Federal bank regulators have come out with a new final rule that will affect how large bank holding companies treat insurance subsidiaries in bank risk-based capital calculations.
The Office of the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corp. and the Office of Thrift Supervision published the final rule today in the Federal Register.
The final rule, which will take effect April 1, 2008, is a revised version of a draft published in the Federal Register in September 2006.
The bank regulatory agencies came up with the draft in response to the Basel II “New Accord,” a document released in June 2006 by the Basel Committee on Banking Supervision, Basel, Switzerland. The document creates a framework for setting risk-based capital requirements for credit risk, market risk and operational risk.
The final rule will apply mainly to “core banks.”
The rule defines core banks as those “with consolidated total assets (excluding assets held by an insurance underwriting subsidiary of a bank holding company) of $250 billion or more or with consolidated total on-balance-sheet foreign exposure of $10 billion or more.”
The rule requires some banks and permits others 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.
Banks that adopt an IRB approach use their internal systems to come up with parameters for calculating credit risk capital needs.
An “advanced measurement approach” relies on a bank’s internal estimates of its operational risks to determine how much risk capital the bank needs to operate.
Affected bank holding companies will have to have enough tier 1 capital, or core capital, to amount to 4% of total risk-weighted assets.
The bank holding companies will have to have “total capital” equal to at least 8% of total risk-weighted assets, officials write.
Total capital includes tier 1 capital and “tier 2,” or supplemental, capital.
The basic definitions of the tier 1 and tier 2 elements will be the same as they are in banks’ current RBC calculations, officials say.
When a bank holding company with an insurance company subsidiary regulated by a U.S. state or a comparable entity is making RBC calculations, “the assets and liabilities of the subsidiary would be consolidated for purposes of determining the [bank holding company]‘s risk-weighted assets,” officials write.
Originally, officials proposed adjusting for insurance underwriting risk by deducting the insurance subsidiary’s minimum regulatory capital requirement from the bank’s tier 1 capital total.
For U.S. insurance underwriting subsidiaries, the deduction would usually be about 200% of the authorized control level established by an insurance subsidiary’s state insurance regulator, officials write.