Just nine U.S. banks are likely to be subject to the government's proposed market risk capital rules.
The proposals, issued by the banking agencies last July, initially would have required about 25 big banks and a few small ones to set aside capital to account for swings in the value of their derivatives, securities, and foreign exchange portfolios.
But at a meeting of the Federal Deposit Insurance Corp. board Tuesday, an FDIC official said the three banking agencies would be able to exempt all but the biggest trading banks from the rules.
"It could fall to as few as nine or 10 banks," said Miguel Browne, the agency's deputy assistant director of supervision. Mr. Browne did not name the banks, but nine institutions stand out in call report data as far and away the biggest derivatives traders. (See accompanying chart.)
This prompted FDIC Chairman Ricki Helfer to ask: "Why adopt a regulation for nine institutions?"
Mr. Browne responded, "The intent of the Basel process is for all large international banks to be playing basically on an even field."
The proposed rules are the work of the Basel Committee on Banking Supervision, which in 1988 set international risk-based capital standards for credit risk and has now proposed to add market risk to the equation.
Regulators would calculate the amount of capital banks must set aside to account for market risk either by using a regulatory formula or banks' internal risk-measurement models. The banking agencies have said they hope to adopt the rules so that they take effect at the end of 1997.
On Tuesday, the FDIC board voted to seek comments on an addition to the internal models proposal - a formula for "back-testing" the models to ensure they work. The Federal Reserve Board plans to vote on back-testing today, and the Office of the Comptroller of the Currency is expected to vote on the issue soon.
With back-testing, the internal models approach would work like this: Banks would calculate how much money they could lose in 10 business days due to market movements. Most money-centers now calculate only how much they could lose in a day. A 10-day estimate could be calculated from that figure.
To build in extra cushion, the 10-day number would be multiplied by three to come up with the capital standard. If backtesting reveals that a bank's risk model underestimated daily trading losses more than four times in a year, the multiplication factor would be increased. Ten days of higher-than-expected losses would result in a multiplier of four.
Comments on the back-testing proposal will be accepted until 30 days after its publication in the Federal Register, which should occur in a few days.