Federal Register /Vol. 60, No. 148/Wednesday, August 2 ......39496 Federal Register/Vol. 60, No....

39495Federal Register / Vol. 60, No. 148 / Wednesday, August 2, 1995 / Proposed Rules

DEPARTMENT OF THE TREASURY

Office of the Comptroller of theCurrency

12 CFR Part 3

[Docket No. 95–17]

FEDERAL RESERVE SYSTEM

12 CFR Part 208

[Docket No. R–0802]

FEDERAL DEPOSIT INSURANCECORPORATION

12 CFR Part 325

Joint Agency Policy Statement:Supervisory Policy StatementConcerning a Supervisory Frameworkfor Measuring and Assessing Banks’Interest Rate Risk Exposure

AGENCIES: Office of the Comptroller ofthe Currency (OCC), Treasury; Board ofGovernors of the Federal ReserveSystem (Board); and Federal DepositInsurance Corporation (FDIC).ACTION: Policy statement; request forcomment.

SUMMARY: The OCC, the Board, and theFDIC (collectively, ‘‘the agencies’’) seekcomment on a proposed interagencySupervisory Policy to establish auniform supervisory framework formeasuring banks’ interest rate risk (IRR)exposures. The proposed policyestablishes a framework that theagencies would use to measure andmonitor the level of IRR at individualbanks. The measurement processproposed and described in this policystatement is intended to facilitate theagencies’ assessment of a bank’s IRRexposure and its capital adequacy. Theresults of the supervisory and internalmodels would be one factor used by theagencies in their assessments’ of abank’s capital adequacy for IRR. Otherfactors that the agencies will considerinclude the quality of the bank’s IRRrisk management process, the overallfinancial condition of the bank, and thelevel of other risks at the bank for whichcapital is needed. Pursuant to the finalrule banks may be required to holdadditional capital.

The proposed supervisory frameworkprovides measures of the change in abank’s economic value for a givenchange in interest rates using asupervisory model. The framework alsoconsiders the results of a bank’s internalmodel results when that model providesa measure of the change in a bank’seconomic value. Banks not specifically

exempted from detailed IRR reportingwould submit new IRR Call Reportschedules indicating the maturity,repricing, or price sensitivity of theirvarious on- and off-balance sheetinstruments. A bank also would havethe option of reporting its internalmodel estimates of the price sensitivityof its major portfolios and its economicvalue.

Concurrent with the publication ofthis proposed Supervisory Policystatement, the agencies have issued afinal rule that amends their capitalguidelines for IRR. Those amendmentsindicate that the agencies will considerin their evaluation of a bank’s capitaladequacy, the exposure of a bank’scapital and economic value to changesin interest rates. The amendments are inresponse to section 305 of the FDICImprovement Act of 1991 (FDICIA)which requires the agencies to amendtheir risk-based capital standards to takeadequate account of interest rate risk.

As noted in the discussion of the finalrule on IRR, the agencies intend, at asubsequent date, to incorporate explicitminimum requirements for IRR intotheir risk-based capital standards. Theagencies anticipate that themeasurement framework described inthis proposed policy, will be the basisfor such a capital requirement. Towardthat end, the agencies intend to workwith the industry to evaluate thereliability and accuracy of the resultsfrom the supervisory model and bankinternal models. Any explicit minimumcapital charge would be implementedthrough the agencies’ rulemakingprocess and would provide theopportunity for public comment beforea final rule is adopted.DATES: Comments must be received byOctober 2, 1995.ADDRESSES: Interested parties areinvited to submit written comments toany or all of the agencies. All commentswill be shared among the agencies.

OCC: Written comments should besubmitted to Docket No. 95–17,Communications Division, Ninth Floor,Office of the Comptroller of theCurrency, 250 E Street, S.W.,Washington, D.C. 20219, Attention:Karen Carter. Comments will beavailable for inspection andphotocopying at that address.

Board of Governors: Comments,which should refer to Docket No. R–0802, may be mailed to Mr. WilliamWiles, Secretary, Board of Governors ofthe Federal Reserve System, 20th andConstitution Avenue, N.W.,Washington, D.C. 20551. Commentsaddressed to Mr. Wiles may also bedelivered to the Board’s mail room

between 8:45 a.m. and 5:15 p.m. and tothe security control room outside ofthose hours. Both the mail room andcontrol room are accessible from thecourtyard entrance on 20th Streetbetween Constitution Avenue and CStreet, N.W. Comments may beinspected in Room B–1122 between 9:00a.m. and 5:00 p.m., except as providedin 261.8 of the Board’s ‘‘Rules RegardingAvailability of Information,’’ 12 CFR261.8.

FDIC: Written comments should besent to, Jerry L. Langley, ExecutiveSecretary, Attention: Room F–402,Federal Deposit Insurance Corporation,550 17th Street, N.W., Washington, D.C.20429. Comments may be hand-delivered to Room F–402, 1776 F StreetN.W., Washington, D.C. 20429, onbusiness days between 8:30 a.m. and5:00 p.m. [FAX number (202) 898–3838;Internet address: comments @ fdic.gov].Comments will be available forinspection and photocopying in Room7118, 550 17th Street, N.W.,Washington, D.C. 20429, between 9:00a.m. and 4:30 p.m. on business days.FOR FURTHER INFORMATION CONTACT:

OCC: Christina Benson, CapitalMarkets Specialist, or Lisa Lintecum,National Bank Examiner (202/874–5070), Office of the Chief National BankExaminer; Michael Carhill, FinancialEconomist, Risk Analysis Division (202/874–5700); and Ronald Shimabukuro,Senior Attorney, Bank Operations andAssets Division (202/874–4460), Officeof the Comptroller of the Currency, 250E Street, S.W., Washington, D.C. 20219.

Board of Governors: James Houpt,Assistant Director (202/452–3358),William F. Treacy, SupervisoryFinancial Analyst (202/452–3859),Division of Banking Supervision andRegulation; Gregory Baer, ManagingSenior Counsel (202/452–3236), LegalDivision, Board of Governors of theFederal Reserve System. For the hearingimpaired only, TelecommunicationDevice for the Deaf (TDD), DorotheaThompson (202/452–3544), Board ofGovernors of the Federal ReserveSystem, 20th and C Streets, N.W.,Washington, D.C. 20551.

FDIC: William A. Stark, AssistantDirector (202/898–6972) or Phillip J.Bond, Senior Capital Markets Specialist(202/898–3519), Division ofSupervision, Federal Deposit InsuranceCorporation, 550 17th Street, N.W.,Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. Introduction

Interest rate risk is the risk thatchanges in market interest rates willhave an adverse effect on a bank’s

39496 Federal Register / Vol. 60, No. 148 / Wednesday, August 2, 1995 / Proposed Rules

earnings and its underlying economicvalue. Changes in interest rates affect abank’s reported earnings by changing itsnet interest income and the level ofother interest-sensitive income andoperating expenses. The underlyingeconomic value of the bank’s assets,liabilities, and off-balance sheetinstruments also is affected by changesin interest rates. These changes occurbecause the present value of future cashflows and in some cases, the cash flowsthemselves, are affected when interestrates change. The combined effects ofthe changes in these present valuesreflect the change in the bank’sunderlying economic value.

Interest rate risk is inherent in the roleof banks as financial intermediaries.However, a bank that has an excessivelevel of interest rate risk can facediminished future earnings, impairedliquidity and capital positions, and,ultimately, may jeopardize its solvency.

The agencies believe that safety andsoundness requires effectivemanagement and measurement ofinterest rate risk, and each agency hasprovided supervisory guidance to banksand examiners on this subject. Inaddition, the agencies believe that abank’s capital adequacy should beassessed in the context of the risks itfaces, including interest rate risk.Section 305 of FDICIA Pub. L. 102–242(12 U.S.C. 1828 note), on which a finalrule is being issued at the same time asthis statement, specifically requires theagencies to take account of interest raterisk in assessing capital adequacy. Bothof these aspects of interest rate riskdepend on, among other things, ameaningful measurement of the bank’srisk exposure.

The agencies believe that a bankshould have an IRR measurementsystem that is commensurate with thenature and scope of its IRR exposures.Among the difficulties in performing asupervisory evaluation of interest raterisk, however, is that measurementsystems and management philosophiescan differ significantly from one bank toanother. As a result, although two banksmay each be well-managed, theirmeasured exposure may not be directlycomparable. This difficulty has beenmagnified by the rapid pace of changein financial markets and instrumentsthemselves.

In implementing Section 305 ofFDICIA, and in light of the rapidevolution in financial instruments andpractices, the agencies believe there is aneed for a more formal supervisoryassessment of banks’ interest rate riskexposures. To support that effort, theagencies propose a measurementframework that includes a supervisory

measurement system (‘‘supervisorymodel’’) that will, on a standardizedbasis, measure the risk of all banks notexempted from reporting additionalinformation on their IRR exposures. Inaddition, banks will be encouraged toreport, through a voluntary andconfidential supplemental Call Reportschedule, the results of their internalIRR measurement systems. Thesemeasured results would then serve as anadditional source of information for anexaminer’s assessment of the bank’s riskmanagement and capital adequacy. Theresults also would provide informationon industry trends and patterns that willbetter inform both present and futuresupervisory efforts related to interestrate risk.

The measurement frameworkdescribed in this policy statementfocuses on the exposure to a bank’sunderlying economic value frommovements in market interest rates. Theexposure to a bank’s economic value, asused in this policy statement, is definedas the change in the present value of itsassets, minus the change in the presentvalue of its liabilities, plus the changein the present value of its off-balancesheet interest-rate positions. Theagencies haven chosen this focusbecause they believe that changes in abank’s economic value best reflect thepotential impact of embedded optionsand the potential exposure that thebank’s current business activities poseto the bank’s future earnings stream, andhence, its ability to sustain adequatecapital levels. Changes in economicvalue measure the effect that a changein interest rates will have on the valueof all of the future cash flows generatedby a bank’s current financial positions,not just those cash flows which affectearnings over the few months orquarters. Thus, changes in economicvalue provide a more comprehensivemeasure of risk than measures whichfocus solely on the exposure to a bank’snear-term earnings. It is for this reasonthat the agencies have amended theircapital standards to identify explicitly abank’s exposure to declines in economicvalue from changes in interest rates asan important factor to consider inevaluating a bank’s capital adequacy.

II. Summary of ApproachIn assessing the sensitivity of a bank’s

economic value to changes in interestrates, the agencies are proposing to usethe results of a supervisory model and,for those electing to provide suchanalysis, the results of banks’ owninternal models. These assessments willrely on data reported in regulatory CallReports. Recognizing that the burden forreporting IRR exposures would fall most

heavily on smaller organizations withlimited resources, the policy statementmakes provisions for smaller, well-managed institutions that are less likelyto be significantly exposed to IRR to beexempt from additional reporting. Asdescribed in further detail in the policystatement, the agencies propose thatbanks with (i) assets under $300million, (ii) composite supervisoryCAMEL ratings of 1 or 2 and, (iii)moderate or low holdings of assets withintermediate and long term maturity orrepricing characteristics, be exemptedfrom expanded reporting requirementsfor IRR.

Banks that are not specificallyexempted by the proposed policystatement will submit additional CallReport information on the repricing andmaturity of their portfolios. Theproposed supervisory model applies aseries of IRR risk-weights to a bank’sreported repricing and maturitybalances. These weights estimate theprice sensitivity of a bank’s reportedbalances to a 200 basis point increaseand decrease in interest rates. Thesummation of these balances, along withcertain price sensitivity information thata bank may be required to self-report,results in a net risk-weighted exposurefor the bank. That exposure representsthe estimated change in the bank’seconomic value to the specified ratechange.

The proposed supervisory modelrepresents a refinement of the modelpresented in the September 1993 noticeof proposed rulemaking (SeptemberNPR) [58 FR 48206, September 14,1993]. The September NPR solicitedcomments on a framework formeasuring banks’ exposure to IRR forcapital purposes pursuant to Section305 of FDICIA. The final rule for Section305 does not incorporate an explicitmeasurement framework for IRR intothe agencies’ risk-based capitalstandards. The agencies have concludedthat it is appropriate to first collectindustry data and evaluate theperformance of the measurementframework before explicitlyincorporating the results of thatframework into their risk-based capitalstandards. The data collected by theagencies will assist current supervisoryefforts and will facilitate thedevelopment of a measurementframework that could be explicitlyincorporated into capital standards inthe future. This proposed policystatement would implement thatsupervisory measurement framework.The proposed framework is broadlyconsistent with the one discussed in theSeptember NPR. The agencies, however,have made several refinements to the


supervisory model to improve itsaccuracy while still endeavoring to limitthe burden of the expanded reportingand maintain model transparency. Therefinements to the September NPRmodel include:

(1) Separate risk-weights and reporting forresidential adjustable-rate mortgages;

(2) Separate risk-weights and reporting forresidential fixed-rate mortgages and all otheramortizing assets;

(3) Self-reporting by banks of pricesensitivities of instruments with complexand/or non-standardized cash flowcharacteristics such as structured notes,collateralized mortgage obligations (CMOs),and mortgage servicing rights;

(4) Supplemental reporting for banks withconcentrations in adjustable- and fixed-ratemortgage loans.

(5) Greater flexibility in reporting depositswithout stated maturity or repricing dates;

(6) Separate reporting and treatment in thebaseline schedule for residential mortgageloans which are held by the bank for sale anddelivery to a secondary market participantunder terms of a binding commitment.

A summary of the public commentsand agency analysis that led to theserefinements are included in section IVof this document and the refinementsthemselves are described in detail in thepolicy statement and accompanyingreporting instructions.

For a bank choosing also to report theresults of its internal IRR model, theagencies are proposing to collect thedollar change in value of the bank’smajor portfolios and the net change inthe bank’s economic value using thesame rate scenario incorporated in thesupervisory model. To the extentspecific details concerning a bank’sfinancial instruments are incorporatedin an internal model with adequateintegrity and reasonable assumptions,those results should provide theagencies with an improvedunderstanding of a bank’s IRR profile.For a bank reporting internal modelresults, an examiner would have thebenefit of weighing the results of bothmeasures in assessing a bank’s overallIRR exposure for capital adequacypurposes. Moreover, comparisonsbetween the results of the supervisorymodel and internal models are expectedto aid the agencies in determining what,if any, refinements should be made tothe proposed measurement frameworkbefore incorporating it into a minimumcapital charge for IRR.

III. CDFI Section 335 ConsiderationsOn September 23, 1994 the Reigle

Community Development andRegulatory Improvement Act of 1994(‘‘CDFI’’) (Pub. L. 103–325) was enacted.Section 335 of CDFI amended section305 of FDICIA by instructing the

agencies to be sure that steps taken toimplement Section 305 ‘‘take intoaccount the size and activities of theinstitutions and do not cause unduereporting burdens.’’ The agenciesbelieve that the Congressional mandateto avoid undue reporting burdens is alsoapplicable and desirable for purposes ofimplementing the proposed policystatement. Consequently, as alreadynoted, the agencies have formulated areporting exemption test that takes intoaccount the size and activities of aninstitution. In addition, the reportingrequirements for the supervisory modelalso considers the nature and scope ofa bank’s activities. Banks holdingcertain types of financial instrumentsthat often have complex ornonstandardized cash flowcharacteristics will be expected to havethe ability to calculate on their own, orobtain from reliable sources, estimatesof those instruments’ market valuesensitivity. Banks with holdings offixed- and adjustable-rate residentialmortgage loans and securities thatexceed certain levels would be requiredto report additional information onthose portfolios to better assess theembedded option risks associated withthose products.

IV. September 1993 Notice of ProposedRulemaking

A. Description of September NPR

In September 1993, the BankingAgencies issued a notice of proposedrulemaking (September NPR) [58 FR48206, September 14, 1993] thatsolicited comments on a framework formeasuring a bank’s IRR exposure anddetermining the amount of capital thebank needed for IRR.

The framework outlined in theSeptember NPR incorporated the use ofa three-level measurement process toevaluate banks’ IRR exposures. The firstmeasure was a quantitative screen,based on existing Call Reportinformation, that exempted potentiallow risk banks from additional reportingrequirements. The exemption screenused two criteria: (1) The amount of abank’s off-balance-sheet interest ratecontracts in relation to its total assets;and (2) the relation between a bank’sfixed- and floating-rate loans andsecurities that mature or reprice beyondfive years and its total capital.

Banks not meeting the proposedexemption test were required tocalculate their economic exposure byeither: (1) A supervisory model thatmeasured the change in the economicvalue of bank for a specified change ininterest rates; or (2) the bank’s own IRRmodel, provided that the model was

deemed adequate by examiners for thenature and scope of the bank’s activitiesand that it measured the bank’seconomic exposure using the interestrate scenarios specified by the agencies.

B. Comments on the September NPRMeasurement Framework

The agencies collectively received atotal of 133 comments on the SeptemberNPR. The majority of commenters werebanks. Thrift, trade associations, bankconsultants, and other government-sponsored agencies and regulators alsocommented. The majority ofcommenters responded favorably tomodifications that the agencies madefrom an earlier, advanced notice ofproposed rulemaking (ANPR) [57 FR35507, August 10, 1992]. In particular,most commenters expressed strongsupport for using the results of a bank’sown IRR model to determine its level ofexposure and corresponding need forcapital. Commenters noted the potentialinaccuracies of standardized regulatorymodels as one reason for allowing theuse of internal models. Internal models,they believed, would better capture theunique characteristics of individualbank portfolios. Many commenters alsostated that permitting the use of internalmodels would provide banks withincentives to improve their internal riskmeasurement systems.

Many commenters raised concernsabout various elements of themeasurement framework outlined in theSeptember NPR. Most commentersbelieved that the proposed treatment ofnon-maturity deposits understated theireffective maturity. Others questionedthe accuracy of the proposedsupervisory model and theappropriateness of the proposedexemption test criteria.

C. Agencies’ Responses to Comments

The agencies have carefullyconsidered the concerns raised bycommenters regarding the structure andelements of the proposed measurementframework and the accuracy of theproposed supervisory model. Althoughthe agencies have decided to retainmany of the principles and structuresoutlined in the September NPRframework, the agencies are alsoproposing several modifications andrefinements to that framework. Thesemodifications include changes to theproposed exemption criteria, thestructure of the supervisory model, andthe treatment of certain types of assetsand non-maturity deposits. Thesemodifications are discussed in greaterdetail in the sections that follow.


1 CAMEL refers to the Uniform FinancialInstitution’s Rating System that the agencies haveadopted. Each bank is assigned a uniformcomposite rating based on an evaluation ofpertinent financial and operational standards,criteria and principles. This overall rating isexpressed through use of a numerical scale of ‘‘1’’through ‘‘5’’ with ‘‘1’’ indicating the highest ratingand ‘‘5’’ the lowest. The composite rating assess fivekey performance dimensions that are commonlyidentified by the acronym ‘‘CAMEL’’: Capitaladequacy, Asset quality, Management, Earnings andLiquidity.

1. Exemption Criteria

The September NPR included criteriathat would exempt a bank fromadditional measurement and reportingrequirements. The proposal set forth thefollowing two criteria that a bank wouldhave to meet to qualify for anexemption:

(1) The total notional principalamount of all of the bank’s off-balance-sheet interest rate contracts must notexceed 10 percent of its assets; and

(2) 15 percent of the sum of the bank’sfixed- and floating-rate loans andsecurities that mature or reprice beyond5 years must be less than 30 percent ofits total capital.

There was general support amongcommenters for some type ofexemption. The majority of commentersaddressing this issue, however, voicedconcerns with the proposed test. Manycommenters believed that a 10 percentthreshold for off-balance sheet contractswould discourage the use of suchinstruments in managing and reducingIRR exposures. Commenters alsoexpressed concerns that the maturitytest, incorporated in the secondcriterion, used contractual maturitiesrather than expected average lives andwould overstate the risk associated withamortizing loans and securities, such asmortgage-related products. Severalcommenters suggested modifying thecriterion to use bank management’sestimates of average lives, rather thancontractual maturities.

Several commenters questionedwhether the proposed exemptioncriteria provided sufficient safeguardsagainst exempting banks that may posesignificant risks to the Bank InsuranceFund due to their potential IRRexposures. A few commenters noted thepotential for material intermediate-termmaturity (e.g., 1- to 5-years) mismatches.A minority of commenters question theneed for, or efficacy of, any exemptiontest.

The agencies continue to believe thatan exemption is desirable and thatsection 335 of CDFI Bill reinforces theneed to consider ways of minimizingburdens associated with this policystatement. The agencies also believe thatthere is a need to ensure sufficientsafeguards against exempting banks thatmay pose significant systemic risks orcosts to the Bank Insurance Fund.Consequently, the agencies propose tomodify the exemption test to focus onthree considerations: the size of thebank; the quality of its overall conditionand management, as measured by itscomposite CAMEL rating; and the levelof its potential repricing exposure asmeasured by its intermediate and

longer-term assets. Specifically, to beexempted, a bank would have to meetthe all of the following three conditions:

(1) The bank must have total assets ofless than $300 million; and

(2) Have a ‘‘1’’ or ‘‘2’’ compositeCAMEL 1 rating from its primarysupervisor; and

(3) The sum of:(a) 30 percent of its loans and

securities with contractual maturity orrepricing dates between one and fiveyears, and

(b) 100 percent of its loans andsecurities with contractual maturity orrepricing dates beyond five years mustbe less than 30 percent of the bank’stotal assets.Banks that meet this proposedexemption test could elect to submit theproposed IRR Call Report schedules ona voluntary basis. The agenciesencourage such voluntary reporting.

The exemption test does not alleviatethe need for an exempted bank toemploy sound IRR measurement andmanagement practices and to havesufficient capital for its risk exposure.Exempted banks will continue to besubject to safety and soundness IRRexaminations that the agencies mayconduct. As a result of suchexaminations, a bank that is exemptfrom this policy statement may bedirected by their primary supervisor toimprove its IRR measurement andmanagement practices, or to holdadditional capital for IRR. In addition,the agencies would retain the right torequire any bank to comply with theprovisions of this policy statement andany subsequent rulemakings regardingIRR.

2. Interest Rate ScenariosThe September NPR outlined a

number of factors that should beconsidered in selecting an appropriateinterest scenario for measuring banks’IRR exposures and evaluating capitaladequacy. These factors included:

(1) The time horizon over whichbanks and supervisors could reasonablybe expected to identify risk andimplement mitigating responses;

(2) The likelihood of occurrence, asreflected by historical rate volatility;and

(3) The appropriate historical sampleperiod used to determine the likelihoodof a given rate movement.

The agencies sought comment onseveral alternative methodologies fordeveloping appropriate interest ratescenarios, including both parallel andnon-parallel changes in interest rates.Among the non-parallel methods, theinterest rate scenario could be basedupon observed nominal changes ininterest rates, or upon observedproportional changes in interest rates.As an alternative, the agencies alsosought comment on using a simpleparallel shift in interest rates across theentire maturity spectrum (‘‘parallel rateshocks’’).

The agencies received a range ofcomments on the selection anddetermination of the appropriateinterest rate scenarios. Commenterswere divided on whether a short or longhistorical sample was most appropriatefor determining the potential range ofinterest rate movements. Those favoringa shorter sample period believed such aperiod best reflected current and likelyprobabilities of rate changes. Othersfavored a longer sample period,primarily to minimize the impact of anyone rate cycle. Opinions were alsodivided on whether a monthly,quarterly, or annual time horizon wasmost appropriate for analyzing potentialrate scenarios. The majority ofcommenters favored either a monthly orquarterly horizon, on the grounds thatsuch time frames represented the timebank management would need toimplement risk mitigating actions inresponse to an adverse movement ininterest rates. Others, however,disagreed and favored the use of anannual time horizon.

Commenters also expressed diverseviews on whether the proposed ratescenarios should be based on nominalor proportional changes in historicalrates, or on the basis of a simple parallelrate shock. A majority of commentersargued against the use of parallel rateshocks, on the grounds that suchscenarios were not realistic of probablefuture interest rate changes. Of thesecommenters, most favored scenariosthat would be based on proportionalrate changes, such that the size of therate change used to measure exposureswould depend upon, and vary with, thecurrent level of market interest rates.Other commenters, however, favoredthe use of parallel rate shocks, primarilyon the grounds of simplicity and ease ofunderstanding.

The agencies propose to use a simple200 basis point, instantaneous parallelupward and downward shift in interestrates for measuring and evaluating


banks’ exposures for purposes ofassessing capital adequacy. Theagencies believe that such ratemovements are realistically conservativegiven the movements in interest ratesexperienced in 1994. They also believethat such rate scenarios are sufficientlytransparent and easy to understand thatthey can be easily incorporated intoeither a bank’s own IRR model or thesupervisory model. The scenarios areincorporated into the proposedsupervisory model via the proposedrisk-weights that are applied to a bank’sreported maturity and repricingbalances.

The agencies stress that their adoptionof these rate scenarios does not replacethe need for a bank to evaluate its IRRexposure over a wider range of possiblerate changes for its own riskmanagement purposes. Such ratechanges may include non-parallel yieldcurve shifts and gradual, as well asimmediate, rate changes. To ensuregreater consistency, however, in theagencies’ assessments of banks’exposures and their need for capital,banks are encouraged to include theproposed instantaneous and parallel 200basis point rate scenarios into theirinternal IRR measurement processes.

3. Structure of Supervisory ModelThe supervisory model in the

September NPR grouped assets,liabilities, and off-balance-sheetpositions by various categories, basedon their general cash flow and productcharacteristics. Each category and timeband was assigned risk-weightscorresponding to a rising rate scenarioand a declining-rate scenario. The risk-weights were constructed by theagencies, using hypothetical marketinstruments that were representative ofthe category being measured. Foramortizing instruments, the risk-weightsincorporated assumptions aboutprepayments.

A number of commenters expressedconcerns regarding the accuracy of themodel proposed in the September NPR.Frequently cited concerns included: theuse of hypothetical, rather than bank-specific, instruments to derive riskweights; the level of data aggregation;the use of standardized prepaymentassumptions; and the treatment ofinterest rate protection agreements (capsand floors). A number of commentersvoiced concerns about the treatment ofresidential mortgage-related products. Ingeneral, these commenters believed thatadditional detail on mortgage holdings,such as coupon information on fixed-rate mortgages, and more explicitinformation on periodic and lifetimeinterest caps for adjustable-rate

products, would improve the model’saccuracy.

The agencies sought comment in theSeptember NPR on whether commercialbanks with portfolios that are similar tothrift should be required to use the NetPortfolio Value model used by theOffice of Thrift Supervision (OTS) forfederally-supervised thrift institutions.Most commenters believed that such arequirement would impose substantiallygreater reporting burdens withoutnecessarily improving the accuracy ofthe measure and might create incentivesfor banks to substitute such a model forthe judgment of bank management. Aminority of commenters disagreed andstated that the approach and data usedby the OTS were superior and moreaccurate than what the banking agencieshad proposed.

The agencies have carefullyconsidered commenters’ concerns aboutthe proposed supervisory model’saccuracy. The agencies believe it iscritical to have a supervisory model thatcan identify banks with significant IRRexposures. They also are attentive to therisk that model measurement errorscould lead to undesirable incentives orincorrect assessments regarding the riskand complexity of products, activities,or banks. At the same time, the agenciesrecognize the need to balance the desirefor increased accuracy against thepotential costs of greater reporting detailand model complexity. The agencies areparticularly concerned that thesupervisory model retain sufficienttransparency so that bankers canunderstand its methodology andanticipate and compute their bank’smeasured exposure and that it notreplace the role or need for soundinternal interest rate risk managementsystems.

The agencies intend to make fivemodifications to the structure of thesupervisory model to improve itsaccuracy and which are describedbelow. The first four changes modify thebasic supervisory model outlined in theSeptember NPR. This revised basicmodel will be the baseline model fornon-exempted banks. The lastmodification creates supplementalmodules for banks that haveconcentrations in residential mortgage-related instruments. The agencies aremindful that the supplementalschedules will impose additionalreporting requirements for some banks.Nonetheless, the agencies are concernedthat the baseline model may not besufficiently accurate to capture the riskat banks with significant holdings ofmortgage loans or mortgage pass-through securities, and thereforepropose to require additional reporting

for those banks. A detailed descriptionof the model, the risk weights, andinformation requirements are discussedin the policy statement. Schedule 1,provided in the attached policystatement, illustrates the type ofinformation that will be used in thebaseline supervisory model, whileSchedules 2–4 illustrate the informationused for the supplemental modules.

a. Adjustable-rate residentialmortgages. The first modification thatthe agencies have made is to treatadjustable-rate residential mortgageloans and securities (ARMs) separatelyfrom fixed-rate residential mortgageassets. As modified, information onARMs will be reported by a bank on thebasis of the reset frequency of theARM’s pricing index, rather than by theARM’s next date to repricing. Inaddition, a bank will report ARMs thatare currently within 200 basis points oftheir lifetime cap separately from thoseARMs that are further away from theirlifetime caps. The agencies believe thatthis stratification of ARM products willprovide a better reflection of theirpotential price sensitivity to changes inmarket interest rates than the treatmentdescribed in the September NPR.

b. Fixed-rate residential mortgagesand other amortizing assets. The secondmodification the agencies made is totreat fixed-rate residential mortgageassets separately from other amortizingassets. In the September NPR, theseassets had been combined into a singlecategory. As a result of thiscombination, the same prepaymentassumptions were applied to allamortizing assests. By separating thesetwo categories, the agencies propose toapply different prepayment assumptionsto the two categories.

c. Self-reporting of market valuesensitivities. The third modification willrequire a bank that holds certain typesof financial instruments to provide in itsCall Report submissions, estimates ofchanges in market value sensitivities ofthose instruments for the specified 200basis point interest rate scenarios. Theseestimates may be obtained from thebank’s own internal risk measurementsystems or from reliable third-partysources, provided that the bank knows,understands, and documents theassumptions underlying those estimates.All estimates and supportingdocumentation will be subject toexaminer review. The September NPRused this approach for certain mortgagederivatives securities. The agenciespropose to extend this treatment toother products. The products for whichbanks would be required to self-reportmarket value sensitivities generally havecomplex options or cash flow


2 Effective February 10, 1992, the agencies and theOffice of Thrift Supervision adopted revisedsupervisory policies on securities activities thatwere developed under the auspices of the FFIEC.The revised policies established a framework foridentifying ‘‘high-risk mortgage derivativeproducts.’’

3 The Basle Committee on Banking Supervision isa committee of banking supervisory authoritieswhich was established by the central-bankGovernors of the Group of Ten countries in 1975.

4 The Committee’s proposal is described in aconsultative paper, entitled ‘‘Planned Supplementto the Capital Accord to Incorporate Market Risks,’’issued in Basle, Switzerland on April 12, 1995.Copies of that paper may be obtained by contacting:The OCC’s Communications Division, Ninth Floor,Office of the Comptroller of the Currency, 250 EStreet, S.W., Washington, D.C. 20219. A copy of thepaper also is available at the FDIC Reading Room,550 North 17th Street, NW, Washington, D.C.

5 Appendix 4 of the policy statement provides adescription of the derivation of the risk-weights forthe baseline supervisory model and supplementalmodules.

characteristics. These characteristicsmake it difficult to adequately measurethese products in a standardized modelwithout collecting detailed transaction-oriented data.

Self-reporting of market valuesensitivities generally would berequired for the following products orportfolios:

(1) All mortgage-backed derivativesecurities that meet the FFIEC’s definition of‘‘high-risk.’’ 2

(2) All structured notes, as defined in theCall Report instructions;

(3) Non-high-risk mortgage derivativesecurities when those holdings represent 10percent or more of a bank’s assets.

(4) Mortgage servicing rights that arecapitalized and reported on the bank’sbalance sheet;

(5) Off-balance-sheet interest rate options,caps, and floors, including interest rateswaps with embedded option characteristics.

The agencies believe that given thepotential price sensitivity of theseproducts or portfolios to interest ratechanges, it is reasonable to expect banksto be able to calculate or obtain reliableestimates of their market valuesensitivities. Industry comments on theavailability of such information areespecially welcomed.

d. Trading account portfolios. Theagencies also propose to change themanner in which trading accountpositions are treated in the supervisorymodel. These changes are in response tocommenters concerns regarding theburden associated with distributingtrading positions into the maturityladder and applying a 200 basis pointrate shock to those positions.

As modified, banks will be asked toself report the change in the economicvalue of all of their trading accountpositions for a 100 basis point parallelincrease or decrease in interest rates.This rate change, smaller than the 200basis point change used for the rest ofthe bank’s holdings, reflects the shorterholding period typical for tradingaccount positions. It also is similar tothe 100 basis point scenario used by theBasle Committee on BankingSupervision (Basle Committee) in itsApril 1995 proposal on capitalrequirements for the market risks oftraded debt securities.3

The agencies believe the self-reportingtreatment for trading accounts is

consistent with supervisory guidanceissued by each of the agencies thatdirects banks with significant tradingactivities to have internal riskmeasurement and limit systemscommensurate with the size andcomplexity of their activities.

As previously noted, the BasleCommittee has recently released forcomment a proposal to incorporate themarket risks of trading activities into theBasle Accord risk-based capitalstandards.4 The agencies published inthe Federal Register on July 25, 1995(60 FR 38082) a notice of proposedrulemaking on the Basle market riskproposal. If the agencies adopt a finalrule to implement the Basle market riskproposal for banks with a largeconcentration of trading activities, theagencies anticipate that modifications tothis policy statement will be required toensure that IRR exposures arising fromthose activities are not ‘‘double-counted.’’ One approach that theagencies are considering is to excludetrading activities from this proposedpolicy statement and IRR measure forthose banks that are subject to themarket risk proposal. If such anapproach is adopted, those banks wouldbe exempted from having to report thechanges in the market value of theirtrading portfolios for the IRR measure.If, however, a bank’s trading portfoliooffsets the exposure from othercomponents of the bank’s balance sheet,this treatment would overstate thebank’s total IRR exposure.

e. Supplemental modules. The finalmodification made by the agencies tothe supervisory model structure is thedevelopment of supplemental modulesfor fixed-rate and adjustable-rateresidential mortgage loans and pass-through securities. A bank whoseholdings of these products exceedscertain threshold levels will be requiredto report additional information onthose holdings in their Call Reportsubmissions. The agencies will applyexpanded tables of risk-weights to thoseportfolios. The supplemental module forfixed-rate residential mortgages requiresa bank to stratify its balances into eightcoupon ranges. The agencies havedeveloped separate risk-weights for eachcoupon range which reflect thedifferences in expected prepaymentspeeds that are associated with the

underlying coupon rates. To developthese risk-weights, the agencies haveused the September 30, 1994 pricingtables generated by the Office of ThriftSupervision’s Net Portfolio ValueModel.5 The agencies will apply thissupplemental module and associatedrisk-weights when a bank’s holdings offixed-rate residential mortgage loansand pass-through securities represent 20percent or more of its total assets.Schedule 2 in the attached policystatement illustrates the informationthat will be used in the supplementalmodule for fixed-rate residentialmortgages. This expanded module willbe optional for a bank whose holdingsof these instruments are less than 20percent of its assets.

Two levels of supplemental moduleshave been developed by the agencies foradjustable-rate residential mortgages.The first level, illustrated by Schedule3 in the attached policy statement,requires information on ARMs to bestratified by reset frequency (as in thebaseline model), periodic caps, and theARMs’ distances from lifetime caps.This module will be used by theagencies when a bank’s ARM holdingsare greater than 10 but less than 25percent of its assets. The second level,illustrated by Schedule 4 in the attachedpolicy statement, requires that ARMbalances be further stratified by theunderlying rate index of the ARM. Thismodule will apply to banks whoseholdings equal or exceed 25 percent oftheir total assets. The agencies havedeveloped risk-weights that correspondwith each various reset frequency,lifetime cap, periodic cap, and, indexcombination, again using pricing tablesgenerated from the OTS Net PortfolioValue Model.

The agencies are mindful that manycommenters to the September NPRraised concerns about tradeoffs betweenattempts to improve the supervisorymodel accuracy and associatedreporting burdens, especially withregards to the use of the OTS model.Nonetheless, the agencies believe thedistribution of coupons for fixed-ratemortgage portfolios and the interactionof the parameters illustrated inSchedules 3 and 4 significantly affectthe price sensitivity of mortgage loansand securities. The agencies believe thatby explicitly considering theseparameters, the supplemental moduleswill enhance the accuracy of thesupervisory model. The agencies believethat this increased accuracy is


6 For purposes of this policy statement, the term‘‘commercial’’ is used to mean ‘‘nonpersonal’’ asthat term is defined under the Board of Governor

of the Federal Reserve System’s Regulation Ddealing with reserve requirements.

warranted due to the increased holdingsof mortgage products among commercialand savings banks. They also note theflexibility that many banks exercise intheir ability to tailor the various pricingcombinations of their ARM products. Asbanks expand their activities in theseproducts, the agencies are particularlyconcerned that banks not ignore thepotential impact and interaction of thesepricing parameters.

Draft instructions for completing thesupplemental modules and a technicaldescription of the risk-weights used inthe modules are provided in theappendices 2 and 4 to the proposedpolicy statement.

4. Non-maturity deposit assumptions.The September NPR established limitson the maximum maturities that a bankcould attribute to its non-maturitydeposits when measuring its IRRexposures for capital adequacy. Non-maturity deposits were defined to bethose instruments without a specificmaturity or repricing date and includeddemand deposits (DDA), negotiableorder of withdrawal (NOW), savings,and money market deposit (MMDA)accounts. In the September NPR, bankswere subject to the following constraintsin distributing these deposits acrosstime bands:

(1) A bank could distribute its DDA andMMDA accounts across any of the first threetime bands, with a maximum of 40 percentof those balances in the 1 to 3 year time band;

(2) A bank could distribute its savings andNOW account balances across any of the firstfour time bands, with a maximum of 40percent of the total of those balances in the3 to 5 year time band.

The treatment of non-maturitydeposits was one of the mostcommented upon aspects of theSeptember NPR. Most commentersstated that the proposed treatmentcould, in many cases, understate theeffective maturity of these deposits andurged the agencies to adopt a moreflexible approach or extend thepermissible maturities. Commenters

expressed concern that the adoption ofthe proposed rules could lead toincorrect assessments of risk exposuresor inappropriate incentives to shortenasset maturities.

The agencies recognize that thetreatment of non-maturity deposits willbe, for many banks, the single mostimportant assumption in measuringtheir IRR exposures. The agencies alsoagree that many banks historically havebeen able to exercise considerableflexibility in the timing and magnitudeof pricing changes for these accounts. Itis for this reason that the agencies hadproposed to allow banks some flexibilityin the treatment of these deposits.Nonetheless, the agencies believe thatthere are risks associated with assumingthat a bank has sufficient flexibility inits management of these deposits so asto offset any IRR position it may have.While these deposits can, in manycircumstances, help to mitigate a bank’sIRR exposure, historical experiencesuggests that an institution can incursignificant levels of IRR though it mayhave sizeable holdings of non-maturitydeposits. The agencies also areconcerned that increased competitivepressures and changing customerdemographics may, over time, makethese deposits more rate sensitive orprone to migration into otherinvestment vehicles.

Given these considerations, theagencies believe it is appropriate toextend, but not eliminate, the maximumpermissible maturities for non-maturitydeposits. Within these maturity ranges,a bank would have the flexibility todistribute its balances based on its ownassumptions and experience. Theagencies will expect that bankmanagement will be able to document toexaminers the rationale for thetreatment they have chosen.

In addition to extending permissiblematurities, the agencies believe thatdemand deposit balances held bybusinesses should be treated differently

than demand balances held by otherentities. In particular, the agenciesbelieve that a shorter maturity isappropriate for commercial demanddeposit accounts since many of theseaccounts are in the form ofcompensating balances.6 The implicitearnings from these compensatingbalances are often used to offset servicecharges incurred by the customer, andthe level of these implicit earningsattributed to the deposits is generallydependent upon the level of currentmarket rates. As such, these balancesbehave very much like interest-sensitivebalances. As market rates increase, thelevel of balances drops due to a higherearnings credit, while as rates decline,the level of balances will generallyincrease.

The agencies propose to extend therange of permissible maturities for non-maturity deposits by revising thedistribution rules for those deposits. Asproposed, a bank may distribute itsdeposits across time bands according toits individual assumptions andexperience, subject to the followingconstraints:

(1) Commercial Demand Deposits: A bankwould report 50 percent of it’s commercialdemand deposits in the 0–3 month timeband. The remaining balances may bedistributed across the first four time bands,with a maximum of 20 percent of totalbalances in the 3–5 year time band.

(2) Retail DDA, Savings, and NOWAccounts: A bank may distribute thebalances in these accounts across any of thefirst five time bands, with a maximum of 20percent in the 5–10 year time band and nomore than 40 percent combined in the 3–5and 5–10 year bands.

(3) MMDA Accounts: A bank maydistribute the balances in these accountsacross any of the first three time bands, witha maximum of 50 percent in the 1–3 yearband.

Table A summarizes the distributionthat would result if a bank reported itsbalances so as to maximize its allowablematurities.

TABLE A.—MATURITY DISTRIBUTION LIMITS FOR NON-MATURITY DEPOSITS

0–3 months(percent)

3–12months

(percent)

1–3 years(percent)



Commercial DDA ...................................................................................... 50 0 30 20 ...................Retail DDA ................................................................................................ 0 0 60 20 20MMDA ....................................................................................................... 0 50 50 ................... ...................Savings ..................................................................................................... 0 0 60 20 20NOW ......................................................................................................... 0 0 60 20 20


The agencies believe that thesematurity limits provide appropriateguidelines for the purpose ofstandardized IRR measurement acrossthe banking industry. These limits arenot intended to replace the need forbanks to evaluate and consider thesensitivity of their individual depositbases when managing their IRRexposures. Examiners will consider abank’s assessment of its deposit baseand how those assessments may differfrom those used in the standardizedsupervisory model during theexamination process when evaluating abank’s capital adequacy for IRR. Theagencies do not propose to requirebanks to incorporate these assumptionsinto their internal IRR models whensubmitting internal model results to theagencies. Rather, through theexamination process, examiners willconsider whether the treatment used inthe bank’s model is appropriate, basedon the analysis the bank provides.

5. Use of a Bank’s Internal IRR ModelThe September NPR permitted a bank

to use the results of its internal IRRmodel, as an alternative to thesupervisory model, when assessing itsneed for capital for IRR, provided thatits model was deemed adequate by theappropriate supervisor. Mostcommenters expressed strong supportfor using the results of a bank’s internalmodel and believed that such a modelwould provide a more accurateassessment of risk than the proposedsupervisory model.

The proposed policy statementprovides for the consideration of abank’s internal model results in theassessment of that bank’s level of IRRexposure and its need for capital. Theresults and quality of a bank’s IRRmeasurement process will be one factorthat examiners will consider inassessing a bank’s need for capital.Among the factors that an examiner willconsider when evaluating the quality ofa bank’s internal model is whether therisk profile it generates is an adequatemeasure of the bank’s risk position,taking account of the types ofinstruments held or offered by the bank,the integrity and completeness of thedata used in the model, and whether theassumptions and relationshipsunderlying the model are reasonable.When assessing the exposure of a bank’seconomic value to changes in interestrates, examiners generally will placegreater reliance on the results of abank’s internal model, rather than thesupervisory model, provided that thebank’s own model:

(1) Measures IRR from an economicperspective, as defined in this proposal;

(2) Uses the proposed supervisoryscenario of an instantaneous andparallel 200 basis point movement ininterest rates; and

(3) Is deemed by the examiner toprovide a more accurate assessment ofthe bank’s IRR risk profile than thesupervisory model and meets thecriteria discussed in Section VII of theproposed policy statement.

Reacting to the September NPR, somecommenters requested the agencies toprovide more explicit guidelines on thecriteria that examiners will use toevaluate the adequacy of a bank’smodel. Other commenters cautioned theagencies against creating checklists ofacceptable assumptions or measurementtechniques. Such lists, they believed,would be incomplete given the diversenature of banks and would stifleinnovation in both risk measurementand product development. Somecommenters also expressed concern thatthe assumptions and results of thesupervisory model would be used as anexplicit benchmark against whichinternal models would be judged andcompared. These commenters wereconcerned that examiners would requirethe bank to conduct detailed andongoing reconciliations between thebank’s internal model and thesupervisory model results. Suchrequirements, they believed, imposedunnecessary burdens and lessened theincentives for banks to use their ownIRR models. Commenters raising theseconcerns generally urged the agencies torefrain from imposing supervisorymodel assumptions on bank models andfrom requiring banks that have theirown internal model to report theinformation required for the supervisorymodel.

A key issue for the agencies, and onereason for delaying the implementationof explicit minimum capital standardsfor IRR, is the degree of specification theagencies need to establish when internalmodels are used for assessing regulatorycapital adequacy. The agencies areaware that there are a variety ofmeasurement systems and assumptionsin use by the industry to measureexposures. While such variation may beappropriate given the diverse nature ofcommercial banks, it may lead todifferent assessments of risk and hence,capital requirements, for institutionsthat have similar risk profiles. Moreexplicit guidance from the agencies onacceptable techniques and assumptionscould help to lessen this variation andthe risk that different amounts of capitalmay be required for banks with similarportfolios. Such guidance also wouldhelp reduce inconsistencies amongexaminers and agencies in evaluating

internal models. Efforts to devise moreexplicit guidance could, however, resultin standards which are inappropriate forsome institutions and may impede theindustry’s continued innovation of moresophisticated risk measurementtechniques. The agencies welcomeindustry comments and suggestions oncriteria and standards that they shouldestablish for accepting internal modelresults.

With regard to reporting, the agenciespropose that internal model results bereported on voluntary basis in asupplemental Call Report schedule likethat portrayed in Schedule A. Inresponse to the concerns of manycommenters, the agencies propose thatsuch reporting be on a confidentialbasis. Although many commenters tothe September NPR requested that bankssubmitting internal model results not berequired to also report the data requiredfor the supervisory model, the agenciespropose the data for the supervisorymodel be collected from all non-exemptbanks. While recognizing the reportingburden that this imposes, the agenciesbelieve that collecting data for bothinternal and the proposed supervisorymodel results will be important foreffective supervision. Moreover, suchdata also will help the agencies evaluatethe use of both the supervisory modeland internal models as the basis forultimately establishing minimumcapital charges for IRR. By monitoringthe maturity and repricing datacollected for the supervisory model, theagencies will be able to assess whethersupervisory and internal models resultscapture major shifts in portfoliocompositions. Such monitoring mayhelp identify key model assumptionsthat should be highlighted for examinerreview and common strengths orweaknesses of internal measures whencompared to the supervisory model.This information will help the agenciesto provide better guidance to examinersand bankers on acceptable riskmeasurement techniques. It will alsoassist the agencies in determining what,if any, improvements could be made tothe proposed supervisory model beforeexplicit minimum capital charges areimplemented.

V. Reporting RequirementsThe implementation of this policy

statement relies on changes to the CallReport. The examples of Call Reportschedules shown in this proposal andthe accompanying draft reportinginstructions for those schedules areprovided to assist the reader inanalyzing the full implications of theproposal. Once comments are receivedon the measurement framework and any


modifications that the agencies believeare appropriate are made, the proposedCall Report schedules would also beamended to reflect those changes. Atthat time, the Call Report scheduleswould be submitted to FFIEC’s ReportsTask Force for inclusion in the commentdocument for March 1996 Call Reportchanges. The FFIEC will submit anyCall Report changes to OMB for reviewas required under the PaperworkReduction Act 44 U.S.C. 3501.Opportunity for public comment isalways provided in relation to such asubmission. Nevertheless, the agenciesinvite comments regarding thepaperwork implications of thisproposed policy statement, and willcarefully consider any commentsreceived in the development of thepolicy, as well as in recommending tothe FFIEC proposed revisions to the CallReport.

VI. Implementation ScheduleThe agencies propose to require any

additional reporting by non-exemptbanks beginning with the March 1996Call Reports. Full implementation ofthis policy statement for assessing theadequacy of bank capital would beeffective December 31, 1996.

VII. Requests for CommentsComments are requested on all

aspects of the proposed policystatement, including the suggestedimplementation schedule. The agenciesparticularly request comments on thefollowing issues:

1. Exemption for Small Banks

The agencies propose to exemptcertain small banks from the proposedpolicy statement and associatedreporting requirements in order tolessen regulatory burdens on small,well-managed banks. The criteria forexemption considers the size of thebank, its overall CAMEL rating and theproportion of assets in intermediate andlonger-term maturities.

a. Are the three criteria used for theexemption appropriate and reasonable?

b. Does the use of a bank’sconfidential CAMEL rating as one of theexemption criteria raise concerns that itmay allow public users of Call Reportsto discern a bank’s CAMEL rating?

c. Does the proposed exemptioncriteria provide adequate safeguardsagainst exempting banks that posesignificant risks to the deposit insurancefund due to IRR?

2. Baseline Supervisory Model

The agencies are proposing that allnon-exempted banks provideinformation for a baseline supervisory

model, the results of which, would beone factor that an examiner would useto assess a bank’s level of IRR exposureand its need for capital. The baselinemodel uses seven time bands andapplies a series of risk-weights to abank’s reported repricing and maturitiesbalances in each of those time bands.For certain types of instruments oractivities, a bank would be required toprovide their own estimate of thechange in value (self-report) of theinstruments or activities for thespecified interest rate scenario.

a. Does the proposed baselinesupervisory model provide a reasonablebasis for measuring a bank’s IRRexposure? If not, what changes shouldbe made to the model?

b. Are the amount and type of dataproposed to be collected for the modelappropriate and reasonable? If not, whatchanges could be made either toimprove the usefulness of the datacollected and/or reduce the burden ofthe proposal?

c. Do banks have the ability tocalculate or obtain reasonable estimatesof changes in market values for theitems where self-reporting would berequired? If not, how should such itemsbe incorporated into the model? Whatfactors should examiners consider inreviewing and assessing the reliabilityof bank’s self-reported estimates?

d. Are the risk-weights proposed forthe baseline model appropriate for animmediate and parallel 200 basis changein interest rates?

e. What portion, if any, of theproposed Call Report interest rate riskdata and output from the proposedsupervisory measurement systemshould be made available to the publicthrough Call Report disclosures and theUniform Bank Performance Report?

3. Treatment of Non-Maturity Deposits

The agencies propose limits on how abank could distribute deposits withoutspecified maturities (DDA, NOW,MMDA and savings) among the timebands for the supervisory model. Insetting these limits, the agenciespropose to treat commercial DDAbalances separately from other DDAbalances. As proposed, these limits onlyapply to the standardized supervisorymodel. The proposal would give anexaminer the latitude to use a bank’sown non-maturity deposit assumptionswhen evaluating the bank’s capitaladequacy for IRR provided that the bankcan demonstrate and support thoseassumptions.

a. Is it appropriate to treat commercialDDA balances separately from otherDDA balances?

b. Are the proposed maturity limitsreasonable for a standardized reportingand measurement framework?

c. Is it appropriate to give examinerslatitude to use a bank’s own non-maturity deposit assumptions? If so,should the agencies specify minimumstandards of analysis that will beacceptable for banks that wish to usetheir own assumptions? What types ofanalyses or factors should beincorporated into such standards?

4. Supplemental Modules for MortgageHoldings

The agencies have proposedsupplemental reporting and expandedrisk-weight tables that would apply tobanks that have concentrations in eitherfixed- or adjustable-rate residentialmortgage products. These supplementalmodules are designed to improve thesupervisory model’s accuracy byincorporating more fully, the parameterswhich may affect a mortgage’s pricesensitivity. The agencies propose toderive the risk-weights for thesupplemental modules from pricingtables generated by the OTS’s NetPortfolio Value Model (OTS model).

a. Is the information that would becollected for the supplemental modulesappropriate and meaningful? If not,what changes should be made?

b. Are the thresholds proposed forrequiring a bank to use thesupplemental modules appropriate? Ifnot, what threshold would beappropriate?

c. Do the supplemental modules andrisk-weights sufficiently addressconcerns about the supervisory model’saccuracy for banks with significantholdings of residential mortgageproducts? Will their use lessen thepossibility of different regulatorytreatment for institutions subject to theOTS model and those subject to thispolicy statement?

d. Will the use of the supplementalmodules and the associated risk-weightsused in those modules provideappropriate incentives for bankdecision-making? Will their usediscourage the development of a bank’sown measurement capabilities?

e. Is the OTS model a reasonablesource for developing the risk-weightsused in this module? If not, are thereother sources that would be more better?

f. The agencies believe thesupplemental schedules related tomortgages are necessary because theprice sensitivity of these products mayvary substantially depending upon theircoupon and cap characteristics. Are theproposed supplemental schedulesappropriate and is the level of precisionsought by the agencies reasonable?


5. Frequency of Updating Risk-Weights

In the interest of minimizingregulatory burden and providing greatertransparency and certainty for thesupervisory model, the agencies proposeto update the risk weights for thebaseline and supplemental schedulesonly in the event of a significantmovement in market rates or othermarket factors that materially changethe accuracy of the derived pricesensitivities and associated risk weights.The OTS, in contrast, recalculates theprice sensitivities for its model eachquarter in order to achieve the precisionit believes necessary to distinguishamong different coupon rates ofmortgage and other products.

a. Does the agencies’ intention to limitthe updating of risk-weights representan appropriate balance among theobjectives of minimizing regulatoryburden, providing transparency andcertainty, and providing sufficientmeasurement accuracy? If not, whatother approaches would be appropriate?

b. Does this limitation on updatingrisk weights materially reduce thebenefits and accuracy that thesupplemental schedules for mortgagesare designed to provide?

c. The supplemental reportingschedule for fixed-rate mortgagesproposes to collect balance informationby set coupon ranges. An alternativethat the agencies have considered is tocollect balances on the basis of theirdistance from prevailing current marketcoupons. Such a treatment would allowthe risk weight applied to any givenmortgage coupon to vary as its spread tocurrent mortgage rates varies. Wouldsuch a treatment be an improvementover the approach currently proposedby the agencies? What, if any,difficulties would be encountered inreporting balances on the basis of theirspread to current mortgage coupons?

6. Use of Carrying Values

In the interest of simplicity, theagencies propose to apply the riskweights, including those derived fromthe OTS price sensitivities, to thecarrying value of a bank’s instruments.To the extent that the carrying andmarket values differ, this introduces anerror in the estimated price sensitivityof an instrument. The price sensitivityof instruments whose market valuesexceed their carrying values will beunderstated whereas the pricesensitivity of instruments whose marketvalues are below carrying values will beoverstated.

a. Is the use of carrying values anappropriate simplification and does theuse of carrying values for both assets

and liabilities sufficiently mitigate themateriality of such errors? If not, whatother approach(es) would beappropriate?

7. Use of Internal Modelsa. Does the proposed policy statement

provide appropriate incentives for theuse of banks’ internal models and forbanks to enhance their internal riskmeasurement systems?

b. Are the criteria described forassessing a bank’s internal modelappropriate? What other factors orcriteria should examiners consider inassessing and reviewing a bank’sinternal model results?

c. Should the agencies provideadditional guidelines on acceptableparameters, assumptions, andmethodologies for internal models?What types of guidance would be mostuseful?

d. Is the proposed voluntary schedulefor reporting internal model resultsappropriate? Are there sufficientincentives for banks to provide thisinformation on a voluntary basis?

8. Treatment of Trading Account

The agencies propose that banks ‘‘self-report’’ the change in value of theirtrading account activities for a 100 basispoint change in interest rates. Theagencies also are considering whethertrading account activities should beexcluded from this policy statement andIRR measure if a bank is subject to themarket risk capital requirements asproposed by the Basle Committee.

a. Is the 100 basis point interest ratescenario that the agencies propose touse when measuring the IRR exposurein a bank’s trading portfolioappropriate? If not, what scenario wouldbe appropriate?

b. What modifications, if any, shouldbe made to this proposal for banks thatmay be subject to the Basle Committee’sproposed capital standards for marketrisk in trading activities? What, if any,operational problems would be createdif such banks were simply exemptedfrom including and reporting theirtrading activities for purposes of thispolicy statement? What, if any,competitive issues would such atreatment present?

The text of the proposed policystatement follows. The first twoappendices to the proposed policystatement provide proposed reportingschedules and accompanyinginstructions for those schedules that areunder consideration by the agencies aspart of this proposed policy statement.The third appendix provides the riskweights that would be used in theproposed supervisory model. The fourth

appendix provides technicaldescriptions of the derivation of themodel’s risk weights and thesupplemental modules for residentialmortgage-related products.

Proposed Policy Statement

I. Purpose

This supervisory policy statement isadopted by the Office of the Comptrollerof the Currency (OCC), the Board ofGovernors of the Federal ReserveSystem (Board) and the Federal DepositInsurance Corporation (FDIC),collectively, the ‘‘agencies.’’ Thestatement establishes a supervisoryframework that the agencies will use toassess and measure the interest rate risk(IRR) exposures of insured commercialand FDIC supervised savings banks. Theresults of this measurement frameworkwill be used by the agencies in theirevaluation of a bank’s IRR exposure andwhether it needs capital for IRR. Eachagency has additional guidance andpolicies on the measurement andmanagement of IRR. Those policies andguidelines set forth each agency’sexpectations regarding safe and soundbanking practices for IRR management.This policy statement does not replaceor supersede those issuances. Theadoption of this policy statement by theagencies does not replace the agencies’expectations that all insured depositoryinstitutions have internal IRRmeasurement and managementprocesses that are commensurate withthe nature and level of their IRRexposures.

II. Background

Interest rate risk is the adverse effectthat changes in market interest rateshave on a bank’s earnings and itsunderlying economic value. Changes ininterest rates affect a bank’s earnings bychanging its net interest income and thelevel of other interest-sensitive incomeand operating expenses. The underlyingeconomic value of the bank’s assets,liabilities, and off-balance sheetinstruments also are affected by changesin interest rates. These changes occurbecause the present value of future cashflows and in some cases, the cash flowsthemselves, change when interest rateschange. The combined effects of thechanges in these present values reflectthe change in the bank’s underlyingeconomic value.

Interest rate risk is inherent in the roleof banks as financial intermediaries.Interest rate risk, however, introducesvolatility to bank earnings and to theeconomic value of the bank. A bank thathas an excessive level of IRR candiminish its future earnings, impair its


liquidity and capital positions, and,ultimately, jeopardize its solvency.

The agencies believe that safety andsoundness requires effectivemanagement and measurement of IRR,and each agency has providedsupervisory guidance to banks andexaminers on this subject. In addition,the agencies believe that a bank’s capitaladequacy should be assessed in thecontext of the risks it faces, includinginterest rate risk. Both of these aspectsof IRR depend, among other things, ona meaningful measurement of the bank’srisk exposure.

The agencies believe that a bankshould have an IRR measurementsystem that is commensurate with thenature and scope of its IRR exposures.Among the difficulties in performing asupervisory evaluation of interest raterisk, however, is that measurementsystems and management philosophiescan differ significantly from one bank toanother. As a result, although two banksmay each be well-managed, theirmeasured exposure may not be directlycomparable. This difficulty has beenmagnified by the rapid pace of changein financial markets and instrumentsthemselves. In light of the rapidevolution in financial instruments andpractices, the agencies believe there is aneed for the more formal assessment ofbanks’ IRR exposures that this policystatement establishes.

The measurement frameworkdescribed in this policy statementfocuses on the exposure to a bank’sunderlying economic value frommovements in market interest rates. Theexposure to a bank’s economic value, asused in this policy statement, is definedas the change in the present value of itsassets, minus the change in the presentvalue of its liabilities, plus the changein the present value of its interest-raterelated off-balance sheet positions. Theagencies have chosen this focus becausethey believe that changes in a bank’seconomic value best reflect the potentialeffect of embedded options and thepotential exposure that the bank’scurrent business activities pose to thebank’s future earnings stream, andhence, its ability to sustain adequatecapital levels. Changes in economicvalue measure the effect that a changein interest rates will have on the valueof all of the future cash flows generatedby a bank’s current financial positions,not just those cash flows which affectearnings over the few months orquarters. Thus, changes in economicvalue provide a more comprehensivemeasure of risk than measures whichfocus solely on the exposure to a bank’snear-term earnings.

III. Definitions and Applicability

A. Definitions

For the purpose of this policystatement, the following definitionsapply:

(1) Interest Rate Risk Exposure meansthe estimated dollar decline in theeconomic value of the bank in responseto a potential change in market interestrates under the specified interest ratescenarios, as measured by either thesupervisory measure or, whereapplicable, a bank’s internal model.

(2) Economic value of the bank meansthe net present value of its assets, minusthe net present value of its liabilities,plus the net present value of its off-balance-sheet instruments.

(3) Interest rate scenarios means thespecified changes in market interestrates used in calculating a bank’s IRRexposure.

(4) Mortgage derivative productsmeans interest-only and principal-onlystripped mortgage-backed securities (IOsand POs), tranches of collateralizedmortgage obligations (CMOs) and realestate mortgage investment conduits(REMICS), CMO and REMIC residualsecurities, and other instruments havingthe same characteristics as thesesecurities.

(5) Net risk-weighted position meansthe sum of all risk-weighted positions ofa bank’s assets, liabilities and off-balance sheet items, plus the estimatedchange in market values for any self-reported items. For the purposes of thesupervisory measure, this numberrepresents the amount by which theeconomic value of the bank is estimatedto change in response to a potentialchange in market interest rates underthe specified interest rate scenarios.

(6) Non-maturity deposits meandemand deposit accounts (DDAs),money market deposit accounts(MMDAs), savings accounts, andnegotiable order of withdrawal accounts(NOWs).

(7) Notional principal amount meansthe total dollar amount upon whichpayments on a contract are based.

(8) Structured notes mean thoseinstruments identified as structurednotes for Call Report purposes.

(9) Commercial demand depositsmean ‘‘nonpersonal’’ demand depositsas that term is defined under the Boardof Governors of the Federal ReserveSystem’s Regulation D.

B. Applicability and Exemption forSmall Banks With Low Risk

All banks will be subject to theprovisions of this policy statement andwill be expected to provide informationfor the supervisory model, unless:

(1) The total assets of the bank are lessthan $300 million, and;

(2) The bank’s primary supervisor hasassigned it a composite CAMEL rating ofeither ‘‘1’’ or ‘‘2’’; and

(3) The sum of:(a) 30% of the bank’s fixed- and

floating-rate loans and securities thathave contractual maturity or repricingdates between 1 and 5 years, and

(b) 100% of the bank’s fixed- andfloating-rate loans and securities thathave contractual maturity or repricingdates beyond 5 years,is less than or equal to 30% of thebank’s total assets.

Notwithstanding this exemption, theappropriate bank supervisor may applyany or all provisions of this policystatement to a bank if the supervisordeems such application is necessary toensure the capital adequacy of the bank.This means that a bank which otherwisemeets the exemption criteria may berequired by the agencies to providematurity and repricing data needed forthe supervisory model. The agencieswould intend to invoke this requirementonly in circumstances where a bankappears to have excessive IRR levels andlacks sufficient internal risk measuressuch that a determination of its need forcapital cannot be adequately assessed bythe agencies. Banks that are exemptedfrom the provisions of this policystatement would continue to be subjectto safety and soundness IRRexaminations and, as a result of suchexams, could be directed by theirsupervisor to improve or strengthentheir risk management practices, or holdadditional capital for IRR.

If a previously exempted bank fails tomeet the exemption criteria as of theJune reporting date, it would berequired to report the necessary data inthe Reports of Condition and Incomebeginning in March of the next yearregardless of its exemption status for theremainder of the current year. The oneexception to this requirement is a bankthat is involved in businesscombinations (pooling of interest,purchase acquisitions, orreorganizations) that would result in achange in their exemption status. Inthose instances, the bank will be subjectto any new reporting requirementsbeginning with the first quarterly reportdate following the effective date of thebusiness combination involving thebank and one or more depositoryinstitutions.

C. Specified Interest Rate ScenariosFor the purpose of measuring a bank’s

level of IRR exposure for capitaladequacy, under either the supervisorymodel or a bank’s internal model, the


7 The agencies have not yet recommended to theFederal Financial Examination Council (FFIEC),Call Report changes for IRR. The schedules andassociated reporting requirements and instructionsthat are discussed in this proposed policy statementand appendix are under consideration by theagencies. These items are included in this policystatement to provide commenters with a fullerunderstanding of the proposal and to give themopportunities to comment on items underconsideration by the agencies. The agencies plan toforward to the FFIEC recommended Call Reportchanges for IRR. Once final recommendations aremade by the agencies, the FFIEC will publish theproposed changes for public comment.

agencies will consider both a rising andfalling interest rate scenario based on aninstantaneous uniform 200 basis pointparallel change in market interest ratesat all maturities. The agencies may, fromtime to time, modify the specifiedinterest rate scenarios as appropriate,considering historical and currentinterest rate levels, interest ratevolatilities and other relevant marketand supervisory considerations.

IV. Description of the Supervisory Model

A. OverviewThe intent of the supervisory model is

to provide the agencies with a measurethat estimates the sensitivity of a bank’seconomic value to a specified change ininterest rates with sufficient accuracy soas to allow the agencies to identifybanks that have high IRR exposures. Themodel applies a series of IRR riskweights to a bank’s reported repricingand maturity balances. These weightsestimate price sensitivity of a bank’sreported balances to a 200 basis pointchange in interest rates. The summationof these weighted balances, along withcertain price sensitivity information thata bank may be required to self-report,results in a net risk-weighted exposurefor the bank. This net risk-weightedexposure is an estimate of the sensitivityof the bank’s economic value to thespecified change in interest rates.

The maturity and repricinginformation contained in the Call Reportthat all non-exempted banks arerequired to file, along with the IRR riskweights that are applied to thatinformation, form the baselinesupervisory model. Banks withconcentrations in fixed- or adjustable-rate residential mortgage products arerequired to submit additional

information on those holdings throughsupplemental Call Report schedules.Supplemental IRR risk weights areapplied to this information. Thesesupplemental reporting schedules andIRR risk weights are referred to assupplemental modules to the baselinesupervisory model.

B. Supervisory Model Calculations

The structure and format of thesupervisory model is designed to allowa bank manager to be able to calculatethe IRR exposure of his or her bank soas to not be dependent upon theagencies for obtaining model results.The calculation of a bank’s IRRexposure using the supervisory modelgenerally requires the following steps

(1) The bank’s assets, liabilities, and off-balance sheet contracts must be assigned tothe appropriate balance sheet categoriesbased on the instrument’s cash flowcharacteristics.

(2) Within each balance sheet category,each asset, liability or off-balance sheetcontract must be assigned to the appropriatetime band generally based on eachinstrument’s remaining maturity or nextrepricing date.

(3) Balances within each time band mustbe multiplied by the appropriate risk weightto produce a risk-weighted position for eachinterest rate scenario.

(4) All risk-weighted positions must besummed to produce a net risk-weightedposition for each interest rate scenario whichis the basis for determining the bank’smeasured exposure to interest rate risk.

A bank performs the first two steps inits compilation and submission of theIRR Call Report schedules. Thoseschedules and accompanyinginstructions are contained in theAppendices 1 and 2 to this policystatement. The risk-weights required for

step three are contained in the tables inAppendix 3 to this policy statement.

C. Information Requirements of theSupervisory Model

Use of the supervisory model requiresinformation on the maturity andrepricing characteristics of a bank’sassets, liabilities and off-balance-sheetpositions. This information is collectedby the agencies through the quarterlyCall Report submissions filed by non-exempted banks and illustrated bySchedule 1.7 This reporting schedulerequires a bank to report its assets,liabilities and off-balance-sheet itemsacross seven maturity ranges (timebands) based on the instrument’s timeremaining to maturity or next repricingdate. The time bands used:

(1) Less than or equal to 3 months;(2) Greater than 3 months and less than or

equal to 12 months;(3) Greater than 1 year and less than or

equal to 3 years;(4) Greater than 3 years and less than or



equal to 20 years;(7) Greater than 20 years.

BILLING CODE 6714–01–P


BILLING CODE 6714–01–C


8 Draft reporting instructions for the schedulesunder consideration by the agencies are provided inAppendix 2 of this policy statement. As previouslynoted, the schedules and associated reportingrequirements and instructions discussed in thisproposed policy statement have not been finalizedand submitted to the FFIEC.

9 Effective February 10, 1992 agencies and theOffice of Thrift Supervision adopted revisedsupervisory policies on securities activities thatwere developed under the auspices of the FFIEC.The revised policies established a framework foridentifying ‘‘high-risk mortgage derivativeproducts.’’

10 The agencies expect banks to have prudentialinternal risk limits and effective risk measurementsystems for their trading activities. For banks withsignificant trading operations, the adequacy andresults of those systems will be closely reviewed byexaminers and would be incorporated into theirassessment of the bank’s overall risk position. TheBasle Committee on Bank Supervision is alsoconsidering methods of evaluating IRR in tradingaccounts and determining appropriate capitalrequirements. This process could lead to aninternational agreement which would affect thetreatment of trading activities for U.S. banks.

In the interest of minimizing reportingburdens, no coupon or yield data arecollected for the baseline supervisorymodel. Rather, the model appliesgeneral assumptions regarding couponrates and other characteristics of theunderlying assets, liabilities, and off-balance-sheet instruments in developingthe interest rate sensitivity weights.Banks with concentrations in fixed-rateor adjustable-rate residential mortgagesare required to provide additionalinformation on those holdings. Forfixed-rate mortgages, this informationincludes data on the underlyingcoupons of the mortgage assets. Foradjustable-rate mortgages, theinformation includes data on lifetimeand periodic caps. These supplementalmodules for fixed- and adjustable-ratemortgages are discussed in Section E ofthis policy statement.

A brief description of how varioustypes of assets, liabilities, and interest-rate related off-balance sheetinstruments are reported is providedbelow. Instructions for completing theschedules required for the supervisorymodel are provided in the Call Reportpackage issued by the FFIEC.8

a. Reporting for assets. The pricesensitivity of a financial instrument isdetermined by the instrument’s cashflow characteristics. Accordingly,maturity and repricing data on mostassets are collected in one of fivecategories that reflect different types ofcash flows:

(1) Adjustable-rate 1–4 familymortgage instruments, includingadjustable-rate mortgage loans andadjustable-rate, pass-through mortgagesecurities. This category would notinclude home-equity loans; those loanswould be reported with otheramortizing loans based on theirremaining maturity or next repricingdate;

(2) Fixed-rate 1–4 family mortgages,including both fixed-rate mortgage loansand pass-through, fixed-rate mortgage-backed securities, again excludinghome-equity loans;

(3) Other amortizing loans andsecurities, including asset-backedsecurities, consumer loans and othereasily identifiable instruments thatinvolve scheduled periodic amortizationof principal more frequently than oncea year;

(4) Zero- or low-coupon securities,including securities with coupons of

less than 3 percent that do not involvescheduled periodic payments ofprincipal; and

(5) All other loans and securities,including loans and securities thatinvolve only periodic payments ofinterest, with payment of principal atmaturity.

Banks holding certain types of assetsare required to self-report the currentmarket value and estimates of thechange in market value of theseinstruments for the specified interestrate scenarios. Banks can use eithertheir internal estimates or estimatesobtained from a reliable third-partysource, provided that the bank knows,understands, and documents theassumptions and methodologies used tocalculate the estimated market valuesensitivities. Assumptions, pricingmethodologies and all otherdocumentation must be reasonable andavailable for examiner review. Self-reporting is used for the followingassets:

(1) All mortgage-backed derivativesecurities that meet the FFIEC’sdefinition of ‘‘high-risk.’’ 9

(2) All structured notes, as defined inthe Call Report instructions;

(3) Non-high risk mortgage derivativesecurities when those holdingsrepresent 10 percent or more of a bank’sassets. Banks whose holdings are lessthan 10 percent of assets have theoption of either self-reporting orreporting those instruments as non-amortizing securities based on bankmanagement’s estimate of theinstrument’s current average life.

(4) Trading account portfolios. A bankshould report the change in theeconomic value of all of their tradingaccount positions for a 100 basis pointparallel increase and decrease ininterest rates.10

(5) Mortgage servicing rights that arecapitalized and reported on the bank’sbalance sheet.

b. Reporting for Liabilities. Themajority of bank liabilities repay

principal only at maturity. Hence, thesupervisory model applies the same setof risk-weights to all of a bank’s interest-sensitive liabilities. Bank liabilitiesdiffer, however, in the certainty of theirmaturity. In particular, many bankliabilities have uncertain orindeterminate contractual maturities.Given these differences, liabilities withcontractual maturities are reportedseparately from those withindeterminate contractual maturities.

The agencies have adopted uniformrules for distributing non-maturitydeposits accounts across the time bands.These rules specify the longest timeband that can be used for each type ofdeposit and the maximum percentageamount that can be reported into thattime band. In its reporting of thesedeposits, a bank may distribute suchdeposits across the time bandsaccording to the bank’s ownassumptions and experience, subject tothe following constraints:

(1) Commercial Demand Deposits: Abank should report 50 percent of itscommercial demand deposits in the 0–3 month time band. The remainingbalances may be distributed across thefirst four time bands, with a maximumof 20 percent of total balances in the 3–5 year time band.

(2) Retail DDA, Savings, and NOWAccounts: A bank may distribute thebalances in these accounts across any ofthe first five time bands, with amaximum of 20 percent in the 5–10 yeartime band and no more than 40 percentcombined in the 3–5 and 5–10 yearbands.

(3) MMDA Accounts: A bank maydistribute these balances across any ofthe first three time bands, with amaximum of 50 percent in the 1–3 yearband.

Within these deposit reportingparameters, a bank is permitted to usedifferent distributions of these depositsfor the rising and falling rate scenarios.This flexibility is designed to reflect theembedded optionality associated withthese products.

c. Reporting for Off-Balance-SheetPositions. Off-balance-sheet contractsthat represent a firm obligation for bothparties are reported within the maturityladder framework using a two-entryapproach to reflect how the contractalters the timing of cash flows. Forinterest rate swaps, the first entry wouldbe reported in the time bandcorresponding to the next repricing dateof the contract, and the second entrywould be reported in the time bandcorresponding to the maturity of theinstrument. For futures, forwards, andFRAs, the first entry would be reportedin the time band corresponding to


11 This differs from earlier proposals where theagencies proposed that options-related contracts be

reported on the basis of their delta-equivalentvalues. The agencies have made this change in thetreatment of option-related contracts due to theirconcerns that delta-equivalent values may bedifficult to compute for longer-dated caps andfloors, and the limitations of using delta as a proxyfor market value sensitivities when evaluating effectof large rate movements.

settlement date of the contract, and thesecond entry would be reported in thetime band corresponding to thesettlement date plus the maturity of theinstrument underlying the contract.

Contracts that are based on non-amortizing instruments are reportedseparately from those based onamortizing principal amounts or onunderlying instruments that amortize.Examples of ‘‘non-amortizing’’ contractsinclude futures, forward-rateagreements, swaps on which thenotional principal amount of thecontract does not amortize,securitization of credit card receivablesunder a spread account approach, andfirm commitments to buy or sell non-mortgage loans or securities. Examplesof ‘‘amortizing’’ contracts arecommitments to buy and sell mortgagesand commitments to originate mortgageloans.

Self Reporting for OptionsOption-related contracts are not

distributed and reported within the timebands of the maturity ladder schedule.A bank that holds such contracts isrequired to ‘‘self-report’’ the marketvalue sensitivities of those positions.11

D. IRR Risk WeightsUnder the supervisory model, a

bank’s IRR exposure is calculated bymultiplying its reported repricing andmaturity positions by IRR risk weights.These risk weighted positions, whensummed and added to the sensitivitiesof any self-reported items, form thebank’s net risk-weighted position.

Each risk weight is constructed toapproximate the percentage change invalue of the reported position thatwould result from a 200 basis point,instantaneous and uniform movementin market interest rates. Separate riskweights are used for the rising andfalling interest rate scenarios to accountfor the asymmetrical price behavior ofvarious bank assets, liabilities and off-balance-sheet instruments.

The set of risk weights used in thebaseline supervisory model for eachscenario consists of:

(1) Four ‘‘ARM’’ risk weights foradjustable-rate residential mortgageloans and securities. There is one risk

weight for each of the three resetfrequency categories, plus one risk-weight for those ARMs that are within200 basis points of their lifetime cap;

(2) Seven ‘‘Fixed-Rate ResidentialMortgage’’ risk weights (i.e., one foreach time band) for fixed-rateresidential mortgage loans and pass-through mortgage securities;

(3) Seven ‘‘Other Amortizing’’ riskweights for asset-backed securities,consumer loans and amortizing off-balance-sheet instruments;

(4) Seven ‘‘Zero or Low Coupon’’ assetrisk weights for instruments with acoupon of 3 percent or less;

(5) Seven ‘‘All Other’’ asset riskweights for non-amortizing instruments;and,

(6) Seven liability risk weights for allliability instruments.

The risk weights used in the baselinesupervisory model are provided inTable 1 and also in Appendix 3 of thepolicy statement. The agencies proposeto limit the frequency of revisions to therisk-weights such that revisions wouldnot be made until such time as marketrates have moved sufficiently as toprompt a revision of all the risk weights.Such changes may occur only onceevery several years.BILLING CODE 6714–01–P


12 Convexity refers to the non-linear price/yieldrelationship of fixed-rate financial instruments.Instruments without option features, such asTreasury notes, have positive convexity, meaningthat as the price of the instrument falls, its yieldwill increase by a proportionately greater amount.Other instruments, such as certain mortgage-backedsecurities, have negative convexity.

The agencies constructed the riskweights shown in Table 1 by usinghypothetical market instruments thatare representative of the category beingmeasured. The risk weights are based onthe percentage change in the presentvalue of the benchmark instruments forthe specified interest rate scenario. Riskweights for adjustable- and fixed-rateresidential mortgage loans andsecurities were derived from dataprovided by the OTS (Office of ThriftSupervision) Net Portfolio Value Modelas of September 30, 1994 for use in theOTS Asset and Liability Pricing Tablespublished by the OTS. The mortgagerisk weights directly incorporateconvexity for the rate scenario andprepayment assumptions for mortgageloans and securities.12 A completedescription of the instruments andmethodologies used by the agencies to

construct the risk weights for eachcategory is contained in Appendix 4 ofthis policy statement.

E. Description of Supplemental ModulesResidential mortgage products have

option features that make the value ofthe instrument more sensitive to interestrate changes than many other types offinancial instruments. To moreaccurately measure the sensitivity ofthese products, a bank that has holdingsof these instruments in excess ofspecified levels is required to provideadditional information on thoseholdings in its Call Report submissions.The agencies will apply expanded tablesof risk weights to those portfolios whenestimating the bank’s IRR exposure.Both one-to-four family residentialmortgage loans and pass-throughsecurities are considered mortgageholdings for these supplementalmodules. Mortgage loans that a bank hasfunded but holds for sale do not needto be reported in the supplementalmodules or included in the calculationof a bank’s holdings of mortgageproducts provided that the bank has afirm and binding commitment from a

third party to purchase the loan. Loanswith such binding commitments arereported separately in Schedule 1 andreceive a risk-weight commensuratewith short-term (three months or less)non-amortizing instruments. A bank,however, may elect to report these loansin the supplemental reportingschedules.

1. Fixed-Rate Residential Mortgages:A bank with fixed-rate residentialmortgage holdings that exceeds 20% ofits total assets will report as part of itsquarterly Call Report submissions,additional information on thoseholdings based upon their timeremaining to maturity and coupon rate(Schedule 2). The term ‘‘coupon rate’’for fixed-rate mortgage loans refers tothe loan’s stated coupon rate, while forpass-through securities, it refers to theweighted average coupon (WAC) of theunderlying mortgages. For each maturityand coupon range, the agencies havedeveloped and will apply risk weightswhich reflect the differences inexpected price sensitivities that areassociated with each coupon range.BILLING CODE 6714–01–P


2. Adjustable-Rate ResidentialMortgages: Adjustable-rate mortgageloans and securities have pricesensitivities that are substantiallydifferent than fixed-rate mortgage assetsprimarily due to their coupon resetfeatures. The coupon adjustments aregenerally limited by caps and floorsboth for the life of the mortgage and alsoat their rest period. These caps areknown as lifetime and period caps. Ingeneral, there are three factors that mostinfluence the price sensitivity of anARM: the reset frequency, the periodiccap, and the lifetime cap. Therelationship between the periodic andlifetime caps and the effect of thatrelationship on ARM prices is complexand varies based upon the likelihoodthat either cap will become binding.

Consequently, information on both theperiodic cap and the lifetime cap will becollected from banks with significantARM holdings.

A bank with ARM holdings greaterthan 10% but less than 25% of its totalassets will through its Call Reportsubmissions, provide additionalinformation on those holdings(Schedule 3). The bank will report itsARM balances by the ARM’s resetfrequency, the nature of its periodic cap,and the distance to its lifetime cap.ARM balances will be reported for thethree reset frequencies (6 months orless, over 6 months but less than orequal to 1 year, and over 1 year). Thethree reset frequencies are divided bywhether or not the ARM carries aperiodic cap, and in the over 6 months

to 1 year column, by the size of theperiodic cap. The distance to thelifetime cap is stratified into fourgroups:

(1) ARMs that are within 200 basispoints of their lifetime caps;

(2) ARMs that are 201 to 400 basispoints from their lifetime caps;

(3) ARMs that are 401 to 600 basispoints from their lifetime caps;

(4) ARMs that are more than 600 basispoints from their lifetime caps.

A bank whose ARM holdings exceed25% of its total assets will providefurther information on its ARMbalances, including information on theARM’s index type and weighted averagecoupon, as illustrated by Schedule 4.BILLING CODE 6714–01–P


V. Calculation of IRR ExposureA bank’s IRR exposure is calculated

for both the rising and declining interestrate scenarios. The exposures derivedfor each scenario may differ inmagnitude due to asymmetries in theprice sensitivity of financial instrumentsas interest rates change (e.g., convexity).For each scenario, the first step incomputing a bank’s IRR exposure is tomultiply each reported repricing ormaturity position (as reported inSchedules 1, 2, 3 or 4) by theappropriate risk weight. This product,referred to as the ‘‘risk weightedposition,’’ represents the estimateddollar change in the present value ofthat position for the 200 basis point ratescenario. The next step is to sum all ofthe risk weighted positions and add tothese positions the sensitivities of anyself-reported items. This result, referredto as the ‘‘net risk weighted position,’’represents the estimated change in theeconomic value of the bank and is thebank’s IRR exposure for the that ratescenario.

Appendix 1 provides exampleworksheets and IRR calculations forhypothetical banks subject to thebaseline and supplemental modules.

VI. Use of a Bank’s Internal IRR ModelResults

The supervisory model set forth inthis policy statement is one tool thatexaminers will use to assess a bank’slevel of IRR exposure and its need forcapital. Examiners also will consider theIRR exposures that are indicated by thebank’s internal IRR model. The agenciesrecognize that many banks havesophisticated internal models formeasuring IRR that take account ofcomplexities that are not captured bythe supervisory model and that aretailored to the products, activities, andcircumstances of each bank. In caseswhere the bank’s internal modelprovides a more accurate assessment ofthe bank’s IRR exposure, the results ofthat model will be the primary basis foran examiner’s conclusion about thebank’s level of IRR exposure.

Factors that examiners will considerin determining whether a bank’sinternal model provides a more accurateassessment of the bank’s IRR profilethan the supervisory model include:

(1) Whether the bank’s internal modelis appropriate to the nature, scope, andcomplexities of the bank and itsactivities;

(2) Whether the model includes allmaterial IRR positions of the bank;

(3) Whether the model provides amore precise measurement of thechanges in the economic value to thebank than the supervisory model;

(4) Whether the model considers allrelevant repricing data, includinginformation on contractual maturitiesand repricing dates, contractual interestrate floors and/or ceilings;

(5) Whether the model measures thebank’s IRR exposure over a probablerange of potential interest rate changes,including but not limited to, the ratescenarios established in this policystatement;

(6) Whether the assumptions andstructure of the model are reasonable,documented and periodically reviewedand validated by an appropriate level ofsenior management that has sufficientindependence from units that take orcreate IRR exposures;

(7) Whether the results of the modelare communicated to and reviewed bysenior management and the institution’sBoard of Directors on at least a quarterlybasis.

VII. Use of Measurement Process Results

The results of the measurementprocess established by this policystatement will be one factor that anexaminer will use when evaluating abank’s capital adequacy with regards toIRR. In reviewing a bank’s capitaladequacy, an examiner will consider theexposure of the bank’s capital andeconomic value to changes in interestrates, as measured by the supervisorymodel and, where applicable, the bank’sinternal model. Other factors that anexaminer will consider include thequality of a bank’s IRR management,internal controls, and the overallfinancial condition of the bank,including its earnings capacity, capitalbase, and the level of other risks whichmay impair future earnings or capital.When assessing the adequacy of thebank’s IRR management process, anexaminer will consider:

(1) The adequacy and effectiveness ofsenior management and Boardoversight;

(2) The adequacy of and compliancewith the bank’s policies, procedures andinternal controls;

(3) The existence of and adherence tospecific risk limits relating to loss ofcapital;

(4) Management’s knowledge andability to identify and manage sources ofIRR effectively; and

(5) The adequacy of internal riskmeasurement and monitoring systems.

At the completion of each safety andsoundness examination, examiners willform and document conclusions as tothe adequacy of a bank’s capital and riskmanagement process with regard tointerest rate risk. An examiner’sconclusions about both the level of riskand the adequacy of the risk

management process will play anintegral role in determining a bank’sneed for capital for IRR. Banks withhigh levels of measured exposure orweak management systems generallywill need to hold capital for IRR. Thespecific amount of capital that may beneeded will be determined on a case-by-case basis by the examiner and theappropriate supervisory agency. Thisdetermination and the examiner’soverall conclusions regarding IRR willbe discussed with bank management atthe close of each examination.

During the intervals betweenexaminations, the agencies will use thesupervisory model to help monitorchanges in a bank’s IRR exposure.Significant changes in reportedexposures or in a bank’s overallfinancial condition will be analyzed bythe bank’s primary supervisor todetermine whether additionalsupervisory actions are warranted. Suchactions may include additionaldiscussions with bank management,requests for additional information, on-site reviews of the bank, andreevaluation of the bank’s capitaladequacy.

Appendix 1—Proposed Call ReportSchedules and Supervisory ModelWorksheets

This appendix contains sample callreport schedules and worksheets thatwould be used for the proposedsupervisory model. As noted in theproposed policy statement, theschedules shown in this appendix areunder consideration by the agencies buthave not yet been submitted to theFFIEC for approval. These schedulesand worksheets are included in thisdocument to provide readers andcommenters a better understanding ofthe proposed supervisory riskmeasurement system.

I. Sample Call Report SchedulesSchedule 1 illustrates the information

that would be collected from all banksthat do not meet the reportingexemption criteria. This informationwould be used for the baselinesupervisory model. Schedules 2–4illustrate the information that would becollected from non- exempt banks thathave concentrations in fixed- oradjustable-rate residential mortgageloans or pass-through securities. Thisinformation would be used in lieu of theitems for these portfolios on Schedule 1.The balances reported in thesupplemental schedules would besubjected to the expanded set of riskweights shown in Appendix 3. Draftreporting instructions for Schedules 1–4 are provided in Appendix 2.


Schedule 5 illustrates the informationon a bank’s internal IRR model resultsthat the agencies propose to collect ona voluntary and confidential basis. Abank that has an internal IRR model thatmeasures the bank’s economic exposurefor a 200 basis point parallel rate shockwould provide summary information onthe estimated change in value forvarious asset, liability, and off-balance-sheet categories.BILLING CODE 6714–01–P


II. Baseline Supervisory ModelWorksheet

To illustrate how a bank’s IRRexposure would be calculated under thebaseline supervisory model, thefollowing worksheets are provided for ahypothetical bank (Bank A) that is notexempted from reporting (see policystatement) and has filed the proposedSchedule 1. Since Bank A’s fixed-rateresidential mortgage loan and securityholdings are less than 20% of its totalassets and its adjustable-rate holdingsare less than 10% of total assets, it is notsubject to any the supplementalreporting schedules. Schedule 1A showsthe completed Schedule 1 for Bank A.Tables 1A and 2A are the baselinemodel worksheets for the rising andfalling rate scenarios, respectively forBank A.

Column A in Tables 1A and 2Acombine and transcribe the balanceinformation that Bank A reported. Forexample, Bank A reported $4.126million of fixed-rate mortgage securitiesand $5.432 million of fixed-ratemortgage loans that had maturities of10- to 20-years. These balances havebeen combined and reported in Item 1(f)in Tables 1A and 2A.

Column B in Tables 1A and 2A showsthe supervisory model risk weights foreach instrument type and maturity

category. The risk weights represent theestimated percentage change in thevalue of the reported balances for a 200basis point rise (Table 1A) and decline(Table 2A) in interest rates. Forexample, the value of a 3- to 5-year non-amortizing loan or security, as shown inItem 6(d) is estimated to decline by6.60% if interest rates increase by 200basis points and increase in value by7.10% if rates decline by 200 basispoints. The risk weights shown inColumn B are established by theagencies and published in Appendix 3to this policy statement. Becauseliabilities represent future obligations ofthe bank, the risk-weights used forliabilities are shown as positivenumbers for the rising rate scenario(representing a benefit to the bank) andnegative numbers for the declining ratescenario.

Column C in Tables 1A and 2Arepresents the estimated dollar changein the present value of each reportedbalance. These values are obtained bymultiplying the reported balance inColumn A by the corresponding riskweight in Column B. For example, BankA has $3.458 million in ARMs that arenear their lifetime caps (line 2(d) inTables 1A and 2A). The agencies haveestimated that the value of such ARMswill decline by approximately 7.00% if

rates increase by 200 basis points. Thus,the estimated decline in value for BankA’s reported ARM balances near lifetimecaps is approximately $242 thousand($3.458 million times¥7.00%). Notethat for self-reported items, nomultiplication is needed. Rather, theestimated dollar change in valuereported by the bank in Schedule 1A isincorporated directly into the exposureestimate.

Bank A’s net IRR exposure iscalculated by summing the individualrisk-weighted positions and self-reported change amounts shown inColumn C. The sum of the risk-weightedasset positions plus self-reported itemsfor Bank A indicates a decline in valuefor these portfolios of approximately$17.560 million under the rising ratescenario. This decline is partially offsetby $11.093 million and $0.266 millionincreases in value for liabilities andother off-balance sheet items,respectively. Bank A’s net risk-weightedposition is the sum of these items andindicates that the economic value ofBank A is expected to decline by $6.201million under the rising rate scenario.Conversely, under the declining ratescenario, the economic value of Bank Ais expected to increase by $10.103million.BILLING CODE 6714–01–P


III. Supplemental Module WorksheetsThe calculation of net IRR exposure

for a bank using the supplementalschedules is similar to the processdescribed for the baseline model. Theprimary difference is that the risk-weighted positions for the applicableresidential mortgage portfolios arederived from the supplementalschedules and expanded risk-weighttables rather than from baselineschedules.

To illustrate the calculation,worksheets are provided for ahypothetical bank (Bank B) that hasfiled supplemental Schedule 2 (fixed-

rate mortgages) and Schedule 4(adjustable-rate mortgages). Bank B usesthese schedules because both its fixed-rate and adjustable-rate residentialmortgage loans and pass-throughsecurities holdings exceed 25% of itstotal assets. Schedules 1B, 2B and 4B(corresponding to the proposedSchedules 1, 2 and 4) show the data thatBank B has reported. Table 1B is theworksheet used to calculate Bank B’sIRR exposure for the rising rate scenario.This worksheet is similar to theworksheets used for the baseline model.Column A combines and transcribes thebalance information that Bank B

reported in Schedules 1B, 2B and 4B.Column B shows the applicable risk-weights for each instrument andmaturity category. Column C reflects theestimated dollar change in value foreach portfolio. The only difference inthis worksheet and the one used for thebaseline model is that risk-weightedpositions in Column C for the fixed- andadjustable-rate mortgages are obtainedby applying the expanded set of risk-weights (provided in Appendix 3) to thebalances reported in Schedules 2B and4B.



Table 2B illustrates how the change invalue for Bank B’s fixed-rate mortgageportfolio is calculated. The first block ofinformation in Table 2B is the balancesthat Bank B reported in Schedule 2B.Note that the total balance shown in theright-hand corner of Table 2B, $144.245million, corresponds to the total balanceshown in Column A for line 1 in Table1B. The second block of informationreproduces the risk-weights shown inAppendix 3 for Schedule 2. The last

block of information shows the net risk-weighted position for each coupon andmaturity category and is derived bymultiplying the balances shown in thefirst block by the corresponding risk-weight in the second block. Forexample, Bank B has $1.008 million offixed-rate balances with a maturity of 5–10 years and coupons between 6.76 and7.25 percent. The agencies haveestimated the present value of suchbalances will decline by 7.80% if

interest rates increase by 200 basispoints. Thus, the estimated decline inthe value of these balances is $79thousand, the product of $1.008 milliontimes¥7.80%. The change in value foreach maturity and coupon category aresummed to produce a net change inBank B’s fixed-rate mortgage portfolio of¥$13.796 million. This amount istranscribed to Column C in line 1 for theworksheet shown in Table 1B.

SCHEDULE 2B.—BANK B—FIXED-RATE MORTGAGES

[Supplemental Reporting Schedule][To be completed by banks with FRM holdings > 20% of total assets]

Balance with coupons of:

Remaining time to maturity

(Column A)5 years or

less

(Column B)over 5years

through 10years

(Column C)over 10years

through 20years

(Column D)over 20years

2. <=6.75% ....................................................................................................................... $149 $246 $1,284 $9,3623. 6.76%¥7.25% ............................................................................................................. 793 1,0008 2,451 10,0414. 7.26%¥7.75% ............................................................................................................. 726 1,095 2,068 13,4985. 7.76%¥8.25% ............................................................................................................. 833 1,163 1,984 15.9846. 8.26%¥8.75% ............................................................................................................. 623 1,994 2,201 16,4987. 8.76%¥9.25% ............................................................................................................. 511 2,541 2,468 27,3758. 9.26%¥9.75% ............................................................................................................. 336 2,006 1,604 19,2309. >=9.75% ....................................................................................................................... 597 736 948 1,892

TABLE 2B.—BANK B—FIXED-RATE MORTGAGES

[Supplemental Reporting Worksheet]Balance from Schedule 2B



Total(Column A)5 years or

less


through 10years


through 20years


2.<=6.75% ................................................................................................ $149 $246 $1,284 $9,362 $11,0413. 6.76%–7.25% ....................................................................................... 793 1,008 2,451 10,041 14,2934. 7.26%–7.75% ....................................................................................... 726 1,095 2,068 13,498 17,3875. 7.76%–8.25% ....................................................................................... 833 1,163 1,984 15,984 19,9646. 8.26%–8.75% ....................................................................................... 623 1,994 2,201 16,498 21,3167. 8.76%–9.25% ....................................................................................... 511 2,541 2,468 27,375 32,8958. 9.26%–9.75% ....................................................................................... 336 2,006 1,604 19,230 23,1769. >9.75% ................................................................................................. 597 736 948 1,892 4,173

Total ............................................................................................... 4,568 10,789 15,008 113,880 144,245

Risk Weights—Rising Rates




less(percent)


through 10years

(percent)


through 20years

(percent)


(percent)

<=6.75% ........................................................................................................................... ¥6.00 ¥7.90 ¥8.90 ¥12.306.76%–7.25% ................................................................................................................... ¥5.90 ¥7.80 ¥8.80 ¥11.907.26%–7.75% ................................................................................................................... ¥5.70 ¥7.60 ¥8.50 ¥11.507.76%–8.25% ................................................................................................................... ¥5.50 ¥7.20 ¥8.20 ¥11.00


Risk Weights—Rising Rates




less(percent)


through 10years

(percent)


through 20years

(percent)


(percent)

8.26%–8.75% ................................................................................................................... ¥5.20 ¥6.80 ¥7.70 ¥10.308.76%–9.25% ................................................................................................................... ¥4.70 ¥6.10 ¥7.10 ¥9.509.26%–9.75% ................................................................................................................... ¥4.10 ¥5.40 ¥6.40 ¥8.50>=9.75% ........................................................................................................................... ¥3.00 ¥3.90 ¥4.90 ¥6.30

Net Position (Balance × Risk Weight) ($)




less


through 10years


through 20years


<=6.75% ................................................................................................... ($9) ($19) ($114) ($1,152) ($1,294)6.76%–7.25 .............................................................................................. (47) (79) (216) (1,195) (1,536)7.26%–7.75% ........................................................................................... (41) (83) (176) (1,552) 1,853)7.76%–8.25% ........................................................................................... (46) (84) (163) (1,758) (2,050)8.26%–8.75% ........................................................................................... (32) (136) (169) (1,699) (2,037)8.76%–9.25% ........................................................................................... (24) (155) (175) (2,601) (2,955)9.26%–9.75% ........................................................................................... (14) (108) (103) (1,635) (1,859)>=9.75% ................................................................................................... (18) (29) 46) (119) (212)

Total ............................................................................................... (231) (693) (1,162) (11,711) (13,796)



Tables 3B–6B illustrate how thechange in value for Bank B’s ARMholdings is calculated. Table 3B showsthe calculation for the Bank B’s ARMsthat are priced off of the current marketindex and have heset frequencies or 6months or less. Table 4B shows thesimilar calculation for the currentmarket-indexed ARMs with resetfrequencies of 6 months to 1 year whileTable 5B is for the current market-indexed ARMs with reset frequenciesover 1 year. Table 6B is for Bank B’slagging market-indexed ARMs. Thesteps for calculating the change in valuefor each of these sub-portfolios isidentical so only Table 3B is described.

The first block of information onTable 3B is the balance and coupon datathat Bank B reported for this category of

ARMs on Schedule 4B. The secondblock of information reproduces theapplicable risk weights for this productin the rising rate scenario fromAppendix 3. The highlighted riskweights represent the risk weightsapplied to the balances and coupon datareported by Bank B in Schedule 4B. Thethird block of information is the netposition for each category of ARMs,representing the estimated decline invalue for a 200 basis increase in interestrates. The net position is derived bymultiplying the balance shown in thefirst block by the corresponding risk-weight in the second block. Forexample, Bank B has $3.023 million ofcurrent market-indexed ARMs that havea reset frequency of 6 months or lessthat are currently within 200 basis

points of their lifetime cap and that alsohave a periodic cap. These balanceshave a weighted average coupon of5.60%. The applicable risk-weight forthese mortgages is the one shown forARMs with these characteristics and aweighted average coupon between 4.76and 6.25 percent, or —8.70%. Thedecline in value for these mortgage loanbalances is $263 thousand, the productof the balance ($3.023 million) times theapplicable risk weight (¥8.70%).Similar calculations are used to for theremaining balances reported in Tables3B–6B. The total amounts are thensummed ($2.372 million) and reportedin Column C of the worksheet in Table1B.



Tables 7B–12B show the calculationsfor Bank B’s IRR exposure for thedeclining rate scenario.BILLING CODE 6714–01–P


6714–01–C


TABLE 8B.—BANK B—FIXED-RATE MORTGAGES

[Supplemental Reporting Worksheet]Balance from Schedule 2B




less


through 10years


through 20years


2. <=6.75% ............................................................................................... $149 $246 $1,284 $9,362 $11,0413. 6.76%–7.25% ....................................................................................... 793 1,008 2,451 10,041 14,2934. 7.26%–7.75% ....................................................................................... 726 1,095 2,068 13,498 17,3875. 7.76%–8.25% ....................................................................................... 833 1,163 1,984 15,984 19,9646. 8.26%–8.75% ....................................................................................... 623 1,994 2,201 16,498 21,3167. 8.76%–9.25% ....................................................................................... 511 2,541 2,468 27,375 32,8958. 9.26%–9.75% ....................................................................................... 336 2,006 1,604 19,230 23,1769. >9.75% ................................................................................................. 597 736 948 1,892 4,173

Total ............................................................................................... 4,568 10,789 15,008 113,880 144,245

Risk Weights—Declining Rates




less(percent)


through 10years

(percent)


through 20years

(percent)


(percent)

<=6.75% ........................................................................................................................... 5.80 7.80 9.30 13.406.76%–7.25% ................................................................................................................... 5.20 6.90 8.50 12.107.26%–7.75% ................................................................................................................... 4.50 5.80 7.50 10.607.76%–8.25% ................................................................................................................... 3.70 4.80 6.50 9.108.26%–8.75% ................................................................................................................... 3.10 3.80 5.50 7.608.76%–9.25% ................................................................................................................... 2.60 3.10 4.50 6.209.26%–9.75% ................................................................................................................... 2.30 2.70 3.80 5.10>=9.75% ........................................................................................................................... 2.10 2.40 2.90 3.50

Net Position (Balance x Risk Weight) ($)




less(percent)


through 10years

(percent)


through 20years

(percent)


(percent)

<=6.75% ................................................................................................... $9 $19 $119 $1,255 $1.4026.76%–7.25% ........................................................................................... 41 70 208 1,215 1,5347.26%–7.75% ........................................................................................... 33 64 155 1,431 1,6827.76%–8.25% ........................................................................................... 31 56 129 1,455 1,6708.26%–8.75% ........................................................................................... 19 76 121 1,254 1,4708.76%–9.25% ........................................................................................... 13 79 111 1,697 1,9009.26%–9.75% ........................................................................................... 8 54 61 981 1,104>=9.75% ................................................................................................... 13 18 27 66 124

Total ............................................................................................... 166 434 932 9,353 10,886



Appendix 2—Draft ReportingInstructions

General Instructions

I. Interest Rate Risk ReportingRequirements

A. Schedule 1

Schedule 1 must be completed bythose commercial banks and FDIC-supervised savings banks which do notmeet all of the following exemptioncriteria:

(1) The institution’s total assets areless than $300 million, and

(2) The bank’s primary federalsupervisor has assigned the institution acomposite CAMEL rating of either ‘‘1’’or ‘‘2’’; and

(3) The sum of:a. 30% of the institution’s fixed- and

floating-rate loans and securities withcontractual maturity or repricing datesbetween 1 and 5 years, and

b. 100% of the institution’s fixed- andfloating-rate loans and securities withcontractual maturity or repricing datesbeyond 5 years,is less than 30% of the institution’s totalassets as of the report date.

Exempted institutions may fileSchedule 1 on a voluntary basis.Institutions that file Schedule 1 shouldreport ‘‘N/A’’ in Schedule RC–B,Memorandum Item 2; Schedule RC–C,Part I, Memorandum Item 2 on FFIEC034; Schedule RC–C, Part I,Memorandum Item 3 on FFIEC 031, 032,and 033; and Schedule RC–E,Memorandum Items 5 and 6. FDIC-supervised savings banks which fileSchedule 1 should report ‘‘N/A’’ inSchedule RC–J.

All shifts in reporting status, with oneexception, are to begin with the MarchReports for Condition and Income. Sucha shift will take place only if thereporting bank’s condition fails to meetthe exemption criteria, as previouslynoted, as of the June reporting date.Banks involved with businesscombinations (pooling of interests,purchase acquisitions, orreorganizations) will be subject to newreporting requirements, if any,beginning with the first quarterly reportdate following the effective date of abusiness combination involving a bankand one or more depository institutions.

II. Criteria for Required Completion ofSupplemental Schedules 2–4

These schedules are applicable onlyto banks that answered ‘‘yes’’ to thereporting requirement for Schedule 1.This section identifies which of thesupplemental interest rate risk reportingschedules, if any, must be completedbased on the reporting bank’s level of

mortgage holdings as a percent of totalassets as of the report date.

A. Schedule 2If ‘‘total adjusted fixed-rate mortgage

holdings’’ divided by total assets (on anunrounded basis) is greater than 20percent of total assets, then the bankshould place an ‘‘X’’ in the box marked‘‘Yes’’. Otherwise, indicate ‘‘No’’ in Item1. If the box marked ‘‘Yes’’ is checked,then the bank must complete Schedule2. Banks completing Schedule 2 shouldonly report the total amount of fixed-rate mortgage holdings on Schedule 1,Items 1(b) and 2(b), in Column A; thedistribution of these instruments acrossColumns B through H is not required.

For purposes of this item, ‘‘totaladjusted fixed-rate mortgage holdings’’equals the sum of the bank’s permanentloans secured by first liens on 1–4family residential mortgages, whichhave fixed interest rates; and the bank’smortgage-backed pass-through securitiesnot held for trading, which have fixedinterest rates less any of those loansheld for sale and delivery to secondarymarket participants such as FNMA orFHLMC under terms of a bindingcommitment.

B. Schedule 3If ‘‘total adjusted adjustable-rate

mortgage holdings’’ divided by totalassets (on an unrounded basis) is equalto or greater than 10 percent but lessthan 25 percent of total assets, then thebank should place an ‘‘X’’ in the boxmarked ‘‘Yes’’ in Item No. 1. Otherwise,indicate ‘‘No’’ in Item No. 1. If the boxmarked ‘‘Yes’’ is checked, then the bankmust complete Schedule 3. Bankscompleting Schedule 3 are exempt fromcompleting Schedule 4 and thememoranda section of Schedule 1.

C. Schedule 4If ‘‘total adjusted adjustable-rate

mortgage holdings’’ divided by totalassets (on an unrounded basis) is greaterthan or equal to 25 percent of totalassets, then the bank should place an‘‘X’’ in the box marked ‘‘Yes’’ in ItemNo. 1. Otherwise, indicate ‘‘No’’ in ItemNo. 1. If the box marked ‘‘Yes’’ ischecked, then the bank must completeSchedule 4. Banks completing Schedule4 are exempt from completing Schedule3 and the memoranda section ofSchedule 1.

For purposes of Schedules 3 and 4,‘‘total adjusted adjustable-rate mortgageholdings’’ equals the sum of the bank’spermanent loans secured by first lienson 1–4 family residential mortgageswhich have adjustable interest rates andthe bank’s mortgage pass-throughsecurities not held for trading which

have adjustable interest rates less any ofthose loans held for sale and delivery tosecondary market participants such asFNMA or FHLMC under terms of abinding commitment.

Institutions that are not required tocomplete the supplemental schedulesmay elect to do so on a voluntary basis.

III. Reporting Instructions—Schedule 1The information required in Schedule

1 primarily represents the distributionacross Columns B through H of maturityand repricing data for selected assets,liabilities and off- balance sheet itemsthat are outstanding as of the reportdate. These distributed dollar amountsmust equal the total dollar amountsreported in Column A. Assets innonaccrual status are excluded from thisschedule. Additionally, a self-reportingsection is to be completed by thosebanks holding particular types and/orconcentrations of interest rate sensitiveassets and off-balance sheet contracts.This section requests informationconcerning the carrying value of theseitems as well as estimates of marketvalue changes for the 200 basis pointrising and falling interest rate scenarios.The carrying value of the bank’s tradingaccount holdings is requested separatelyin the self-reported section, along withmarket value changes given 100 basispoint rising and falling interest ratescenarios. Estimates for self-reporteditems may be obtained from a reliablethird party source or from theinstitution’s internal risk measurementsystem. Schedule 1 also contains amemoranda section for the reporting ofadjustable-rate mortgage holdings byreset frequency for those banks with lessthan 10% of total assets in adjustable-rate mortgages.

DefinitionsA fixed interest rate is a rate that is

specified at the origination of thetransaction, is fixed and invariableduring the term of the asset or liability,and is known to both the borrower andthe lender. Also treated as a fixedinterest rate is any rate that changesduring the term of the asset or liabilityon a predetermined basis, with the exactrate of interest over the life of theinstrument known with certainty toboth the borrower and the lender atorigination or when the instrument isacquired.

The remaining maturity is the amountof time remaining from the report dateuntil the final contractual maturity of anasset or liability.

A floating or adjustable rate is a ratethat varies, or can vary, in relation to anindex, to some other interest rate suchas the rate on certain U.S. Government


13 For purposes of this schedule, available-for-saledebt securities are to be reported on the basis oftheir fair value, while held-to-maturity debtsecurities are to be reported on the basis of theiramortized cost. Therefore, throughout theinstructions to this schedule, references to thecarrying value should be read as such.

securities or the bank’s ‘‘prime rate,’’ orto some other variable criterion theexact value of which cannot be knownin advance.

The reset or repricing frequency ishow often the contract permits theinterest rate on an instrument to bechanged (e.g., daily, monthly, quarterly,semiannually, annually) without regardto the length of time between the reportdate and the date the rate can nextchange.

The next repricing date is the amountof time remaining from the report dateuntil the instrument’s contract permitsthe rate of interest to change.

Distribution of Securities, Loans andLeases, and Other Interest-BearingAssets

Banks must distribute the carryingvalue of selected securities, loans andleases and other interest-bearing assetsin the specified balance sheet categoriesof this schedule in accordance with theprocedures set forth in the iteminstructions below.

All permanent loans secured by firstliens on 1–4 family residentialmortgages and 1–4 family residentialmortgage pass-through securities shouldbe reported on the following basis:

(1) The entire carrying value of eachasset with a fixed rate of interest shouldbe reported on the basis of the asset’sremaining contractual maturity, and

(2) The entire carrying value of eachasset with a floating or adjustable rate ofinterest should be reported on the basisof its reset frequency.

The bank’s own estimates of expectedcash flows associated with thesemortgage products should not be usedin this schedule. Loans held for sale anddelivery to secondary marketparticipants under terms of bindingcommitments are reported separately inItem No. 2(c) without regard to maturityor repricing.

The carrying value of other debtsecurities, all other loans and leases,and all other interest-bearing assetsshould be reported on the followingbasis:

(1) Assets which carry a fixed rate ofinterest should be spread among theColumns according to their remainingmaturity (as defined below), and

(2) Assets which carry a floating oradjustable rate of interest should bereported on the basis of the timeremaining until the next repricing date.

Distribution of Time Deposits, Non-Maturity Deposits, and All OtherInterest-Bearing Liabilities

All time deposits and other interest-bearing nondeposit liabilities should bedistributed across Columns B through H

according to remaining contractualmaturity for fixed-rate liabilities andaccording to next repricing date foradjustable-rate liabilities. The maturityand repricing for all non-maturitydeposits (DDAs, MMDAs, NOWaccounts, and other savings deposits) isdetermined by bank management basedon its own assumptions and experienceand must be reported in both rising andfalling interest rate scenarios inaccordance with the parametersdescribed in the item instructionsbelow.

Distribution of Off-Balance SheetPositions

Institutions are required to distributeselected off-balance sheet contracts thatare not held for trading among the timebands (Columns) of Schedule 1. The off-balance sheet items include interest rateforward contracts, interest rate futurescontracts, interest rate swaps withoutembedded options, and commitments tooriginate, buy, and sell loans andsecurities. Such commitments shouldexclude unused lines of credit andcommitments to sell 1–4 familymortgage loans that the bank holds forsale and delivery to secondary marketparticipants.

Off-balance sheet contracts should bereported as either amortizing or non-amortizing contracts depending onwhether the notional value of thecontract amortizes over time.

The selected off-balance sheet itemsmust be reported using two entries toreflect the timing of the cash flows. Thenotional amounts of the contracts areoffsetting: one entry is positive and theother is an offsetting negative entry.This reporting method reflects the wayin which the off-balance sheetinstruments affect the institution’sbalance sheet. In general, if theoutstanding contract serves to lengthenan asset’s maturity (i.e., long futures)then the first entry is negative and thesecond entry is positive. If theoutstanding contract serves to shortenan asset’s maturity (i.e., pay-fixed swap)then the first entry is positive and thesecond entry is negative. Reportinginstructions for particular types of off-balance sheet contracts are provided insections that follow.

Excluded from this section are: (1)Interest rate option contracts, includingcaps, floors, collars, corridors, andswaptions, and (2) interest rate swapswith embedded options, such as indexamortizing swaps. These items areincluded in the self-reported sectionbelow.

Self-Reported Items

This self-reported section requestsinformation regarding certain assets andoff- balance sheet contracts. Institutionsare required to provide estimates ofchanges in market values for eachinstrument given both a 200 basis pointrise and decline in interest rates. Theseestimates may be obtained from reliablethird party sources or from theinstitution’s internal risk measurementsystem.

Item Instructions

The total amount reported in ColumnA must equal the sum of Columns Bthrough H.

Item 1, Debt Securities (exclude selfreported items): The sum of Items 1(a)and 1(b), Column A for this item plusthe amount of nonaccrual pass-throughsecurities included in Schedule RC-N,Column C, must equal the sum ofSchedule RC-B, Items 4(a)(1) through4(a)(3), Columns A and D.

Fixed-rate debt securities should bereported without regard to their calldate unless the security has actuallybeen called. When fixed-rate debtsecurities have been called, they shouldbe reported on the basis of the timeremaining until the call date.Adjustable-rate debt securities shouldbe reported on the basis of their resetfrequency without regard to their calldate even if the security has actuallybeen called.

Fixed-rate debt securities that thereporting bank has the option to redeemprior to maturity (‘‘put bonds’’) shouldbe reported on the basis of the timeremaining until the earliest ‘‘put’’ date.Adjustable-rate ‘‘put bonds’’ should bereported on the basis of reset frequencywithout regard to ‘‘put’’ dates.

The information requested in Items1(c), 1(d), and 1(e) applies to both fixed-rate and adjustable-rate instruments.

Item 1(a), ARM Securities (useMemoranda section below): Report thetotal carrying value 13 of all adjustable-rate mortgage-backed pass-throughcertificates, such as those guaranteed bythe Government National MortgageAssociation (GNMA) and those issuedby the Federal National MortgageAssociation (FNMA), the Federal HomeLoan Mortgage Corporation (FHLMC),and others (e.g., other depositoryinstitutions or insurance companies)


which are included in Schedule RC–B,Items 4(a)(1) through 4(a)(3).

The reporting of these adjustable-ratepass-through securities by resetfrequency depends upon theinstitution’s asset concentration leveland is requested in the MemorandaSection of this schedule as well as inSchedules 3 and 4.

Item 1(b), Fixed-Rate MortgageSecurities: Report the carrying value ofall fixed-rate mortgage-backed pass-through certificates, such as thoseguaranteed by the Government NationalMortgage Association (GNMA) andthose issued by the Federal NationalMortgage Association (FNMA), theFederal Home Loan MortgageCorporation (FHLMC), and others (e.g.,other depository institutions orinsurance companies) which areincluded in Schedule RC–B, Items4(a)(1) through 4(a)(3).

Item 1(c), All Other AmortizingSecurities: Report the carrying value ofall other debt securities (not reported inItems 1(a) and 1(b) above) which haveregularly scheduled principalamortization more frequently than on anannual basis, exclude amortizingsecurities which require a balloonpayment of 25 percent or more of theoriginal principal at maturity. This mayinclude:

(1) U.S. Government agency andcorporation obligations reported inSchedule RC–B, Item 2(a) and 2(b).

(2) Securities issued by states andpolitical subdivisions in the U.S.reported in Schedule RC–B, Items 3(a)through 3(c).

(3) Other debt securities reported inSchedule RC–B, Item 5, including homeequity loan-backed securities (and theappropriate subitems on the FFIEC 031,032, and 033 report forms).

Exclude from all other amortizingsecurities:

(1) All equity securities reported inSchedule RC–B, Items 6(a) through 6(c).

(2) Zero- or low-coupon (3 percent orless) securities (report in Item 1(e)below).

(3) All debt securities which are onnonaccrual status.

(4) All structured notes (include inItem 8 of the self-reported items below).

(5) All ‘‘high-risk’’ mortgage securities(include in Item 6 of the self-reporteditems below.)

(6) CMO and REMIC holdings. If CMOand REMIC holdings exceed 10% oftotal assets, they must be included inItems 6 or 7 of the self-reporting sectionbelow. For holdings of 10% or less ofassets, an institution may elect to reportthese balances in the non-amortizingsection based on bank management’s

estimate of the instrument’s currentaverage life.

Item 1(d), Non-Amortizing Securities:Report all debt securities with couponsgreater than 3 percent that have either:(1) regularly scheduled principalpayments less frequently than on anannual basis, or (2) full repayment ofprincipal at maturity. Also reported inthis item are amortizing securitieswhich require a balloon payment of 75percent or more of the original principalat maturity. Non-amortizing securitiesmay include:

(1) U.S. Treasury securities reportedin Schedule RC–B, Item 1.

(2) U.S. Government agency andcorporation obligations reported inSchedule RC–B, Items 2(a) and 2(b).


(4) CMOs and REMICs reported inSchedule RC–B, Items 4(b)(1) through4(b)(3) if the institution is not requiredor does not elect to self-report theestimated changes in the market valuesof these instruments for a 200 basispoint increase and decrease in interestrates. Institutions should not reportCMO and REMIC holdings in this itemif these exceed 10% of total assets. IfCMOs and REMIC holdings exceed 10%of total assets, they must be included inthe self-reporting section below.

(5) Other debt securities reported inSchedule RC–B, Item 5 (and theappropriate subitems on the FFIEC 031,032, and 033 report forms).

Exclude from non-amortizingsecurities:


(2) Zero- or low-coupon (3 percent orless) securities (report in Item 1(e)below).



(5) All ‘‘high-risk’’ mortgage securities(include in Item 6 of the self-reporteditems below).

(6) Non-high-risk mortgage securitiesthat are included in the self-reporteditems below.

Item 1(e), Zero- or Low-CouponSecurities Report: On the basis of finalmaturity, all holdings of debt securitieswith coupon rates of 3 percent or less.Such holdings may include:

(1) U.S. Treasury securities reportedin Schedule RC–B, Item 1, including allU.S. Treasury bills issued on a discountbasis.

(2) U.S. Government agency andcorporation obligations reported inSchedule RC–B, Items 2(a) and 2(b).


(4) Other debt securities reported inSchedule RC–B, Item 5 (and theappropriate subitems on the FFIEC 031,032, and 033 report forms).

Exclude from zero- or low-couponsecurities:




(4) All ‘‘high-risk’’ mortgage securities(include in Item 6 of the self-reporteditems below).

Item 2, Loans and Leases: Loanamounts should be reported net ofunearned income to the extent that theyhave been reported net of unearnedincome in Schedule RC–C.

The sum of Items 2(a), 2(b) and 2(c),Column A of this schedule, plus theamount of permanent loans secured byfirst liens on 1–4 family residentialmortgages in nonaccrual status reportedin Schedule RC–N, Column C,Memorandum Item 4(c)(2) on FFIEC 033and 034, and Memorandum Item 3(c)(2)on FFIEC 031 and 032 must equal RC–C, Item 1(c)(2)(a).

Included in Items 2(c), 2(d) and 2(e)is information regarding both fixed- andadjustable-rate instruments.

Item 2(a), ARM Loans (useMemorandum section below): Reportthe total amount of permanent loanssecured by first liens on 1–4 familyresidential mortgages that are includedin RC–C, Item 1(c)(2)(a), which aresubject to a floating or adjustableinterest rate. Exclude from this item anyloans in nonaccrual. Also exclude loansheld for sale with firm commitments(report in Item 2(c) below).

The reporting of these items accordingto reset frequency depends on theinstitution’s asset concentration leveland is requested in the Memorandasection of this schedule as well asSchedules 3 and 4.

Item 2(b), Fixed-Rate Mortgage Loans:Report all permanent loans secured byfirst liens on 1–4 family residentialmortgages included in RC–C, Item1(c)(2)(a) that are subject to a fixed orpredetermined interest rate on the basisof time remaining until their finalcontractual maturity. Exclude any loansin nonaccrual status. Also exclude loansheld for sale with firm commitments(report in Item 2(c) below).

Item 2(c), Mortgage Loans Held forSale with Firm Commitments: Report inthis item the total amount of alloutstanding loans secured by first liens


on 1–4 family residential mortgageswhich are held by the bank for sale anddelivery to a secondary marketparticipant under the terms of a bindingcommitment.

Item 2(d), Other Amortizing Loans:Report all other loans and leases withregularly scheduled principalamortization (more frequently thanannually), which are not included abovein Items 2(a), 2(b) and 2(c).

Include in this item all revolving linesof credit and credit card receivables.The reporting of adjustable-raterevolving credit should be according tothe next repricing date, while fixed-raterevolving credit should be reportedbased on management determination ofthe likely repayment horizon. Relevantconsiderations in assigning a repaymentperiod should include, at a minimum:(1) Required minimum monthlypayments, (2) the effect of ‘‘paymentholidays,’’ (3) historical repaymentpatterns, (4) the effect of credit cardaccounts used strictly for transactionspurposes, and (5) the effect of pricingincentives such as tiered rates linked tothe amount outstanding.

Exclude amortizing loans whichrequire a balloon payment of 75 percentor more of the original principal atmaturity. For this schedule, such loansare considered to be non-amortizing andare included in Item 2(d), ‘‘All otherloans’’, below. Also exclude any loansin nonaccrual status.

Item 2(e), All Other Loans: Report allother loans and leases with noscheduled principal amortization orwith principal amortization scheduledannually or less frequently that are notincluded above in Items 2(a) through2(c). Also include loans which requirea balloon payment of 25 percent or moreof the original principal at maturity.Exclude any loans in nonaccrual status.

Item 3, All Other Interest-BearingAssets: Report all interest-earningassets, other than loans and securities.The sum of the amount reported inColumn A for this item must equal thesum of Schedule RC, Item 1(b),‘‘Interest-bearing balances due fromdepository institutions,’’ Item 3(a),‘‘Federal funds sold,’’ and Item 3(b)‘‘Securities purchased under agreementsto resell,’’ less any amount reported innonaccrual status.

Item 4, Liabilities: For purposes ofthis schedule, report all fixed-rate timedeposits and interest-bearingnondeposit liabilities on the basis oftheir remaining maturity, andadjustable-rate time deposits andnondeposit interest-bearing liabilities onthe basis of their next repricing date.Non-maturity deposits include: (1)Commercial demand deposit accounts;

(2) money market deposit accounts(MMDAs); and (3) NOW accounts, allother savings deposits, and all otherretail demand deposit accounts. Thedistribution of these non-maturitydeposits across the time bands will bebased on management determinationwithin defined constraints.

The term ‘‘commercial’’ for purposesof this schedule refers to all demanddeposit accounts in which the beneficialinterest is held by a depositor that is notan individual or sole proprietorship.Such accounts include, but are notlimited to, demand deposits held by:corporations, partnerships, and otherassociations; the U.S. and foreigngovernments; states and politicalsubdivision in the U.S.; U.S. and foreignbanks. Only those commercial accountswhich are noninterest-bearing demanddeposit accounts are differentiated forreporting purposes; all othercommercial deposits (i.e., NOWaccounts, MMDAs and other savingsdeposits) are not differentiated forpurposes of this schedule.

The term ‘‘retail’’ for purposes of thisreport refers to all demand depositaccounts in which the beneficial interestis held by a depositor that is anindividual or sole proprietorship.

Institutions must report all non-maturity deposits across the time bandseach quarter according to management’sown assumptions and experience inboth a rising rate and a declining ratescenario in accordance with thefollowing parameters:

(1) Commercial Demand DepositAccounts: A minimum of 50 percent ofan institution’s commercial demanddeposit accounts is required to bereported in Column B, ‘‘Up to 3months.’’ The remaining balances canbe distributed across Columns Bthrough E (‘‘Up to 3 months,’’ ‘‘Greaterthan 3 months–1 year,’’ ‘‘1–3 years,’’and ‘‘3–5 years’’) with a maximum of 20percent of the total balance in ColumnE, ‘‘3–5 years.’’

(2) MMDA Accounts: These depositaccounts may be distributed acrossColumns B through D (‘‘Up to 3months,’’ ‘‘Greater than 3 months–1year,’’ and ‘‘1–3 years’’) with amaximum of 50 percent reported in theColumn D, ‘‘1–3 years.’’

(3) NOW Accounts, Other SavingsDeposits and Retail Demand DepositAccounts: These deposit accounts maybe distributed across Columns Bthrough F (‘‘Up to 3 months,’’ ‘‘Greaterthan 3 months–1 year,’’ ‘‘1–3 years,’’‘‘3–5 years,’’ and ‘‘5–10 years’’) underthe following constraints: a maximum of20 percent in Column F, ‘‘5–10 years,’’and a maximum of 20 percent combined

in Columns E and F, ‘‘3–5 years’’ and‘‘5–10 years.’’

Item 4(a), Time Deposits: Report thetotal amount of all time deposits,regardless of amount. This itemincludes both time certificates ofdeposit and open-account time deposits.The amount in Column A must equalthe sum of Schedule RC–E,Memorandum Items 2(b), 2(c), and 2(d).For purposes of this schedule, timedeposits with ‘‘step up’’ features shouldbe reported on the basis of remainingmaturity.

Item 4(b), All Other Interest-BearingNondeposit Liabilities: The amountreported in this item must equal thesum of the following items fromSchedule RC: Item 14(a), ‘‘Federal fundspurchased;’’ Item 14(b), Securities soldunder agreements to repurchase;’’ Item15(a), ‘‘Demand notes issued to the U.S.Treasury;’’ Item 16(a), ‘‘Other borrowedmoney with original maturity of oneyear or less;’’ Item 16(b), ‘‘Otherborrowed money with original maturityof more than one year;’’ Item 17,‘‘Mortgage indebtedness and obligationsunder capitalized leases;’’ Item 19,‘‘Subordinated notes and debentures;’’and Item 22, ‘‘Limited-life preferredstock and related surplus.’’

Item 4(c), Commercial DemandDeposits—Rising Rates: Report the totalamount of all demand deposit accounts(included in Schedule RC–E, ColumnsA and B) representing funds in whichany beneficial interest is held by adepositor which is not an individual orsole proprietorship.

Item 4(d), MMDAs—Rising Rates:Report the total amount of all MMDAsas reported on Schedule RC–E,Memorandum Item 2(a)(1).

Item 4(e), NOW Accounts, OtherSavings Deposits, and Other DemandDeposits—Rising Rates: Report the totalamount of all NOW accounts that areincluded in Schedule RC–E,Memorandum Item 3, all other savingsdeposits as reported on Schedule RC–E,Memorandum Item 2(a)(2), and alldemand deposits representing funds inwhich any beneficial interest is held byan individual or sole proprietorshipincluded in Schedule RC–E, Item 1,Columns A and B.

Item 4(f), Commercial DemandDeposits—Declining Rates: Report thetotal amount of all demand depositaccounts (included in Schedule RC–E,Columns A and B) representing funds inwhich any beneficial interest is held bya depositor which is not an individualor sole proprietorship.

Item 4(g), MMDAs—Declining Rates:Report the total amount of all MMDAsas reported on Schedule RC–E,Memorandum Item 2(a)(1).


Item 4(h), NOW Accounts, OtherSavings Deposits, and Other DemandDeposits—Declining Rates: Report inthis item the total amount of all NOWaccounts that are included in ScheduleRC–E, Memorandum Item 3, all othersavings deposits as reported onSchedule RC–E, Memorandum Item2(a)(2), and all demand depositsrepresenting funds in which anybeneficial interest is held by anindividual or sole proprietorshipincluded in Schedule RC–E, Item 1,Columns A and B.

Item 5, Off-Balance Sheet Positions: Inthis section, respondents must reportselected off-balance sheet contractsusing two entries. Each contract has twooffsetting entries (one is positive, one isnegative) which reflect the timing of thecash flows. This reporting methodreflects the way in which the off-balancesheet instruments affect the institution’seconomic value.

Item 5(a), Non-Amortizing Contracts:Report the notional amounts of thefollowing contracts that are not held fortrading: (1) Futures contracts whosepredominant risk characteristic isinterest rate risk as reported in ScheduleRC–L, Item 14(a), ‘‘Futures contracts,Column A, ‘‘Interest Rate Contracts;’’ (2)forward contracts whose predominantrisk characteristic is interest rate riskreported in Schedule RC–L, Item 14(b),‘‘Forward contracts,’’ Column A,‘‘Interest Rate Contracts;’’ and (3)interest rate swaps, excluding basisswaps, reported in Schedule RC–L, Item14(e), ‘‘Swaps,’’ Column A, ‘‘InterestRate Contracts.’’ Also included in thisitem are commitments to originate, buy,and sell non-amortizing loans andsecurities. Exclude all unused lines ofcredit.

Exclude from this item all exchange-traded option contracts and over-the-counter option contracts and any swapswith embedded options. Swaptions, i.e.,options to enter into a swap contract,and contracts known as caps, floors,collars and corridors should be reportedas options and are included in Item 11of the self-reported section below. Alsoexclude all contracts held for trading(report in Item 12 of the self-reportingsection below.)

Futures contracts and interest rateforwards must be reported in ColumnsB through H on the following basis: Thefirst entry corresponds to the settlementdate of the contract, and the offsettingentry corresponds to the settlement dateplus the maturity of the instrumentunderlying the contract.

Long positions in futures contractsand forward rate agreements representcommitments to purchase specifiedfinancial instruments at a specified

future date at a specified price or yield.For outstanding long positions, the firstentry corresponding to the contractsettlement date must be negative. Theoffsetting positive entry must bereported according to the settlementdate plus the maturity of the instrumentunderlying the contract.

Short positions in futures contractsand forward rate agreements representcommitments to sell specified financialinstruments at a specified future date ata specified price or yield. For anoutstanding short position, the firstentry corresponding to the contractsettlement date must be positive. Theoffsetting negative entry must bereported according to the settlementdate plus the maturity of the instrumentunderlying the contract.

Interest rate swaps must be reportedin Columns B through H on thefollowing basis: The first entrycorresponds to the next repricing date ofthe adjustable-rate coupon, and theoffsetting entry corresponds to thematurity of the swap.

For swaps in which the reportingbank pays an adjustable rate andreceives a fixed rate, the first entrycorresponding to the next repricing dateof the floating rate coupon must benegative. The offsetting positive entrymust be reported according to thematurity of the swap.

For swaps in which the reportingbank pays a fixed rate and receives anadjustable rate, the first entrycorresponding to the next repricing dateof the floating rate coupon must bepositive. The offsetting negative entrymust be reported according to thematurity of the swap.

Securitized credit cards where thecredit card holders pay a fixed rate andthe security has an adjustable-ratecoupon are treated similarly to interestrate swaps. Like swaps, the first entrycorresponds to the repricing date of theadjustable-rate coupon that is paid tothe holder of the security. However, theoffsetting entry in these transactionscorresponds to the expected maturity ofthe security. Exclude securitized creditcards where the cards and the securityare both fixed rate or both variable rate.

Firm commitments to originate, buyor sell non-amortizing loans orsecurities must be reported in ColumnsB through H on the following basis: Thefirst entry corresponds to the settlementdate of the commitment contract. Theoffsetting entry corresponds to thesettlement date plus the maturity of theunderlying instrument if the underlyinginstrument carries a fixed rate, or to thesettlement date plus the time until thenext repricing date of the underlying

instrument if the underlying instrumentcarries an adjustable rate.

For commitments to originate or buynon-amortizing loans or securities, thefirst entry corresponding to the contractsettlement date must be negative. Theoffsetting positive entry must bereported according to the settlementdate plus the maturity of the underlyinginstrument if the underlying instrumentcarries a fixed rate, or to the settlementdate plus the time until the nextrepricing date if the underlyinginstrument carries an adjustable rate.

For commitments to sell non-amortizing loans or securities, the firstentry corresponding to the contractsettlement date must be positive. Theoffsetting negative entry must bereported according to the settlementdate plus the maturity of the underlyinginstrument if the underlying instrumentcarries a fixed rate, or to the settlementdate plus the time until the nextrepricing date of the underlyinginstrument if the underlying instrumentcarries an adjustable rate.

Item 5(b) Amortizing Contracts:Report all outstanding commitments tooriginate, buy and sell mortgages andother amortizing loans and securities.Include only those commitments forwhich interest rates have already beenlocked in, either on a fixed-rate oradjustable-rate basis. Also include allother interest rate contracts whosenotional value amortizes over time.

Commitments to originate, buy or sellmortgages and other amortizing loans orsecurities must be reported in ColumnsB through H on the following basis: Thefirst entry corresponds to the settlementdate of the commitment contract. Theoffsetting entry corresponds to thesettlement date plus the maturity of theunderlying instrument if the underlyinginstrument carries a fixed rate, or to thesettlement date plus the time until thenext repricing date of the underlyinginstrument if the underlying instrumentcarries an adjustable rate. Allcommitments should be reported on agross basis, using a zero percent falloutfactor.

For commitments to originate or buymortgages and other amortizing loans orsecurities, the first entry correspondingto the contract settlement date must benegative. The offsetting positive entrymust be reported according to thesettlement date plus the maturity of theunderlying instrument if the underlyinginstrument carries a fixed rate, or to thesettlement date plus the time until thenext repricing date of the underlyinginstrument if the underlying instrumentcarries an adjustable rate.

For commitments to sell mortgagesand other amortizing loans or securities,


the first entry corresponding to thecontract settlement date must bepositive. The offsetting negative entrymust be reported according to thesettlement date plus the maturity if theunderlying instruments carry a fixedrate, or to the settlement date plus thetime until the next repricing date if theunderlying instruments carry anadjustable rate.

Self-Reported ItemsMaturity and repricing information is

not requested in this section. However,banks must report the carrying value ofon-balance sheet instruments in ColumnA and the market value of allinstruments in Column B. In additionbanks must report in Columns C and D,respectively, each instrument’sestimated change in market value givena 200 basis point instantaneous andparallel rise and decline in interestrates. These estimates may be obtainedfrom a reliable third party source orfrom the institution’s internal riskmeasurement system. Item 7 in thissection requests estimated market valuechanges of the institution’s tradingaccount holdings given 100 basis pointinstantaneous and parallel rise anddecline in interest rates.

Item 6, High-Risk Mortgage Securities:Report all high-risk mortgage securitiesincluded in Schedule RC–B,Memorandum Item 8. This itemincludes all mortgage derivativeproducts (stripped mortgage-backedsecurities, CMOs, REMICs, and CMOand REMIC residuals) that meet thedefinition of a high-risk mortgagesecurity under the FFIEC’s SupervisoryPolicy Statement on SecuritiesActivities.

Item 7, Nonhigh-Risk MortgageSecurities: Non-high risk mortgagesecurities are those mortgage derivativeproducts which did not meet thedefinition of a high-risk mortgagesecurity under the FFIEC’s SupervisoryPolicy Statement on SecuritiesActivities as of their most recent testingdate. Institutions with greater than 10%of total assets in nonhigh-risk mortgagederivative securities as of the report datemust report information about suchinstruments in this item. Institutionsthat are not required to complete thisitem may elect to do so on a voluntarybasis.

Item 8, Structured Notes: Report allstructured notes included in ScheduleRC–B, Memorandum Item 9. Structurednotes are debt securities whose cashflow characteristics are dependent uponone or more indices and/or haveembedded forwards or options.Included below is a list of commonstructures. For further information

concerning these products, refer to theinstructions for Schedule RC–B,Memorandum Item 9.(1) Step-up Bonds(2) Index Amortizing Notes (IANs)(3) Dual Index Notes(4) De-leveraged Bonds(5) Range Bonds(6) Inverse Floaters

Item 9, Mortgage Servicing Rights:Report the unamortized portion ofexcess residential mortgage servicingfees receivable included in ScheduleRC–F, Item 3. Also report theunamortized amount (carrying value) ofmortgage servicing rights included inSchedule RC–M, Item 7(a) on FFIEC034; Item 5(a) on FFIEC 033; and Item6(a) on FFIEC 031 and 032.

Item 10, Interest Rate Swaps withEmbedded Options: Report all interestrate swaps with embedded options.Exclude all interest rate swaps held fortrading.

Item 11, Interest Rate Options: Reportinterest rate option contracts not held intrading accounts, including options topurchase/sell interest-bearing financialinstruments and whose predominantrisk characteristic is interest rate risk aswell as contracts known as caps, floors,collars, corridors and swaptions.Include all exchange-traded and over-the-counter interest rate contracts asreported on Schedule RC–L, Items 14(c),Column A, and Item 14(d), Column A.

Item 12, Trading Account: Report inthis item the carrying value of alltrading account assets, liabilities andoff-balance sheet contracts. Also reportthe market value changes of theseholdings given both a 100 basis pointinstantaneous and parallel rise anddecline in interest rates. The carryingvalue of these items are included inSchedule RC, Items 5 and 15(b), andSchedule RC–L, Item 15, Column A onFFIEC 033 and 034; and Schedule RC–D, Items 12 and 15, and Schedule RC–L, Item 15, Column A on FFIEC 031 and032.

Memoranda Section

This memoranda section is to becompleted only by those banks whoseARM holdings are less than 10% of totalassets as of the report date and havechecked an ‘‘X’’ in the ‘‘No’’ boxes onItem 1 of both Schedules 3 and 4.

Memoranda Items 1–4 divide totalARM securities and loans included inSchedule 1, Items 1(a) and 2(a) aboveinto two categories, those adjustable-rateinstruments whose rates are greater thanor equal to 200 basis points (bp) awayfrom their lifetime interest rate cap, andthose whose rates are less than 200 bpfrom their lifetime interest rate cap. The

lifetime interest rate cap is the upperlimit on the mortgage rate that can becharged over the life of a loan. Reportin Memorandum Items 1 and 2 theentire amount of those instrumentswhose rates are greater than or equal to200 bp away from their lifetime interestrate cap according to the frequency withwhich the interest rate on the mortgagemay contractually reset. Report inMemorandum Items 3 and 4 the totalamount of adjustable ARM securitiesand loans whose rates are less than 200bp from their lifetime interest rate cap.

With respect to the relationship ofthis memoranda section to the mainbody of this schedule, the sum ofMemorandum Items 1, Columns Athrough C, and Memorandum Item 3must equal Schedule 1, Item 1(a).

The sum of Memoranda Item 2,Columns A through C, andMemorandum Item 4 must equalSchedule 1, Item 2(a).

MemorandaItem 1, ARM Securities: Report the

carrying value of all adjustable-rate,mortgage-backed pass-through securitieson the basis of their reset frequency.Exclude any securities in nonaccrualstatus. Also exclude those pass-throughsecurities whose rates are less than 200bp of their lifetime interest rate cap. Forthis memoranda section, such securitiesare to be reported in Memorandum Item3.

Column A, 0 to 6 Months: Report thedollar amount of the bank’s adjustable-rate pass-through securities whose ratesmay reset semiannually or morefrequently (e.g., semiannually, quarterly,monthly, weekly, daily).

Column B, 6 Months to 1 Year: Reportthe dollar amount of the bank’sadjustable-rate, pass-through securitieswhose rates reset annually or morefrequently, but less frequently thansemiannually.

Column C, Greater than 1 Year: Reportthe dollar amount of the bank’sadjustable-rate, pass-through securitieswhose rates reset less frequently thanannually.

Item 2, ARM Loans: Report alladjustable-rate, permanent loanssecured by first liens on 1–4 familyresidential mortgages on the basis of thereset frequency. Exclude all loans innonaccrual status. Also exclude thoseloans whose rates are less than 200 bpfrom their lifetime interest rate cap. Forthis memoranda section, such loans areto be reported in Memorandum Item 4.

Column A, 0 to 6 Months: Report thedollar amount of the bank’s adjustable-rate, permanent loans secured by firstliens on 1–4 family residentialmortgages whose rates reset


14 The term ‘‘coupon rate’’ is used in thisschedule as a generic term, but for loans and pass-through securities it has two distinct definitions.Whereas loans are to be reported according to each

individual loan’s coupon or stated interest rate,pass-through securities are to be reported accordingto the weighted average coupon (WAC) of theunderlying collateral. If this rate is not known, itshould be estimated by adding 50 bp to the rate thebank receives on each pass-through certificate. The50 bp represents the deduction of servicing fees andany applicable guarantee fees. As a consequence ofthese fees, the pass-through rate is lower than theWAC of the underlying of mortgages. Therefore, toestimate the WAC of the mortgage pool, the feesshould be added back to the pass-through rate.

semiannually or more frequently (e.g.semiannually, quarterly, monthly,weekly, daily.)

Column B, 6 Months to 1 Year: Reportthe dollar amount of the bank’sadjustable-rate, permanent loanssecured by first liens on 1–4 familyresidential mortgages whose rates resetannually or more frequently, but lessfrequently than semiannually.

Column C, Greater than 1 Year: Reportthe dollar amount of the bank’sadjustable-rate, permanent loanssecured by 1–4 family residentialmortgages whose rates reset lessfrequently than annually.

Near Lifetime Cap

Item 3, ARM Securities: Report thetotal amount of the bank’s adjustable-rate, pass-through securities whose ratesare less than 200 bp from their lifetimeinterest rate cap.

Item 4, ARM Loans: Report the totalamount of the bank’s adjustable-rate,permanent loans secured by 1–4 familyresidential mortgages whose rates areless than 200 bp from their lifetimeinterest rate cap.

IV. Reporting Instructions—Schedule 2


Institutions which complete Schedule2 should only report the total amount offixed-rate mortgage holdings onSchedule 1, Items 1(b) and 2(b), ColumnA. The distribution of these instrumentsacross Columns B through H is notrequired.

The information required in thissupplemental schedule represents thedistribution of individual fixed-ratemortgages holding balances by maturityand coupon rate. In the distribution ofSchedule 2 items, the entire carryingvalue of all fixed-rate mortgage holdingsshould be reported on the basis of finalmaturities. The bank’s own estimate ofexpected cash flows is not reported onthis schedule.

Items 2 through 9 of Schedule 2 listeight coupon rate ranges, beginningwith a rate of less than or equal to6.75% proceeding in 50 bp increments,to a rate of greater than 9.75%. ColumnsA through D list four time ranges, whichrepresent the time remaining from thereport date until the final maturity ofthe instrument: 5 years or less, over 5years through 10 years, over 10 yearsthrough 20 years, and greater than 20years. Respondents must report selectedassets by the coupon rate 14 in each ofthe relevant time bands.

ExamplesAn 8%, fixed-rate, residential

mortgage loan which matures in 15years would be reported in Item 5,Column C.

An 8.5%, fixed-rate, mortgage pass-through security which matures in threeyears would be reported in Item 7,Column A. Note that 50 bp added to the8.5% rate results in a 9% estimatedweighted average coupon rate of theunderlying collateral.

For purposes of this supplementalschedule the following definitionsapply:

A fixed interest rate is a rate that isspecified at the origination of thetransaction, is fixed and invariableduring the term of the loan or security,and is known to both the borrower andthe lender. Also treated as a fixedinterest rate is a predetermined interestrate which is a rate that changes duringthe term of the loan or security on apredetermined basis, with the exact rateof interest over the life of the instrumentknown with certainty to both theborrower and the lender at loanorigination or when the debt security isacquired.

Remaining maturity is the amount oftime remaining from the report dateuntil the final contractual maturity of aloan or debt security.

The carrying value of a held-to-maturity pass-through security is itsamortized cost, while the carrying valueof an available-for-sale pass-throughsecurity is its fair value.

All loans are to be reported net ofunearned income to the extent that theloans have been reported net ofunearned income in Schedule RC–C,Item 1(c)(2)(a).

Include as fixed interest rateresidential mortgage holdings thefollowing instruments:

(1) All permanent loans secured byfirst liens on 1–4 family residentialmortgages included in Schedule RC–C,Item 1(c)(2)(a), that have fixed interestrates regardless of whether they arecurrent or are reported as ‘‘past due andstill accruing’’ in Schedule RC–N,Columns A and B.

(2) The carrying value of all pass-through securities which have fixedinterest rates and are included in

Schedule RC–B, Items 4(a)(1) through4(a)(3), Columns A and D.

Exclude from this schedule(1) Fixed-rate residential mortgage

loans held for sale and delivery tosecondary market participants, such asFNMA and FHLMC, under terms of abinding commitment.

(2) Fixed-rate residential mortgageholdings that are on nonaccrual status.

(3) All collateralized mortgageobligations (CMOs), real estate mortgageinvestment conduits (REMICs), andstripped mortgage-backed securities.

(4) All pass-through securities heldfor trading.

Column Instructions

Distribute the carrying value ofselected assets in accordance with theprocedures described for Columns Athrough D below.

Report in Column A the entirecarrying value of the bank’s fixed-rateresidential mortgage holdings withremaining maturities of 5 years or less.

Report in Column B the entirecarrying value of the bank’s fixed-rateresidential mortgage holdings withremaining maturities of over 5 yearsthrough 10 years.

Report in Column C the entirecarrying value of the bank’s fixed-rateresidential mortgage holdings withremaining maturities of over 10 yearsthrough 20 years.

Report in Column D the entirecarrying value of the bank’s fixed-rateresidential mortgage holdings withremaining maturities of over 20 years.

Item Instructions

Item 1: Test for determining whetherSchedule 2 should be completed. Eitherrepeat the instruction on page 1 of theGeneral Instructions or cross-referenceit. In Items 2 through 9, distribute, inaccordance with Column instructions,the carrying value of the bank’s fixed-rate residential mortgage holdings.

Item 2: Report the bank’s fixed-rateresidential mortgage holdings with acoupon rate of less than or equal to6.75%.

Item 3: Report the bank’s fixed-rateresidential mortgage holdings with acoupon rate of 6.76% through 7.25%.








Item 9: Report the bank’s fixed-rateresidential mortgage holdings with acoupon rate of greater than or equal to9.76%.

V. Reporting Instructions—Schedule 3


This supplemental schedule primarilyrequests information related to theinterest rate sensitivity of adjustable-ratemortgage (ARM) holdings. Theinformation required in thissupplemental schedule represents thecategorization of the reporting bank’sARM holdings according to the distinctcharacteristics of each loan or security.The defining ARM characteristicsrequested for this schedule include:

(1) Reset frequency. The resetfrequency is how often the contractpermits the interest rate on a loan to bechanged (e.g., daily, monthly, quarterly,semiannually, annually) without regardto the length of time between the reportdate and the date the rate can nextchange.

(2) Lifetime interest rate cap. Thelifetime cap is the upper limit on themortgage rate that can be charged overthe life of a loan. This lifetime loan capis expressed in terms of the initial rate.For example, if the initial mortgage rateis 7% and the lifetime cap is 5%, themaximum interest rate that the bank cancharge over the life of the loan is 12%.

(3) Periodic cap. A periodic cap limitsthe amount that the interest rate mayincrease at the reset (repricing) date.The periodic cap is expressed in basispoints (bp). For example, the bank ownsa 7% adjustable-rate mortgage loan. Ifthe periodic cap is 100 bp, then themaximum rate the bank can charge atthe next reset date is 8%. If the indexingrate rose by 150 bp, making the fullyindexed mortgage rate 8.5%, the bankcould only charge 8% at the next resetdate.

Schedule 3, Columns A through G,list three reset frequency Columnswhich are divided by the presence of aperiodic cap, and, in the over ‘‘6 monthsthrough 1 year’’ Column only, by thesize of the periodic cap. Items 2 through5 list four basis point ranges for how farthe ARM’s current rate is from theinstrument’s lifetime interest rate cap.In terms of ARM pass-throughsecurities, the information requiredpertains to the relationship between thecurrent interest rates and caps of theunderlying mortgages. If the loans in themortgage pool are not uniform in termsof periodic caps and lifetime caps, theweighted cap information is required.

In the distribution of Schedule 3items, the entire carrying value of allARM holdings should be reported onthe basis of the reset frequency.

ExamplesAn adjustable-rate permanent loan

secured by a first lien on a 1–4 familyresidence whose current rate is 7.5%and that has a lifetime cap of 12% anda periodic cap of 200 bp which repricesannually would be reported to Item 4,Column E.

An adjustable-rate pass-throughsecurity whose current coupon is 8%and has a lifetime cap of 10.5% and aperiodic cap of 100 bp which repricessemiannually would be reported to Item3, Column B.


A floating or adjustable rate is a ratethat varies, or can vary, in relation to anindex, to some other interest rate suchas the rate on certain U.S. Governmentsecurities or the bank’s ‘‘prime rate,’’ orto some other variable criterion theexact value of which cannot be knownin advance. Therefore, the exact rate theloan or security carries at anysubsequent time cannot be known at thetime of origination or acquisition.

All loans are to be reported net ofunearned income to the extent that theloans have been reported net ofunearned income on RC–C, Item1(c)(2)(a).

Include as adjustable-rate residentialmortgage holdings the followinginstruments:

(1) All permanent loans secured byfirst liens on 1–4 family residentialmortgages included in Schedule RC–C,Item 1(c)(2)(a), that have adjustableinterest rates, regardless of whether theyare current or are reported as ‘‘past dueand still accruing’’ in Schedule RC–NColumns A and B.

(2) The carrying values 15 of all pass-through securities which haveadjustable interest rates and areincluded in RC–B, Items 4(a)(1) through4(a)(3), Columns A and D.

Exclude from this schedule(1) Adjustable-rate residential

mortgage loans held for sale anddelivery to secondary marketparticipants such as FNMA and FHLMCunder terms of a binding commitment.

(2) All adjustable-rate mortgageholdings that are on nonaccrual status.

(3) All collateralized mortgageobligations (CMOs) and real estatemortgage investment conduits(REMICs), and stripped mortgage-backed securities.

(4) All pass-through securities heldfor trading.

Column Instructions

Distribute the carrying value ofselected assets in accordance with theprocedures described for Columns Athough G below.

Report in Column A the carryingvalue of the bank’s ARM holdingswhich reprice in 6 months or less andhave no periodic cap.

Report in Column B the carryingvalue of the bank’s ARM holdingswhich reprice in 6 months or less andhave a periodic cap.

Report in Column C the carryingvalue of the bank’s ARM holdingswhich reprice over 6 months through 1year and have no periodic cap.

Report in Column D the carryingvalue of the bank’s ARM holdingswhich reprice over 6 months through 1year and have a periodic cap equal to orless than 150 bp.

Report in Column E the carrying valueof the bank’s ARM holdings whichreprice over 6 months through 1 yearand have a periodic cap greater than 150bp.

Report in Column F the carrying valueof the bank’s ARM holdings whichreprice over 1 year and have no periodiccap.

Report in Column G the carryingvalue of the bank’s ARM holdingswhich reprice over 1 year and have aperiodic cap.

Item Instructions

In Items 2 through 5, distribute, inaccordance with column instructions,the carrying value of the bank’s ARMholdings.

Item 1: Test for determining whetherSchedule 3 should be completed. Eitherrepeat the instruction on page 1 of theGeneral Instructions or cross-referenceit.

Item 2: Report the bank’s ARMholdings that are within 200 bp of theirlifetime cap.

Item 3: Report the bank’s ARMholdings that are 201–400 bp from theirlifetime cap.

Item 4: Report the bank’s ARMholdings that are 401–600 bp from theirlifetime cap.

Item 5: Report the bank’s ARMholdings that are greater than 600 bpfrom their lifetime cap.



VIII. Reporting Instructions—Schedule 4

General InstructionsThis supplemental schedule primarily

requests information related to theinterest rate sensitivity of adjustable-ratemortgage (ARM) holdings. Theinformation required in thissupplemental schedule represents thecategorization of the reporting bank’sARMs according to the distinctcharacteristics of each loan or security.The characteristics of an ARM include:

(1) Underlying Index. The underlyingindex of an ARM represents the base orreference point for calculating themortgage rate of an ARM loan. There aretwo main categories of indices: (1) thosebased on a current market index, and (2)those derived from a lagging marketindex. A current market index is onethat adjusts quickly to changes inmarket interest rates. Examples includerates on Treasury securities, and theLondon Interbank Offered Rate (LIBOR).A lagging market index is one thatadjusts to changes in market interestrates more slowly than the —currentmarket indexes— such as rates onTreasury securities, the LondonInterbank Offered Rate (LIBOR), etc.Examples of lagging market indexes arethe various published FHLB cost-of-funds indexes and the National AverageContract Rate for the Purchase ofPreviously Occupied Homes.

(2) Lifetime Interest Rate Cap. Thelifetime cap is the upper limit on themortgage rate that can be charged overthe life of a loan. This lifetime loan capis expressed in terms of the initial rate.For example, if the initial mortgage rateis 7% and the lifetime cap is 5%, themaximum interest rate that the bank cancharge over the life of the loan is 12%.

(3) Periodic Cap. A periodic cap limitsthe amount that the interest rate mayincrease or decrease at the reset(repricing) date. The periodic cap isexpressed in basis points (bp). Forexample, the bank owns a 7%adjustable-rate mortgage loan. If theperiodic cap is 100 bp, then themaximum rate the bank can charge atthe next reset date is 8%. Even if theindexing rate rose by 150 bp, making thefully indexed mortgage rate 8.5%, thebank could only charge 8% at the nextreset date.

(4) Reset Frequency. The reset orrepricing frequency is how often thecontract permits the interest rate on aloan to be changed (e.g., daily, monthly,quarterly, semiannually, annually)without regard to the length of timebetween the report date and the date therate can next change.

Columns A through I on Schedule 4list the two major indices, current and

lagging, each of which is divided byreset frequencies. The current marketindex columns are further divided bythe presence of a periodic cap, and, inthe —Over 6 months through 1 year—columns only, by the size of theperiodic cap. Items 2 through 9 coverfour distance groups, in terms of basispoint ranges, of current ARM rates inrelation to the instrument—s lifetimeinterest rate cap. For each distancegroup, both the ARM balances and theassociated weighted average coupon(WAC) rates must be reported. Theweighted average coupon rate for thisschedule is determined by multiplyingthe balance of each ARM loan by theapplicable annual interest rate (i.e., theannualized rate in effect for the asset asof the report date) and by dividing thesum of all such calculated amounts bythe total carrying value of the category.The WAC required for ARM securitiesin this schedule is that of the underlyingmortgages, which should be estimatedby adding 75 bp to the bank’s pass-through rate. The 75 bp represents thededuction of servicing fees and anyapplicable guarantee fees. As aconsequence of these fees, the couponrate of the pass-through is lower thanthat of the WAC of the underlyingmortgages. Therefore, to estimate theWAC of the mortgage pool, the feesshould be added back to the couponrate.

ExamplesAn adjustable-rate permanent loan

secured by a first lien on a 1–4 familyresidence repricing quarterly whosecurrent rate is 7.25% and has a lifetimecap of 10%, no periodic cap, and basedon the COFI index would be reported inItems 4 and 5, Column I.

An ARM pass-through security,repricing annually whose currentcoupon is 7.75% and has a lifetime capof 14.25%, periodic cap of 200 bp, andbased on the Treasury index would bereported in Items 6a and 7, Column E.Note the WAC of the underlyingmortgages in this case is estimated to be8.5%, which is the pass-through rate of7.75% plus 75 bp.


A floating or adjustable rate is a ratethat varies, or can vary, in relation to anindex, to some other interest rate suchas the rate on certain U.S. Governmentsecurities or the bank’s ‘‘prime rate,’’ orto some other variable criterion theexact value of which cannot be knownin advance. Therefore, the exact rate theloan or security carries at anysubsequent time cannot be known at thetime of origination or acquisition.

All loans are to be reported net ofunearned income to the extent that theloans have been reported net ofunearned income on RC-C, Item1(c)(2)(a).

Adjustable-rate residential mortgageloans that are held by the bank for saleand delivery to a secondary marketparticipant under the terms of a bindingcontract should be reported according totheir repricing frequency regardless ofthe delivery date specified in thecommitment.

Include as adjustable-rate residentialmortgage holdings the followinginstruments:

(1) All permanent loans secured byfirst liens on 1–4 family residentialmortgages included in Schedule RC-C,Item 1(c)(2)(a) that have adjustableinterest rates, regardless of whether theyare current or are reported as ‘‘past dueand still accruing’’ in Schedule RC-N,Columns A and B.

(2) The carrying values 16 of all pass-through securities which haveadjustable interest rates and areincluded in RC-B, Items 4(a)(1) through4(a)(3), Columns A and D.

Exclude from this schedule:(1) All adjustable-rate mortgage

holdings that are on nonaccrual status.(2) All collateralized mortgage

obligations (CMOs) and real estatemortgage investment conduits.

Column InstructionsDistribute the balance of selected

assets in accordance with theprocedures described for Columns Athrough I below.

Report in Column A the balance of thebank’s ARM holdings which are basedon the current market index, reprice 6months or less, and have no periodiccap.

Report in Column B the balance of thebank’s ARM holdings which are basedon the current market index, reprice 6months or less, and have a periodic cap.

Report in Column C the balance of thebank’s ARM holdings which are basedon the current market index, reprice,over 6 months through 1 year, and haveno periodic cap.

Report in Column D the balance of thebank’s ARM holdings which are basedon the current market index, repriceover 6 months through 1 year,, and havea periodic cap equal to or less than 150bp.

Report in Column E the balance of thebank’s ARM holdings which are based


on the current market index, repriceover 6 months through 1 year, and havea periodic cap greater than 150 bp.

Report in Column F the balance of thebank’s ARM holdings which are basedon the current market index, repriceover 1 year, and have no periodic cap.

Report in Column G the balance of thebank’s ARM holdings which are basedon the current market index, repriceover 1 year, and have a periodic cap.

Report in Column H the balance of thebank’s ARM holdings which are basedon the lagging market index andreprice1 month or less.

Report in Column I the balance of thebank’s ARM holdings which are basedon the lagging market index and repriceover 1 month.

Item Instructions

In Items 2 through 9, distribute, inaccordance with column instructions,the carrying value as well as theweighted average coupon rate of thebank’s ARM holdings.

Items 2 and 3: Report the bank’s ARMholdings which are within 200 bp oftheir lifetime cap.

Items 4 and 5: Report the bank’s ARMholdings which are 201–400 bp fromtheir lifetime cap.

Items 6 and 7: Report the bank’s ARMholdings which are 401–600 bp fromtheir lifetime cap.

Items 8 and 9: Report the bank’s ARMholdings which are greater than 600 bpfrom their lifetime cap.

Appendix 3—Risk Weight Tables

This appendix contains the riskweights that would be used in theproposed supervisory model. Table 1provides the risk weights used for thebaseline module and reporting Schedule1. Table 2 provides the risk weightsused for the fixed-rate mortgagesupplemental module and Schedule 2while Table 3 provides the risk weightsused for adjustable-rate mortgagesreported in Schedule 3. Table 4provides the risk weights used foradjustable-rate mortgages reported inSchedule 4.


17 For the third quarter of 1994, the averageeffective yield on earning assets at all commercialbanks was approximately 7.50% on an annualizedbasis.

18 The 3.75% coupon approximates the effectivecost of interest-bearing liabilities at all commercialbanks for the third quarter of 1994 on an annualizedbasis.

Appendix 4—Technical Description ofSupplemental Modules and RiskWeights

This appendix is intended to providedetailed information on the methodsused to derive the risk weights used inthe supervisory measurement system.Descriptions of the derivation of non-mortgage risk weights are provided,followed by the descriptions for fixedand adjustable-rate mortgage riskweights. Titles and locations ofreference documents are also provided.

I. Non-Mortgage Risk WeightsThe non-mortgage risk weights were

derived using hypothetical marketinstruments that are representative ofthe asset or liability category that ismeasured. Each weight approximatesthe percentage change in the price of thebenchmark instruments given a 200basis point, instantaneous and uniformshift in market interest rates. Separaterisk weights are constructed for therising and falling interest rate scenariosfor the following categories:

(1) Other amortizing assets;(2) Zero or low coupon assets;(3) All other assets;(4) Liabilities; and(5) Off-balance sheet.

A. Benchmark Instruments for Non-Mortgage Risk Weights

The benchmark instruments for eachcategory of assets and liabilities,corresponding maturities, coupons andbond-equivalent yields are listed below.

(1) Other Amortizing Assets: For other(non-mortgage) amortizing assets, abenchmark monthly amortizinginstrument with an original maturityequal to the end point of the specifictime band; a remaining maturity equalto the midpoint of the time band; anda coupon and bond-equivalent yieldequal to 7.50% was used.17 Noprepayments are assumed for thiscategory of instruments.

(2) Zero- or Low-Coupon Assets: Therisk weights for zero- or low-couponinstruments were calculated using thepercentage change in the price of a zero-coupon instrument with an assumedmaturity equal to the mid-point of eachtime band and a bond-equivalent yieldof 7.50%.

(3) All Other Assets: The risk weightsfor the ‘‘All Other’’ category werecalculated assuming semi-annualinterest payments, a maturity equal tothe mid-point of each time band, and anassumed coupon and yield equal to7.50%.

(4) Liabilities: The only set of riskweights used for liabilities isrepresented by the percentage pricechange for a semi-annual interest-bearing instrument with an assumedcoupon and yield equal to 3.75%.18

(5) Off-Balance Sheet Positions: Therisk weights for interest rate futures,forwards and swaps are the same asthose applied to the ‘‘All Other’’category. Off-balance sheet positionswith amortizing features are assignedthe same risk weights as the ‘‘OtherAmortizing’’ category.

B. Derivation of Non-Mortgage RiskWeights

The prices and risk weights for eachrate scenario were calculated in thefollowing manner:

(1) The benchmark instruments werepriced at par in the base case, or currentinterest rate environment. Using thecoupon and maturity of the instrumentsand static discounted cash flowanalysis, the bond-equivalent yieldswere calculated.

(2) Prices for the benchmarkinstruments were then calculated for therising and declining rate scenarios byshifting the bond-equivalent yields upand down by 200 basis points. Thepresent values of the expected cashflows in each scenario were thendetermined to arrive at the new price foreach instrument.

(3) The percentage change in the pricefrom the base case price of parrepresents the risk weight for thebenchmark instrument in thecorresponding rate scenarios. If the riskweight was determined to be less than1 percentage point, it was expanded tothe nearest 5 basis points interval. If therisk weight was greater than 1percentage point, it was rounded to thenearest 10 basis points interval.

II. Treatment of Fixed-rate Mortgagesand Derivation of Risk Weights

Office of Thrift Supervision PricingInformation

Representative benchmark mortgageinstruments used in the calculation ofrisk weights for Schedules 1 through 4were based on instruments available inthe Office of Thrift Supervision (OTS)Asset and Liability Price Tables as ofSeptember 30, 1994. Publicly availabledata on certain coupon ranges andweighted average remaining maturities(WARM) not specifically presented inthe OTS Asset and Liability Price Tables

were obtained from the OTS as part ofa separate data request by the agencies.

Representative benchmark fixed-ratemortgage instruments for Schedule 1were drawn from a combination ofhypothetical mortgage pass-throughinstruments and mortgage poolsecurities listed in the OTS Asset andLiability Price Tables. The mortgagepool security price informationcontained in the OTS Asset andLiability Price Tables were calculatedusing the OTS Net Portfolio ValueModel. A brief overview of the pricingmethodology in The OTS Net PortfolioValue Model Manual, published inNovember 1994, states that ‘‘the modeluses the options-based approach todetermine the market value of 1 to 4family mortgages. Cash flows consist ofscheduled principal payments, interest,and prepaid principal. Prepayments aremodeled using a prepayment equationthat relates the prepayment rate for aparticular period to, among otherfactors, the difference between themortgage coupon rate and the currentmarket interest rate. Scheduledprincipal and interest cash flows areestimated by amortizing the remainingbalance in each period over itsremaining term. To calculate marketvalues in each of the alternate interestrate scenarios, cash flows for thatscenario are discounted by thesimulated Treasury rates for thatscenario plus the option-adjustedspread.’’ For additional detail andmodel specifications, refer to The OTSNet Portfolio Value Model, published bythe OTS, Risk Management Division,Washington, District of Columbia.Copies of the aforementionedpublication are available for review inthe FDIC Reading Room, 550 North 17thStreet, N.W., Washington, District ofColumbia, and the in the OCC Libraryat 250 E Street SW., Washington,District of Columbia.

The OTS model projects prices fornumerous fixed-rate and adjustable-ratemortgage securities with variousweighted average coupons (WAC) andWARM given different interest ratescenarios. Price tables are provided fordifferent types of mortgage poolsecurities. Each table contains mortgagepool security prices as a percentage ofthe underlying mortgage balance in thebase case (current interest rates) as wellas price projections for interest ratemovements up and down 400 basispoints in 100 basis point increments.

Fixed-rate residential mortgage assetshave embedded options that make thevalue of the instrument more sensitiveto interest rate changes than fixedmaturity instruments. In order to moreeffectively analyze the impact of


embedded options on the value of thisasset class, additional reportingschedules are required depending onthe amount of an institution’s mortgageholdings in relation to its total assets.Both one-to-four family residentialmortgage loans and pass-throughsecurities are considered mortgageholdings for the purposes of theseschedules. CMOs and other mortgagederivative securities are accordedseparate treatment as described in thebody of the Policy Statement.

A. Benchmark InstrumentsRisk weights have been derived from

a group of benchmark fixed-rate

mortgages with attributes mostrepresentative of the mortgage market asof September 30, 1994. Balancesreported by banks would be assignedrisk weights corresponding to thesebenchmark instruments. It is believedthat the benchmark risk weights willprovide reasonable approximations ofthe price sensitivity of an institution’sactual holdings.

1. Benchmark Instruments for Schedule1

For Schedule 1, outstanding balanceswould be reported according to theirremaining maturity in one of seven timebands represented by Columns B

through H of Schedule 1 as shown inTable 1. The balances in each time bandwould be assigned risk weights equal tothe price sensitivity of the benchmarkinstruments chosen for that specifictime band. The benchmark instrumentfor the first three time bands (ColumnsB, C, and D) on Schedule 1 are monthlyamortizing instruments with originalmaturities equal to the end point of thespecific time band; remaining maturitiesequal to the midpoint of each time band;and a coupon and bond-equivalent yieldequal to 7.50%. No prepayments areassumed for those time bands.

TABLE 1.—FIXED-RATE MORTGAGES RISK WEIGHT DERIVATIONS FOR SCHEDULE 1

ColumnB C 3 Months to 1

year

D E F G H

≤ 3 months 1 to 3 years 3 to 5 years 5 to 10 years 10 to 20 years > 20 years

Source .............. DiscountedCash Flow.

DiscountedCash Flow.

DiscountedCash Flow.

OTS Data ........ OTS Data ........ OTS Data ........ OTS Data.

The benchmark mortgage instrumentsfor the remaining four time bands are asfollows:

(1) Column E (3 to 5 years): 7-yearfixed-rate balloon mortgage poolsecurity with a 48-month WARM and a7.50% WAC;

(2) Column F (over 5 to 10 years): 7-year fixed-rate balloon mortgage poolsecurity with a 72-month WARM and a7.50% WAC;

(3) Column G (over 10 to 20 years): 15-year fixed-rate mortgage pool securitywith a 160-month WARM and a 7.50%WAC;

(4) Column H (over 20 years):FHLMC/FNMA 30-year fixed-ratemortgage pool security with a 330-month WARM and a 7.50% WAC.

The coupon rate of 7.50 percent waschosen for consistency with the averageeffective annualized yield on earningassets at all commercial banks as ofSeptember 30, 1994. Consideration wasalso given to the average dollar amountof outstanding 30 year Federal NationalMortgage Association (FNMA) mortgagepass-through securities in September1994.


The benchmark instruments used toderive the risk weights for Schedule 2include the following:

(1) Column A (0–5 years): 7-yearfixed-rate balloon mortgage poolsecurity with a 48 month WARM;

(2) Column B (Over 5 to 10 years): 7-year fixed-rate balloon mortgage poolsecurity with a 72 month WARM;

(3) Column C (Over 10 to 20 years):15-year fixed-rate mortgage poolsecurity with a 160 month WARM;

(4) Column D ( Over 20 years):FHLMC/FNMA 30-year fixed-ratemortgage pool security with a 330month WARM.

The weighted average coupon rates ofthe benchmark instruments were themidpoints of the coupon ranges with theexception of those coupons equal to orless than 6.75 percent and equal to orgreater than 9.76 percent. For thosecoupon ranges, the WACs used were6.50 percent and 10.50 percentrespectively.

B. Derivation of Fixed-rate MortgageRisk Weights

The following examples have beentaken directly from the information

contained in the OTS Asset andLiability Price Tables as of 9/30/94 aswell as data obtained from the OTS ina separate request by the agencies. Aspreviously noted, the OTS price tablespresent prices of mortgage poolsecurities based on bond-equivalentyields, given an increase and decreasein interest rates from 100 to 400 basispoints in 100 basis point increments.The supervisory measurement systemrisk weights are derived using the 200basis point increase and decreasescenarios.

Table 2 includes prices for therepresentative mortgage instrumentchosen for the first column of Schedule2, which is a 7-year fixed-rate balloonwith a 48-month WARM. All mortgageholding balances reported in the 0–5year column would receive a risk weightequal to the percentage change in pricefor this instrument given ±200 basispoint rate shifts. Price changes for eachbenchmark vary depending on theparticular WAC as depicted in the table.The midpoint of each WAC range wasselected to determine which benchmarkinstrument to use from the OTS pricetable.

TABLE 2.—7–YEAR FIXED-RATE BALLOON WITH A 48–MONTH WARM PRICES AS A PERCENT OF THE UNDERLYINGMORTGAGE BALANCE AS OF SEPTEMBER 30, 1994

0–5 Year time band benchmark

Interest rate scenario

Coupon –200 bp 0 bp +200 bp

≥6.75% ......................................................................................................................................... 101.57 96.01 90.26


TABLE 2.—7–YEAR FIXED-RATE BALLOON WITH A 48–MONTH WARM PRICES AS A PERCENT OF THE UNDERLYINGMORTGAGE BALANCE AS OF SEPTEMBER 30, 1994—Continued

0–5 Year time band benchmark


Coupon –200 bp 0 bp +200 bp

6.76%–≤7.25% ............................................................................................................................. 102.54 97.50 91.777.26%–≤7.75% ............................................................................................................................. 103.17 98.76 93.107.76%–≤8.25% ............................................................................................................................. 103.74 100.01 94.498.26%–≤8.75% ............................................................................................................................. 104.33 101.23 96.008.76%–≤9.25% ............................................................................................................................. 104.89 102.26 97.479.26%–≤9.75% ............................................................................................................................. 105.34 102.99 98.74>9.75% ......................................................................................................................................... 106.30 104.12 100.98

Example of a Risk Weight Calculation:The risk weights for the 7.26%-7.75%

coupon range are calculated as follows:Using 7.50 percent as the midpoint ofthe coupon range, the base case price asof September 30, 1994, for a 7.50percent, 7-year fixed-rate balloonmortgage, with a 48 month WARM is98.76. In the +200 bp scenario, the baseprice of 98.76 is subtracted from +200bp price of 93.10: (93.10¥98.76=¥5.66). The absolute change is ¥5.66representing a percentage decrease inprice of ¥5.7% (¥5.66/98.76=¥0.057

or ¥5.7%.) Negative 5.7% serves as therisk weight for the benchmark mortgagein the +200 bp scenario. As a result, allbalances reported on Schedule 2, in the0–5 year remaining maturity column,and the 7.26%–7.75% coupon rowwould receive a risk weight of ¥5.7 inthe rising rate analysis.

In the –200 bp scenario, the base priceof 98.76 is subtracted from the –200 bpprice of 103.17: (103.17¥98.76=4.41).The absolute change is 4.41 representinga percentage increase in price of 4.5%(4.41/98.76=0.0446 or 4.5%). The risk

weight for this benchmark mortgagebecomes 4.5% in the -200 bp scenario.Consequently, all balances in this itemreceive the 4.5% risk weight in thedeclining rate analysis. Theaforementioned method for calculatingthe risk weights is used to determine therisk weights for the other mortgageinstruments. Tables 3, 4, and 5 are theprice tables for the other three fixed-ratebenchmark instruments used in thesupervisory measurement system.

TABLE 3.—7-YEAR FIXED-RATE BALLOON WITH A 72-MONTH WARM PRICES AS A PERCENT OF THE UNDERLYINGMORTGAGE BALANCE AS OF SEPTEMBER 30, 1994

>5–10 year time band benchmark

Coupon


¥200 bp 0 bp +200 bp

≤6.75% ......................................................................................................................................... 101.24 93.90 86.476.76%¥≤7.25% ........................................................................................................................... 102.48 95.89 88.447.26%¥≤7.75% ........................................................................................................................... 103.25 97.57 90.197.76%¥≤8.25% ........................................................................................................................... 103.94 99.211 92.028.26%¥≤8.75% ........................................................................................................................... 104.63 100.79 93.988.76%¥≤9.25% ........................................................................................................................... 105.30 102.14 95.899.26%¥≤9.75% ........................................................................................................................... 105.87 103.10 97.55≤9.75% ......................................................................................................................................... 107.09 104.57 100.53

TABLE 4.—15-YEAR FIXED-RATE POOL WITH A 160-MONTH WARM PRICES AS A PERCENT OF THE UNDERLYINGMORTGAGE BALANCE AS OF SEPTEMBER 30, 1994

>10–20 year time band benchmark

CouponInterest rate scenario

¥200 bp 0 bp +200 bp

≤6.75% ......................................................................................................................................... 99.74 91.29 83.126.76%¥≤7.25% ........................................................................................................................... 101.39 93.48 85.287.26%¥≤7.75% ........................................................................................................................... 102.74 95.55 87.407.76%¥≤8.25% ........................................................................................................................... 103.93 97.59 89.598.26%¥≤8.75% ........................................................................................................................... 105.09 99.64 91.938.76%¥≤9.25% ........................................................................................................................... 106.31 101.70 94.459.26%¥≤9.75% ........................................................................................................................... 107.53 103.63 96.99≤9.75% ......................................................................................................................................... 109.79 106.72 101.53


TABLE 5 30-YEAR FIXED-RATE POOL WITH A 330-MONTH WARM PRICES AS A PERCENT OF THE UNDERLYING MORTGAGEBALANCE AS OF SEPTEMBER 30, 1994

20 year time band benchmark

CouponInterest rate scenario

¥200 bp 0 bp +200 bp

≤6.75% ......................................................................................................................................... 97.78 86.20 75.616.76%¥≤7.25% ........................................................................................................................... 100.13 89.33 78.667.26%¥≤7.75% ........................................................................................................................... 101.87 92.07 81.467.76%¥≤8.25% ........................................................................................................................... 103.36 94.73 84.338.26%¥≤8.75% ........................................................................................................................... 104.77 97.36 87.338.76%¥≤9.25% ........................................................................................................................... 106.20 99.97 90.529.26%¥≤9.75% ........................................................................................................................... 107.67 102.49 93.80≤9.75% ......................................................................................................................................... 110.67 106.91 100.15

III. Treatment of Adjustable-RateMortgages and Derivation of RiskWeights

Adjustable-rate mortgage loans andsecurities (ARMS) have pricesensitivities that are substantiallydifferent than fixed-rate mortgage assetsprimarily due to their coupon resetfeatures. The coupon adjustments aregenerally limited by caps and floorsboth for the life of the mortgage and alsoat their reset period. These caps areknown as lifetime caps and periodiccaps. In general, there are three factorsthat most influence the price sensitivityof an ARM: the reset frequency, theperiodic cap, and the lifetime cap.

A review of ARM price behaviorreveals that the relationship between theperiodic and lifetime caps and the effectof that relationship on ARM prices iscomplex and varies based upon thelikelihood that either cap will becomebinding. Consequently, information onboth the periodic cap and the lifetimecap would be reported by institutionswith significant ARM holdings.Benchmark mortgages representative ofthe ARM market have been identifiedand are used to assign risk weights.Supplemental reporting schedules werealso developed to capture the effect ofthese characteristics on the price ofARMs.

A. Benchmark ARM InstrumentsThe coupon ranges provided in

Schedule 4 were chosen to be

representative of the ARM securitiesoutstanding. In an effort to maintainconsistency with the risk weightsapplied to the non-mortgage productsand FRM holdings in Schedule 1, a7.5% WAC was selected for all of thebenchmark ARM instruments inSchedule 1 as well as for Schedule 3.


The benchmark instruments forSchedules 1, 3, and 4 represent thecharacteristics of the ARM mortgagesmost prevalent in the market placeaccording to reported index, margin,periodic cap, and distance to lifetimecap. Schedules 1 and 3 are based oninstruments with 7.5% WACs and shareother common characteristics, hence, allof the benchmark instruments and riskweights used for Schedule 1 may befound in Schedule 3. However, thebenchmark WACs in Schedule 4 do notnecessarily fall precisely on a 7.5percent WAC. To obtain the 7.5 percentWAC sensitivity for Schedules 1 and 3an additional interpolation was used.The interpolation used was thefollowing:

(1) for the 6-month and 1-year ARMs:P7.5=1/3[P8.5–P7.0]+P7.0;

(2) for the 3-year ARMs: P7.5=1/3[P9.5–P7.5]+P6.5.

Where as Px=PriceWAC(X)

The benchmark instruments forSchedule 1 are as follows:

(1) Reset Frequency—0 to 6 Months:Six month Constant Maturity Treasury(CMT) index, 275 basis point margin,four month reset period, 100 basis pointperiodic cap and 500 basis points to thelifetime cap;

(2) Reset Frequency—6 Months to 1Year: One year CMT, 275 basis pointmargin, six month reset period, 200basis point periodic cap and 500 basispoints to the lifetime cap;

(3) Reset Frequency—Greater than 1Year: Three year CMT, 275 basis pointmargin, 18 month reset period, 200 basispoint periodic cap and 500 basis pointsto the lifetime cap;

(4) Reset Frequency—Near LifetimeCap: One year CMT, 275 basis pointmargin, six month reset period, noperiodic cap and 200 basis points fromthe lifetime cap.


The benchmark instruments forSchedule 3 represent the characteristicsof the ARM mortgages most prevalent inthe market place according to reportedindex, margin, periodic cap, anddistance to lifetime cap. Banks arerequired to report their ARM holdingsby reset frequency, periodic interest ratecap levels, and distance from thelifetime cap in Schedule 3. Thebenchmark instruments for each resetfrequency and lifetime cap aresummarized in Table 6.


TABLE 6.—BENCHMARK INSTRUMENTS FOR SCHEDULE 3

RESET frequency

6 Months or less: 6 Month treasury 275margin 330 month WARM 7.50% WAC

Over 6 months to 1 year: 1 Year treasury 275 margin 330month WARM 7.50% WAC

Over 1 year: 3 Year treasury 275margin 330 month WARM 7.50%

WAC

No Cap: No peri-odic cap

Cap: 100 bp peri-odic cap and floor

No Cap: No peri-odic cap

Cap <150bp: 100bp periodic cap and

floor

Cap > 150bp: 200bp periodic cap

and floorNo Cap: No peri-

odic capCap: 200 bp peri-

odic cap

DISTANCE FROM LIFETIME CAP

Instruments 200 basis points or less from lifetime cap: 200 basis pointsInstruments 201 to 400 basis points from lifetime cap: 300 basis points.Instruments 401 to 600 basis points from lifetime cap: 500 basis points.Instruments more than 600 basis points from lifetime cap: 700 basis points.


Schedule 4 collects information on anARM’s rate index, reset frequency,

periodic and lifetime caps as shown inTable 7.

TABLE 7.—ADJUSTABLE-RATE MORTGAGE INFORMATION FOR SCHEDULE 4

Current market index by reset frequency Lagging market index byreset frequency

6 Months or less Over 6 months to 1 year Over 1 year1 Month or

less Over 1 monthNo cap Cap No Cap Cap of 150

bp or lessCap of more

than 150 No Cap Cap

Treasury ARM securities were used asthe benchmark for the class of mortgageslabeled Current Market Index. COFIARM securities were used as thebenchmark for the class of mortgageslabeled as Lagging Market Index. Withineach reset frequency and cap range forthe Current Market Index and LaggingMarket Index mortgage classes,benchmark instruments were used. TheWAC and cap benchmarks for theinstruments used for Schedule 4 are asfollows:

a. Current Market Index By ResetFrequency

(1) 6 Months or Less, No Cap: 6-monthTreasury ARM securities, as publishedin the OTS price tables as of September30, 1994, subject to the aforementionedlinear interpolation were used for thiscategory. OTS price tables provide pricedata on 7.00 percent WAC and 8.50percent WAC 6-Month Treasury ARMsecurities. The benchmark weightedaverage coupons for each WAC rangeare provided in Table 8.

TABLE 8.—BENCHMARK WACS FOR 6MONTH TREASURY ARMS

Weighted average coupon

Bench-markWAC(per-cent)

4.75% and under ............................ 4.004.76% to 6.25% .............................. 5.506.26% to 7.75% .............................. 7.00Over 7.75% ..................................... 8.50

(2) 6 Months or Less, Cap: The samebenchmark WAC’s as those listed inTable 7 were used for the benchmarkinstruments in this category, subject toa 100 basis point periodic cap and floor.

(3) Over 6 Months to 1 year, No Cap:12-Month Treasury ARM securities, aspublished in the OTS price tables as ofSeptember 30, 1994, were used for thiscategory. Because the WAC rangesprovided in the OTS price tables varybased on the underlying index, theWAC ranges developed for thesupervisory measurement system alsovary with the underlying index. OTSprice tables provide price informationon 7.00 percent WAC and 8.50 WAC12–Month Treasury ARM securities.The benchmark weighted averagecoupon used for the WAC ranges areprovided in Table 9.

TABLE 9.—BENCHMARK WACS FOR12-MONTH TREASURY ARMS




(4) Over 6 Months to 1 Year, Cap of150 Basis Points of Less: The samebenchmark WAC’s as those listed inTable 10 were used for the benchmarkinstruments in this category, subject toa 100 basis point periodic cap and floor.

(5) Over 6 Months to 1 Year, Cap ofMore Than 150 Basis Points: The samebenchmark WAC’s as those listed inTable 10 were used for the benchmarkinstruments in this category, subject toa 200 basis point periodic cap and floor.

(6) Over 1 Year, No Cap: 36–MonthTreasury ARM securities, as publishedin the OTS price tables as of September30, 1994, were used for this category.Because the WAC ranges provided inthe OTS price tables vary based on theunderlying index, the WAC rangesdeveloped for the supervisorymeasurement system also vary with theunderlying index. OTS price tables


provide price information on 6.50percent WAC and 9.50 WAC 36-MonthTreasury ARM securities. Thebenchmark weighted average couponsused for the WAC ranges are providedin Table 10.

TABLE 10.—BENCHMARK WACS FOR36 MONTH TREASURY ARMS



5.50% and under ............................ 4.505.51% to 8.00% .............................. 6.508.01% to 10.50% ............................ 9.50Over 10.50% ................................... 11.50

(7) Over 1 Year, Cap: The samebenchmark WAC’s as those listed inTable 11 were used for the benchmarkinstruments in this category, subject toa 200 basis point periodic cap and floor.

b. Lagging Market Index By ResetFrequency

(1) 1 Month or Less: 1 Month COFIARM securities, as published in theOTS price tables as of September 30,1994, were used for this category.Because the WAC ranges provided inthe OTS price tables vary based on theunderlying index, the WAC ranges

developed for the supervisorymeasurement system also vary with theunderlying index. OTS price tablesprovide price information on 6.00percent WAC and 7.00 WAC 1 MonthCOFI ARM securities. No periodic capor floor were used for the benchmarkinstrument in this category. Table 11provides the benchmark weightedaverage coupons used for each WACrange.

TABLE 11.—BENCHMARK WACS FOR 1MONTH COFI ARMS




(2) Over 1 Month: The samebenchmark WAC’s as those listed inTable 12 were used for the benchmarkinstruments in this category, subject toa 200 basis point periodic cap and floor.

B. Derivation of Benchmark InstrumentPrices and Risk Weights

Benchmark ARM instruments used inthe calculation of risk weights for

Schedules 1,3, and 4 were based onARM securities available in the OTSAsset and Liability Price Tables as ofSeptember 30, 1994 and industry data.The OTS price tables do not containprices for the benchmark instrumentsused in the supervisory measurementsystem.

Using the OTS price tables, a series oflinear interpolations was performed togenerate prices for the benchmarkinstruments, using bond-equivalentyields, selected for the supervisorymeasurement system. Prices werecalculated for each WAC underlying abenchmark instrument (e.g., forbenchmark instruments tied to the 6-month CMT-based ARM, WACs of 4.00percent, 5.50 percent, 7.00 percent, 7.50percent and 8.50 percent werecalculated). Prices for the benchmarkinstruments for each of the selectedWACs were interpolated for selectedloan characteristics (i.e., margin,lifetime cap, and reset frequency) ineach of the three interest rate scenariosused in the supervisory measurementsystem (i.e., +200 basis points, basecase, and ¥200 basis points). Table 12presents the OTS price table for a 6month CMT-based ARM with a 7.0percent WAC.

TABLE 12.—6-MONTH TREASURY ARM SECURITY PRICES AS OF SEPTEMBER 30, 1994 (WAC 7.00 PERCENT)

ARM parameters Interest rate scenario

∂200 PriceMargin Lifetime cap

(percent)Months to

reset ¥200 Price 0 Base

200 basis points ....................................................................................... 11.0 2 100.85 99.64 95.13200 basis points ....................................................................................... 11.0 6 101.34 99.42 94.03200 basis points ....................................................................................... 15.0 2 100.86 100.07 97.58200 basis points ....................................................................................... 15.0 6 101.35 99.85 96.32350 basis points ....................................................................................... 11.0 2 104.30 101.68 95.29350 basis points ....................................................................................... 11.0 6 104.52 100.73 94.18350 basis points ....................................................................................... 15.0 2 104.39 103.02 99.02350 basis points ....................................................................................... 15.0 6 104.61 102.02 97.60

In addition to the criteria establishedin the OTS price table presented above,the ARM securities have the followingcharacteristics:

(1) WARM of 330 months;(2) Lifetime floor 1200 basis points

below the lifetime cap; and(3) Periodic cap and floor of 100 basis

points.The OTS price table provides the data

for the linear interpolation process. Asstated above, an interpolated price foreach property of the benchmarkinstrument is derived through thisprocess.

For each value of a selected variable,a linear interpolation was performed togenerate a particular price of the

benchmark instrument. With each layerof interpolation, a new set of prices wasproduced. At the completion of therequisite number of interpolationsneeded to generate a price estimategiven the set of criterion for thevariables underlying a benchmarkinstrument, the resulting price table wasused to calculate the risk weights forthat particular instrument. Once theinterpolated price table was developed,the risk weights were calculated in thesame manner as those for fixed-ratemortgages.

Office of the Comptroller of theCurrency

Dated: June 29, 1995.

Eugene A. Ludwig,Comptroller of the Currency.

By Order of the Board of Governors of theFederal Reserve System.

Dated: July 7, 1995.

William Wiles,Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, DC this 27th day ofJune, 1995.


Federal Deposit Insurance Corporation.Jerry L. Langley,Executive Secretary.[FR Doc. 95–18099 Filed 8–1–95; 8:45 am]BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P

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