1557-0242 (Basel II Pillar 2) -- Final Supporting Statement 08.25.23

Supporting Statement

OMB Control No. 1557-0242

Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework

A. Justification.

1. Circumstances that make the collection necessary:

At 12 USC 3907, the International Lending Supervision Act requires each appropriate Federal banking agency to cause banking institutions to achieve and maintain adequate capital by establishing minimum levels of capital for such banking institutions and by using such other methods as the appropriate Federal banking agency deems appropriate. Additionally, at 12 USC 1831o, the Federal Deposit Insurance Act requires each appropriate Federal banking agency to adopt a prompt corrective action framework that references banks’ levels of capital.

The Basel II advanced capital framework (Basel II) is a three-pillar framework for establishing regulatory risk-based capital requirements (Pillar 1); supervisory review of capital adequacy (Pillar 2); and market discipline through enhanced public disclosures (Pillar 3). Basel II also provided for a process for the supervisory review of capital adequacy under Pillar 2. The OCC rule implementing the regulatory risk-based capital requirements¹ into the OCC’s Capital Rule² describes the qualification process and provides qualification requirements for obtaining supervisory approval to use the internal models in the advanced approaches risk-based capital requirements. The qualification requirements are written broadly to accommodate the many ways a national bank or Federal savings association (collectively, a bank) may design and implement robust credit and operational risk measurement and management systems and to permit industry practice to evolve.

The supervisory guidance that contains the information collection, “Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework” (Guidance),³ was issued subsequent to the rule implementing Basel II and provides additional detail that is intended to help banks comply with the qualification requirements in the rule.⁴ The Guidance, and the information collection contained within, is directed at banks that are subject to the advanced approaches capital rule.⁵ The Guidance does not apply to small banks.

While the OCC’s Capital Rule has been revised in the intervening years, the Guidance continues to provide useful information to banks, which can be used to supplement the current risk-based capital framework, promote safety and soundness, and encourage comparability across banks. The OCC uses the information provided in response to the information collection in determining whether a bank (i) has satisfied the qualification requirements for implementing the advanced approaches risk-based capital requirements; (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; and (iii) maintains a satisfactory risk management and control structure, consistent with its capital position and overall risk profile.

2. Use of the information:

The Guidance recommends that respondents maintain certain documentation, as described in paragraphs 37, 41, 43, and 46 of the Guidance. OCC examiners use the information provided as part of the supervisory process. The specific recommendations are as follows:

Paragraph 37. Various definitions of capital are used in the banking industry. A bank should clearly state the definition of capital used in any aspect of its internal capital adequacy assessment process (ICAAP). Since components of capital are not necessarily alike and have varying ability to absorb losses, a bank should be able to demonstrate the relationship between its internal capital definition and its assessment of capital adequacy. The bank should document any changes in its internal definition of capital and the reason for those changes.

Paragraph 41. Banks should maintain thorough documentation covering the ICAAP. At a minimum, this documentation should include a description of the overall process, including committees and individuals responsible for the ICAAP, the frequency and distribution of ICAAP-related reporting, and procedures for the periodic evaluation of the appropriateness and adequacy of the ICAAP. If 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. A bank should document the assumptions, methods, data, information, and judgment used in its quantitative and qualitative approaches.

Paragraph 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, review the ICAAP and its components on a regular basis, and approve any revisions. This review should encompass the effectiveness of the ICAAP, the appropriateness of risk tolerance levels and capital planning, as well as 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. A bank’s internal audit function should play a key role in reviewing the controls and governance surrounding the ICAAP on an ongoing basis.

Paragraph 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 market-determined. 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. 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.

3. Consideration of the use of improved information technology:

A bank may use any means of improved information technology that meets these requirements.

4. Efforts to identify duplication:

The information required is not otherwise available to the OCC.

5. If the collection of information impacts small businesses or other small entities, describe any methods used to minimize burden.

The information collection does not apply to small banks.

6. Consequences of less frequent collection:

The OCC will not be able to adequately monitor capital levels and ensure safety and soundness.

7. Special circumstances necessitating collection inconsistent with 5 CFR part 1320:

This information collection is conducted in accordance with OMB guidelines in 5 CFR part 1320.

8. Consultation with persons outside the agency:

The OCC issued a notice for 60 days of comment on May 24, 2023, 88 FR 33665. No comments were received.

9. Payment or gift to respondents:

None.

10. Any assurance of confidentiality:

The information will be kept private to the extent permitted by law.

11. Information of a sensitive nature:

Not applicable. No personally identifiable information is collected.

12. Burden estimate:

Number of respondents	Estimated annual frequency	Estimated response time	Estimated annual burden hours
20	1	140 hours	2,800

Cost of Burden Hours

2,800 x $128.05 = $ 358,540

To estimate wages the OCC reviewed May 2022 data for wages (by industry and occupation) from the U.S. Bureau of Labor Statistics (BLS) for credit intermediation and related activities (NAICS 5220A1).  To estimate compensation costs associated with the rule, the OCC uses $128.05 per hour, which is based on the average of the 90th percentile for six occupations adjusted for inflation (5.1 percent as of Q1 2023), plus an additional 34.3 percent for benefits (based on the percent of total compensation allocated to benefits as of Q4 2022 for NAICS 522: credit intermediation and related activities).

13. Estimate of annualized costs to respondents:

Not applicable.

14. Estimate of annualized costs to the government:

Not applicable.

15. Changes in burden:

Prior Burden: 2,660 Burden Hours.

Current Burden: 2,800 Burden Hours

Difference: 140 Burden Hours

The change is due to one additional respondent.

16. Information regarding collections whose results are planned to be published for statistical use:

Not applicable.

17. Display of expiration date:

Not applicable.

18. Exceptions to certification statement:

Not applicable.

2. Collections of Information Employing Statistical Methods.

Not applicable.

1 See 72 FR 69288, at 69302, part III, section B (Dec. 7, 2007).

2 12 CFR part 3.

3 Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation of the Basel II Advanced Capital Framework, 73 FR 44620 (July 31, 2008).

4 The Guidance draws on the Basel II international framework, which has been superseded by the Basel III international framework. However, the Pillar 2 standards described in the Guidance remain in effect.

5 See 12 CFR 3.100(b).

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