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To: Chief Executive Officers of All National Banks, Department and Division Heads, and All Examining Personnel

Description: Final Rule

The attached final rule on specific risk was published in the Federal Register on April 19, 1999, and applies to banks with significant trading activity subject to the market risk-based capital regulation (appendix B of 12 CFR 3.) The rule was issued jointly by the OCC, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation; it adopts without change the interim rule that became effective on December 31, 1997.

Since January 1, 1998, national banks with significant trading activities have been required to use an internal value-at-risk (VAR) model to calculate risk-based capital for these activities. A bank is subject to the rule if either: (1) the sum of the bank's trading assets and liabilities is at least 10 percent of total assets, or (2) the sum of the bank's trading assets and liabilities is greater than $1 billion. However, the OCC may exempt a national bank that meets one of these criteria if the institution does not have significant market risk.

The final rule permits a bank to use its internal VAR model to calculate the specific risk component of its market risk-based capital charge. This component covers the risk that the market value of on- or off-balance-sheet items will change because of the unique circumstances of a particular issuer. Prior to the interim rule, the specific risk component amounted to at least 50 percent of a standard, formulaic specific risk charge. (Since January 1, 1998, banks have been able to use their VAR models to calculate the component for general market risk, which covers risk due to broad movements in interest rates, equity prices, foreign exchange rates, or commodity prices.)

For further information about this bulletin, contact Margot Schwadron in the Capital Policy Division at (202) 874 5070.

Kevin J. Bailey
Deputy Comptroller of Core Policy

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