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Monday, February 24, 2014

FRB, OCC: “Advanced Approaches” to Determine Capital Requirements

The Federal Reserve Board and the OCC have permitted certain financial institutions to begin using the agencies’ Advanced Approaches capital framework to determine their risk-based capital requirements. Under the framework, which implements standards developed by the Basel Committee on Banking Supervision, firms must meet specific risk measurement and management criteria. The agencies’ framework applies to large, internationally active financial institutions and includes the financial institutions’ subsidiaries.

Financial institutions intending to use the Advanced Approaches framework must conduct a satisfactory trial run (“parallel run”) to show that the firm can comply with the framework for at least four consecutive quarters using risk-measurement and risk-management systems that adhere to the Advanced Approaches framework. Eight bank holding companies, plus their eligible subsidiaries, have successfully completed their trial runs, the agencies said, and may now begin using advanced approaches.

In, addition the Federal Reserve published a final rule clarifying that these institutions using the Advanced Approaches framework will also incorporate the changes into the capital planning and stress testing cycles that begin October 1, 2015, a year later than previously decided in order to give financial institutions more time to comply.

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