WASHINGTON -- The Federal Reserve Board zeroed in on risk-based capital Wednesday, approving rules aimed at boosting internal bank controls and proposing regulations for derivatives.
The derivatives proposal, which was developed with the other bank regulatory agencies, is designed to make capital more sensitive to the risks posed by these contracts.
The plan breaks down into two parts. The first expands the conversion charts that regulators use to determine a bank's capital requirement.
Five-Year Time Horizon
The charts would include risk weightings for precious metals and commodities, in addition to the current interest rate and exchange rate factors.
A time factor also will be added to the charts. Now, derivatives contracts are categorized as more or less than one year. The proposal adds "more than five years" to the list.
Part two of the Fed's proposal seeks to reward banks that hold derivatives contracts under netting arrangements. Netting - in which a bank takes both sides of potential rate swings - reduces risk.
The Fed and the other regulators already have a proposal pending that would reward banks using netting in the short run. Wednesday's proposal would .expand that to the longterm benefit of netting and its associated lower risks.
Part of Basel Accord
The new derivatives proposal is part of an international effort under the Basel accord to revise capital treatment of derivatives contracts. But it won't be the last time regulators grapple with the issue.
Fed Governor Susan M. Phillips said at the meeting that the proposal is a clear improvement over present policy. But she said she feared it would become outdated in five years or less:
"This may be too simplistic," she said.
Because the proposal is associated with the international agreement, Governor Lawrence B. Lindsey said domestic and foreign banks would operate under the same rules.
Level Playing Field
"The important thing is that we are in no way disadvantaging U.S. banks," he said.
Separately, the Fed added two components to risk-based capital calculations as required by the Federal Deposit Insurance Corporation Improvement Act of 1991.
The first deals with concentrations of credit risk. Examiners will look at a broad class of credit and determine whether an institution is overinvesting in certain areas.
The institution's risk-based capital requirement would be raised or reduced depending on the examiner's judgment, rewarding institutions that diversify their assets.
Currently, examiners are not permitted to take concentration into account in setting riskbased capital requirements.
The other addition would boost capital requirements for banks that engage in nontraditional activities, if the central bank concludes the institutions don't monitor risk adequately.
The new rules will take effect 30 days after their publication in the Federal Register.