FED DRAFTS CURRENCY, RATE SWAP RISK GAUGE

  The Federal Reserve Board voted
  unanimously to propose a formula for calculating the risk of
  interest rate and currency swaps as part of its ongoing effort
  to come up with a new capital standard for U.S. banks that
  takes into account the riskiness of a bank's loans and other
  assets.
      Fed officials said an identical proposal was being issues
  today by the Bank of England.
      The Fed set a 60-day period for public comment on the plan.
      The proposal adopted today addresses only the credit risks
  associated with interest rate swaps, forward foreign exchange
  contracts and similar financial instruments.
      Previously, the Fed Jan. 8 proposed a series of guidelines
  for calculating the risk of other off-balance-sheet activities
  that banks would be required to take into account in
  calculating the minimum financial cushion they would need to
  maintain.
      Both guidelines set five broad categories of risk for loans
  and other bank assets and assigned to each a level of risk that
  would establish a bank's minimum capital needs.
      The additional guidelines proposed today would determine
  the amount of capital support required for a bank's current
  exposure for a given asset and the potential future exposure.
      The current exposure would be measured by the
  mark-to-market value of the asset, which would reflect the
  replacement cost.
      Potential future increases in the replacement cost would be
  calculated using credit conversion factors based on statistical
  analyses by the staffs of the Bank of England and U.S. banking
  regulators. Future exposure would rise over the life of the
  asset.
      The Fed staff said the risk gauge attempted to balance
  conflicting needs for precision and simplicity.
      They ignore, for example, the relative volatility of the
  particular currencies involved in exchange rate contracts.
      Board officials said the new gauge could increase the
  capital required of the largest money center banks, which are
  the principal participants in these types of activities.
      They cautioned the Fed board to take account of the
  potential impact of the plan on the ability of U.S. banks to
  compete in world financial markets.
      However, the staff concluded, "The credit risks inherent in
  such contracts now constitute a significant element of the risk
  profiles of some banking organizations."
      The Fed proposal would exempt all but the 20-25 largest
  participants in this market, on grounds the benefits of
  including the smaller banks would be outweighed by costs.
      Also excluded would be interest rate and foreign exchange
  contracts traded on organized exchanges.
      Governor Martha Seger said she was concerned that Japan was
  not involved in the U.K.-U.S. effort to draft new capital
  rules.
  

