Circular
Basel Committee on Banking Supervision
Proposed New Capital Adequacy Framework for Large Internationally Active Banking Organizations
June 10, 1999
Circular No. 11160

To All State Member Banks, Bank Holding Companies, and Branches
and Agencies of Foreign Banks, in the Second Federal Reserve District:

The following is from a statement by the Board of Governors of the Federal Reserve System:

The Basel Committee on Banking Supervision has issued a consultative paper on a new capital adequacy framework for large internationally active banking organizations.

The proposed new framework would revise the Committee's current capital adequacy framework, which was issued in 1988 and is commonly referred to as the Basel Capital Accord.

Comments to the Basel Committee on the consultative paper are requested by March 31, 2000.

The proposed new capital framework consists of:

Development of a more comprehensive and sensitive treatment of credit risk is the objective of the proposed minimum capital standard. Three approaches are outlined in the consultative paper: a modified version of the existing approach and, going forward, the use of banks' internal ratings and portfolio credit risk models.

Revisions proposed to the existing approach include incorporating external ratings to varying degrees into the capital treatment of claims on sovereigns, public sector entities, banks and highly rated corporates. An approach to addressing asset securitization also is proposed.

Additionally, the Committee is soliciting industry comment on the capital treatment of certain credit risk mitigation techniques and ways to expand coverage of the Accord to incorporate interest rate and operational risk.

The Committee is further proposing to expand the scope of the Basel Accord, which currently applies to internationally active banks. Under this proposal, the Accord also would be applied on a consolidated basis to holding companies that are parents of internationally active banking groups.

In this regard, the Federal Reserve notes that the Committee's consultative paper does not make any proposals regarding the definition of capital.

The Committee was established by the central bank Governors of the Group of Ten countries in 1975 and operates under the auspices of the Bank for International Settlements (BIS) in Basel, Switzerland. It consists of senior supervisory authorities representing the world's largest banking systems and works to strengthen bank supervisory and regulatory practices worldwide.

A copy of the Basel Committee's press release on this matter, together with the executive summary of the consultative paper is available. These documents, and the complete 62-page paper, can also be accessed at the BIS web site. Comments should be sent to the Committee by March 31, 2000. Questions may be directed, at this Bank, to Beverly Hirtle, Vice President, Stefan Walter, Assistant Vice President, Kim Olson, Bank Supervision Officer, or Christine Cumming.