FR4199_20110907_omb

Supporting Statement for the
Basel II Interagency Pillar 2 Supervisory Guidance
(FR 4199; OMB No. 7100-0320)
Summary
The Board of Governors of the Federal Reserve System, under delegated authority from
the Office of Management and Budget (OMB), proposes to extend for three years, without
revision, the Basel II Interagency Pillar 2 Supervisory Guidance (FR 4199; OMB No. 71000320). The Paperwork Reduction Act (PRA) classifies reporting, recordkeeping, or disclosure
requirements of agency guidance as an “information collection.”1 This supervisory guidance
assisted financial institutions implementing revisions to the risk-based capital standards in the
United States, the Advanced Capital Adequacy Framework - Basel II (framework).2 In addition,
this supervisory guidance provided detail for the supervisory review process that helped banks
satisfy the qualification requirements in the final rule. For the Pillar 2 guidance, the Office of the
Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS)3, the Federal
Reserve, and the Federal Deposit Insurance Corporation (FDIC), (the agencies) determined that
paragraphs 37, 41, 43, and 46 contain information collection requirements that were beyond the
scope of the burden estimates developed for the final rule. The Pillar 2 guidance contains certain
documentation or recordkeeping requirements for state member banks and bank holding
companies (BHCs).
The Federal Reserve’s total annual burden for this information collection is estimated to
be 7,560 hours for the estimated 18 financial institutions that are likely to be subject to the
Pillar 2 guidance. The 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. There are no required reporting forms associated with this information collection.
Background and Justification
Section 1831(o) of the Federal Deposit Insurance Act (FDI Act) requires each Federal
banking agency to adopt a risk-based capital requirement, which is based on the prompt
corrective action framework in that section. The International Lending Supervision Act (ILSA)
(12 U.S.C. § 3907(a)(1)) mandates that each Federal banking agency require banks to achieve
and maintain adequate capital by establishing minimum levels of capital or by other methods that
the appropriate federal banking agency may deem appropriate. Section 908 of the ILSA
(12 U.S.C. § 3907(b)(3)(C)) also directs the Chairman of the Federal Reserve and the Secretary
of the Treasury to encourage governments, central banks, and regulatory authorities of other
1

See 44 U.S.C. § 3501 et seq.
These revisions were published in the Federal Register on December 7, 2007 (72 FR 69288) as a final
rulemaking.
3
On July 21, 2010, President Barack Obama signed into law the Dodd-Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act). As part of the comprehensive package of financial regulatory reform measures
enacted, Title III of the Dodd-Frank Act transfers the powers, authorities, rights and duties of the OTS to other
banking agencies, including the OCC, on the “transfer date.” The transfer date is one year after the date of
enactment of the Dodd-Frank Act, July 21, 2011. The Dodd-Frank Act also abolishes the OTS ninety days after the
transfer date. As a result of the Dodd-Frank Act, OTS transferred this information collection to the OCC.
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major banking countries to work toward maintaining and, where appropriate, strengthening the
capital bases of banking institutions involved in international lending.
General U.S. risk-based capital requirements are based on an internationally agreed upon
framework for capital measurement that was developed by the Basel Committee on Banking
Supervision (BCBS) and endorsed by the central-bank governors of the Group of 10 (G–10)
Countries in 1988. This international framework (1988 Accord) accomplished several important
objectives. It strengthened capital levels at large, internationally active banks and fostered
international consistency and coordination. The 1988 Accord also reduced disincentives for
banks to hold liquid, low-risk assets. Moreover, by requiring banks to hold capital against offbalance-sheet exposures, the 1988 Accord represented a significant step forward for regulatory
capital measurement. Although the 1988 Accord was a stabilizing force for the international
banking system, the world financial system became increasingly more complex. The BCBS
worked for several years to develop a new regulatory capital framework that recognizes new
developments in financial products, incorporates advances in risk measurement and management
practices, and more precisely assesses capital charges in relation to risk. On April 29, 2003, the
BCBS released for public comment a document entitled The New Basel Capital Accord
(Proposed New Accord) that sets forth proposed revisions to the 1988 Accord.
On August 4, 2003, the agencies published an advanced notice of proposed rulemaking
(ANPR) in the Federal Register to seek public comment on a new risk-based regulatory capital
framework.4 This ANPR was based on the Proposed New Accord. Also, the agencies
participated with other members of the BCBS during the development of the New Accord, which
was issued in June 2004. The agencies also participated in the BCBS’s Fourth Quantitative
Impact Study (QIS 4; OMB No. 7100-0303) during the fall and winter of 2004-2005, to better
understand the potential impact of the proposed framework on the risk-based capital
requirements for banks.
Contemporaneously with the ANPR, the agencies also issued for public comment two
proposed supervisory guidance documents relating to the proposed framework.5 The first
proposed 2003 guidance document described supervisory views on the credit risk measurement
and management systems that should be implemented by banks that adopt the internal ratingsbased (IRB) approach for computing risk-based capital requirements for corporate credit risk
exposures. The second proposed 2003 guidance document provided supervisory views on the
operational risk measurement and management systems that should be implemented by banks
that adopt the advanced measurement approach (AMA) for computing risk-based capital
requirements for operational risk, including their operational risk management, data elements,
and quantification processes. In October 2004, the agencies also issued for public comment
proposed supervisory guidance on IRB systems for retail credit risk exposures.6
The agencies issued a notice of proposed rulemaking (NPR) on September 25, 2006,7
which sought comment on the New Advanced Capital Adequacy Framework that revises the
4
5
6
7

See 68 FR 45900 (August 4, 2003).
See 68 FR 45949 (August 4, 2003).
See 69 FR 62748 (October 27, 2004), and 70 FR 423 (January 4, 2005) (correction).
See 71 FR 55830 (September 25, 2006).

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existing general risk-based capital standards as applied to large, internationally active U.S.
banks.8 The public comment period on the NPR was extended to March 26, 2007.9 The
framework implements Basel II in the United States. As described in the final rule, Basel II sets
forth a three-pillar framework encompassing regulatory risk-based capital requirements
(Pillar 1); supervisory review of capital adequacy (Pillar 2)10; and market discipline through
enhanced public disclosures (Pillar 3). The framework outlined in the final rule for Pillar 1
requires some and permits other qualifying banks to calculate their regulatory risk-based capital
requirements using the IRB approach for credit risk and the AMA for operational risk.11 The
final rule also requires a process for the supervisory review of capital adequacy under Pillar 2,
and outlines requirements for enhanced public disclosures under Pillar 3. The final rule
describes the qualification process and provides qualification requirements for obtaining
supervisory approval for use of the advanced approaches.12 The qualification requirements are
written broadly to accommodate the many ways a bank may design and implement robust credit
and operational risk measurement and management systems, and to permit industry practice to
evolve. On December 7, 2007, the agencies published a final rule for the New Advanced Capital
Adequacy Framework.
The Pillar 2 supervisory guidance is companion guidance to the December 2007 final rule
and, as such, is designed to be consistent with the rule. It provides additional detail that should
help banks satisfy certain qualification requirements in the final rule. The agencies believe that
the Pillar 2 supervisory guidance document is necessary to supplement the framework with
standards to promote safety and soundness and encourage comparability across banks. A bank’s
primary Federal supervisor will review the bank’s framework relative to the qualification
requirements in the final rule to determine whether the bank may apply the advanced approaches
and has complied with the rule in determining its regulatory capital requirements.
Description of Information Collection
The final rule sets forth a new risk-based regulatory capital adequacy framework that
requires certain large or internationally active banks and BHCs to use an internal ratings-based
approach to calculate regulatory credit risk capital requirements and advance measurement
approaches to calculate regulatory operational risk capital requirements.

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For simplicity, and unless otherwise noted, the term “banks” is used here to refer to 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 and do not include savings and loan holding companies regulated by the OTS. For
a detailed description of the institutions covered by this notice, refer to part I, section 1, of the NPR.
9
See 71 FR 77518 (December 26, 2006).
10
The process of supervisory review described in this document reflects a continuation of the longstanding
approach employed by the agencies in their supervision of banking institutions. For example, the Federal Reserve
introduced in 1999 expectations for certain large, complex banking organizations to develop internal processes for
assessing capital adequacy, beyond minimum regulatory capital requirements. See Federal Reserve Supervision and
Regulation Letter “Assessing Capital Adequacy in Relation to Risk at Large Banking Organizations and Others with
Complex Risk Profiles,” July 1999.
11
While Basel II provides several approaches for calculating regulatory risk-based capital requirements under
Pillar 1, only the advanced approaches are proposed for implementation in the United States.
12
See part III, section 22 of the NPR.

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A bank is required to comply with the final rule and the guidance if it meets either of two
independent threshold criteria: (1) consolidated total assets of $250 billion or more, as reported
on the most recent year-end regulatory reports; or (2) consolidated total on-balance sheet foreign
exposure of $10 billion or more at the most recent year-end. To determine total on-balance sheet
foreign exposure, a bank sums its adjusted cross-border claims, local country claims, and crossborder revaluation gains (calculated in accordance with the Federal Financial Institutions
Examination Council (FFIEC) Country Exposure Report (FFIEC 009)13). Adjusted cross-border
claims equal total cross-border claims less claims with the head office/guarantor located in
another country, plus redistributed guaranteed amounts to the country of head office/guarantor.
A bank is required to comply if it is a subsidiary of another financial institution that uses the
advanced approaches.
A BHC is required to comply with the final rule and the guidance if the BHC has: (1)
consolidated total assets (excluding assets held by an insurance underwriting subsidiary) of $250
billion or more, as reported on the most recent year-end regulatory reports; (2) consolidated total
on-balance sheet foreign exposure of $10 billion or more at the most recent year-end; or (3) a
subsidiary depository institution (DI) that is a core bank or opt-in bank. Currently 11 top-tier
banking organizations meet these criteria. The agencies note that, using this approach to define
whether a BHC is a core bank, it is possible that no single DI under a BHC would meet the
threshold criteria, but that all of the BHC’s subsidiary DIs would be core banks.
Also, some banks or BHCs may voluntarily decide to adopt the framework. Both
mandatory and voluntary respondents are required to meet certain qualification requirements
before they could use the advanced approaches for risk-based capital purposes.
The Pillar 2 guidance requires respondents to maintain certain documentation as
described in paragraphs 37, 41, 43, and 46 of this portion of the guidance. Details of the
requirements for each section are provided below.
Setting and Assessing Capital Adequacy Goals that Relate to Risk
Paragraph 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 internal
capital adequacy assessment process (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.
13

The OMB control numbers for the FFIEC 009 are Federal Reserve (7100-0035), FDIC (3064-0017), and OCC
(1557-0100).

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Ensuring Integrity of Internal Capital Adequacy Assessments
Paragraph 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 capitalmanagement 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 thirdparty 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, 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. 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.
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. 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.
Time Schedule for Information Collection
Because the documentation required by the guidance is a recordkeeping requirement,
copies of the documentation are not collected by the Federal Reserve System and are not
published. These recordkeeping requirements are documented on occasion. Bank examiners
would verify compliance with this recordkeeping requirement during examinations of state
member banks and BHCs.

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Legal Status
The Board’s Legal Division has determined that section 9(6) of the Federal Reserve Act
(12 U.S.C. § 324(B)) and section 5(c) of the Bank Holding Company Act (12 U.S.C. § 1844
(c)(1)(A)) authorize the Federal Reserve to require the FR 4199 with respect to banks or BHCs
that are required to comply with the guidance. The FR 4199 recordkeeping requirements are
required to obtain the benefit of participating in Basel II with respect to all other banks and
BHCs. Because the FR 4199 recordkeeping requirements require that banks and BHCs retain
their own records, the Freedom of Information Act (FOIA) would only be implicated if the
Federal Reserve’s examiners retained a copy of the records as part of an examination or
supervision of a bank or BHC. However, records obtained as a part of an examination or
supervision of a bank or BHC are exempt from disclosure under FOIA exemption (b)(8), for
examination material (5 U.S.C. 552 § (b)(8)). In addition, the records may also be exempt under
(b)(4), which exempts from disclosure “trade secrets and commercial or financial information
obtained from a person and privileged or confidential,” and under (b)(6) for non-public personal
information regarding owners, shareholders, directors, officers or employees if the disclosure
would “constitute a clearly unwarranted invasion of personal privacy” (5 U.S.C. §§ 552(b)(4)
and (b)(6)).
Consultation Outside the Agency
The agencies have agreed that no revisions are necessary for this information collection.
On April 21, 2011, the agencies published a notice in the Federal Register (76 FR 22450)
requesting public comment for 60 days on the extension of the FR 4199. The comment period
for this notice expired on June 20, 2011. The agencies did not receive any comments. On
August 17, 2011, the agencies published a final notice in the Federal Register (76 FR 51123).
Estimate of Respondent Burden
The total annual burden for the Pillar 2 portion of the guidance is 7,560 hours, as shown
in the table below. The Federal Reserve estimates that it will take each respondent 420 hours to
complete the documentation requirements, which is approximately 50 percent of the hours
allocated to documentation for the Pillar 1 requirements in the final rule. These recordkeeping
requirements represent less than 1 percent of the total Federal Reserve System paperwork
burden.

FR 4199

Number
of
respondents14

Estimated
annual
frequency

Estimated
average hours
per response

Estimated
annual burden
hours

18

1

420 hours

7,560

14

Of these respondents, zero are small entities as defined by the Small Business Administration (i.e., entities with
less than $175 million in total assets) www.sba.gov/contractingopportunities/officials/size/table/index.html.

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The total cost to the public for this information collection is estimated to be $328,104.15
Sensitive Questions
This collection of information contains no questions of a sensitive nature, as defined by
OMB guidelines.
Estimate of Cost to the Federal Reserve System
Since records are maintained at the financial institutions, the cost to the Federal Reserve
System is negligible.

15

Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rate (30% Office & Administrative Support @ $16, 45% Financial Managers @
$50, 15% Legal Counsel @ $54, and 10% Chief Executives @ $80). Hourly rate for each occupational group are
the median hourly wages (rounded up) from the Bureau of Labor and Statistics (BLS), Occupational Employment
and Wages 2010, www.bls.gov/news.release/ocwage.nr0.htm. Occupations are defined using the BLS Occupational
Classification System, www.bls.gov/soc/.

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