Circular
Amendment to Risk-Based Capital Standards to Incorporate a Measure for Market Risk
November 21, 1996
Circular No. 10895

To the Chief Executive Officers of All State Member Banks and Bank Holding Companies in the Second Federal Reserve District:

The Board of Governors of the Federal Reserve System, along with the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, has issued a final rule amending risk-based capital standards to incorporate a measure for market risk. The final rule is effective January 1, 1997, with compliance mandatory beginning January 1, 1998.

The rule implements an amendment to the Basle Capital Accord to measure the market risk of an institution's overall foreign exchange and commodity positions, as well as its traded debt and equity positions.

This final rule requires any bank and bank holding company whose trading activity exceeds either $1 billion or 10% of its total assets to measure market risk with its own internal value-at-risk model, and hold a commensurate amount of capital.

Many institutions have developed value-at-risk models as part of their overall risk management strategy. While we expect that only a few institutions will be required to comply with the enclosed rule, those that do not meet the above criteria may elect to comply voluntarily.

Institutions required to comply with this rule will be contacted soon to discuss implementation. Other institutions that wish to comply with this rule voluntarily should contact their relationship manager. Finally, if you have any additional questions, please contact Brian Peters, Examining Officer.

The text of the joint final rule, published in the Federal Register.