FR4199_20220210_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 (Board), under authority
delegated by the Office of Management and Budget (OMB), has extended for three years,
without revision, the Basel II Interagency Pillar 2 Supervisory Guidance (Pillar 2 Guidance)1
(FR 4199; OMB No. 7100-0320). The Pillar 2 Guidance is intended to assist banking
organizations2 that are subject to the Basel II advanced approaches capital adequacy framework
(advanced approaches framework) in applying that framework. Paragraphs 37, 41, 43, and 46 of
the Pillar 2 Guidance contain recordkeeping provisions for state member banks and bank holding
companies (BHCs) subject to the advanced approaches framework (advanced approaches
banking organizations) beyond those required by the Board’s capital rule, and therefore require
separate clearance under the Paperwork Reduction Act.3
The estimated total annual burden for the FR 4199 is 6,300 hours.
Background and Justification
Section 38 of the Federal Deposit Insurance Act (FDI Act) requires each federal banking
agency to adopt risk-based capital standards for the depository institutions that they regulate.4 In
addition, among other authorities, the Board may establish capital requirements for state member
banks under the Federal Reserve Act, 5 and for state member banks and bank holding companies
under the International Lending Supervision Act of 1983 (ILSA),6 and Bank Holding Company
Act of 1956.7 The ILSA mandates that each federal banking agency require banking institutions
to achieve and maintain adequate capital by establishing minimum levels of capital or by other
methods that the appropriate agency may deem appropriate.
In 2007, the Office of the Comptroller of the Currency (OCC), Office of Thrift
Supervision (OTS),8 Board, and Federal Deposit Insurance Corporation (FDIC) published a final
rule to revise the risk-based capital requirements in the United States for large, internationally
1

Supervisory Guidance: Supervisory Review Process of Capital Adequacy (Pillar 2) Related to the Implementation
of the Basel II Advanced Capital Framework, 73 FR 44620 (July 31, 2008).
2
With respect to entities regulated by the Board, the term “banking organizations” include state member banks and
bank holding companies.
3
See 44 U.S.C. § 3501 et seq.
4
12 U.S.C. § 1831o(c).
5
12 U.S.C. §§ 321-338.
6
12 U.S.C. § 3907.
7
12 U.S.C. § 1844.
8
On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) became
law. As part of the comprehensive package of financial regulatory reform measures enacted, Title III of the DoddFrank Act transferred the powers, authorities, rights and duties of the OTS to other banking agencies, including the
OCC, on the “transfer date.” The transfer date was one year after the date of enactment of the Dodd-Frank Act, July
21, 2011. The Dodd-Frank Act also abolished the OTS ninety days after the transfer date. As a result of the DoddFrank Act, OTS transferred this information collection to the OCC.

active banking organizations. 9 The rule set forth a three-pillar framework encompassing
regulatory risk-based capital requirements (Pillar 1), supervisory review of capital adequacy
(Pillar 2), and market discipline through enhanced public disclosures (Pillar 3).
The advanced approaches framework requires certain state member 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.
Currently, a BHC is required to comply with the advanced approaches framework if it is a global
systemically important BHC, a Category II banking organization, or has a subsidiary depository
institution that is subject to the advanced approaches framework; a state member bank must
comply with the advanced approaches framework if it is the subsidiary of a global systemically
important BHC or a depository institution or BHC that is subject to the advanced approaches
framework, or is a Category II Board-regulated institution. 10 Banking organizations also may
elect to comply with the advanced approaches framework.
The Pillar 2 Guidance supplements the rule. Specifically, the Pillar 2 Guidance provides
additional detail to help advanced approaches banking organizations satisfy certain qualification
requirements and provides standards to promote safety and soundness and encourage
comparability across banking organizations. The Board reviews each advanced approaches
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 with the regulatory capital requirements.
Description of Information Collection
Advanced approaches banking organizations are required to use an internal ratings-based
approach to calculate regulatory credit risk capital requirements and advanced measurement
approaches to calculate regulatory operational risk capital requirements. Banking organizations
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 such organizations 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). Among other things,
this paragraph provides that the banking organization should document any changes in its
internal definition of capital, and the reason for those changes.

9

72 FR 69288 (December 7, 2007).
12 CFR 217.100(b)(1).

10

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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. Among other things, this paragraph provides that 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.
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. 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.
Respondent Panel
The FR 4199 panel comprises state member banks and BHCs that use the advanced
approaches framework.
Time Schedule for Information Collection
These recordkeeping provisions are documented on occasion. Bank examiners may
review documents kept based on the recommendations in the Pillar II Guidance during
examinations of state member banks and BHCs.
Public Availability of Data
The documentation set forth in the guidance is a recordkeeping provision, and no data
related to this information collection is made available to the public by the Federal Reserve.

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Legal Status
The FR 4199 is authorized pursuant to the sections 9 and 11 of the Federal Reserve Act
authorizing the Board to require a state member bank to submit reports of condition (12 U.S.C. §
324) and authorizing the Board to require a state member bank to submit reports of liabilities and
assets (12 U.S.C. § 248(a)); section 5 of the Bank Holding Company Act of 1956 authorizing the
Board to require a bank holding company and any subsidiary thereof to submit reports regarding
financial condition and compliance (12 U.S.C. § 1844); and section 161 of the Dodd-Frank Wall
Street Reform and Consumer Protection Act authorizing the Board to require reports of financial
condition and compliance from nonbank financial companies subject to the Board’s supervision
(12 U.S.C. § 5361). The FR 4199 is voluntary.
Because the collections of information associated with the guidance is maintained by
each institution, the Freedom of Information Act (FOIA) would only be implicated if the Board
obtained such records as part of the examination or supervision of a banking organization. In the
event the records are obtained by the Board as part of the examination or supervision of a
financial institution, this information may be considered confidential pursuant to exemption 8 of
the FOIA, which protects information contained in “examination, operating, or condition
reports” obtained in the bank supervisory process (5 U.S.C. § 552(b)(8)). In addition, the
information may also be kept confidential under exemption 4 of the FOIA, which protects trade
secrets and commercial or financial information obtained from a person that is both customarily
and actually treated as private by the respondent (5 U.S.C. § 552(b)(4)).
Consultation Outside the Agency
The Board has consulted with the FDIC and OCC and confirmed that there will be no
revisions to the guidance, and no revision to the time per response estimates.
Public Comments
On June 9, 2021, the Board published an initial notice in the Federal Register (86 FR
30603) requesting public comment for 60 days on the extension, without revision, of the
FR 4199. The comment period for this notice expired on August 9, 2021. The Board did not
receive any comments. The Board adopted the extension, without revision, of the FR 4199 as
originally proposed. On October 18, 2021, the Board published a final notice in the Federal
Register (86 FR 57674).
Estimate of Respondent Burden
As shown in the table below, the estimated total annual burden for the FR 4199 is 6,300
hours. The Board estimates that it will take each respondent 420 hours to complete the
documentation recommendations. These recordkeeping provisions represent less than 1 percent
of the Board’s total paperwork burden.

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FR 4199
Paragraphs 37, 41, 43, and 46
of the Pillar 2 Guidance

Estimated
number of
respondents11

Annual
frequency

Estimated
average hours
per response

Estimated
annual burden
hours

15

1

420

6,300

The estimated total annual cost to the public for the FR 4199 is $372,645.12
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, there is no cost to the Federal
Reserve System.

11

Of these respondents, none are considered small entities as defined by the Small Business Administration (i.e.,
entities with less than $600 million in total assets), https://www.sba.gov/document/support--table-size-standards.
12
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 $20, 45% Financial Managers at
$73, 15% Lawyers at $72, and 10% Chief Executives at $95). 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 2020, published March 31, 2021, https://www.bls.gov/news.release/ocwage.t01.htm. Occupations are defined
using the BLS Standard Occupational Classification System, https://www.bls.gov/soc/.

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