FR4199_20150923_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 voluntary Basel II Interagency Pillar 2 Supervisory Guidance (Pillar 2 Guidance)
(FR 4199; OMB No. 7100-0320). The Pillar 2 Guidance is intended to assist firms in
implementing the Basel II advanced approaches capital adequacy framework (advanced
approaches framework), as provided in the 2007 final rule,1 as amended in 2011 and 2013.
Paragraphs 37, 41, 43, and 46 of the Pillar 2 Guidance contain, however, information collection
requirements for state member banks and bank holding companies (BHCs) that are beyond the
scope of the burden estimates developed for the 2007 final rule, and as such require approval
under the Paperwork Reduction Act.2
The Federal Reserve’s total annual burden for this information collection is estimated to
be 5,460 hours for the estimated 13 financial institutions that are likely to be subject to the
Pillar 2 Guidance. The number of respondents includes both institutions for which the advanced
approaches framework requirements are mandatory and institutions that may opt-in to the
advanced approaches framework. No required reporting forms are 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 based on the prompt corrective action
framework in that section. Section 5(b) of the Bank Holding Company Act (12 U.S.C. §
1844(b)) authorizes the Federal Reserve Board to issue such regulations and orders, including
regulations and orders relating to the capital requirements for BHCs, as may be necessary to
enable it to administer and carry out the purposes of the FDI Act and prevent evasions thereof.
The International Lending Supervision Act (ILSA) (12 U.S.C. § 3907(a)(1)) mandates that each
Federal banking agency require banking organizations 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 major banking countries to work
toward maintaining and, where appropriate, strengthening the capital bases of banking
organizations involved in international lending.

1
2

See 72 FR 69288 (December 7, 2007).
See 44 U.S.C. § 3501 et seq.

On December 7, 2007, 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) published a final rule to revise the risk-based capital
requirements in the United States for large, internationally active banking organizations.4 The
2007 final rule set forth a three-pillar framework encompassing regulatory risk-based capital
requirements (Pillar 1); supervisory review of capital adequacy (Pillar 2)5; and market discipline
through enhanced public disclosures (Pillar 3).
The agencies have since amended the 2007 final rule twice. In July 2011, the agencies
adopted a final rule that establishes a floor for the risk-based capital requirements applicable to
the largest, internationally active banking organizations implementing the advanced approaches
framework.6 A banking organization operating under the agencies’ advanced approaches
framework must meet the higher of the minimum requirements under the general risk-based
capital rules and the minimum requirements under the advanced approaches framework. In July
2013, the agencies adopted the revised regulatory capital rules, which require banking
organizations operating under the advanced-approaches framework to hold more appropriate
levels of capital for credit risk and to strengthen the risk-based capital requirements for certain
securitization exposures. The revisions to the 2007 final rule do not alter the original Pillar 2
requirements.
The Pillar 2 Guidance supplements the 2007 final rule, as revised in 2011 and 2013. The
Pillar 2 Guidance provides additional detail to help banking organizations satisfy certain
qualification requirements and provides standards to promote safety and soundness and
encourage comparability across banking organizations. A banking organization’s primary
Federal supervisor will review the banking organization’s balance sheet relative to the
qualification requirements to determine whether the banking organization may apply the
advanced approaches framework and has complied the regulatory capital requirements.
Description of Information Collection
The advanced approaches framework requires certain 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, and to

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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.
4
72 FR 69288 (December 7, 2007).
5
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.
6
76 FR 37620 (June 28, 2011).

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meet the higher of the minimum requirements under the general risk-based capital rules and the
minimum requirements under the advanced approaches framework.
A bank is required to comply with the advanced approaches framework 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.
A BHC is required to comply with the advanced approaches framework 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 meets the criteria to be subject to the advanced
approaches rule, or elects to adopt the advanced approaches. As of September 30, 2014, 13
BHCs meet the above criteria and are therefore subject to the advanced approaches rule.7
Also, some banks or BHCs may voluntarily decide to adopt the advanced approaches
framework. Both mandatory and voluntary respondents are required to meet certain qualification
requirements before they can use the advanced approaches framework for risk-based capital
purposes.
The Pillar 2 Guidance sets the expectation that respondents maintain certain
documentation as described in paragraphs 37, 41, 43, and 46 of this portion of the guidance.
Details of the expectations for each section are provided below.
Setting and Assessing Capital Adequacy Goals that Relate to Risk
Paragraph 37. In analyzing capital adequacy, a banking organization should evaluate
the capacity of its capital to absorb losses. Because various definitions of capital are used within
the banking industry, each banking organization should state clearly the definition of capital used
in any aspect of its internal capital adequacy assessment process (ICAAP).8 Since components
of capital are not necessarily alike and have varying capacities to absorb losses, a banking
organization should be able to demonstrate the relationship between its internal capital definition
and its assessment of capital adequacy. If a banking organization’s definition of capital differs
from the regulatory definition, the banking organization 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 banking organization’s capital structure, a banking organization may be able to
support the inclusion of other capital instruments in its internal definition of capital if it can
7

Regulation YY permits a bank holding company that is a subsidiary of a foreign banking organization to elect not
to comply with the advanced approaches rule prior to formation of an intermediate holding companies (IHC) with
the prior approval of the Board. 12 C.F.R. § 252.153(e)(2)(C).
8
A bank holding company with total consolidated assets of $50 billion or more is required to develop and maintain
a capital plan, which must set forth a capital adequacy process. 76 FR 74631 (December 1, 2011). ICAAP would
constitute an internal capital adequacy process for purposes of the final rule, and bank holding companies that have a
satisfactory ICAAP generally would be considered to have a satisfactory internal capital adequacy process for
purposes of the final rule.

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demonstrate a similar capacity to absorb losses. The banking organization should document any
changes in its internal definition of capital, and the reason for those changes.
Ensuring Integrity of Internal Capital Adequacy Assessments
Paragraph 41. A banking organization should maintain thorough documentation of its
ICAAP to ensure transparency. At a minimum, this should include a description of the banking
organization’s overall capital-management 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 banking
organization’s sound use of quantitative methods (including model selection and limitations) and
data-selection techniques, as well as appropriate maintenance, controls, and validation. A
banking organization 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 banking organization 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 banking organization 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 banking
organization’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 banking
organization’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 banking organization’s risk profile or risk tolerance) management should consult and adhere
to formal procedures to correct the capital deficiency.

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Time Schedule for Information Collection
Because the documentation set forth in 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.
Legal Status
The Board’s Legal Division has determined that section 9(6) of the Federal Reserve Act
requires state member banks to “comply with the reserve and capital requirements of this
chapter” and to make reports of condition “in such form” and “contain[ing] such information” as
the Board may require (12 U.S.C. § 324). Section 5 of the Bank Holding Company Act
authorizes the Board to “issue regulations and orders relating to the capital requirement for bank
holding companies” and requires BHCs to “keep the Board informed as to [their] financial
condition, systems for monitoring and controlling financial and operating risks…” (12 U.S.C. §
1844 (b) & (c)). Because the recordkeeping requirements are contained within guidance (and not
a statute or regulation), they are voluntary. 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 May 28, 2015, the Federal Reserve published a notice in the Federal Register (80 FR 30459)
requesting public comment for 60 days on the extension, without revision, of the FR 4199. The
comment period for this notice expired on July 27, 2015. The Federal Reserve did not receive
any comments. On August 28, 2015, the Federal Reserve published a final notice in the Federal
Register (80 FR 52279) for the FR 4199.
Estimate of Respondent Burden
The total annual burden for the Pillar 2 portion of the guidance is 5,460 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

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requirements represent less than 1 percent of the total Federal Reserve System paperwork
burden.

FR 4199

Number of
respondents9

Annual
frequency

Estimated
average hours
per response

Estimated
annual
burden hours

13

1

420

5,460

The total cost to the public for this information collection is estimated to be $282,555.10
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.

9

Of these respondents, none are small entities as defined by the Small Business Administration (i.e., entities with
$550 million or less in total assets) www.sba.gov/content/small-business-size-standards.
10
Total cost to the public was estimated using the following formula: percent of staff time, multiplied by annual
burden hours, multiplied by hourly rates (30% Office & Administrative Support at $17, 45% Financial Managers at
$63, 15% Lawyers at $64, and 10% Chief Executives at $87). Hourly rates for each occupational group are the
(rounded) mean hourly wages from the Bureau of Labor and Statistics (BLS), Occupational Employment and Wages
May 2014, published March 25, 2015, 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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