SUPPORTING STATEMENT
Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2)
Related to the Implementation of the Basel II Advanced Capital Framework
INTRODUCTION
On September 25, 2006, the FDIC, jointly with the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision (collectively, the agencies) issued a notice of proposed rulemaking seeking public comment on a new risk-based regulatory capital framework based on the Basel Committee on Banking Supervision April 2003 consultative paper entitled “New Basel Capital Accord” (New Accord). The New Accord set forth a “three pillar” framework encompassing 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 disclosures (Pillar 3). On December 7, 2007 (72 FR 69288), the agencies published a final rule adopting the Pillar 1 internal ratings-based approach for calculating regulatory credit risk capital and the advanced measurement approaches for calculating regulatory operational risk capital (together the advanced approaches). The advanced approaches rule is mandatory for the largest U.S. banks and optional for other banks. The information collection requirements associated with the advanced approaches final rule were approved by OMB under information collection control numbers 3064-0153 and 3064-0159. The agencies anticipate issuing shortly a notice of proposed rulemaking seeking comment on a Pillar 1 risk-based capital framework that is generally consistent with the standardized approach for credit risk and the basic indicator approach for operational risk provided in the New Accord. This standardized approach would provide an option for banks that do not plan to adopt the advanced approaches because of the cost and complexity of implementation.
On February 28, 2007, the agencies published a notice seeking public comment on “Proposed Supervisory Guidance for Internal Ratings-Based Systems for Credit Risk, Advanced Measurement Approaches for Operational Risk, and the Supervisory Review Process (Pillar 2) Related to Basel II Implementation.” The proposed guidance provided additional detail for certain aspects of Pillar 1 and the supervisory review process to help banks satisfy qualification requirements. In the current request for OMB review, the FDIC is seeking approval only for the information collection requirements contained in the final supervisory guidance document for Pillar 2.
1. Circumstances and Need
U.S. banks that qualify for and adopt the Advanced Capital Adequacy Framework will be subject to new risk-based capital rules as described in the agencies’ December 7, 2007, final rule. Prior to qualification, a bank that adopts the new risk-based capital rules must also undergo a parallel run period during which time it will determine its capital requirements under both the new risk-based capital rules and existing risk-based capital rules.
In order to assess a bank’s conformance with internal capital adequacy standards set forth under Pillar II of the final rule, the Agencies have issued guidance that outlines the agencies’ expectations for (i) satisfying the qualification requirements provided in the advanced approaches final rule; (ii) addressing the limitations of the minimum risk-based capital requirements for credit risk and operational risk; (iii) 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 (iv) encouraging each institution to improve its risk identification and measurement techniques.
2. Use of Information Collected
The FDIC will use this information to assess an institution’s Internal Capital Adequacy Assessment Process (ICAAP) and minimum risk based capital requirements under the final rule. Section 37 of the guidance 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 and senior management should approve the bank’s ICAAP, review it on a regular basis, and approve any changes. Boards of directors and senior management are also required under Section 46 to periodically review the assessment of overall capital adequacy and include an analysis of how measures of internal capital adequacy compare with other capital measures.
3. Use of Technology to Reduce Burden
Banks are free to use the method they deem most appropriate to maintain any documentation required by the supervisory guidelines.
4. Efforts to Identify Duplication
There is no other report that collects information pertaining to a bank’s ICAAP process.
5. Minimizing the Burden on Small Banks
Organizations that are subject to the new risk-based capital rules on a mandatory basis are large (over $250 billion in consolidated assets) and internationally active organizations (over $10 billion in consolidated on-balance sheet foreign exposures) and their depository institution subsidiaries. The FDIC believes these reporting requirements will have a limited burden on small institutions. The FDIC estimates that one small state nonmember bank (out of a total of 3,242 state nonmember banks with assets of $165 million or less) would be subject to the final rule, and correspondingly these reporting requirements, on a mandatory basis.
6. Consequences of Less Frequent Collection
Less frequent reporting would reduce the ability of the FDIC to identify and respond in a timely manner to noncompliance with minimum risk-based capital rules, and evidence of risk estimates that call into question the accuracy of a bank’s ICAAP.
7. Special Circumstances
There are no special circumstances.
8. Summary of Public Comments
The supervisory guidance was issued for 60-days of comment on February 28, 2007 (72 FR 9084). Although the agencies received 16 comments in response to the proposal, none of the comments received addressed the burden estimates set out in that notice.
9. Payment or Gift to Respondents
No payment or gift will be provided to respondents.
10. Confidentiality
All documentation required under this supervisory guidance would be maintained by the bank and would not be shared publicly.
11. Information of a Sensitive Nature
There is no information of a sensitive nature that is required.
12. Estimate of Annualized Burden
It is estimated that, on average, it will take an FDIC-supervised bank approximately 105 hours per quarter to meet the informational requirements. There are an estimated 19 state nonmember banks that will be required to submit reports under these reporting requirements. The estimated number of respondents includes both institutions for which the Basel II risk-based 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). The combined estimated annual reporting burden for these banks is 7,980 hours. These estimates reflect considerations pertaining to the time required to complete other types of regulatory documentation as well as the greater level of detail required in these requirements.
The annual recurring salary and employee benefit cost to state nonmember banks that will be subject to supervisory guidance requirements for the burden hours shown above is estimated to be $798,000. This cost is based on the application of an hourly rate of $100 to the estimated 7,980 total hours of annual burden, which considers the specialized technical skills in the fields of credit risk and operational risk of those bank staff members involved in implementing the Advanced Capital Adequacy Framework who will be responsible for compliance with the supervisory guidance.
13. Estimate of Total Annual Cost Burden
Under the final rule’s new risk-based capital requirements, banks will be required to maintain a significant volume of information to support the risk estimates used in the calculation of the ICAAP. There will be certain additional costs (excluding costs included in Item 12 above) associated with implementing the final rule and these informational requirements relating to developing and maintaining software, data systems, and data processing capabilities. It is difficult to develop estimates of capital and start-up costs as well as operation and maintenance/purchase of services costs that distinguish between those pertaining to these reporting requirements and those related to satisfying the requirements of the guidance.
14. Estimate of Total Annual Cost to the Federal Government
The FDIC does not expect to incur material incremental costs in connection with the collection of these data.
15. Reason for Change in Burden
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 and senior management should approve the bank’s ICAAP, review it on a regular basis, and approve any changes. Boards of directors and senior management are also required under Section 46 to periodically review the assessment of overall capital adequacy and include an analysis of how measures of internal capital adequacy compare with other capital measures.
16. Publication
The information collected reports are intended primarily to meet the supervisory and policy needs of the FDIC and the other agencies. As such, the majority of the reported items will be afforded confidential treatment.
17. Display of Expiration Date
Not applicable.
18. Exceptions to Certification
None.
B. COLLECTION OF INFORMATION EMPLOYING STATISTICAL METHODS
Not applicable.
| File Type | application/msword |
| File Title | SUPPORTING STATEMENT |
| File Modified | 2008-07-14 |
| File Created | 2008-07-14 |