advances in risk measurement and
management practices. For example, a
bank should incorporate in its ICAAP
the introduction of new products and
business lines and activities to ensure
that the bank’s capital plan is
responsive to changes in the operational
and/or business environment.
43. The board of directors and senior
management have certain
responsibilities in developing,
implementing, and overseeing the
ICAAP. The board should approve the
ICAAP and its components. The board
or its appropriately delegated agent
should review the ICAAP and its
components on a regular basis, and
approve any revisions. That review
should encompass the effectiveness of
the ICAAP, the appropriateness of risk
tolerance levels and capital planning,
and the strength of control
infrastructures. Senior management
should continually ensure that the
ICAAP is functioning effectively and as
intended, under a formal review policy
that is explicit and well documented.
Additionally, a bank’s internal audit
function should play a key role in
reviewing the controls and governance
surrounding the ICAAP on an ongoing
basis.
44. Each bank should ensure that the
components of its ICAAP, including any
models and their inputs, are subject to
the bank’s validation policies and
procedures. Validation should be
independent of the development,
implementation, and operation of the
ICAAP components, or the validation
process should be subject to an
independent review of its adequacy and
effectiveness. Validation is generally
defined as an ongoing process that
includes, but is not limited to, the
collection and review of developmental
evidence, process verification,
benchmarking, outcomes analysis, and
monitoring activities used to confirm
that processes are operating as designed.
Validation policies and procedures
should reflect the bank’s business,
structure, and sophistication, as well as
the relative importance of each
component of the ICAAP. Accordingly,
a bank is encouraged to consult the
agencies’ existing guidance on
validation.

VerDate Aug<31>2005

15:05 Jul 30, 2008

Jkt 214001

45. A bank’s ICAAP should be aligned
with and be a part of the bank’s wider
internal governance structure and
overall risk-management processes. The
ICAAP should not be viewed as simply
a compliance exercise. Rather, it is a
dynamic and evolving process that is
used by a bank to provide internal
assurance that capital is adequate given
the bank’s risk profile. Management is
responsible for ensuring that the ICAAP
is fully consistent with the overall risk
management framework of the bank.
Information derived through the ICAAP
process should influence decision
making at both the consolidated and
individual business-line levels, and be
used to inform other management
processes related to risk assessment,
business planning and forecasting,
pricing strategies, and performance
measurement.
46. As part of the ICAAP, the board
or its delegated agent, as well as
appropriate senior management, should
periodically review the resulting
assessment of overall capital adequacy.
This review, which should occur at least
annually, should include an analysis of
how measures of internal capital
adequacy compare with other capital
measures (such as regulatory,
accounting-based or marketdetermined). Upon completion of this
review, the board or its delegated agent
should determine that, consistent with
safety and soundness, the bank’s capital
takes into account all material risks and
is appropriate for its risk profile.
However, in the event a capital
deficiency is uncovered (that is, if
capital is not consistent with the bank’s
risk profile or risk tolerance)
management should consult and adhere
to formal procedures to correct the
capital deficiency.
Dated: July 14, 2008.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, July 15, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, the 15th day of
July, 2008.
By order of the Federal Deposit Insurance
Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: July 14, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E8–17555 Filed 7–30–08; 8:45 am]
BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P,
6720–01–P

PO 00000

Frm 00014

Fmt 4700

Sfmt 4700

DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration
14 CFR Part 39
[Docket No. FAA–2008–0821; Directorate
Identifier 2008–NE–20–AD; Amendment 39–
15619; AD 2008–16–01]
RIN 2120–AA64

Airworthiness Directives; General
Electric Co. (GE) CF34–8E Series
Turbofan Engines
Federal Aviation
Administration (FAA), Department of
Transportation (DOT).
ACTION: Final rule; request for
comments.
AGENCY:

SUMMARY: The FAA is adopting a new
airworthiness directive (AD) for GE
CF34–8E series turbofan engines with
certain part number (P/N) full authority
digital engine controls (FADECs)
installed. This AD requires
reprogramming the FADEC software
from version 8Ev5.40 to an FAAapproved software version. This AD
results from six loss of thrust control
events from the same software fault
scenario. We are issuing this AD to
prevent loss of thrust control and
controllability of the airplane.
DATES: This AD becomes effective
August 15, 2008.
We must receive any comments on
this AD by September 29, 2008.
ADDRESSES: Use one of the following
addresses to comment on this AD:
• Federal eRulemaking Portal: Go to
http://www.regulations.gov and follow
the instructions for sending your
comments electronically.
• Mail: U.S. Docket Management
Facility, Department of Transportation,
1200 New Jersey Avenue, SE., West
Building Ground Floor, Room W12–140,
Washington, DC 20590–0001.
• Hand Delivery: Deliver to Mail
address above between 9 a.m. and 5
p.m., Monday through Friday, except
Federal holidays.
• Fax: (202) 493–2251.
Contact General Electric Company via
Lockheed Martin Technology Services,
10525 Chester Road, Suite C, Cincinnati,
Ohio 45215; telephone (513) 672–8400;
fax (513) 672–8422, for the service
information identified in this AD.
FOR FURTHER INFORMATION CONTACT:
Kenneth Steeves, Aerospace Engineer,
Engine Certification Office, FAA, Engine
& Propeller Directorate, 12 New England
Executive Park, Burlington, MA 01803;
e-mail: kenneth.steeves@faa.gov;
telephone (781) 238–7765; fax (781)
238–7199.

E:\FR\FM\31JYR1.SGM

31JYR1