Federal Reserve System October 2005 – Federal Register Recent Federal Regulation Documents

The Office of the Comptroller of the Currency (OCC), Board of Governors of the Federal Reserve System (Board), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS) (collectively, ``the Agencies'') are considering various revisions to the existing risk-based capital framework that would enhance its risk sensitivity. These changes would apply to banks, bank holding companies, and savings associations (``banking organizations''). The Agencies are soliciting comment on possible modifications to their risk-based capital standards that would facilitate the development of fuller and more comprehensive proposals applicable to a range of activities and exposures. This ANPR discusses various modifications that would increase the number of risk-weight categories, permit greater use of external ratings as an indicator of credit risk for externally-rated exposures, expand the types of guarantees and collateral that may be recognized, and modify the risk weights associated with residential mortgages. This ANPR also discusses approaches that would change the credit conversion factor for certain types of commitments, assign a risk-based capital charge to certain securitizations with early-amortization provisions, and assign a higher risk weight to loans that are 90 days or more past due or in nonaccrual status and to certain commercial real estate exposures. The Agencies are also considering modifying the risk weights on certain other retail and commercial exposures.

The Board has approved modifications to the method for calculating the private sector adjustment factor, which imputes the costs that would have been incurred and profits that would have been earned, including the return on equity capital, had the Federal Reserve Banks' priced services been provided by a private sector business. When setting prices in 2006, the Board will use only the capital asset pricing model to determine the target return on equity capital. Rather than continuing the long-standing process of identifying a peer group to calibrate the target return on equity capital, the return on equity capital will be based on the rate of return for the equity market as a whole. The Board's method for setting the level of equity capital imputed to priced services would continue to be based on the Federal Deposit Insurance Corporation guidelines for a well-capitalized depository institution for insurance premium purposes. In addition, the Board will continue using the financial data from the top fifty bank holding companies by deposit balance to determine the priced-services effective tax rate each year.

The Board is amending Regulation D, Reserve Requirements of Depository Institutions, to reflect the annual indexing of the low reserve tranche and of the reserve requirement exemption amount for 2006. The Regulation D amendments increase the amount of net transaction accounts at each depository institution that is subject to a three percent reserve requirement in 2006 from $47.6 million to $48.3 million. This amount is known as the low reserve tranche. The Regulation D amendments also increase the amount of total reservable liabilities of each depository institution that is subject to a zero percent reserve requirement in 2006 from $7.0 million to $7.8 million. This amount is known as the reserve requirement exemption amount. The adjustments to both of these amounts are derived using statutory formulas specified in the Federal Reserve Act. The Board is also announcing increases in two other amounts, the nonexempt deposit cutoff level and the reduced reporting limit, that are used to determine the frequency with which depository institutions must submit deposit reports. These amounts are indexed annually in order to reduce reporting burden for smaller depository institutions.