Market Risk PRA Supporting Statement (final)

SUPPORTING STATEMENT
Risk-Based Capital Standards: Market Risk
OMB Control No. 1550-NEW

The Office of Thrift Supervision (OTS) requests OMB approval of the collection of
information contained in the interagency proposed rulemaking, “Risk-Based Capital
Standards: Market Risk” (“the Market Risk Rule” or “joint NPRM,” Attachment 1).
OTS proposes to collect information from savings associations with aggregate trading
assets and liabilities equal to 10 percent or more, or $1 billion or more, of total assets.
The Market Risk Rule will supplement the general risk-based capital rules (12 CFR part
567) by requiring any savings association subject to the rule to adjust its risk-based
capital ratio to reflect explicitly market risk in its trading assets.
A. JUSTIFICATION
1. Circumstances and Need
The first international capital framework for banks (and savings associations) entitled,
International Convergence of Capital Measurement and Capital Standards (1988 Capital
Accord), was developed by the Basel Committee on Banking Supervision (BCBS) and
endorsed by the G-10 governors in 1988. The Office of the Comptroller of the Currency
(OCC), the Board of Governors of the Federal Reserve System (Board), the Federal
Deposit Insurance Corporation (FDIC), and the OTS (collectively, the agencies)
implemented the 1988 Capital Accord in 1989. In 1996, the BCBS amended the 1988
Capital Accord to require banks to measure and hold capital to cover their exposure to
market risk associated with foreign exchange and commodity positions and positions
located in the trading account (the Market Risk Amendment or MRA). The OCC, Board,
and FDIC implemented the MRA effective January 1, 1997 (market risk capital rule). 1
OTS did not adopt the MRA.
In June 2004, the BCBS issued a revised regulatory capital framework for banks entitled,
International Convergence of Capital Measurement and Capital Standards: A Revised
Framework (New Accord), which was intended for use by individual countries as the
basis for national consultation and implementation. The New Accord sets forth a “threepillar” framework encompassing (1) minimum risk-based capital requirements for credit
risk, market risk, and operational risk; (2) supervisory review of capital adequacy; and (3)
market discipline through enhanced public disclosures.
By way of a joint NPRM, published on September 25, 2006 (71 FR 55958), the OCC,
Board, and FDIC are proposing revisions to the market risk capital rule to enhance its risk
1

61 FR 47358 (September 6, 1996). The agencies’ implementing regulations are available at 12 CFR part
3, Appendices A and B (national banks); 12 CFR part 208, Appendices A and E (state member banks); 12
CFR part 225, Appendices A and E (bank holding companies); and 12 CFR part 325, Appendices A and C
(state nonmember banks).

sensitivity and introduce requirements for public disclosure of certain qualitative and
quantitative information about the market risk of a bank or bank holding company.
Because OTS currently does not apply a market risk capital rule for savings associations,
it is now proposing in the joint NPRM a market risk capital rule for savings associations.
For market risk, the New Accord generally retains the approach contained in the MRA.
In addition, the New Accord adopts the July 2005 publication of The Application of
Basel II to Trading Activities and the Treatment of Double Default Effects by the BCBS
and the International Organization of Securities Commissions (IOSCO),2 and
incorporates it within its “three-pillar” structure. With respect to market risk, the Pillar 1
changes clarify the types of positions that are subject to the market risk capital framework
and revises modeling standards; the Pillar 2 changes require banks to conduct internal
assessments of their capital adequacy with respect to market risk, taking into account the
output of their internal models, valuation adjustments, and stress tests; and the Pillar 3
changes require banks to disclose quantitative and qualitative information on their
valuation techniques for covered positions, the soundness standard they employ for
modeling purposes, and the methodologies they use to make the internal capital adequacy
assessment.
The information collection requirements contained in the Market Risk Rule are found in
Subpart B to Part 566–Market Risk Adjustment, Sections 3, 4, 5, 6, and 9. The
collections of information are essential for supervisory, regulatory, and informational
purposes.
2. Use of Information Collected
The information collection is necessary to ensure capital adequacy according to the level
of market risk. OTS will use the information in the off-site evaluation of the institution in
planning examinations, as well as in performing on-site examinations. OTS’s Office of
Economic Analysis will use the data periodically for verification of modeling approaches
implemented by the institution, and for economic studies.
3. Use of Technology to Reduce Burden
Savings associations may use any information technology that permits review by OTS
examiners.
4. Efforts to Identify Duplication
The required information is unique and is not duplicative of any other information
already collected.

2

The treatment of double default effects is discussed in section V.C.5 of the proposed advanced capital
adequacy framework.

5. Minimizing the Burden on Small Institution
Not applicable. The collection does not have a significant impact on a substantial
number of small entities.
6. Consequences of Less Frequent Collections
OTS will not be able to adequately supervise and monitor capital levels and ensure safety
and soundness if the collection is conducted less frequently.
7. Special Circumstances
The information collection will be conducted in a manner consistent with 5 CFR 1320.
8. Consultation with Persons Outside the OTS
The agencies are publishing a joint NPRM. Extensive interagency collaboration was
involved in creating this proposed information collection. The NPRM is being issued for
120 days of comment. The agencies will carefully consider all public comments received
in response to the NPRM in developing the Final Rule.
9. Payment or Gifts to Respondents
None.
10. Any Assurance of Confidentiality
The information will be kept confidential, pursuant to applicable exemptions under the
Freedom of Information Act. 5 U.S.C. § 552.
11. Information of a Sensitive Nature
There are no questions of a sensitive nature.
12. Burden Estimates
Number of Respondents: 1
Number of Responses per Respondent: Varied – Some requirements are done at least
quarterly and some at least annually
Estimated Burden Hours Per Respondent: 2,088 hours
Total Annual Burden: 2,088 hours
Hours of Response:
1,208 hours for Section 3 policy development responses, 40 hours for Section 4 reporting
responses, 480 hours for Section 5 model development responses, 240 hours for Section 6

model development responses, 120 hours for Section 9 recordkeeping responses x 1
respondent.
Total Burden Hours: 1,208 policy development and 40 reporting and 720 program
development and 120 recordkeeping = 2,088 hours.
Cost of Hour Burden to Respondents:
The OTS estimates the cost of the hour burden to respondents as follows:
2,088 x $100/hour (combination of various levels of staff) = $208,800
Total Hour Burden Cost: $208,800
Section-by-Section Burden Analysis
Section 3 requires that the institution have clearly defined policies and procedures for
determining the positions (covered positions) subject to the Market Risk Rule, and for
actively managing these positions. This section also requires a clearly defined trading
and hedging strategy, and policies and procedures for valuation of these positions. It
establishes the requirements for modeling risks of the covered positions, validation, stress
testing, control, and oversight. Section 3 also requires that the institution document all
material aspects of the internal models, management/valuation of covered positions,
control, oversight, validation, and internal assessment of capital adequacy.
Section 4 establishes adjustments to the risk-based capital ratio calculations.
Section 5 establishes the basic requirements that the institution must follow to develop
general and specific risk models. It specifies what risks internal models must include and
address.
Section 6 establishes criteria for modeling incremental default risk.
Section 9 requires the institution to develop a formal disclosure policy and to have
internal disclosure controls in place. The institution must also publicly disclose specified
information quarterly for each portfolio, and annually if there is a material change.

Section Number
Section 3
Section 4
Section 5
Section 6
Section 9

Section Title
Requirements for Application of the Market
Risk Capital Rule
Adjustments to the Risk-Based Capital Ratio
Calculations
Specific Risk
Incremental Default Risk
Market Risk Disclosures

Estimated Burden Hours
1,208

40
480
240
120

13. Estimates of Annualized Costs
Not applicable.
14. Estimates of Cost to the Government
OTS will spend approximately 1,000 hours having professional staff (average $60 per
hour) review this information. With 1 respondent, the cost to the government is
approximately $60,000.
15. Reason for Change in Burden
This program change (increase) is due to the fact that this is a new collection.
16. Statistical Methods
OTS has no plans to publish the information for statistical purposes.
17. Reasons for Not Displaying OMB Approval Expiration Date
Not applicable.
18. Exceptions to the Certification Statement
None.
B. Collections of Information Employing Statistical Methods
Not applicable.
Attachments:
Notice of Proposed Rulemaking