Risk-Based Capital Guidelines; Capital Adequacy Guidelines: Standardized Framework, 43982-44060 [E8-16262]
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
Office of the Comptroller of the
Currency
12 CFR Part 3
[Docket ID: OCC–2008–0006]
RIN 1557–AD07
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R–1318]
FEDERAL DEPOSIT INSURANCE
CORPORATION
12 CFR Part 325
RIN 3064–AD29
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 2008–002]
RIN 1550–AC19
Risk-Based Capital Guidelines; Capital
Adequacy Guidelines: Standardized
Framework
Office of the Comptroller of
the Currency, Treasury; Board of
Governors of the Federal Reserve
System; Federal Deposit Insurance
Corporation; and Office of Thrift
Supervision, Treasury.
ACTION: Joint notice of proposed
rulemaking.
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AGENCIES:
SUMMARY: The Office of the Comptroller
of the Currency (OCC), Board of
Governors of the Federal Reserve
System (Board), Federal Deposit
Insurance Corporation (FDIC), and
Office of Thrift Supervision (OTS)
(collectively, the agencies) propose a
new risk-based capital framework
(standardized framework) based on the
standardized approach for credit risk
and the basic indicator approach for
operational risk described in the capital
adequacy framework titled
‘‘International Convergence of Capital
Measurement and Capital Standards: A
Revised Framework’’ (New Accord)
released by the Basel Committee on
Banking Supervision. The standardized
framework generally would be available,
on an optional basis, to banks, bank
holding companies, and savings
associations (banking organizations) that
apply the general risk-based capital
rules.
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Comments on this joint notice of
proposed rulemaking must be received
by October 27, 2008.
ADDRESSES: Comments should be
directed to:
OCC: Because paper mail in the
Washington, DC area and at the OCC is
subject to delay, commenters are
encouraged to submit comments by
e-mail, if possible. Please use the title
‘‘Risk-Based Capital Guidelines; Capital
Adequacy Guidelines: Standardized
Framework; Proposed Rule and Notice’’
to facilitate the organization and
distribution of the comments. You may
submit comments by any of the
following methods:
• Federal eRulemaking Portal—
‘‘Regulations.gov’’: Go to https://
www.regulations.gov, under the ‘‘More
Search Options’’ tab click next to the
‘‘Advanced Docket Search’’ option
where indicated, select ‘‘Comptroller of
the Currency’’ from the agency dropdown menu, then click ‘‘Submit.’’ In the
‘‘Docket ID’’ column, select OCC–2008–
0006 to submit or view public
comments and to view supporting and
related materials for this notice of
proposed rulemaking. The ‘‘How to Use
This Site’’ link on the Regulations.gov
home page provides information on
using Regulations.gov, including
instructions for submitting or viewing
public comments, viewing other
supporting and related materials, and
viewing the docket after the close of the
comment period.
• E-mail: regs.comments@occ.treas.
gov.
• Mail: Office of the Comptroller of
the Currency, 250 E Street, SW., Mail
Stop 1–5, Washington, DC 20219.
• Fax: (202) 874–4448.
• Hand Delivery/Courier: 250 E
Street, SW., Attn: Public Information
Room, Mail Stop 1–5, Washington, DC
20219.
Instructions: You must include
‘‘OCC’’ as the agency name and ‘‘Docket
Number OCC–2008–0006’’ in your
comment. In general, OCC will enter all
comments received into the docket and
publish them on the Regulations.gov
Web site without change, including any
business or personal information that
you provide such as name and address
information, e-mail addresses, or phone
numbers. Comments received, including
attachments and other supporting
materials, are part of the public record
and subject to public disclosure. Do not
enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
You may review comments and other
related materials that pertain to this
DATES:
DEPARTMENT OF THE TREASURY
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[insert type of rulemaking action] by any
of the following methods:
• Viewing Comments Electronically:
Go to https://www.regulations.gov, under
the ‘‘More Search Options’’ tab click
next to the ‘‘Advanced Document
Search’’ option where indicated, select
‘‘Comptroller of the Currency’’ from the
agency drop-down menu, then click
‘‘Submit.’’ In the ‘‘Docket ID’’ column,
select ‘‘OCC–2008–0006’’ to view public
comments for this rulemaking action.
• Viewing Comments Personally: You
may personally inspect and photocopy
comments at the OCC’s Public
Information Room, 250 E Street, SW.,
Washington, DC. For security reasons,
the OCC requires that visitors make an
appointment to inspect comments. You
may do so by calling (202) 874–5043.
Upon arrival, visitors will be required to
present valid government-issued photo
identification and submit to security
screening in order to inspect and
photocopy comments.
• Docket: You may also view or
request available background
documents and project summaries using
the methods described above.
Board: You may submit comments,
identified by Docket No. R–1318, by any
of the following methods:
• Agency Web Site: https://
www.federalreserve.gov. Follow the
instructions for submitting comments at
https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
• Federal eRulemaking Portal: https://
www.regulations.gov. Follow the
instructions for submitting comments.
• E-mail:
regs.comments@federalreserve.gov.
Include docket number in the subject
line of the message.
• FAX: (202) 452–3819 or (202) 452–
3102.
• Mail: Jennifer J. Johnson, Secretary,
Board of Governors of the Federal
Reserve System, 20th Street and
Constitution Avenue, NW., Washington,
DC 20551.
All public comments are available
from the Board’s Web site at https://
www.federalreserve.gov/generalinfo/
foia/ProposedRegs.cfm as submitted,
unless modified for technical reasons.
Accordingly, your comments will not be
edited to remove any identifying or
contact information. Public comments
may also be viewed electronically or in
paper form in Room MP–500 of the
Board’s Martin Building (20th and C
Street, NW.) between 9 a.m. and 5 p.m.
on weekdays.
FDIC: You may submit by any of the
following methods:
• Federal eRulemaking Portal: https://
www.regulations.gov Follow the
instructions for submitting comments.
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
• Agency Web site: https://
www.FDIC.gov/regulations/laws/
federal/propose.html.
• Mail: Robert E. Feldman, Executive
Secretary, Attention: Comments/Legal
ESS, Federal Deposit Insurance
Corporation, 550 17th Street, NW.,
Washington, DC 20429.
• Hand Delivered/Courier: The guard
station at the rear of the 550 17th Street
Building (located on F Street), on
business days between 7 a.m. and 5 p.m.
• E-mail: comments@FDIC.gov.
• Public Inspection: Comments may
be inspected and photocopied in the
FDIC Public Information Center, Room
E–1002, 3502 Fairfax Drive, Arlington,
VA 22226, between 9 a.m. and 5 p.m.
on business days.
Instructions: Submissions received
must include the Agency name and title
for this notice. Comments received will
be posted without change to https://
www.FDIC.gov/regulations/laws/
federal/propose.html, including any
personal information provided.
OTS: You may submit comments,
identified by OTS–2008–0002, by any of
the following methods:
• Federal eRulemaking Portal:
‘‘Regulations.gov’’: Go to https://
www.regulations.gov, under the ‘‘more
Search Options’’ tab click next to the
‘‘Advanced Docket Search’’ option
where indicated, select ‘‘Office of Thrift
Supervision’’ from the agency
dropdown menu, then click ‘‘Submit.’’
In the ‘‘Docket ID’’ column, select
‘‘OTS–2008–0002’’ to submit or view
public comments and to view
supporting and related materials for this
proposed rulemaking. The ‘‘How to Use
This Site’’ link on the Regulations.gov
home page provides information on
using Regulations.gov, including
instructions for submitting or viewing
public comments, viewing other
supporting and related materials, and
viewing the docket after the close of the
comment period.
• Mail: Regulation Comments, Chief
Counsel’s Office, Office of Thrift
Supervision, 1700 G Street, NW.,
Washington, DC 20552, Attention: OTS–
2008–0002.
• Facsimile: (202) 906–6518.
• Hand Delivery/Courier: Guard’s
Desk, East Lobby Entrance, 1700 G
Street, NW., from 9 a.m. to 4 p.m. on
business days, Attention: Regulation
Comments, Chief Counsel’s Office,
Attention: OTS–2008–0002.
• Instructions: All submissions
received must include the agency name
and docket number for this rulemaking.
All comments received will be
entered into the docket and posted on
Regulations.gov without change,
including any personal information
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provided. Comments, including
attachments and other supporting
materials received are part of the public
record and subject to public disclosure.
Do not enclose any information in your
comment or supporting materials that
you consider confidential or
inappropriate for public disclosure.
• Viewing Comments Electronically:
Go to https://www.regulations.gov, select
‘‘Office of Thrift Supervision’’ from the
agency drop-down menu, then click
‘‘Submit.’’ Select Docket ID ‘‘OTS–
2008–0002’’ to view public comments
for this notice of proposed rulemaking.
• Viewing Comments On-Site: You
may inspect comments at the Public
Reading Room, 1700 G Street, NW., by
appointment. To make an appointment
for access, call (202) 906–5922, send an
e-mail to public.info@ots.treas.gov, or
send a facsimile transmission to (202)
906–6518. (Prior notice identifying the
materials you will be requesting will
assist us in serving you.) We schedule
appointments on business days between
10 a.m. and 4 p.m. In most cases,
appointments will be available the next
business day following the date we
receive a request.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk
Expert, (202) 874–6022, Capital Policy
Division; Carl Kaminski, Attorney; or
Ron Shimabukuro, Senior Counsel,
Legislative and Regulatory Activities
Division, (202) 874–5090; Office of the
Comptroller of the Currency, 250 E
Street, SW., Washington, DC 20219.
Board: Barbara Bouchard, Associate
Director, (202) 452–3072; or William
Tiernay, Senior Supervisory Financial
Analyst, (202) 872–7579, Division of
Banking Supervision and Regulation; or
Mark E. Van Der Weide, Assistant
General Counsel, (202) 452–2263; or
April Snyder, Counsel, (202) 452–3099,
Legal Division. For the hearing impaired
only, Telecommunication Device for the
Deaf (TDD), (202) 263–4869.
FDIC: Nancy Hunt, Senior Policy
Analyst, (202) 898–6643; Ryan Sheller,
Capital Markets Specialist, (202) 898–
6614; or Bobby R. Bean, Chief, Policy
Section, Capital Markets Branch, (202)
898–3575, Division of Supervision and
Consumer Protection; or Benjamin W.
McDonough, Senior Attorney, (202)
898–7411, or Michael B. Phillips,
Counsel, (202) 898–3581, Supervision
and Legislation Branch, Legal Division,
Federal Deposit Insurance Corporation,
550 17th Street, NW., Washington, DC
20429.
OTS: Michael Solomon, Director,
Capital Policy Division, (202) 906–5654;
or Teresa Scott, Senior Project Manager,
Capital Policy Division, (202) 906–6478,
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Office of Thrift Supervision, 1700 G
Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Rule
A. Applicability of the Standardized
Framework
B. Reservation of Authority
C. Principle of Conservatism
D. Merger and Acquisition Transition
Provisions
E. Calculation of Tier 1 and Total
Qualifying Capital
F. Calculation of Risk-Weighted Assets
1. Total Risk-Weighted Assets
2. Calculation of Risk-Weighted Assets for
General Credit Risk
3. Calculation of Risk-Weighted Assets for
Unsettled Transactions, Securitization
Exposures, and Equity Exposures
4. Calculation of Risk-Weighted Assets for
Operational Risk
G. External and Inferred Ratings
1. Overview
2. Use of External Ratings
H. Risk-Weight Categories
1. Exposures to Sovereign Entities
2. Exposures to Certain Supranational
Entities and Multilateral Development
Banks (MDBs)
3. Exposures to Depository Institutions,
Foreign Banks, and Credit Unions
4. Exposures to Public Sector Entities
(PSEs)
5. Corporate Exposures
6. Regulatory Retail Exposures
7. Residential Mortgage Exposures
8. Pre-Sold Construction Loans and
Statutory Multifamily Mortgages
9. Past Due Loans
10. Other Assets
I.Off-Balance Sheet Items
J. OTC Derivative Contracts
1. Background
2. Treatment of OTC Derivative Contracts
3. Counterparty Credit Risk for Credit
Derivatives
4. Counterparty Credit Risk for Equity
Derivatives
5. Risk Weight for OTC Derivative
Contracts
K. Credit Risk Mitigation (CRM)
1. Guarantees and Credit Derivatives
2. Collateralized Transactions
L. Unsettled Transactions
M. Risk-Weighted Assets for Securitization
Exposures
1. Securitization Overview and Definitions
2. Operational Requirements
3. Hierarchy of Approaches
4. Ratings-Based Approach (RBA)
5. Exposures that Do Not Qualify for the
RBA
6. CRM for Securitization Exposures
7. Risk-Weighted Assets for Early
Amortization Provisions
8. Maximum Capital Requirement
N. Equity Exposures
1. Introduction and Exposure Measurement
2. Hedge Transactions
3. Measures of Hedge Effectiveness
4. Simple Risk-Weight Approach (SRWA)
5. Non-Significant Equity Exposures
6. Equity Exposures to Investment Funds
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7. Full Look-Through Approach
8. Simple Modified Look-Through
Approach
9. Alternative Modified Look-Through
Approach
10. Money Market Fund Approach
O. Operational Risk
1. Basic Indicator Approach (BIA)
2. Advanced Measurement Approach
(AMA)
P. Supervisory Oversight and Internal
Capital Adequacy Assessment
Q. Market Discipline
1. Overview
2. General Requirements
3. Frequency/Timeliness
4. Location of Disclosures and Audit/
Certification Requirements
5. Proprietary and Confidential Information
6. Summary of Specific Public Disclosure
Requirements
III. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
B. OCC Executive Order 12866
Determination
C. OTS Executive Order 12866
Determination
D. OCC Executive Order 13132
Determination
E. Paperwork Reduction Act
F. OCC Unfunded Mandates Reform Act of
1995 Determination
G. OTS Unfunded Mandates Reform Act of
1995 Determination
H. Solicitation of Comments on Use of
Plain Language
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I. Background
In 1989, the agencies implemented a
risk-based capital framework for U.S.
banking organizations (general riskbased capital rules).1 The agencies
based the framework on the
‘‘International Convergence of Capital
Measurement and Capital Standards’’
(Basel I), released by the Basel
Committee on Banking Supervision
(Basel Committee) 2 in 1988. The general
risk-based capital rules established a
uniform risk-based capital system that
was more risk sensitive and addressed
several shortcomings in the capital
regimes the agencies used prior to 1989.
In June 2004, the Basel Committee
introduced a new capital adequacy
framework, the New Accord,3 that is
1 12 CFR part 3, Appendix A (OCC); 12 CFR parts
208 and 225, Appendix A (Board); 12 CFR part 325,
Appendix A (FDIC); and 12 CFR part 567, subpart
B (OTS). The risk-based capital rules generally do
not apply to bank holding companies with less than
$500 million in assets. 71 FR 9897 (February 28,
2006).
2 The Basel Committee was established in 1974 by
central banks and governmental authorities with
bank supervisory responsibilities. Current member
countries are Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, Spain,
Sweden, Switzerland, the United Kingdom, and the
United States.
3 ‘‘International Convergence of Capital
Measurement and Capital Standards, A Revised
Framework, Comprehensive Version,’’ the Basel
Committee on Banking Supervision, June 2006. The
text is available on the Bank for International
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designed to promote improved risk
measurement and management
processes and better align minimum
risk-based capital requirements with
risk. The New Accord includes three
options for calculating risk-based capital
requirements for credit risk and three
options for operational risk. For credit
risk, the three approaches are:
standardized, foundation internal
ratings-based, and advanced internal
ratings-based. For operational risk, the
three approaches are: basic indicator
(BIA), standardized, and advanced
measurement (AMA). The advanced
internal ratings-based approach and the
AMA together are referred to as the
‘‘advanced approaches.’’
On September 25, 2006, the agencies
issued a notice of proposed rulemaking
to implement the advanced approaches
in the United States (advanced
approaches NPR).4 Many of the
commenters on the advanced
approaches NPR requested that the
agencies harmonize certain provisions
of the agencies’ proposal with the New
Accord and offer the standardized
approach in the United States. A
number of these commenters supported
making the standardized approach
available for all U.S. banking
organizations.
On December 7, 2007, the agencies
issued a final rule implementing the
advanced approaches (advanced
approaches final rule).5 The advanced
approaches final rule is mandatory for
certain banking organizations and
voluntary for others. In general, the
advanced approaches final rule requires
a banking organization that has
consolidated total assets of $250 billion
or more, has consolidated on-balance
sheet foreign exposure of $10 billion or
more, or is a subsidiary or parent of an
organization that uses the advanced
approaches (core banking organization)
to implement the advanced approaches.
The implementation of the advanced
approaches has created a bifurcated
regulatory capital framework in the
United States: one set of risk-based
capital rules for banking organizations
using the advanced approaches
(advanced approaches organizations),
and another set for banking
organizations that do not use the
advanced approaches (general banking
organizations).
On December 26, 2006, the agencies
issued a notice of proposed rulemaking
(Basel IA NPR), which proposed
modifications to the general risk-based
Settlements Web site at https://www.bis.org/publ/
bcbs128.htm.
4 71 FR 55830 (September 25, 2006).
5 72 FR 69288 (December 7, 2007).
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capital rules for general banking
organizations.6 One objective of the
Basel IA NPR was to enhance the risk
sensitivity of the risk-based capital rules
without imposing undue regulatory
burden. Specifically, the agencies
proposed to increase the number of riskweight categories, expand the use of
external ratings for assigning risk
weights, broaden recognition of
collateral and guarantors, use loan-tovalue ratios (LTV ratios) to risk weight
most residential mortgages, increase the
credit conversion factor for various
short-term commitments, assess a riskbased capital requirement for early
amortizations in securitizations of
revolving retail exposures, and remove
the 50 percent risk-weight limit for
derivative transactions. The Basel IA
NPR also sought comment on the extent
to which certain advanced approaches
organizations should be permitted to
use approaches other than the advanced
approaches in the New Accord.
Most commenters on the Basel IA
NPR supported the agencies’ goal to
make the general risk-based capital rules
more risk sensitive without adding
undue regulatory burden. However, a
number of the commenters representing
a broad range of U.S. banking
organizations and trade associations
urged the agencies to implement the
New Accord’s standardized approach
for credit risk in the United States.
These commenters generally stated that
the standardized approach is more risk
sensitive than the Basel IA NPR and
would more appropriately address the
industry’s concerns regarding domestic
and international competitiveness. Most
of these commenters requested that the
U.S. implementation of the standardized
approach closely follow the New
Accord. Certain commenters also
requested that the agencies make some
or all of the other options for credit risk
and operational risk in the New Accord
available in the United States. For
example, some commenters preferred
implementation of the standardized
approach without a separate capital
requirement for operational risk. Other
commenters supported including one or
more of the approaches in the New
Accord for operational risk.
II. Proposed Rule
After considering the comments on
both the Basel IA and the advanced
approaches NPRs, the agencies have
decided not to finalize the Basel IA NPR
and to propose instead a new risk-based
capital framework that would
implement the standardized approach
for credit risk, the BIA for operational
6 71
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FR 77446 (December 26, 2006).
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
risk, and related disclosure
requirements (collectively, this NPR or
this proposal). This NPR generally
parallels the relevant approaches in the
New Accord. This NPR, however,
diverges from the New Accord where
the U.S. markets have unique
characteristics and risk profiles, notably
the proposal for risk weighting
residential mortgage exposures. The
agencies have also sought to make this
NPR consistent where relevant with the
advanced approaches final rule.
This NPR would not modify how a
banking organization that uses the
standardized framework would
calculate its leverage ratio requirement.7
Banking organizations face risks other
than credit and operational risks that
neither the New Accord nor this NPR
addresses. The leverage ratio is a
straightforward measure of solvency
that supplements the risk-based capital
requirements. Consequently, the
agencies continue to view the tier 1
leverage ratio and other prudential
safeguards such as Prompt Corrective
Action as important components of the
regulatory capital regime.
Question 1a: The agencies seek
comments on all aspects of this
proposal, including risk sensitivity,
regulatory burden, and competitive
impact.
The agencies’ general risk-based
capital rules permit the use of external
ratings issued by a nationally
recognized statistical rating organization
(NRSRO) to assign risk weights to
recourse obligations, direct credit
substitutes, certain residual interests,
and asset- and mortgage-backed
securities. The New Accord permits a
banking organization to use external
ratings to determine risk weights for a
broad range of exposures, including
sovereign, bank, corporate, and
securitization exposures. It also
provides, within certain limitations, for
the use of both inferred ratings and
issuer ratings. As discussed in more
detail later in this preamble, the
agencies propose that external, issuer,
and inferred ratings be used to risk
weight various exposures. While the
agencies believe that the use of ratings
proposed in this NPR can contribute to
a more risk-sensitive framework, they
are aware of the limitations associated
with using credit ratings for risk-based
capital purposes and, thus, are
particularly interested in comments on
the use of such ratings for those
purposes.
7 12 CFR 3.6(b) and (c)(OCC); 12 CFR part 208,
Appendix B and 12 CFR part 225, Appendix D
(Board); 12 CFR 325.3 (FDIC); and 12 CFR 567.8
(OTS).
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Numerous bank supervisory groups
and committees, including the Basel
Committee on Banking Supervision, the
Financial Stability Forum, and the
Senior Supervisors Group, have
undertaken work to better understand
the causes for and possible responses to
the recent market events, discussing,
among numerous other issues, the role
of credit ratings. In addition, in March,
the President’s Working Group on
Financial Markets (PWG) issued its
report titled ‘‘Policy Statement on
Financial Market Developments,’’
providing an analysis of the underlying
factors contributing to the recent market
stress and a set of recommendations to
address identified weaknesses. Among
its recommendations, the PWG
encouraged regulators, including the
Federal banking agencies, to review the
current use of credit ratings in the
regulation and supervision of financial
institutions. In this regard, the PWG
policy statement noted that certain
investors and asset managers failed to
obtain sufficient information or to
conduct comprehensive risk
assessments, with some investors
relying exclusively on credit ratings for
valuation purposes. More generally, the
PWG statement also noted market
participants, including originators,
underwriters, asset managers, credit
rating agencies, and investors, failed to
obtain sufficient information or to
conduct comprehensive risk
assessments on complex instruments,
including securitized credits and their
underlying asset pools.
The PWG policy statement also
acknowledged the steps already taken
by credit rating agencies to improve the
performance of credit ratings and
encouraged additional actions,
potentially including the publication of
sufficient information about the
assumptions underlying their credit
rating methodologies; changes to the
credit rating process to clearly
differentiate ratings for structured
products from ratings for corporate and
municipal securities; and ratings
performance measures for structured
credit products and other asset-backed
securities readily available to the public
in a manner that facilitates comparisons
across products and credit ratings.
Most directly relevant to this NPR, the
agencies were encouraged to reinforce
steps taken by the credit rating agencies
through revisions to supervisory policy
and regulation, including regulatory
capital requirements that use ratings. At
a minimum, regulators were urged to
distinguish, as appropriate, between
ratings of structured credit products and
ratings of corporate and municipal
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bonds in regulatory and supervisory
policies.
Question 1b: The agencies seek
comment on the advantages and
disadvantages of the use of external
credit ratings in risk-based capital
requirements for banking organizations
and whether identified weakness in the
credit rating process suggests the need
to change or enhance any of the
proposals in this NPR. The agencies also
seek comment on whether additional
refinements to the proposals in the NPR
should be considered to address more
broadly the prudent use of credit ratings
by banking organizations. For example,
should there be operational conditions
for banking organizations to make use
of credit ratings in determining riskbased capital requirements,
enhancements to minimum capital
requirements, or modifications to the
supervisory review process?
The agencies also note that efforts are
underway by the BCBS to review the
treatment in the New Accord for certain
off-balance sheet conduits,
resecuritizations, such as collateralized
debt obligations referencing assetbacked securities, and other
securitization-related risks. The
agencies are fully committed to working
with the BCBS in this regard and also
intend to review the agencies’ current
approach to securitization transactions
to assess whether modifications might
be needed. This review will take into
account lessons learned from recent
market-related events and may result in
additional proposals for modification to
the risk-based capital rules.
Question 1c: The agencies seek
commenters’ views on what changes to
the approaches set forth in this NPR, if
any, should be considered as a result of
recent market events, particularly with
respect to the securitization framework
described in this NPR.
A. Applicability of the Standardized
Framework
Most commenters on the Basel IA
NPR favored its opt-in approach,
whereby a banking organization could
voluntarily decide whether or not to use
the proposed rules. They supported the
flexibility of the opt-in provision and
the ability of a general banking
organization to remain under the
general risk-based capital rules.
Commenters observed that many
banking organizations choose to hold
capital well in excess of regulatory
minimums and would not necessarily
benefit from a more risk-sensitive
capital rule. For these commenters,
limiting regulatory burden was a higher
priority than increasing the risk
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sensitivity of their risk-based capital
requirements.
The agencies acknowledge this
concern and propose to make the
standardized framework optional for
banking organizations that do not use
the advanced approaches final rule to
calculate their risk-based capital
requirements.8 Under this NPR, a
banking organization that opts to use the
standardized framework generally
would have to notify its primary Federal
supervisor in writing of its intent to use
the new rules at least 60 days before the
beginning of the calendar quarter in
which it first uses the standardized
framework. This notice must include a
list of any affiliated depository
institutions or bank holding companies,
if applicable, that seek supervisory
exemption from the use of the
standardized framework. Before it
notifies its primary Federal supervisor,
the banking organization should review
its ability to implement the proposed
rule and evaluate the potential impact
on its regulatory capital.
Under this proposal, a banking
organization that opts to use this
standardized framework could return to
the general risk-based capital rules by
notifying its primary Federal supervisor
in writing at least 60 days before the
beginning of the calendar quarter in
which it intends to opt out of the
standardized framework. The banking
organization would have to include in
its notice an explanation of its rationale
for ceasing to use the standardized
framework and identify the risk-based
capital framework it intends to use. The
primary Federal supervisor would
review this notice to ensure that the use
of the general risk-based capital rules
would be appropriate for that banking
organization.9 The agencies expect that
a banking organization would not
alternate between the general risk-based
capital rules and this standardized
framework.
Any general banking organization
could generally continue to calculate its
risk-based capital requirements using
the general risk-based capital rules
without notifying its primary Federal
supervisor. The primary Federal
supervisor would, however, have the
authority to require a general banking
organization to use a different risk-based
8 The agencies are not proposing in this NPR to
make this standardized framework available to
banking organizations for which the application of
the advanced approaches final rule is mandatory,
unless such a banking organization is exempted in
writing from the advanced approaches final rule by
its primary Federal supervisor.
9 The primary Federal supervisor may waive the
60-day notice period for opting in to the
standardized framework and for returning to the
general risk-based capital rules.
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capital rule if that supervisor
determines that a particular capital rule
is appropriate in light of the banking
organization’s asset size, level of
complexity, risk profile, or scope of
operations.
Under section 1(b) of the proposed
rule, if a bank holding company opts in
to the standardized framework, its
subsidiary depository institutions also
would apply the standardized
framework. Similarly, if a depository
institution opts in to the standardized
framework, its parent bank holding
company (where applicable) and any
subsidiary depository institutions of the
parent holding company generally
would be required to apply the
standardized rules as well. Savings and
loan holding companies, however, are
not subject to risk-based capital rules.
Accordingly, if a savings association
opts in to the proposed rule, the
proposed rule would not apply to the
savings and loan holding company or to
a subsidiary depository institution of
that holding company, unless the
subsidiary depository institution is
directly controlled by the savings
association.
The agencies believe that this
approach serves as an important
safeguard against regulatory capital
arbitrage among affiliated banking
organizations. The agencies recognize,
however, that there may be infrequent
situations where the use of the
standardized rules could create undue
burden at individual depository
institutions within a corporate family.
Therefore, under section 1(c) of the
proposed rule, a banking organization
that would otherwise be required to
apply the standardized rule because a
related banking organization has elected
to apply it may instead use the general
risk-based capital rules if its primary
Federal supervisor determines in
writing that that application of the
standardized framework is not
appropriate in light of the banking
organization’s asset size, level of
complexity, risk profile, or scope of
operations. When seeking such a
determination, the banking organization
should provide a rationale for its
request. The primary Federal supervisor
may consider potential capital arbitrage
issues within a corporate structure in
making its determination.
Question 2: The agencies seek
comment on the proposed applicability
of the standardized framework and in
particular on the degree of flexibility
that should be provided to individual
depository institutions within a
corporate family, keeping in mind
regulatory burden issues as well as ways
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to minimize the potential for regulatory
capital arbitrage.
In the advanced approaches final rule,
the agencies require core banking
organizations to use only the most
advanced approaches provided in the
New Accord. As proposed, the
standardized framework generally
would be available only for banking
organizations that are not core banking
organizations.
Question 3: The agencies seek
comment on whether or to what extent
core banking organizations should be
able to use the proposed standardized
framework.
B. Reservation of Authority
Under this NPR, a primary Federal
supervisor could require a banking
organization to hold an amount of
capital greater than would otherwise be
required if that supervisor determines
that the risk-based capital requirements
under the standardized framework are
not commensurate with the banking
organization’s credit, market,
operational, or other risks. In addition,
the agencies expect that there may be
instances when the standardized
framework would prescribe a riskweighted asset amount for one or more
exposures that was not commensurate
with the risks associated with the
exposures. In such a case, the banking
organization’s primary Federal
supervisor would retain the authority to
require the banking organization to
assign a different risk-weighted asset
amount for the exposures or to deduct
the amount of the exposures from
regulatory capital. Similarly, this NPR
proposes to authorize a banking
organization’s primary Federal
supervisor to require the banking
organization to assign a different riskweighted asset amount for operational
risk if the supervisor were to find that
the risk-weighted asset amount for
operational risk produced by the
banking organization under this NPR is
not commensurate with the operational
risks of the banking organization.
C. Principle of Conservatism
The agencies believe that in some
cases it may be reasonable to allow a
banking organization not to apply a
provision of the proposed rule if not
doing so would yield a more
conservative result. Under section 1(f) of
the proposed rule, a banking
organization may choose not to apply a
provision of the rule to one or more
exposures provided that: (i) The banking
organization can demonstrate on an
ongoing basis to the satisfaction of its
primary Federal supervisor that not
applying the provision would, in all
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circumstances, unambiguously generate
a risk-based capital requirement for each
exposure greater than that which would
otherwise be required under the rule;
(ii) the banking organization
appropriately manages the risk of those
exposures; (iii) the banking organization
provides written notification to its
primary Federal supervisor prior to
applying this principle to each
exposure; and (iv) the exposures to
which the banking organization applies
this principle are not, in the aggregate,
material to the banking organization.
The agencies emphasize that a
conservative capital requirement for a
group of exposures does not reduce the
need for appropriate risk management of
those exposures. Moreover, the
principle of conservatism applies to the
determination of capital requirements
for specific exposures; it does not apply
to the disclosure requirements in
section 71 of the proposed rule.
D. Merger and Acquisition Transition
Provisions
A banking organization that uses the
standardized framework and that
merges with or acquires another banking
organization operating under different
risk-based capital rules may not be able
to quickly integrate the acquired
organization’s exposures into its riskbased capital system. Under this NPR, a
banking organization that uses the
standardized framework and that
merges with or acquires a banking
organization that uses the general riskbased capital rules could continue to
use the general risk-based capital rules
to calculate the risk-based capital
requirements for the merged or acquired
banking organization’s exposures for up
to 12 months following the last day of
the calendar quarter during which the
merger or acquisition is consummated.
The risk-weighted assets of the merged
or acquired company calculated under
the general risk-based capital rules
would be included in the banking
organization’s total risk-weighted assets.
Deductions associated with the
exposures of the merged or acquired
company would be deducted from the
banking organization’s tier 1 capital and
tier 2 capital.
Similarly, where both banking
organizations calculate their risk-based
capital requirements under the
standardized framework, but the merged
or acquired banking organization uses
different aspects of the framework, the
banking organization may continue to
use the merged or acquired banking
organization’s own systems to
determine its organization’s riskweighted assets for, and deductions
from capital associated with, the merged
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or acquired banking organization’s
exposures for the same time period.
A banking organization that merges
with or acquires an advanced
approaches banking organization may
use the advanced approaches risk-based
capital rules to determine the riskweighted asset amounts for, and
deductions from capital associated with,
the merged or acquired banking
organization’s exposures for up to 12
months after the calendar quarter during
which the merger or acquisition
consummates. During the period when
the advanced approaches risk-based
capital rules apply to the merged or
acquired company, any allowance for
loan and lease losses (ALLL) associated
with the merged or acquired company’s
exposures must be excluded from the
banking organization’s tier 2 capital.
Any excess eligible credit reserves
associated with the merged or acquired
banking organization’s exposures may
be included in that banking
organization’s tier 2 capital up to 0.6
percent of that banking organization’s
risk-weighted assets. (Excess eligible
credit reserves would be determined
according to section 13(a)(2) of the
advanced approaches risk-based capital
rules.)
If a banking organization relies on
these merger provisions, it would be
required to disclose publicly the
amounts of risk-weighted assets and
total qualifying capital calculated under
the applicable risk-based capital rules
for the acquiring banking organization
and for the merged or acquired banking
organization.
E. Calculation of Tier 1 and Total
Qualifying Capital
This NPR would maintain the
minimum risk-based capital ratio
requirements of 4.0 percent tier 1 capital
to total risk-weighted assets and 8.0
percent total qualifying capital to total
risk-weighted assets. A banking
organization’s total qualifying capital is
the sum of its tier 1 (core) capital
elements and tier 2 (supplemental)
capital elements, subject to various
limits, restrictions, and deductions
(adjustments). The agencies are not
restating the elements of tier 1 and tier
2 capital in the proposed rule. Those
capital elements generally would be
unchanged from the general risk-based
capital rules.10 Deductions or other
adjustments would also be unchanged,
10 See 12 CFR part 3, Appendix A, section 2
(national banks); 12 CFR part 208, Appendix A,
section II (state member banks); 12 CFR part 225,
Appendix A, section II (bank holding companies);
12 CFR part 325, Appendix A, section I (state
nonmember banks); and 12 CFR 567.5 (savings
associations).
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except for those provisions discussed
below.
Under this NPR, a banking
organization would make certain other
adjustments to determine its tier 1 and
total qualifying capital. Some of these
adjustments would be made only to tier
1 capital. Other adjustments would be
made 50 percent to tier 1 capital and 50
percent to tier 2 capital. If the amount
deductible from tier 2 capital exceeds
the banking organization’s actual tier 2
capital, the banking organization would
have to deduct the shortfall amount
from tier 1 capital. Consistent with the
agencies’ general risk-based capital
rules, a banking organization would
have to have at least 50 percent of its
total qualifying capital in the form of
tier 1 capital.
Under this NPR, a banking
organization would deduct from tier 1
capital any after-tax gain-on-sale
resulting from a securitization. Gain-onsale means an increase in a banking
organization’s equity capital that results
from a securitization, other than an
increase in equity capital that results
from the banking organization’s receipt
of cash in connection with the
securitization. The agencies included
this deduction to offset accounting
treatments that produce an increase in
a banking organization’s equity capital
and tier 1 capital at the inception of a
securitization, for example, a gain
attributable to a credit-enhancing
interest-only strip receivable (CEIO) that
results from Financial Accounting
Standard (FAS) 140 accounting
treatment for the sale of underlying
exposures to a securitization special
purpose entity (SPE).11 The agencies
expect that the amount of the required
deduction would diminish over time as
the banking organization realizes the
increase in equity capital and, thus, tier
1 capital booked at the inception of the
securitization, through actual receipt of
cash flows.
Under the general risk-based capital
rules, a banking organization must
deduct CEIOs, whether purchased or
retained, from tier 1 capital to the extent
that the CEIOs exceed 25 percent of the
banking organization’s tier 1 capital.
Under this NPR, a banking organization
would have to deduct CEIOs from tier
1 capital to the extent they represent
after-tax gain-on-sale, and would have
to deduct any CEIOs that do not
constitute an after-tax gain-on-sale 50
percent from tier 1 capital and 50
percent from tier 2 capital.
11 See Statement of Financial Accounting
Standards No. 140, ‘‘Accounting for Transfers and
Servicing of Financial Assets and Extinguishments
of Liabilities’’ (September 2000).
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Under the FDIC, OCC, and Board
general risk-based capital rules, a
banking organization must deduct from
its tier 1 capital certain percentages of
the adjusted carrying value of its
nonfinancial equity investments. In
contrast, OTS general risk-based capital
rules require the deduction of most
investments in equity securities from
total capital.12 Under this NPR,
however, a banking organization would
not deduct these investments. Instead,
the banking organization’s equity
exposures generally would be subject to
the treatment provided in Part V of this
proposed rule.
A banking organization also would
have to deduct from total capital the
amount of certain unsettled transactions
and certain securitization exposures.
These deductions are provided in
section 21, section 38, and Part IV of
this proposed rule.
Consistent with the advanced
approaches final rule, for bank holding
companies with consolidated insurance
underwriting subsidiaries that are
functionally regulated (or subject to
comparable supervision and minimum
regulatory capital requirements in their
home jurisdiction), the following
treatment would apply. The assets and
liabilities of the subsidiary would be
consolidated for purposes of
determining the bank holding
company’s risk-weighted assets. The
bank holding company, however, would
deduct 50 percent from tier 1 capital
and 50 percent from tier 2 capital an
amount equal to the insurance
underwriting subsidiary’s minimum
regulatory capital requirement as
determined by its functional (or
equivalent) regulator. For U.S. regulated
insurance subsidiaries, this amount
generally would be 200 percent of the
subsidiary’s Authorized Control Level
as established by the appropriate state
insurance regulator. Under the general
risk-based capital rules, such
subsidiaries typically are fully
consolidated with the bank holding
company.
While the elements of tier 1 and tier
2 capital are the same across the general
12 OTS general risk-based capital rules require
savings associations to deduct all ‘‘equity
investments’’ from total capital. 12 CFR
567.5(c)(2)(ii). ‘‘Equity investments’’ are defined to
include: (i) Investments in equity securities (other
than investments in subsidiaries, equity
investments that are permissible for national banks,
indirect ownership interests in certain pools of
assets (for example, mutual funds), Federal Home
Loan Bank stock and Federal Reserve Bank stock);
and (ii) investments in certain real property. 12 CFR
567.1. The proposed treatment of investments in
equity securities is discussed above. Equity
investments in real estate would continue to be
deducted to the same extent as under the general
risk-based capital rules.
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risk-based capital rules, the advanced
approaches final rule, and this NPR, the
deductions from those elements are
different for each of the three risk-based
capital frameworks. As a result, each
framework has a distinct definition of
tier 1, tier 2, and total qualifying capital.
Securitization-related deductions
create a significant difference in the
calculation of tier 1 and tier 2 capital
across the three frameworks. Under the
general risk-based capital rules, only
certain CEIOs must be deducted from
capital; all other high-risk exposures for
which dollar-for-dollar capital must be
held may be ‘‘grossed-up’’ in accordance
with the regulatory reporting
instructions, effectively increasing the
denominator of the risk-based capital
ratio but not affecting the numerator. In
contrast, under the advanced
approaches final rule and this NPR,
certain high risk securitization
exposures must be deducted directly
from total capital. Other significant
differences in the definition of tier 1,
tier 2, and total qualifying capital across
the three frameworks include the
treatment of nonfinancial equity
investments for banks and bank holding
companies, certain equity investments
for savings associations, certain
unsettled transactions, consolidated
insurance underwriting subsidiaries of
bank holding companies, and the ALLL/
eligible credit reserves.
The different definitions of tier 1, tier
2, and total capital across the risk-based
capital frameworks raise a number of
issues. The agencies clarified in the
preamble to the advanced approaches
rule that a banking organization’s tier 1
capital and tier 2 capital for all nonregulatory-capital supervisory and
regulatory purposes (for example,
lending limits and Regulation W
quantitative limits) is the banking
organization’s tier 1 capital and tier 2
capital as calculated under the riskbased capital framework to which it is
subject. The agencies did not
specifically state a position regarding
the numerator of the leverage ratio. One
potential approach is for each banking
organization to use its applicable riskbased definition of tier 1 capital for
determining both the risk-based and
leverage capital ratios. Another
potential approach is to define a
numerator for the tier 1 leverage ratio
that would be the same for all banking
organizations. This approach could
require banks to calculate one measure
of tier 1 capital for risk-based capital
purposes and another measure of tier 1
capital for leverage ratio purposes.13
13 To the extent that the agencies decide to change
the numerator of the leverage ratio, they would
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Question 4: Given the potential for
three separate definitions of tier 1
capital under the three frameworks, the
agencies solicit comment on all aspects
of the tier 1 leverage ratio numerator,
including issues related to burden and
competitive equity.
F. Calculation of Risk-Weighted Assets
(1) Total Risk-Weighted Assets
Under this NPR, a banking
organization’s total risk-weighted assets
would be the sum of its total riskweighted assets for general credit risk,
unsettled transactions, securitization
exposures, equity exposures, and
operational risk. Banking organizations
that use the market risk rule (MRR)
would supplement their capital
calculations with those provisions.14
(2) Calculation of Risk-Weighted Assets
for General Credit Risk
For each of its general credit risk
exposures (that is, credit exposures that
are not unsettled transactions subject to
section 38 of the proposed rule,
securitization exposures, or equity
exposures), a banking organization must
first determine the exposure amount
and then multiply that amount by the
appropriate risk weight set forth in
section 33 of the proposed rule. General
credit risk exposures include exposures
to sovereign entities; exposures to
supranational entities and multilateral
development banks; exposures to public
sector entities; exposures to depository
institutions, foreign banks, and credit
unions; corporate exposures; regulatory
retail exposures; residential mortgage
exposures; pre-sold construction loans;
statutory multifamily mortgage
exposures; and other assets.
Generally, the exposure amount for
the on-balance sheet component of an
exposure is the banking organization’s
carrying value for the exposure. If the
exposure is classified as a security
available for sale, however, the exposure
amount is the banking organization’s
carrying value of the exposure adjusted
for unrealized gains and losses. The
exposure amount for the off-balance
sheet component of an exposure is
typically determined by multiplying the
propose such changes in a separate rulemaking. As
a related matter, the OTS advanced approaches
final rule incorrectly states that the leverage ratio
is calculated using the revised definition of tier 1
and tier 2 capital. This NPR would remove this
provision until the agencies conclusively resolve
this matter.
14 12 CFR part 3, Appendix B (national banks); 12
CFR part 208, Appendix E (state member banks); 12
CFR part 225, Appendix E (bank holding
companies); and 12 CFR part 325, Appendix C
(state nonmember banks). OTS intends to codify a
market risk capital rule for savings associations at
12 CFR part 567, Appendix D.
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notional amount of the off-balance sheet
component by the appropriate credit
conversion factor (CCF) under section
34 of the proposed rule. The exposure
amount for over-the-counter (OTC)
derivative contracts is determined under
section 35 of the proposed rule.
Exposure amounts for collateralized
OTC derivative contracts, repo-style
transactions, or eligible margin loans
may be determined under particular
rules in section 37 of the proposed rule.
(3) Calculation of Risk-Weighted Assets
for Unsettled Transactions,
Securitization Exposures, and Equity
Exposures
(a) Unsettled Transactions
Risk-weighted assets for specified
unsettled and failed securities, foreign
exchange, and commodities transactions
are calculated according to paragraph (f)
of section 38 of the proposed rule.15
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(b) Securitization Exposures
Risk-weighted assets for securitization
exposures are calculated according to
Part IV of the proposed rule. Generally,
a banking organization would calculate
the risk-weighted asset amount of a
securitization exposure by multiplying
the amount of the exposure as
determined in section 42 of the
proposed rule by the appropriate risk
weight in section 43 of this NPR.
Part IV of the proposed rule provides
a hierarchy of approaches for
calculating risk-weighted assets for
securitization exposures. Among the
approaches included in Part IV is a
ratings-based approach (RBA), which
calculates the risk-weighted asset
amount of a securitization exposure by
multiplying the amount of the exposure
by risk-weights that correspond to the
applicable external or applicable
inferred rating of the securitization. Part
IV provides other treatments for specific
types of securitization exposures
including deduction from capital for
certain exposures, and different riskweighted asset computations for certain
securitizations exposures that do not
qualify for the RBA and for
securitizations that have an early
amortization provision.
(c) Equity Exposures
Risk-weighted assets for equity
exposures are calculated according to
the rules in Part V of the proposed rule.
Generally, risk-weighted assets for
equity exposures that are not exposures
to investment funds would be
calculated according to the simple risk15 Certain transaction types are excluded from the
scope of section 38, as provided in paragraph (b) of
section 38.
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weight approach (SRWA) in section 52
of this proposed rule. Risk-weighted
assets for equity exposures to
investment funds would, with certain
exceptions, be calculated according to
one of three look-through approaches or,
if the investment fund qualifies,
calculated according to the money
market fund approach. These
approaches are described in section 53
of the proposed rule.
(4) Calculation of Risk-Weighted Assets
for Operational Risk
Risk-weighted assets for operational
risk are calculated under the BIA
provided in section 61 of this proposed
rule.
G. External and Inferred Ratings
(1) Overview
The agencies’ general risk-based
capital rules permit the use of external
ratings issued by a nationally
recognized statistical rating organization
(NRSRO) to assign risk weights to
recourse obligations, direct credit
substitutes, residual interests (other
than a credit-enhancing interest-only
strip), and asset- and mortgage-backed
securities.16 Under the ratings-based
approach in the general risk-based
capital rules, a banking organization
must use the lowest NRSRO external
rating if multiple ratings exist. The
approach also requires one rating for a
traded exposure and two ratings for a
non-traded exposure and allows the use
of inferred ratings within a
securitization structure. When the
agencies revised their general risk-based
capital rules to permit the use of
external ratings issued by an NRSRO for
these exposures, the agencies
acknowledged that these ratings
eventually could be used to determine
the risk-based capital requirements for
other types of debt instruments, such as
externally rated corporate bonds.
The New Accord would permit a
banking organization to use external
ratings to determine risk weights for a
broad range of exposures. It also
provides for the use of both inferred
and, within certain limitations, issuer
ratings, but discourages the use of
unsolicited ratings. Generally consistent
with the New Accord, and in response
to favorable comments on the Basel IA
NPR’s proposal to expand the use of
external ratings, the agencies propose
that external, issuer, and inferred ratings
16 Some synthetic structures also may be subject
to the external rating approach. For example,
certain credit-linked notes issued from a synthetic
securitization are risk weighted according to the
rating given to the notes. 66 FR 59614, 59622
(November 29, 2001).
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be used to risk weight various
exposures.
This proposed use of ratings is a more
risk-sensitive approach than relying on
membership in the Organization for
Economic Cooperation and
Development (OECD) 17 to differentiate
the risk of exposures to sovereign
entities, depository institutions, foreign
banks, and credit unions. The proposed
approach also would use a greater
number of risk weights than the general
risk-based capital rules, which would
further improve the risk sensitivity of a
banking organization’s risk-based
capital requirements.
Consistent with the agencies’ general
risk-based capital rules and the
advanced approaches final rule, the
agencies propose to recognize only
credit ratings that are issued by an
NRSRO. For the purposes of this NPR,
NRSRO means an entity registered with
the U.S. Securities and Exchange
Commission (SEC) as an NRSRO under
section 15E of the Securities Exchange
Act of 1934 (15 U.S.C. 78o–7).18
(2) Use of External Ratings
Under this NPR, a banking
organization would use the applicable
external rating of an exposure (for
certain exposures that have external
ratings) to determine its risk weight.
Additionally, consistent with the New
Accord, the banking organization would
infer a rating for certain exposures that
do not have external ratings from the
issuer rating of the obligor or from the
external rating of another specific issue
of the obligor. The agencies’ proposal
for the use of external and inferred
ratings, however, differs in some
respects from the New Accord, as
described below.
(a) External Ratings
Under this NPR, an external rating
means a credit rating that is assigned by
an NRSRO to an exposure, provided that
the credit rating fully reflects the entire
amount of credit risk with regard to all
payments owed to the holder of the
exposure. If, for example, a holder is
17 The OECD-based group of countries comprises
all full members of the OECD, as well as countries
that have concluded special lending arrangements
with the International Monetary Fund (IMF)
associated with the IMF’s General Arrangements to
Borrow. The list of OECD countries is available on
the OECD Web site at https://www.oecd.org.
18 See 17 CFR 240.17g–1. On September 29, 2006,
the President signed the Credit Rating Agency
Reform Act of 2006 (‘‘Reform Act’’) (Pub. L. 109–
291) into law. The Reform Act requires a credit
rating agency that wants to represent itself as an
NRSRO to register with the SEC. The agencies may
review their risk-based capital rules, guidance and
proposals from time to time to determine whether
any modification of the agencies’ definition of an
NRSRO is appropriate.
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owed principal and interest on an
exposure, the credit rating must fully
reflect the credit risk associated with
timely repayment of principal and
interest. If a holder is owed only
principal on an exposure, the credit
rating must fully reflect only the credit
risk associated with timely repayment of
principal. Furthermore, a credit rating
would qualify as an external rating only
if it is published in an accessible form
and is or will be included in the
transition matrices made publicly
available by the NRSRO that summarize
the historical performance of positions
rated by the NRSRO. An external rating
may be either solicited or unsolicited by
the obligor issuing the rated exposure.
This definition is consistent with the
definition of ‘‘external rating’’ in the
advanced approaches final rule.
Under this NPR, a banking
organization would determine the risk
weight for certain exposures with
external ratings based on the applicable
external ratings of the exposures. If an
exposure to a sovereign or public sector
entity (PSE), a corporate exposure, or a
securitization exposure has only one
external rating, that rating is the
applicable external rating. If such an
exposure has multiple external ratings,
the applicable external rating would be
the lowest external rating. This
approach for determining the applicable
external rating differs from the New
Accord. In the New Accord, if an
exposure has two external ratings, a
banking organization would apply the
lower rating to the exposure to
determine the risk weight. If an
exposure has three or more external
ratings, the banking organization would
use the second lowest external rating to
risk weight the exposure. The agencies
believe that the proposed approach,
which is designed to mitigate the
potential for external ratings arbitrage,
more reliably promotes safe and sound
banking practices.
(b) Inferred Ratings
Consistent with the New Accord, the
agencies propose that a banking
organization must, subject to certain
conditions, infer a rating on an exposure
to a sovereign entity or a PSE or on a
corporate exposure that does not have
an applicable external rating (unrated
exposure).19 An inferred rating may be
based on the issuer rating of the
sovereign, PSE, or corporate obligor or
based on another externally rated
exposure of that obligor. Exposures with
an inferred rating would be treated the
19 The treatment of inferred ratings for
securitization exposures is discussed in section
M.(4) of this preamble.
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18:35 Jul 28, 2008
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same as exposures with an identical
external rating.
(i) Determining Inferred Ratings
To determine the risk weight for an
unrated exposure to a sovereign entity
or a PSE, or for an unrated corporate
exposure, a banking organization must
first determine if, within the framework
established in this NPR, the exposure
has one or more inferred ratings. An
unrated exposure may have inferred
ratings based both on the issuer ratings
of the obligor and the external ratings of
specific issues of the obligor. A banking
organization would not be able to use an
external rating assigned to an obligor or
specific issues of the obligor to infer a
rating for an exposure to the obligor’s
affiliate.
(A) Inferred Rating Based on an Issuer
Rating
Under this NPR, a senior unrated
exposure to a sovereign entity or a PSE,
or a senior unrated corporate exposure
where the corporate issuer has one or
more issuer ratings, has inferred ratings
based on those issuer ratings. For
purposes of inferring a rating from an
issuer rating, a senior exposure would
be an exposure that ranks at least pari
passu (that is, equal) with the obligor’s
general creditors in the event of
bankruptcy, insolvency, or other similar
proceeding. This NPR defines an issuer
rating as a credit rating assigned by an
NRSRO to the obligor that reflects the
obligor’s capacity and willingness to
satisfy all of its financial obligations,
and is published in an accessible form
and is or will be included in the
transition matrices made publicly
available by the NRSRO that summarize
the historical performance of the
NRSRO’s ratings.
(B) Inferred Rating Based on a Specific
Issue Rating
Under this NPR, an unrated exposure
to a sovereign entity or a PSE, or an
unrated corporate exposure may have
one or more inferred ratings based on
external ratings assigned to another
exposure issued by the obligor. An
unrated exposure would have an
inferred rating equal to the external
rating of another exposure issued by the
same obligor and secured by the same
collateral (if any), if the externally rated
exposure: (i) Ranks pari passu with the
unrated exposure (or at the banking
organization’s option, is subordinated in
all respects to the unrated exposure); (ii)
has a long-term rating; (iii) does not
benefit from any credit enhancement
that is not available to the unrated
exposure, (iv) has an effective remaining
maturity that is equal to or longer than
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that of the unrated exposure, and (v) is
denominated in the same currency as
the unrated exposure. The currency
requirement would not apply where the
unrated exposure that is denominated in
a foreign currency arises from a
participation in a loan extended by a
multilateral development bank or is
guaranteed by a multilateral
development bank against convertibility
and transfer risk. If the banking
organization’s participation is only
partially guaranteed against
convertibility and transfer risk, the
banking organization could use the
external rating for the portion of the
participation that benefits from the
multilateral development bank’s
participation. If the externally rated
exposure does not meet these
requirements, it cannot be used to infer
a rating for the unrated exposure.
The inferred rating approach provides
a special treatment for inferred ratings
from low-quality ratings (ratings that
correspond to a risk weight of 100
percent or greater for an exposure to a
PSE and 150 percent for an exposure to
a sovereign entity or a corporate
exposure). An unrated exposure would
have inferred rating(s) equal to the longterm external rating(s) of exposures with
low-quality ratings that are issued by
the same obligor and that are senior in
all respects to the unrated exposure.
This approach for inferred ratings
differs from the New Accord, which
would require that any low-quality
rating of an exposure issued by an
obligor be assigned to any unrated
exposure to the obligor. The agencies
have concluded that this treatment
could result in an inappropriately high
capital charge in some circumstances.
For example, an obligor for business
reasons may choose to issue
subordinated debt that receives a lowquality rating. The New Accord suggests
this low-quality rating should be
assigned to unrated senior exposures of
the obligor, even if the unrated senior
exposures are also senior to exposures
with a high-quality rating. Under this
NPR, a banking organization in that
situation could assign the high-quality
rating to the unrated senior secured
exposure.
(ii) Determining the Applicable Inferred
Rating
Once a banking organization has
determined all the inferred ratings for
an unrated exposure, it must determine
the applicable inferred rating for the
exposure. Under this NPR, the
applicable inferred rating for an
exposure that has only one inferred
rating would be the inferred rating. If
the unrated exposure has two or more
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inferred ratings, the applicable inferred
rating would be the lowest inferred
rating.
The agencies believe that this
approach for determining the applicable
inferred rating for an unrated exposure
is appropriately risk sensitive and
consistent with the principles for use of
external ratings in this NPR and the
advanced approaches final rule. The
agencies are aware, however, that the
proposed use of unsolicited external
ratings in this NPR may raise certain
issues. The New Accord suggests that
banking organizations generally should
use solicited ratings and expresses
concern that NRSROs might potentially
use unsolicited ratings to put pressure
on issuers to obtain solicited ratings.
Question 5: The agencies seek
comment on the use of solicited and
unsolicited external ratings as proposed
in this NPR.
H. Risk-Weight Categories
(1) Exposures to Sovereign Entities
The agencies’ general risk-based
capital rules generally assign a risk
weight to an exposure to a sovereign
entity based on the type of exposure and
membership of the sovereign in the
OECD. Consistent with the New Accord,
the agencies propose to risk weight an
exposure to a sovereign entity based on
the exposure’s applicable external or
applicable inferred rating (see Table
1).20
For purposes of this NPR, sovereign
entity means a central government
(including the U.S. government) or an
agency, department, ministry, or central
bank of a central government. In the
43991
United States, this definition would
include the twelve Federal Reserve
Banks. The definition would not
include commercial enterprises owned
by the central government that are
engaged in activities involving trade,
commerce, or profit, which are generally
conducted or performed in the private
sector.
Where a sovereign entity’s banking
supervisor allows a banking
organization under its jurisdiction to
apply a lower risk weight to the same
exposure to that sovereign than Table 1
provides, a U.S. banking organization
would be able to assign that lower risk
weight to its exposures to that sovereign
entity provided the exposure is
denominated in that sovereign entity’s
domestic currency, and the banking
organization has at least the equivalent
amount of liabilities in that currency.
TABLE 1.—EXPOSURES TO SOVEREIGN ENTITIES
Applicable external or applicable inferred rating for an exposure to a sovereign entity
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
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(2) Exposures to Certain Supranational
Entities and Multilateral Development
Banks
Consistent with the New Accord’s
treatment of exposures to supranational
entities, the agencies propose to assign
a zero percent risk weight to exposures
to the Bank for International
Settlements, the European Central Bank,
the European Commission, and the
International Monetary Fund.
Generally consistent with the New
Accord, the agencies also propose that
an exposure to a multilateral
development bank (MDB) receive a zero
percent risk weight. This proposed risk
weight would apply only to those MDBs
listed below and is based on the
generally high credit quality of these
MDBs, their strong shareholder support,
and a shareholder structure comprised
of a significant proportion of sovereign
entities with high quality issuer ratings.
In this NPR, MDB means the
International Bank for Reconstruction
and Development, the International
Finance Corporation, the Inter-
American Development Bank, the Asian
Development Bank, the African
Development Bank, the European Bank
for Reconstruction and Development,
the European Investment Bank, the
European Investment Fund, the Nordic
Investment Bank, the Caribbean
Development Bank, the Islamic
Development Bank, the Council of
Europe Development Bank, and any
other multilateral lending institution or
regional development bank in which the
U.S. government is a shareholder or
contributing member or which the
primary Federal supervisor determines
poses comparable credit risk. Exposures
to regional development banks and
multilateral lending institutions that do
not meet these requirements would
generally be treated as corporate
exposures.
(3) Exposures to Depository Institutions,
Foreign Banks, and Credit Unions
The agencies’ general risk-based
capital rules assign a risk weight of 20
percent to all exposures to U.S.
depository institutions, foreign banks,
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0
0
20
50
100
100
150
100
and credit unions incorporated in an
OECD country. Short-term exposures to
such entities incorporated in a nonOECD country receive a 20 percent risk
weight and long-term exposures to such
entities in these countries receive a 100
percent risk weight.
Since this NPR eliminates the OECD/
non-OECD distinction, the agencies
propose that exposures to a depository
institution, a foreign bank, or a credit
union receive a risk weight based on the
lowest issuer rating of the entity’s
sovereign of incorporation. In this NPR,
sovereign of incorporation means the
country where an entity is incorporated,
chartered, or similarly established. In
general, exposures to a depository
institution, foreign bank, or credit union
would receive a risk weight one
category higher than the risk weight
assigned to an exposure to the entity’s
sovereign of incorporation. For
exposures to a depository institution,
foreign bank, or credit union where the
sovereign of incorporation is rated one
or two categories below investment
grade or is unrated, the risk weight
20 The ratings examples used throughout this
document are illustrative and do not express any
preferences or determinations on any NRSRO.
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Risk weight
(in percent)
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
would be 100 percent. If the sovereign
of incorporation is rated three or more
categories below investment grade,
these exposures would receive a risk
weight of 150 percent. Table 2
illustrates the proposed risk weights for
exposures to depository institutions,
foreign banks, and credit unions. A
depository institution is defined as in
section 3 of the Federal Deposit
Insurance Act (12 U.S.C. 1813), and
foreign bank means a foreign bank as
defined in section 211.2 of the Federal
Reserve Board’s Regulation K (12 CFR
211.2) other than a depository
institution.
TABLE 2.—EXPOSURES TO DEPOSITORY INSTITUTIONS, FOREIGN BANKS, AND CREDIT UNIONS
Lowest issuer rating of the sovereign of incorporation
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No issuer rating .............................................................................................................................
Exposure risk
weight
(in percent)
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
Consistent with the general risk-based
capital rules and the New Accord,
exposures to a depository institution or
foreign bank that are includable in the
regulatory capital of that institution
would receive a risk weight no lower
than 100 percent unless the exposure is
subject to deduction as a reciprocal
holding.21
The proposal outlined above is
consistent with one of the two options
available in the New Accord for risk
weighting claims on banks. The
alternative approach, which the
agencies propose for exposures to PSEs,
risk weights exposures based on the
applicable external or applicable
inferred rating of the exposures. This
alternative approach for exposures to
PSEs is described below.
Question 6: The agencies seek
comment on this proposed approach, as
well as on the appropriateness of
applying the alternative approach to
exposures to depository institutions,
credit unions, and foreign banks.
(4) Exposures to Public Sector Entities
(PSEs)
The agencies’ general risk-based
capital rules assign a 20 percent risk
weight to general obligations of states
and other political subdivisions of
OECD countries.22 Exposures to entities
that rely on revenues from specific
projects, rather than general revenues
(for example, revenue bonds), receive a
risk weight of 50 percent. Generally,
other exposures to state and political
subdivisions of OECD countries
(including industrial revenue bonds)
and exposures to political subdivisions
of non-OECD countries receive a risk
weight of 100 percent.
Consistent with the New Accord, the
agencies propose that an exposure to a
PSE receive a risk weight based on the
20
20
50
100
100
100
150
100
applicable external or applicable
inferred rating of the exposure. This
approach would apply to both general
obligation and revenue bonds. In no
case, however, may an exposure to a
PSE receive a risk weight that is lower
than the risk weight that corresponds to
the lowest issuer rating of a PSE’s
sovereign of incorporation (see Table 1
for risk weights for exposures to
sovereign entities).
The proposed rule defines a PSE as a
state, local authority, or other
governmental subdivision below the
level of a sovereign entity. This
definition would not include
commercial companies owned by a
government that engage in activities
involving trade, commerce, or profit,
which are generally conducted or
performed in the private sector. Table 3
illustrates the risk weights for exposures
to PSEs.
TABLE 3.—EXPOSURES TO PUBLIC SECTOR ENTITIES: LONG-TERM CREDIT RATING
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external or applicable inferred rating of an exposure to a PSE
Risk weight
(in percent)
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
20
20
50
50
100
100
150
50
The New Accord also suggests that a
national supervisor may permit a
banking organization to assign a risk
weight to an exposure to a PSE as if it
were an exposure to the sovereign entity
in whose jurisdiction the PSE is
established. The agencies are not
proposing to risk weight exposures to
PSEs in the United States in this
manner. In certain cases, however, the
agencies have allowed a banking
organization to rely on the risk weight
21 12 CFR part 3, Appendix A, section 2(c)(6)(ii)
(OCC); 12 CFR parts 208 and 225, Appendix A,
section II.B.3 (FRB); 12 CFR part 325, Appendix A,
I.B.(4) (FDIC); and 12 CFR 567.5(c)(2)(i) (OTS).
22 Political subdivisions of the United States
include a state, county, city, town or other
municipal corporation, a public authority, and
generally any publicly owned entity that is an
instrument of a state or municipal corporation.
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that a foreign banking supervisor assigns
to its own PSEs. Therefore, the agencies
propose to allow a banking organization
to risk weight an exposure to a foreign
PSE according to the risk weight that the
foreign banking supervisor assigns. In
no event, however, could the risk
weight for an exposure to a foreign PSE
be lower than the lowest risk weight
assigned to that PSE’s sovereign of
incorporation.
The New Accord contains an
alternative approach to risk weight
exposures to a PSE, which is based on
the lowest issuer rating of the PSE’s
sovereign of incorporation. The agencies
are proposing this approach for
exposures to depository institutions,
foreign banks, and credit unions as
described in the previous section.
Question 7: The agencies seek
comment on the pros and cons of the
proposed approach for risk weighting
exposures to PSEs as well as on the
appropriateness of applying, instead,
the approach proposed in this NPR for
depository institutions.
The New Accord does not incorporate
the use of short-term ratings for
exposures to PSEs. The agencies
43993
recognize, however, that an NRSRO may
assign a short-term municipal rating to
an exposure to a PSE that has a maturity
of up to three years (for example, a bond
anticipation note). Further, the agencies
understand that there are different
techniques for comparing these shortterm ratings to other types of ratings,
both short-term and long-term. The
agencies are considering whether to
permit the use of these short-term
ratings for risk weighting short-term
exposures to PSEs using the risk weights
in Table 4.
TABLE 4.—PUBLIC SECTOR ENTITIES: SHORT-TERM RATINGS
Applicable external rating of an exposure to a PSE
Example
Highest investment grade .............................................................................................................
Second-highest investment grade .................................................................................................
Third-highest investment grade .....................................................................................................
Below investment grade ................................................................................................................
No applicable external rating ........................................................................................................
SP–1/MIG–1 ............................
SP–2/MIG–2 ............................
SP–3/MIG–3 ............................
Non-prime ................................
N/A ...........................................
Question 8: The agencies solicit
comment on the use of short-term
ratings for exposures to PSEs generally
and specifically on the ratings and
related risk weights in Table 4.
(5) Corporate Exposures
Under the agencies’ general risk-based
capital rules, most corporate exposures
receive a risk weight of 100 percent.
Exposures to securities firms
incorporated in the United States or in
an OECD country may receive a 20
percent risk weight if they meet certain
requirements, and exposures to U.S.
government-sponsored agencies or
entities (GSEs) may also receive a 20
percent risk weight. GSEs include an
agency or corporation originally
established or chartered by the U.S.
Government to serve public purposes
specified by the U.S. Congress, but
whose obligations are not explicitly
guaranteed by the full faith and credit
of the U.S. Government.
In this NPR, corporate exposure
means a credit exposure to a natural
person or a company (including an
industrial development bond, an
exposure to a GSE, or an exposure to a
securities broker or dealer) that is not an
exposure to: a sovereign entity, the Bank
for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, an MDB, a depository institution,
a foreign bank, a credit union, or a PSE;
a regulatory retail exposure; a
residential mortgage exposure; a presold construction loan; a statutory
multifamily mortgage; a securitization
exposure; or an equity exposure.
Consistent with the New Accord, the
agencies propose to permit a banking
organization to elect one of two methods
to risk weight corporate exposures.
Regardless of the method a banking
organization chooses, it would have to
use that approach consistently for all
corporate exposures. First, a banking
organization could risk weight all of its
corporate exposures at 100 percent
without regard to external ratings.
Second, a banking organization could
Risk weight
(in percent)
20
50
100
150
50
risk weight a corporate exposure based
on its applicable external or applicable
inferred rating. Table 5 provides the
proposed risk weights for corporate
exposures with applicable external or
applicable inferred ratings based on
long-term credit ratings. Table 6
provides the proposed risk weights for
corporate exposures with applicable
external ratings based on short-term
credit ratings.
If a corporate exposure has no
external rating, that exposure could not
receive a risk weight lower than the risk
weight that corresponds to the lowest
issuer rating of the obligor’s sovereign of
incorporation in Table 1. In addition, if
an obligor has any exposure with a
short-term external rating that
corresponds to a risk weight of 150
percent under Table 6, a banking
organization would assign a 150 percent
risk weight to any corporate exposure to
that obligor that does not have an
external rating and that ranks pari passu
with or is subordinated to the externally
rated exposure.
TABLE 5.—CORPORATE EXPOSURES: LONG-TERM CREDIT RATING
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external or applicable inferred rating
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
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Exposure risk
weight
(in percent)
20
20
50
100
100
150
150
100
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
TABLE 6.—CORPORATE EXPOSURES: SHORT-TERM CREDIT RATING
Example
Highest investment grade .............................................................................................................
Second-highest investment grade .................................................................................................
Third-highest investment grade .....................................................................................................
Below investment grade ................................................................................................................
No applicable external rating ........................................................................................................
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external rating
A–1/P–1 ...................................
A–2/P–2 ...................................
A–3/P–3 ...................................
B, C, and non-prime ................
N/A ...........................................
As provided in the New Accord, this
NPR (outside of the securitization
framework) would not allow a banking
organization to infer a rating from an
exposure based on a short-term external
rating. Consistent with this position,
this NPR does not include the New
Accord provision that assigns a risk
weight of at least 100 percent to all
unrated short-term exposures of an
obligor if any rated short-term exposure
of that obligor receives a 50 percent risk
weight.
Question 9: The agencies seek
comment on the appropriateness of
including either or both of these aspects
of the New Accord in any final rule
implementing the standardized
framework.
The New Accord would treat
securities firms that meet certain
requirements like depository
institutions. The agencies propose,
however, to risk weight exposures to
securities firms as corporate exposures,
parallel with the treatment of bank
holding companies and savings
association holding companies.
The agencies also propose that
exposures to GSEs be treated as
corporate exposures and risk weighted
based on the NRSRO credit ratings.
These ratings on individual GSE
exposures are often based in part on the
NRSRO assessments of the extent to
which the U.S. government might come
to the financial aid of a GSE. The
agencies believe that risk-weight
determinations should not be based on
the possibility of U.S. government
financial assistance, except where the
U.S. government has legally committed
to provide such assistance.
In addition to the credit ratings on
individual GSE exposures, the NRSROs
also publish issuer ratings that evaluate
the financial strength of some GSEs
without respect to any implied financial
assistance from the U.S. government.
These financial strength ratings are
monitored by the issuing NRSROs but
are not included in the NRSROs’
transition matrices. Accordingly, the
financial strength ratings would not
meet the definition of an external rating
in this NPR. Further, the use of these
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ratings is also problematic because
NRSROs provide financial strength
ratings for issuers, but not for specific
issues, and do not provide the same
level of differentiation between shortand long-term debt and various levels of
subordination as NRSRO ratings of
specific exposures. In addition, NRSROs
have not published financial strength
ratings for all GSEs.
Question 10: The agencies seek
comment on the use of financial
strength ratings to determine risk
weights for exposures to GSEs, and seek
comment on how such ratings might be
applied. The agencies also seek input on
how subordination and maturity of
exposures could be embodied in such
an approach, and what requirements
should be developed for recognizing
ratings assigned to GSEs.
(6) Regulatory Retail Exposures
The general risk-based capital rules
generally assign a risk weight of 100
percent to non-mortgage retail
exposures, secured or unsecured,
including personal, auto, and credit
card loans. Consistent with the New
Accord, the agencies propose that a
banking organization apply a 75 percent
risk weight to regulatory retail
exposures that meet the following
criteria: (i) A banking organization’s
aggregate exposure to a single obligor
does not exceed $1 million; (ii) the
exposure is part of a well diversified
portfolio; and (iii) the exposure is not an
exposure to a sovereign entity, the Bank
for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, an MDB, a PSE, a depository
institution, a foreign bank, or a credit
union; an acquisition, development and
construction loan; a residential
mortgage exposure; a pre-sold
construction loan; a statutory
multifamily mortgage; a securitization
exposure; an equity exposure; or a debt
security. Examples of regulatory retail
exposures would include a revolving
credit or line of credit (including credit
card and overdraft lines of credit), a
personal term loan or lease (including
an installment loan, auto loan or lease,
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Exposure risk
weight
(in percent)
20
50
100
150
100
student or educational loan, personal
loan), and a facility or commitment to
a company.
Any retail exposure that does not
meet these requirements generally
would be considered a corporate
exposure and would receive a risk
weight based on the risk-weight tables
for corporate exposures (see Tables 5
and 6).
Question 11: The agencies seek
comment on whether a specific
numerical limit on concentration should
be incorporated into the provisions for
regulatory retail exposures. For
example, the New Accord suggests a 0.2
percent limit on an aggregate exposure
to one obligor as a measure of
concentration within the regulatory
retail portfolio. The agencies solicit
comment on the appropriateness of a
0.2 percent limit as well as on other
types of measures of portfolio
concentration that may be appropriate.
(7) Residential Mortgage Exposures
The general risk-based capital rules
assign exposures secured by one-to-four
family residential properties to either
the 50 percent or 100 percent risk
weight category. Most exposures
secured by a first lien on a one-to-four
family residential property meet the
criteria to receive a 50 percent risk
weight.23 The New Accord applies a
similarly broad treatment to residential
mortgages. It provides a risk weight of
35 percent for most first-lien residential
mortgage exposures that meet
prudential criteria such as the existence
of a substantial margin of additional
security over the amount of the loan.
In the Basel IA NPR, the agencies
proposed to assign a risk weight for oneto-four family residential mortgage
exposures based on the LTV ratio. The
agencies noted that the LTV ratio is a
meaningful indicator of potential loss
and borrower default. Commenters on
the Basel IA NPR generally supported
23 12 CFR part 3, Appendix A, section 3(c)(iii)
(OCC); 12 CFR parts 208 and 225, Appendix A,
section III.C.3 (Board); 12 CFR part 325, Appendix
A, section II.C.3 (FDIC); and 12 CFR 567.1
(definition of ‘‘qualifying mortgage loan’’) and 12
CFR 567.6(a)(1)(iii)(B) (50 percent risk weight)
(OTS).
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
this LTV ratio approach. In this NPR,
the agencies propose substantially the
same treatment for residential mortgage
exposures as was proposed in the Basel
IA NPR. Given the characteristics of the
U.S. residential mortgage market, the
agencies believe that the risk weights in
the New Accord do not reflect the
appropriate spectrum of risk for these
assets. The agencies believe the wider
range of risk weights that the agencies
proposed in the Basel IA NPR is more
appropriate for the U.S. residential
mortgage market.
The agencies believe that an LTV ratio
approach to residential mortgage
exposures would not impose a
significant burden on banking
organizations because LTV information
is readily available and is commonly
used in the underwriting process. Use of
LTV ratios to assign risk weights to
residential mortgage exposures would
not substitute for, or otherwise release a
banking organization from, its
responsibility to have prudent loan
underwriting and risk management
practices consistent with the size, type,
and risk of its mortgage business.24
Through the supervisory process, the
agencies would continue to assess a
banking organization’s underwriting
and risk management practices
consistent with supervisory guidance
and safety and soundness. The agencies
would continue to use their supervisory
authority to require a banking
organization to hold additional capital
for residential mortgage exposures
where appropriate.
The proposed rule defines a
residential mortgage exposure as an
exposure (other than a pre-sold
construction loan) that is primarily
secured by a one-to-four family
residential property. The proposed rule
identifies two types of residential
mortgage exposures (first-lien
residential mortgage exposures and
junior-lien residential mortgage
exposures), and provides a separate
treatment for each type of exposure. A
first-lien residential mortgage exposure
is a residential mortgage exposure
secured by a first lien or a residential
mortgage exposure secured by first and
junior lien(s) where no other party holds
an intervening lien. This treatment is
similar to the treatment of mortgage
exposures under the general risk-based
capital rules. A junior-lien residential
mortgage exposure is a residential
mortgage exposure that is secured by a
for example, ‘‘Interagency Guidance on
Nontraditional Mortgage Product Risks,’’ 71 FR
58609 (Oct. 4, 2006) and ‘‘Statement on Subprime
Mortgage Lending,’’ 72 FR 37569 (July 10, 2007).
junior lien and that is not a first-lien
residential mortgage exposure.
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TABLE 7.—RISK WEIGHTS FOR FIRSTLIEN RESIDENTIAL MORTGAGE EXPOSURES—Continued
(a) Exposure Amount
The proposed rule provides that a
banking organization would hold capital
for both the funded and the unfunded
portions of residential mortgage
exposures. For the funded portion of a
residential mortgage exposure, the
banking organization would assign a
risk weight to the carrying value of the
exposure (that is, the principal amount
of the exposure). For the unfunded
portion of a residential mortgage
exposure (for example, potential
exposure from a negative amortization
feature or a home equity line of credit
(HELOC)), a banking organization would
risk weight the notional amount of the
exposure (that is, the maximum
contractual commitment) multiplied by
the appropriate credit conversion factor.
For a residential mortgage exposure that
has both funded and unfunded
components, a banking organization
would calculate separate risk-weighted
asset amounts for the unfunded and
funded portions, based on separately
calculated LTV ratios as discussed
below.
(b) Risk Weights
The agencies propose that a banking
organization risk weight first-lien
residential mortgage exposures that
meet certain qualifying criteria
according to Table 7. The risk weights
in Table 7 would apply only to a firstlien residential mortgage exposure that
is secured by property that is owneroccupied or rented, is prudently
underwritten, is not 90 days or more
past due, and is not on nonaccrual. A
first-lien residential mortgage exposure
that has been restructured may receive
a risk weight lower than 100 percent,
only if the banking organization updates
the LTV ratio at the time of the
restructuring and according to the
discussion below and in section 33 of
the proposed rule. First-lien residential
mortgage exposures that do not meet
these criteria would receive a 100
percent risk weight if they have an LTV
ratio less than or equal to 90 percent,
and would receive a 150 percent risk
weight if they have an LTV ratio greater
than 90 percent.
Loan-to-value ratio
(in percent)
Greater than 60 and less
than or equal to 80 ...........
Greater than 80 and less
than or equal to 85 ...........
Greater than 85 and less
than or equal to 90 ...........
Greater than 90 and less
than or equal to 95 ...........
Greater than 95 ....................
Risk weight
(in percent)
Less than or equal to 60 ......
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20
35
50
75
100
150
TABLE 8.—RISK WEIGHTS FOR JUNIOR-LIEN RESIDENTIAL MORTGAGE
EXPOSURES
Loan-to-value ratio
(in percent)
SURES
Loan-to-value ratio
(in percent)
Risk weight
(in percent)
Under the general risk-based capital
rules, a banking organization must
assign a risk weight to an exposure
secured by a junior lien on residential
property at 100 percent, unless the
banking organization also holds the first
lien and there are no intervening liens.
The New Accord does not specifically
discuss the treatment of exposures
secured by junior liens on residential
property.
The agencies continue to believe that
stand-alone junior-lien residential
mortgage exposures have a different risk
profile than first-lien residential
mortgage exposures and should be risk
weighted accordingly. Under the
proposed rule, a banking organization
would compute an LTV ratio as
described below for a junior-lien
residential mortgage exposure that is not
90 days or more past due or on
nonaccrual based upon the loan
amounts for the junior-lien residential
mortgage exposure and all senior
exposures as described below. The
banking organization would then assign
a risk weight to the exposure amount of
the junior-lien residential mortgage
exposure according to Table 8. This
treatment is similar to the Basel IA NPR
and recognizes that stand-alone juniorlien residential mortgage exposures
generally default at a higher rate than
first-lien residential mortgage
exposures. A banking organization
would risk weight a junior-lien
residential mortgage exposure that is 90
days or more past due or on nonaccrual
at 150 percent.
TABLE 7.—RISK WEIGHTS FOR FIRSTLIEN RESIDENTIAL MORTGAGE EXPO-
24 See,
43995
Less than or equal to 60 ......
Greater than 60 and less
than or equal to 90 ...........
Greater than 90 ....................
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Risk weight
(in percent)
75
100
150
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
(c) Loan-to-Value Ratio Calculation
The agencies propose that a banking
organization calculate the LTV ratio on
an ongoing basis as described below.
The denominator of the LTV ratio, that
is, the value of the property, would be
equal to the lesser of the acquisition cost
for the property (for a purchase
transaction) or the estimate of a
property’s value at the origination of the
exposure or, at the banking
organization’s option, at the time of
restructuring. The estimate of value
would be based on an appraisal or
evaluation of the property in
conformance with the agencies’
appraisal regulations 25 and should
conform to the ‘‘Interagency Appraisal
and Evaluation Guidelines’’ 26 and the
‘‘Real Estate Lending Guidelines.’’ 27 If a
banking organization’s first-lien
residential mortgage exposure consists
of both first and junior liens on a
property, a banking organization could
update the estimate of value at the
origination of the junior-lien mortgage.
The numerator of the ratio, that is, the
loan amount, would depend on whether
the exposure is funded or unfunded,
and on whether the exposure is a firstlien residential mortgage exposure or a
junior-lien residential mortgage
exposure. The loan amount of the
funded portion of a first-lien residential
mortgage exposure would be the
principal amount of the exposure. The
loan amount of the funded portion of a
junior-lien residential mortgage
exposure would be the principal
amount of the exposure plus the
maximum contractual amounts of all
senior exposures secured by the same
residential property. Senior unfunded
commitments may include negative
amortization features and HELOCs.
A banking organization would be
required to calculate a separate loan
amount and LTV ratio for the unfunded
portion of a residential mortgage
exposure. The loan amount of the
unfunded portion of a residential
mortgage exposure would be the loan
amount of the funded portion of the
exposure, as described above, plus the
unfunded portion of the maximum
contractual amount of the commitment.
The agencies believe that a banking
organization should be able to reflect
the risk mitigating effects of loan-level
private mortgage insurance (PMI) when
calculating the LTV ratio of a residential
mortgage exposure. Loan-level PMI is
insurance that protects a lender in the
event of borrower default up to a
predetermined portion of the residential
mortgage exposure and that does not
have a pool-level cap that could
effectively reduce coverage below the
predetermined amount of the exposure.
Under this proposed rule, a banking
organization could reduce the loan
amount of a residential mortgage
exposure up to the amount covered by
loan-level PMI, provided the PMI issuer
is a regulated mortgage insurance
company, is not an affiliate 28 of the
banking organization, and (i) has longterm senior debt (without credit
enhancement) that has an external
rating that is in at least the third-highest
investment grade rating category or (ii)
has a claims-paying rating that is in at
least the third-highest investment grade
rating category. The agencies believe
that pool-level PMI generally should not
be reflected in the calculation of the
LTV ratio, because pool-level PMI is not
structured in such a way that a banking
organization can determine the LTV
ratio for a mortgage loan.
Question 12: The agencies request
comment on all aspects of the proposed
treatment of PMI under this framework.
(d) Example of LTV Ratio Calculation
Assume a banking organization
originates a first-lien residential
mortgage exposure with a negative
amortization feature; the property is
valued at $100,000; the original and
outstanding principal amount of the
exposure is $81,000; and the negative
amortization feature has a 10 percent
cap and extends for ten years (that is,
the mortgage loan balance can
contractually negatively amortize to 110
percent of the original balance over the
next 10 years). The funded loan amount
of $81,000 has an 81 percent LTV ratio,
which is risk weighted at 50 percent
(based on Table 7). The negative
amortization feature is an unfunded
commitment with a maximum
contractual amount of $8,100. It would
receive a 50 percent CCF, resulting in an
exposure amount of $4,050. The loan
amount of the unfunded portion would
be $81,000 funded amount plus the
$8,100 maximum contractual unfunded
amount, resulting in an LTV of 89.1
percent. The unfunded commitment
exposure amount of $4,050 would
therefore receive a 75 percent risk
weight (based on Table 7). The total
risk-weighted assets for the exposure
would be $43,538, as illustrated in
Table 9:
TABLE 9.—EXAMPLE OF PROPOSED RISK-BASED CAPITAL CALCULATION FOR FIRST-LIEN RESIDENTIAL MORTGAGE
EXPOSURES WITH NEGATIVE AMORTIZATION FEATURES
Funded Risk-Weighted Assets Calculation
(1)
(2)
(3)
(4)
Amount to Risk Weight ..................................................................................................................................................................
Funded LTV Ratio = Funded Loan Amount / Property Value = $81,000/$100,000 = ..................................................................
Risk Weight based on Table 7 ......................................................................................................................................................
RW Assets for Funded Loan Amount = $81,000 × .50 = ..............................................................................................................
$81,000
81%
50%
$40,500
Unfunded Risk-Weighted Assets Calculation
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(1)
(2)
(3)
(4)
Exposure Amount = Unfunded Maximum Amount × CCF = $8,100 × .50 = ................................................................................
Unfunded LTV Ratio = (Funded Amount + Unfunded Amount)/Property Value = ($81,000 + $8,100)/$100,000 = ....................
Risk Weight based on Table 7 ......................................................................................................................................................
RW Assets for Unfunded Amount = $4,050 × 0.75 .......................................................................................................................
25 12 CFR part 34, subpart C (OCC); 12 CFR part
208, subpart E and part 225, subpart G (Board); 12
CFR part 323 (FDIC); and 12 CFR part 564 (OTS).
26 ‘‘The Comptroller’s Handbook for Commercial
Real Estate and Construction Lending’’, Appendix
E (OCC); SR 94–55 (Board); FIL–74–94 (FDIC); and
12 CFR part 564 (OTS).
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27 12 CFR part 34, subpart D, Appendix A (OCC);
12 CFR part 208, subpart E, Appendix C and part
225, subpart G (Board); 12 CFR part 365 (FDIC); and
12 CFR 560.100–101 (OTS).
28 An affiliate of a banking organization is defined
as any company that controls, is controlled by, or
is under common control with, the banking
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$4,050
89.1%
75%
$3,038
organization. A person or company controls a
company if it: (i) Owns, controls, or holds the
power to vote 25 percent or more of a class of voting
securities of the company, or (ii) consolidates the
company for financial reporting purposes.
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43997
TABLE 9.—EXAMPLE OF PROPOSED RISK-BASED CAPITAL CALCULATION FOR FIRST-LIEN RESIDENTIAL MORTGAGE
EXPOSURES WITH NEGATIVE AMORTIZATION FEATURES—Continued
Total Risk-Weighted Assets for a Loan with Negative Amortizing Features
RW Assets for Funded Amount + RW for Unfunded Amount = $40,500 + $3,038 = ........................................................................
$43,538
Note: The funded and unfunded amount of the loan will change over time once the loan begins to negatively amortize.
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(e) Alternative LTV Ratio Calculation
The agencies are considering an
alternative for calculating the LTV ratio
and risk-weighted asset amount for
residential mortgage exposures with
unfunded commitments. This
alternative is less complex but may
result in different capital implications.
Under the alternative, a banking
organization would not calculate a
separate risk-weighted asset amount for
the funded and unfunded portion of the
residential mortgage exposure. The
alternative calculation would require
only the calculation of a single LTV
ratio representing a combined funded
and unfunded amount when calculating
the LTV ratio for a given exposure.
Under the alternative, the loan amount
of a first-lien residential mortgage
exposure would equal the funded
principal amount (or combined
exposures provided there is no
intervening lien) plus the exposure
amount of any unfunded commitment
(that is, the unfunded amount of the
maximum contractual amount of any
commitment multiplied by the
appropriate CCF). The loan amount of a
junior-lien residential mortgage
exposure would equal the sum of: (i)
The funded principal amount of the
exposure, (ii) the exposure amount of
any undrawn commitment associated
with the junior-lien exposure, and (iii)
the exposure amount of any senior
exposure held by a third party on the
date of origination of the junior-lien
exposure. Where a senior exposure held
by a third party includes an undrawn
commitment, such as a HELOC or a
negative amortization feature, the loan
amount for a junior-lien residential
mortgage exposure would include the
maximum contractual amount of that
commitment multiplied by the
appropriate CCF. The denominator of
the LTV ratio would be the same under
both alternatives.
Question 13: The agencies seek
comment on the pros and cons
associated with the two alternatives for
calculating the LTV ratio.
While the agencies believe risk
weighting one-to-four family residential
mortgage exposures based on the LTV
ratio appropriately captures a large
number of mortgage exposures with
differing risk, the agencies have
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considered basing the risk weight for
these exposures on other parameters.
Examples include using pricing
information that the Home Mortgage
Disclosure Act (HMDA) requires many
banking organizations to report, or
borrower credit scores.
Question 14: The agencies seek
industry views on any other risksensitive methods that could be used to
segment residential mortgage exposures
by risk level and solicit comment on
how such alternatives might be applied.
(8) Pre-Sold Construction Loans and
Statutory Multifamily Mortgages
The general risk-based capital rules
assign 50 percent and 100 percent risk
weights to certain one-to-four family
residential pre-sold construction loans
and multifamily residential loans. The
agencies adopted these provisions as a
result of the Resolution Trust
Corporation Refinancing, Restructuring,
and Improvement Act of 1991 (RTCRRI
Act). The RTCRRI Act mandates that
each agency provide in its capital
regulations (i) a 50 percent risk weight
for certain one-to-four-family residential
pre-sold construction loans and
multifamily residential loans that meet
specific statutory criteria in the RTCRRI
Act and any other underwriting criteria
imposed by the agencies, and (ii) a 100
percent risk weight for one-to-fourfamily residential pre-sold construction
loans for residences for which the
purchase contract is cancelled.
Consistent with the RTCRRI Act, a
pre-sold construction loan would be
subject to a 50 percent risk weight
unless the purchase contract is
cancelled. The NPR defines a pre-sold
construction loan as any one-to-four
family residential pre-sold construction
loan for a residence meeting the
requirements under section 618(a)(1) or
(2) of the RTCRRI Act and under 12 CFR
part 3, Appendix A, section 3(a)(3)(iv)
(for national banks); 12 CFR part 208,
Appendix A, section III.C.3. (for state
member banks); 12 CFR part 225,
Appendix A, section III.C.3. (for bank
holding companies); 12 CFR part 325,
Appendix A, section II.C. (for state
nonmember banks), and that is not 90
days or more past due or on nonaccrual;
or 12 CFR 567.1 (definition of
‘‘qualifying residential construction
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loan’’) (for savings associations), and
that is not on nonaccrual.
Also consistent with the RTCRRI Act,
under the NPR, a statutory multifamily
mortgage would receive a 50 percent
risk weight. The NPR defines statutory
multifamily mortgage as any
multifamily residential mortgage
meeting the requirements under section
618(b)(1) of the RTCRRI Act, and under
12 CFR part 3, Appendix A, section
3(a)(3)(v) (for national banks); 12 CFR
part 208, Appendix A, section III.C.3.
(for state member banks); 12 CFR part
225, Appendix A, section III.C.3. (for
bank holding companies); 12 CFR part
325, Appendix A, section II.C.a. (for
state nonmember banks); or 12 CFR
567.1 (definition of ‘‘qualifying
multifamily mortgage loan’’) and 12 CFR
567.6(a)(1)(iii) (for savings associations),
and that is not on nonaccrual.29 A
multifamily mortgage that does not meet
the definition of a statutory mortgage
would be treated as a corporate
exposure.
(9) Past Due Loans
Under the general risk-based capital
rules, the risk weight of a loan generally
does not change if the loan becomes
past due, with the exception of certain
residential mortgage loans. The New
Accord provides risk weights ranging
from 50 to 150 percent for loans that are
more than 90 days past due, depending
on the amount of specific provisions a
banking organization has recorded.
Most banking organizations in the
United States do not recognize specific
provisions. Therefore, the treatment of
past due exposures in the New Accord
is not applicable for those banking
organizations. Accordingly, to reflect
impaired credit quality, the agencies
propose to risk weight most exposures
that are 90 days or more past due or on
nonaccrual at 150 percent, except for
past due residential mortgage exposures.
A banking organization could reduce
the risk weight of the exposure to reflect
financial collateral or eligible
guarantees.
29 Under these proposed definitions, a loan that
is 90 days or more past due or on nonaccrual would
not qualify as a pre-sold construction loan or a
statutory multifamily mortgage. These loans would
be accorded the treatment described in the next
section.
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Question 15: The agencies seek
comment on whether, for those banking
organizations that are required to
maintain specific provisions, it would be
appropriate to follow the New Accord
treatment, that is, the risk weight would
vary depending on the amount of
specific provisions the banking
organization has recorded.
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(10) Other Assets
The agencies propose to use the
following risk weights, which are
generally consistent with the risk
weights in the general risk-based capital
rules, for other exposures: (i) A banking
organization could assign a zero percent
risk weight to cash owned and held in
all of its offices or in transit; to gold
bullion held in its own vaults, or held
in another depository institution’s
vaults on an allocated basis, to the
extent gold bullion assets are offset by
gold bullion liabilities; and to derivative
contracts that are publicly traded on an
exchange that requires the daily receipt
and payment of cash-variation margin;
(ii) a banking organization could assign
a 20 percent risk weight to cash items
in the process of collection; and (iii) a
banking organization would have to
apply a 100 percent risk weight to all
assets not specifically assigned a
different risk weight under this NPR
(other than exposures that are deducted
from tier 1 or tier 2 capital).
I. Off-Balance Sheet Items
Under the general risk-based capital
rules, a banking organization generally
determines the risk-based asset amount
for an off-balance sheet exposure using
a two-step process. The banking
organization applies a CCF to the offbalance sheet amount to obtain an onbalance sheet credit equivalent amount
and then applies the appropriate risk
weight to that amount.
In general, the agencies propose to
calculate the exposure amount of an offbalance sheet item by multiplying the
off-balance sheet component, which is
usually the notional amount, by the
applicable CCF. The agencies also
propose to retain most of the CCFs in
the general risk-based capital rules.30
Consistent with the New Accord,
however, the agencies propose that a
banking organization apply a 20 percent
CCF to all commitments with an
original maturity of one year or less
(short-term commitments) that are not
unconditionally cancelable rather than
30 The discussion of the risk-based capital
treatment for off-balance sheet securitization
exposures, including liquidity facilities for assetbacked commercial paper, is presented in Part IV
of the proposed rule. Equity commitments are
discussed in Part V of the proposed rule.
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the zero percent in the general riskbased capital rules. The agencies believe
that a 20 percent CCF for these shortterm commitments better reflects the
risk of these exposures.
For purposes of this NPR, a
commitment means any legally binding
arrangement that obligates a banking
organization to extend credit or to
purchase assets. In this NPR,
unconditionally cancelable means, with
respect to a commitment, that a banking
organization may, at any time, with or
without cause, refuse to extend credit
under the facility (to the extent
permitted under applicable law). In the
case of a residential mortgage exposure
that is a line of credit, a banking
organization is deemed able to
unconditionally cancel the commitment
if it can, at its option, prohibit
additional extensions of credit, reduce
the credit line, and terminate the
commitment to the full extent permitted
by applicable law.
Under this NPR, if a banking
organization commits to provide a
commitment on an off-balance sheet
item, that is, a commitment to make a
commitment, the agencies propose that
a banking organization apply the lower
of the two applicable CCFs. If a banking
organization provides a commitment
that is structured as a syndication, it
would only be required to calculate the
exposure amount for its pro rata share
of the commitment.
There is no reference to note issuance
facilities (NIFs) and revolving
underwriting facilities (RUFs) in the
proposed rule as the agencies are not
aware that any such transactions exist in
the United States.
Under the agencies’ general risk-based
capital rules, capital is required against
any on-balance sheet exposures that
arise from securities financing
transactions (that is, repurchase
agreements, reverse repurchase
agreements, securities lending
transactions, and securities borrowing
transactions); for example, capital is
required against the cash receivable that
a banking organization generates when
it borrows a security and posts cash
collateral to obtain the security. A
banking organization faces counterparty
credit risk on securities financing
transactions, however, regardless of
whether the transaction generates an onbalance sheet exposure. In contrast to
the general risk-based capital rules, this
NPR requires a banking organization to
hold risk-based capital against all
securities financing transactions.
Similar to other exposures, a banking
organization would determine the
exposure amount of a securities
financing transaction and then risk
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weight that amount based on the
counterparty or, if applicable, collateral
or guarantee.
In general, a banking organization
must apply a 100 percent CCF to the offbalance sheet component of a
repurchase agreement or securities
lending or borrowing transaction. The
off-balance sheet component of a
repurchase agreement equals the sum of
the current market values of all
positions the banking organization has
sold subject to repurchase. The offbalance sheet component of a securities
lending transaction is the sum of the
current market values of all positions
the banking organization has lent under
the transaction. For securities borrowing
transactions, the off-balance sheet
component is the sum of the current
market values of all non-cash positions
the banking organization has posted as
collateral under the transaction. In
certain circumstances, a banking
organization may instead determine the
exposure amount of the transaction as
described in the collateralized
transaction section of this preamble and
in section 37 of the proposed rule.
J. OTC Derivative Contracts
(1) Background
Under the general risk-based capital
rules for over-the-counter (OTC)
derivative contracts, a banking
organization must hold risk-based
capital for counterparty credit risk.31 To
determine the capital requirement, a
banking organization must first compute
a credit equivalent amount for a contract
and then apply to that amount a risk
weight based on the obligor,
counterparty, eligible guarantor, or
recognized collateral. For an OTC
derivative contract that is not subject to
a qualifying bilateral netting contract,
the credit equivalent amount is the sum
of (i) the greater of the current exposure
(mark-to-market value) or zero and (ii)
an estimate of the potential future credit
exposure (PFE). PFE is the notional
principal amount of the contract
multiplied by a credit conversion factor.
Under the general risk-based capital
rules for OTC derivative contracts
subject to a qualifying bilateral netting
contract, the credit equivalent amount is
calculated by adding the net current
exposure of the netting contract and the
sum of the estimates of PFE for the
individual contracts. The net current
31 OTS rules on the calculation of credit
equivalent amounts for derivative contracts differ
from the rules of the other agencies. That is, OTS
rules address only interest rate and foreign
exchange rate contracts and include certain other
differences. Accordingly, the description of the
current provisions in this preamble primarily
reflects the other banking agencies’ rules.
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exposure is the sum of all positive and
negative mark-to-market values of the
individual contracts but not less than
zero. A banking organization recognizes
the effects of the bilateral netting
contract on the gross potential future
exposure of the contracts by calculating
an adjusted add-on amount based on the
ratio of net current exposure to gross
current exposure, either on a
counterparty-by-counterparty basis or
on an aggregate basis.
(2) Treatment of OTC Derivative
Contracts
Consistent with the treatment in the
New Accord and the general risk-based
capital rules, the proposed rule defines
an OTC derivative contract as a
derivative contract that is not traded on
an exchange that requires the daily
receipt and payment of cash-variation
margin. A derivative contract would be
defined as a financial contract whose
value is derived from the values of one
or more underlying assets, reference
rates, or indices of asset values or
reference rates. Derivative contracts
would include interest rate derivative
contracts, exchange rate derivative
contracts, equity derivative contracts,
commodity derivative contracts, credit
derivatives, and any other instrument
that poses similar counterparty credit
risks. The proposed rule also defines
derivative contracts to include unsettled
securities, commodities, and foreign
exchange trades with a contractual
settlement or delivery lag that is longer
than the normal settlement period
(which the proposed rule defines as the
lesser of the market standard for the
particular instrument and five business
days). This includes, for example,
mortgage-backed securities transactions
that the GSEs conduct in the To-BeAnnounced market.
The current exposure method for
determining the exposure amount for
single OTC derivative contracts
contained in the New Accord is similar
to the method in the agencies’ general
risk-based capital rules. The agencies
propose to retain this risk-based capital
treatment for OTC derivative contracts.
Under the agencies’ general risk-based
capital rules, a banking organization
must obtain a written and well-reasoned
legal opinion for each of its bilateral
qualifying master netting agreements
that cover OTC derivative contracts to
recognize the netting benefit. In this
NPR, the agencies propose that to use
netting treatment for multiple OTC
derivative contracts, the contracts must
be subject to a qualifying master netting
agreement.
In this NPR, a qualifying master
netting agreement means any written,
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legally enforceable bilateral netting
agreement, provided that (i) the
agreement creates a single legal
obligation for all individual transactions
covered by the agreement upon an event
of default, including bankruptcy,
insolvency or similar proceeding, of the
counterparty; (ii) the agreement
provides the banking organization the
right to accelerate, terminate, and close
out on a net basis all transactions under
the agreement and to liquidate or set off
collateral promptly upon an event of
default, including upon an event of
bankruptcy, insolvency, or similar
proceeding, of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions; (iii) the banking
organization has conducted sufficient
legal review to conclude with a wellfounded basis (and maintain sufficient
written documentation of that legal
review) that the agreement meets the
requirements of part (ii) of this
definition and that, in the event of legal
challenge (including one resulting from
default, bankruptcy, insolvency, or
similar proceeding), the relevant court
and administrative authorities would
find the agreement to be legal, valid,
binding, and enforceable under the law
of the relevant jurisdictions; (iv) the
banking organization establishes and
maintains procedures to monitor
possible changes in relevant law and to
ensure that the agreement continues to
satisfy the requirements of the
definition of a qualifying master netting
agreement; and (v) the agreement does
not contain a walkaway clause.
In some cases, the legal review
requirement could be met by reasoned
reliance on a commissioned legal
opinion or an in-house counsel analysis.
In other cases, for example, those
involving certain new derivative
transactions or derivative counterparties
in atypical jurisdictions, the banking
organization would need to obtain an
explicit, written legal opinion from
external or internal legal counsel
addressing the particular situation.
If an OTC derivative contract is
collateralized by financial collateral, a
banking organization would first
determine the exposure amount of the
OTC derivative contract as described
above and in section 35 of this proposed
rule. To take into account the riskreducing effects of the financial
collateral, a banking organization could
recognize the credit risk mitigation
benefits of the financial collateral using
the simple approach for collateralized
transactions provided in section 37(b) of
this proposed rule. Alternatively, a
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43999
banking organization could, if the
financial collateral is marked-to-market
on a daily basis and subject to a daily
margin maintenance requirement, adjust
the exposure amount of the contract
using the collateral haircut approach
provided in section 37(c) of this
proposed rule.
(3) Counterparty Credit Risk for Credit
Derivatives
A banking organization that purchases
a credit derivative that is recognized
under section 36 of the proposed rule as
a credit risk mitigant for an existing
exposure that is not a covered position
under the MRR would not have to
compute a separate counterparty credit
risk capital requirement for the credit
derivative in section 31 of the proposed
rule. If a banking organization chose not
to hold risk-based capital against the
counterparty credit risk of such credit
derivative contracts, it would have to do
so consistently for all such credit
derivative contracts. Further, where the
contracts are subject to a qualifying
master netting agreement, the banking
organization would either include them
all or exclude them all from any
measure used to determine counterparty
credit risk exposure to all relevant
counterparties for risk-based capital
purposes.
Where a banking organization
provides protection through a credit
derivative that is not treated as a
covered position under the MRR, it
would treat the credit derivative as an
exposure to the reference obligor and
compute a risk-weighted asset amount
for the credit derivative under section
31 of the proposed rule. The banking
organization need not compute a
counterparty credit risk capital
requirement for the credit derivative, as
long as it does so consistently for all
such credit derivatives and either
includes all or excludes all such credit
derivatives that are subject to a
qualifying master netting contract from
any measure used to determine
counterparty credit risk exposure to all
relevant counterparties for risk-based
capital purposes. Where the banking
organization provides protection
through a credit derivative treated as a
covered position under the MRR, it
would compute a counterparty credit
risk capital requirement using an
amount determined under the OTC
derivative contracts section of this NPR.
However, the PFE of the protection
provider would be capped at the net
present value of the amount of unpaid
premiums.
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(4) Counterparty Credit Risk for Equity
Derivatives
Under this NPR, a banking
organization would be required to treat
an equity derivative contract as an
equity exposure and compute a riskweighted asset amount for that
exposure. A banking organization could
choose not to hold risk-based capital
against the counterparty credit risk of
such equity contracts unless the banking
organization treats the contract as a
covered position under the MRR.
However, it would have to do so
consistently for all such equity
derivative contracts. Furthermore,
where the contracts are subject to a
qualifying master netting agreement, the
banking organization would have to
either include or exclude all the
contracts from any measure used to
determine counterparty credit risk
exposure to all relevant counterparties
for risk-based capital purposes. (The
approach for equity exposures is
provided in Part V of the proposed rule.)
(5) Risk Weight for OTC Derivative
Contracts
Under the general risk-based capital
rules, a banking organization must risk
weight the credit equivalent amount of
an OTC derivative exposure by applying
the risk weight of the counterparty or,
where applicable, guarantor or
collateral, to the credit equivalent
amount of the contract(s). The risk
weight is limited to 50 percent even if
the counterparty or guarantor would
otherwise receive a higher risk weight.
The agencies limited the risk weight
assigned to OTC derivative contracts to
50 percent when they finalized the
derivatives counterparty credit risk rule
in 1995.32 At that time, most derivatives
counterparties were highly rated and
were generally financial institutions.
The agencies noted, however, that they
intended to monitor the quality of
credits in the interest rate and exchange
rate markets to determine whether some
transactions might merit a 100 percent
risk weight.
Consistent with the New Accord, the
agencies propose that the risk weight for
OTC derivative transactions would not
be subject to any specific ceiling. As the
market for derivatives has developed,
the types of counterparties acceptable to
participants have expanded to include
counterparties that the agencies believe
merit a risk weight greater than 50
percent.
K. Credit Risk Mitigation (CRM)
Banking organizations use a number
of techniques to mitigate credit risks.
32 60
FR 46169–46185 (September 5, 1995).
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For example, a banking organization
may collateralize exposures by firstpriority claims, in whole or in part, with
cash or securities; a third party may
guarantee a loan exposure; or a banking
organization may buy a credit derivative
to offset an exposure’s credit risk.
Additionally, a banking organization
may agree to net exposures to a
counterparty against reciprocal
exposures from that counterparty. This
section describes how a banking
organization could recognize for riskbased capital purposes the riskmitigation effects of guarantees, credit
derivatives, financial collateral, and, in
limited cases, non-financial collateral.
To recognize credit risk mitigants for
risk-based capital purposes, a banking
organization should have in place
operational procedures and risk
management processes that ensure that
all documentation used in
collateralizing or guaranteeing a
transaction is legal, valid, binding, and
enforceable under applicable law in the
relevant jurisdictions. The banking
organization should have conducted
sufficient legal review to reach a wellfounded conclusion that the
documentation meets this standard and
should reconduct such a review as
necessary to ensure continuing
enforceability.
Although the use of credit risk
mitigants may reduce or transfer credit
risk, it simultaneously may increase
other risks, including operational,
liquidity, and market risks. Accordingly,
it is imperative that a banking
organization employ robust procedures
and processes to control risks, including
roll-off risk and concentration risk,
arising from the banking organization’s
use of credit risk mitigants and to
monitor the implications of using credit
risk mitigants for the banking
organization’s overall credit risk profile.
(1) Guarantees and Credit Derivatives
(a) Eligibility Requirements
The agencies’ general risk-based
capital rules generally recognize thirdparty guarantees provided by central
governments, U.S. governmentsponsored entities, public-sector entities
in OECD countries, multilateral lending
institutions and regional development
banks, depository institutions, and
qualifying securities firms in OECD
countries. Consistent with the New
Accord, the agencies propose to allow a
banking organization to use a
substitution approach similar to the
approach in the agencies’ general riskbased capital rules and recognize a
wider range of guarantors.
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This NPR defines an eligible
guarantor as any of the following
entities: (i) a sovereign entity, the Bank
for International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, a Federal Home Loan
Bank, the Federal Agricultural Mortgage
Corporation (Farmer Mac), an MDB, a
depository institution, a foreign bank, a
credit union, a bank holding company
(as defined in section 2 of the Bank
Holding Company Act (12 U.S.C. 1841)),
or a savings and loan holding company
(as defined in 12 U.S.C. 1467a) provided
all or substantially all of the holding
company’s activities are permissible for
a financial holding company under 12
U.S.C. 1843(k); or (ii) any other entity
(other than a securitization special
purpose entity (SPE)) if at the time the
entity issued the guarantee or credit
derivative or at any time thereafter, the
entity has issued and has outstanding an
unsecured long-term debt security
without credit enhancement that has a
long-term applicable external rating.
For recognition under this proposed
rule, consistent with the advanced
approaches final rule, guarantees and
credit derivatives would have to meet
specific eligibility requirements. This
proposed rule defines an eligible
guarantee as a guarantee from an eligible
guarantor that: (i) is written; (ii) is either
unconditional, or a contingent
obligation of the United States
Government or its agencies, the validity
of which to the beneficiary is dependent
upon some affirmative action on the
part of the beneficiary of the guarantee
or a third party (for example, servicing
requirements); (iii) covers all or a pro
rata portion of all contractual payments
of the obligor on the reference exposure;
(iv) gives the beneficiary a direct claim
against the protection provider; (v) is
not unilaterally cancelable by the
protection provider for reasons other
than the breach of the contract by the
beneficiary; (vi) is legally enforceable
against the protection provider in a
jurisdiction where the protection
provider has sufficient assets against
which a judgment may be attached and
enforced; (vii) requires the protection
provider to make payment to the
beneficiary on the occurrence of a
default (as defined in the guarantee) of
the obligor on the reference exposure in
a timely manner without the beneficiary
first having to take legal actions to
pursue the obligor for payment; (viii)
does not increase the beneficiary’s cost
of credit protection on the guarantee in
response to deterioration in the credit
quality of the reference exposure; and
(ix) is not provided by an affiliate of the
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banking organization, unless the affiliate
is an insured depository institution,
foreign bank, securities broker or dealer,
or insurance company that does not
control the banking organization; and is
subject to consolidated supervision and
regulation comparable to that imposed
on U.S. depository institutions,
securities brokers or dealers, or
insurance companies (as the case may
be).
In this NPR, consistent with the
advanced approaches final rule, eligible
credit derivative means a credit
derivative in the form of a credit default
swap, nth-to-default swap, total return
swap, or any other form of credit
derivative approved by the primary
Federal supervisor, provided that:
(i) The contract meets the
requirements of an eligible guarantee
and has been confirmed by the
protection purchaser and the protection
provider;
(ii) Any assignment of the contract
has been confirmed by all relevant
parties;
(iii) If the credit derivative is a credit
default swap or nth-to-default swap, the
contract includes the following credit
events: (A) failure to pay any amount
due under the terms of the reference
exposure, subject to any applicable
minimal payment threshold that is
consistent with standard market
practice and with a grace period that is
closely in line with the grace period of
the reference exposure; and (B)
bankruptcy, insolvency, or inability of
the obligor on the reference exposure to
pay its debts, or its failure or admission
in writing of its inability generally to
pay its debts as they become due, and
similar events;
(iv) The terms and conditions
dictating the manner in which the
contract is to be settled are incorporated
into the contract;
(v) If the contract allows for cash
settlement, the contract incorporates a
robust valuation process to estimate loss
reliably and specifies a reasonable
period for obtaining post-credit event
valuations of the reference exposure;
(vi) If the contract requires the
protection purchaser to transfer an
exposure to the protection provider at
settlement, the terms of at least one of
the exposures that is permitted to be
transferred under the contract must
provide that any required consent to
transfer may not be unreasonably
withheld;
(vii) If the credit derivative is a credit
default swap or nth-to-default swap, the
contract clearly identifies the parties
responsible for determining whether a
credit event has occurred, specifies that
this determination is not the sole
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responsibility of the protection
provider, and gives the protection
purchaser the right to notify the
protection provider of the occurrence of
a credit event; and
(viii) If the credit derivative is a total
return swap and the banking
organization records net payments
received on the swap as net income, the
banking organization records offsetting
deterioration in the value of the hedged
exposure (through reductions in fair
value).
Under this NPR, which is consistent
with the advanced approaches final
rule, a banking organization would be
permitted to recognize an eligible credit
derivative that hedges an exposure that
is different from the credit derivative’s
reference exposure used for determining
the derivative’s cash settlement value,
deliverable obligation, or occurrence of
a credit event only if: (i) The reference
exposure ranks pari passu or
subordinated to the hedged exposure
and (ii) the reference exposure and the
hedged exposure are exposures to the
same legal entity, and legally
enforceable cross-default or crossacceleration clauses are in place to
assure protection payments under the
credit derivative are triggered when the
obligor fails to pay under the terms of
the hedged exposure.
(b) Substitution Approach
Under the substitution approach in
this NPR, if the protection amount (as
defined below) of the eligible guarantee
or eligible credit derivative is greater
than or equal to the exposure amount of
the hedged exposure, a banking
organization could substitute the risk
weight associated with the guarantee or
credit derivative for the risk weight of
the hedged exposure. If the protection
amount of the eligible guarantee or
eligible credit derivative is less than the
exposure amount of the hedged
exposure, the banking organization
would have to treat the hedged exposure
as two separate exposures (protected
and unprotected) to recognize the credit
risk mitigation benefit of the guarantee
or credit derivative on the protected
exposure. A banking organization would
calculate the risk-weighted asset amount
for the protected exposure under section
36 of this NPR (using a risk weight
associated with the guarantee or credit
derivative and an exposure amount
equal to the protection amount of the
guarantee or credit derivative). The
banking organization would calculate its
risk-weighted asset amount for the
unprotected exposure under section 36
of this NPR (using the risk weight
assigned to the exposure and an
exposure amount equal to the exposure
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44001
amount of the original hedged exposure
minus the protection amount of the
guarantee or credit derivative). If the
banking organization determines that
substitution of the guarantee or credit
derivative’s risk weight would lead to
an inappropriate degree of risk
mitigation, it may substitute a higher
risk weight.
The protection amount of an eligible
guarantee or eligible credit derivative
would be the effective notional amount
of the guarantee or credit derivative
reduced by any applicable haircuts for
maturity mismatch, lack of restructuring
coverage, and currency mismatch (each
described below). The effective notional
amount of an eligible guarantee or
eligible credit derivative would be the
lesser of the contractual notional
amount of the credit risk mitigant and
the exposure amount of the hedged
exposure, multiplied by the percentage
coverage of the credit risk mitigant. For
example, the effective notional amount
of a guarantee that covers, on a pro rata
basis, 40 percent of any losses on a $100
bond would be $40.
(c) Maturity Mismatch Haircut
A banking organization that seeks to
reduce the risk-weighted asset amount
of an exposure by recognizing an
eligible guarantee or eligible credit
derivative would have to adjust the
effective notional amount of the credit
risk mitigant downward to reflect any
maturity mismatch between the hedged
exposure and the credit risk mitigant. A
maturity mismatch occurs when the
residual maturity of a credit risk
mitigant is less than that of the hedged
exposure(s). When a banking
organization has a group of hedged
exposures with different residual
maturities that are covered by a single
eligible guarantee or eligible credit
derivative, a banking organization
would treat each hedged exposure as if
it were fully covered by a separate
eligible guarantee or eligible credit
derivative. To determine whether any of
the hedged exposures has a maturity
mismatch with the eligible guarantee or
credit derivative, the banking
organization would assess whether the
residual maturity of the eligible
guarantee or eligible credit derivative is
less than that of the hedged exposure.
The residual maturity of a hedged
exposure would be the longest possible
remaining time before the obligor is
scheduled to fulfill its obligation on the
exposure. Embedded options that may
reduce the term of the credit risk
mitigant would be taken into account so
that the shortest possible residual
maturity for the credit risk mitigant
would be used to determine the
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potential maturity mismatch. Where a
call is at the discretion of the protection
provider, the residual maturity of the
eligible guarantee or eligible credit
derivative would be at the first call date.
If the call is at the discretion of the
banking organization purchasing the
protection, but the terms of the
arrangement at the origination of the
eligible guarantee or eligible credit
derivative contain a positive incentive
for the banking organization to call the
transaction before contractual maturity,
the remaining time to the first call date
would be the residual maturity of the
credit risk mitigant. For example, where
there is a step-up in the cost of credit
protection in conjunction with a call
feature or where the effective cost of
protection increases over time even if
credit quality remains the same or
improves, the residual maturity of the
credit risk mitigant would be the
remaining time to the first call.
Under the proposed rule, a banking
organization would only recognize an
eligible guarantee or an eligible credit
derivative with a maturity mismatch if
the original maturity is equal to or
greater than one year and the residual
maturity is greater than three months.
When a maturity mismatch exists, a
banking organization would have to
apply the following maturity mismatch
adjustment to the effective notional
amount of the guarantee or credit
derivative adjusted for maturity
mismatch:
Pm = E × (t¥0.25) / (T¥0.25),
Where:
(i) Pm = effective notional amount of the
guarantee or credit derivative adjusted
for maturity mismatch;
(ii) E = effective notional amount of the
guarantee or credit derivative;
(iii) t = lesser of T or residual maturity of the
guarantee or credit derivative, expressed
in years; and
(iv) T = lesser of 5 or residual maturity of the
hedged exposure, expressed in years.
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(d) Restructuring Haircut
A banking organization that seeks to
recognize an eligible credit derivative
that does not include a restructuring as
a credit event that triggers payment
under the derivative would have to
reduce the recognition of the credit
derivative by 40 percent. For these
purposes, a restructuring involves
forgiveness or postponement of
principal, interest, or fees that result in
a credit loss event (that is, a charge off,
specific provision, or other similar debit
to the profit and loss account).
In other words, the effective notional
amount of the credit derivative adjusted
for lack of restructuring credit event
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(and maturity mismatch, if applicable)
would be:
Pr = Pm × 0.60,
Where:
(i) Pr = effective notional amount of the
credit derivative, adjusted for lack of
restructuring credit event (and maturity
mismatch, if applicable); and
(ii) Pm = effective notional amount of the
credit derivative (adjusted for maturity
mismatch, if applicable).
(e) Currency Mismatch Haircut
Where the eligible guarantee or
eligible credit derivative is denominated
in a currency different from that in
which any hedged exposure is
denominated, the effective notional
amount of the guarantee or credit
derivative adjusted for currency
mismatch (and maturity mismatch and
lack of restructuring credit event, if
applicable) would be calculated as:
Pc = Pr × (1¥Hfx),
Where:
(i) Pc = effective notional amount of the
guarantee or credit derivative, adjusted
for currency mismatch (and maturity
mismatch and lack of restructuring credit
event, if applicable);
(ii) Pr = effective notional amount of the
guarantee or credit derivative (adjusted
for maturity mismatch and lack of
restructuring credit event, if applicable);
and
(iii) Hfx = haircut appropriate for the
currency mismatch between the
guarantee or credit derivative and the
hedged exposure.
Except as provided below, a banking
organization would be required to use a
standard supervisory haircut of 8.0
percent for Hfx (based on a ten-business
day holding period and daily markingto-market and remargining).
Alternatively, a banking organization
could use internally estimated haircuts
for Hfx based on a ten-business day
holding period and daily marking-tomarket and remargining if the banking
organization qualifies to use the ownestimates haircuts, or the simple VaR
method as provided in section 37(d) of
this NPR. The banking organization
would scale these haircuts up using the
square root of time formula if the
banking organization revalues the
guarantee or credit derivative less
frequently than once every ten business
days. The applicable haircut (HM) is
calculated using the following square
root of time formula:
HM = HN
TM
,
TN
Where:
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(i) TM = greater of ten and the number of days
between revaluations of the credit
derivative or guarantee;
(ii) TN = holding period used by the banking
organization to derive HN; and
(iii) HN = haircut based on the holding period
TN.
(f) Multiple Credit Risk Mitigants
If multiple credit risk mitigants (for
example, two eligible guarantees) cover
a single exposure, the CRM section in
the New Accord provides that a banking
organization must disaggregate the
exposure into portions covered by each
credit risk mitigant (for example, the
portion covered by each guarantee) and
must calculate separately the risk-based
capital requirement of each portion.33
The New Accord also indicates that
when credit risk mitigants provided by
a single protection provider have
differing maturities, the mitigants
should be subdivided into separate
layers of protection.34 The agencies
propose to permit a banking
organization to take this approach.
(2) Collateralized Transactions
The general risk-based capital rules
recognize limited types of collateral:
Cash on deposit; securities issued or
guaranteed by central governments of
the OECD countries; securities issued or
guaranteed by the U.S. government or
its agencies; and securities issued by
certain multilateral development
banks.35
(a) Collateral Proposal
In the past, the banking industry has
urged the agencies to recognize a wider
array of collateral types for purposes of
reducing risk-based capital
requirements. The agencies agree that
their general risk-based capital rules for
collateral are restrictive and, in some
cases, ignore market practice.
Accordingly, the agencies propose to
recognize the credit mitigating impact of
financial collateral. For purposes of this
NPR, financial collateral means
collateral in the form of any of the
following instruments: (i) Cash on
deposit with the banking organization
(including cash held for the banking
organization by a third-party custodian
or trustee); (ii) gold bullion; (iii) longterm debt securities that have an
applicable external rating of one
category below investment grade or
higher (for example, at least BB¥); (iv)
33 New
Accord, ¶ 206.
34 Id.
35 The agencies’ rules for collateral transactions,
however, differ somewhat as described in the
agencies’ joint report to Congress. ‘‘Joint Report:
Differences in Accounting and Capital Standards
among the Federal Banking Agencies,’’ 71 FR 16776
(April 4, 2006).
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short-term debt instruments that have
an applicable external rating of at least
investment grade (for example, at least
A–3); (v) equity securities that are
publicly traded; (vi) convertible bonds
that are publicly traded; (vii) money
market mutual fund shares and other
mutual fund shares if a price for the
shares is publicly quoted daily; or (viii)
conforming residential mortgage
exposures. With the exception of cash
on deposit, the banking organization
would have to have a perfected, firstpriority security interest in the collateral
or, outside of the United States, the legal
equivalent thereof, notwithstanding the
prior security interest of any custodial
agent. A banking organization could
recognize partial collateralization of the
exposure.
The agencies propose to permit a
banking organization to recognize the
risk-mitigating effects of financial
collateral using the simple approach,
the collateral haircut approach, and the
simple VaR approach. The collateral
haircut and simple VaR approaches are
the same as the collateral haircut and
simple VaR approaches in the advanced
approaches final rule. The agencies do
not propose, however, to include the
internal models method (for example,
the expected positive exposure (EPE)
method) in this NPR.
The agencies propose to permit a
banking organization to use any
44003
applicable approach to recognize
collateral provided the banking
organization uses the same approach for
similar exposures. Under this NPR as
under the advanced approaches final
rule, a banking organization could use
the collateral haircut approach only for
repo-style transactions, eligible margin
loans, collateralized OTC derivative
transactions, and single-product netting
sets thereof, and the simple VaR
approach only for single-product netting
sets of repo-style transactions and
eligible margin loans.
Table 10 illustrates the CRM methods
that would be available for various types
of transactions under the proposed rule.
TABLE 10.—APPLICABILITY OF CRM METHODS
Simple
approach
Collateral haircut approach
Simple VaR
method
Any exposure ...............................................................................................................................
OTC Derivative Contract .............................................................................................................
Repo-Style Transaction ...............................................................................................................
Eligible Margin Loan ....................................................................................................................
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Collateralized exposure
X
X
X
X
........................
X
X
X
........................
........................
X
X
The proposed rule defines repo-style
transaction as a repurchase or reverse
repurchase transaction, or a securities
borrowing or securities lending
transaction (including a transaction in
which the banking organization acts as
agent for a customer and indemnifies
the customer against loss), provided
that:
(i) The transaction is based solely on
liquid and readily marketable securities,
cash, gold, or conforming residential
mortgage exposures;
(ii) The transaction is marked-tomarket daily and subject to daily margin
maintenance requirements;
(iii)(a) The transaction is a ‘‘securities
contract’’ or ‘‘repurchase agreement’’
under section 555 or 559, respectively,
of the Bankruptcy Code (11 U.S.C. 555
or 559), a qualified financial contract
under section 11(e)(8) of the Federal
Deposit Insurance Act (12 U.S.C.
1821(e)(8)), or a netting contract
between or among financial institutions
under sections 401–407 of the Federal
Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C.
4401–4407) or the Federal Reserve
Board’s Regulation EE (12 CFR part
231); or (b) if the transaction does not
meet the criteria in paragraph (iii)(a) of
this definition, then: Either the
transaction is executed under an
agreement that provides the banking
organization the right to accelerate,
terminate, and close out the transaction
on a net basis and to liquidate or set off
collateral promptly upon an event of
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default (including upon an event of
bankruptcy, insolvency, or similar
proceeding) of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions; or the transaction is either
overnight or unconditionally cancelable
at any time by the banking organization
and is executed under an agreement that
provides the banking organization the
right to accelerate, terminate, and close
out the transaction on a net basis and to
liquidate or set off collateral promptly
upon an event of counterparty default;
and
(iv) The banking organization has
conducted sufficient legal review to
conclude with a well-founded basis
(and maintains sufficient
documentation of that legal review) that
the agreement meets the requirements of
paragraph (iii) of this definition and is
legal, valid, binding, and enforceable
under applicable law in the relevant
jurisdictions.
This NPR defines an eligible margin
loan as an extension of credit where: (i)
the extension of credit is collateralized
exclusively by liquid and readily
marketable debt or equity securities,
gold, or conforming residential mortgage
exposures; (ii) the collateral is markedto-market daily, and the transaction is
subject to daily margin maintenance
requirements; (iii) the extension of
credit is conducted under an agreement
that provides the banking organization
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the right to accelerate and terminate the
extension of credit and to liquidate or
set off collateral promptly upon an
event of default (including upon an
event of bankruptcy, insolvency, or
similar proceeding) of the counterparty,
provided that, in any such case, any
exercise of rights under the agreement
will not be stayed or avoided under
applicable law in the relevant
jurisdictions; 36 and (iv) the banking
organization has conducted sufficient
legal review to conclude with a wellfounded basis (and maintains sufficient
written documentation of that legal
review) that the agreement meets the
requirements of paragraph (iii) of this
definition and is legal, valid, binding,
and enforceable under applicable law in
the relevant jurisdictions.
(b) Risk Management Guidance for
Recognizing Collateral
Before relying on the CRM benefits of
collateral to risk weight its exposures, a
banking organization should: (i)
Conduct sufficient legal review to
ensure, at inception and on an ongoing
basis, that all documentation used in the
36 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act (12 U.S.C.
1821(e)(8), or netting contracts between or among
financial institutions under sections 401–407 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C. 4401–4407) or
the Federal Reserve Board’s Regulation EE (12 CFR
part 231).
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collateralized transaction is binding on
all parties and legally enforceable in all
relevant jurisdictions; (ii) consider the
correlation between obligor risk of the
underlying direct exposure and
collateral risk in the transaction; and
(iii) fully take into account the time and
cost needed to realize the liquidation
proceeds and the potential for a decline
in collateral value over this time period.
A banking organization also should
ensure that: (i) the legal mechanism
under which the collateral is pledged or
transferred ensures that the banking
organization has the right to liquidate or
take legal possession of the collateral in
a timely manner in the event of the
default, insolvency, or bankruptcy (or
other defined credit event) of the obligor
and, where applicable, the custodian
holding the collateral; (ii) the banking
organization has taken all steps
necessary to fulfill legal requirements to
secure its interest in the collateral so
that it has and maintains an enforceable
security interest; (iii) the banking
organization has clear and robust
procedures to ensure observation of any
legal conditions required for declaring
the default of the borrower and prompt
liquidation of the collateral in the event
of default; (iv) the banking organization
has established procedures and
practices for conservatively estimating,
on a regular ongoing basis, the market
value of the collateral, taking into
account factors that could affect that
value (for example, the liquidity of the
market for the collateral and
obsolescence or deterioration of the
collateral); and (v) the banking
organization has in place systems for
promptly requesting and receiving
additional collateral for transactions
whose terms require maintenance of
collateral values at specified thresholds.
(c) Simple Approach
The agencies propose to allow a
banking organization to apply the
simple approach, which is similar to the
approach in the agencies’ general riskbased capital rules, in a manner
generally consistent with the New
Accord. Generally, under the simple
approach, the collateralized portion of
the exposure would receive the risk
weight applicable to the collateral.
Subject to certain exceptions, the risk
weight assigned to the collateralized
portion of the exposure may not be less
than 20 percent. In most cases, the
collateral would have to be financial
collateral. For repurchase agreements,
reverse repurchase agreements, and
securities lending and borrowing
transactions, the collateral is the
instruments, gold, and cash the banking
organization has borrowed, purchased
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subject to resale, or taken as collateral
from the counterparty under the
transaction. A banking organization,
however, could recognize any collateral
for a repo-style transaction that is
included in the banking organization’s
VaR-based measure under the MRR. In
all cases, the collateral agreement would
have to be for at least the life of the
exposure, a banking organization would
have to revalue the collateral at least
every six months, and the exposure and
the collateral (other than gold) would
have to be denominated in the same
currency.
In certain cases, collateral may be
used to reduce the risk weight to less
than 20 percent for an exposure. The
exceptions to the risk-weight floor of 20
percent are: (i) OTC derivative
transactions that are marked-to-market
on a daily basis and subject to a daily
margin maintenance agreement, which
could receive (1) a zero percent risk
weight to the extent that they are
collateralized by cash on deposit, and
(2) a 10 percent risk weight to the extent
that they are collateralized by a
sovereign security or PSE security that
qualifies for a zero percent risk weight
under section 33 of this NPR; (ii) the
portion of exposures collateralized by
cash on deposit could receive a zero
percent risk weight; and (iii) the portion
of exposures collateralized by a
sovereign security or a PSE security
denominated in the same currency
could receive a zero percent risk weight
provided that the banking organization
discounts the market value of the
collateral by 20 percent.
In the case where a banking
organization chooses to recognize
collateral in the form of conforming
residential mortgages, the banking
organization must risk weight the
portion of the exposure that is secured
by the conforming residential mortgage
at 50 percent.
(d) Collateral Haircut and Simple VaR
Approaches
The agencies propose to permit a
banking organization to use the
collateral haircut approach to recognize
the risk mitigating effect of financial
collateral that secures a repo-style
transaction, eligible margin loan,
collateralized OTC derivative contract,
or single-product netting set of such
transactions through an adjustment to
the exposure amount. The collateral
haircut approach contains two methods
for calculating the haircuts: Supervisory
haircuts or own-estimates haircuts.
Additionally, the banking organization
could use the simple VaR approach for
single-product netting sets of repo-style
transactions or eligible margin loans. In
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this proposed rule, a netting set means
a group of transactions with a single
counterparty that are subject to a
qualifying master netting agreement.
Although a banking organization
could use any combination of
supervisory haircuts, own-estimate
haircuts, and simple VaR (only for
single-product netting sets of repo-style
transactions or eligible margin loans) to
recognize collateral, it would have to
use the same approach for similar
exposures. A banking organization
could, however, apply a different
method to subsets of repo-style
transactions, eligible margin loans, or
OTC derivatives by product type or
geographic location if its application of
different methods were designed to
separate transactions that do no have
similar risk profiles and was not
designed for arbitrage purposes. For
example, a banking organization could
choose to use one method for agency
securities lending transactions, that is,
repo-style transactions in which the
banking organization, acting as agent for
a customer, lends the customer’s
securities and indemnifies the customer
against loss, and another method for all
other repo-style transactions. The
agencies propose to require use of the
supervisory haircut approach to
recognize the risk-mitigating effect of
conforming residential mortgages in
exposure amount. Use of the standard
supervisory haircut approach for repostyle transactions, eligible margin loans,
and OTC derivatives collateralized by
conforming mortgages, however, would
not preclude a banking organization’s
use of own estimates haircuts or the
simple VaR approach for exposures
collateralized by other types of financial
collateral.
Consistent with the New Accord and
the advanced approaches final rule, a
banking organization could also use the
collateral haircut approaches to
recognize the benefits of any collateral
(not only financial collateral) mitigating
the counterparty credit risk of repo-style
transactions included in a banking
organization’s VaR-based measure under
the MRR. In this instance, a banking
organization would not need to apply
the supervisory haircut approach to
conforming mortgage collateral, but
could use one of the other approaches
to recognize that collateral.
(e) Exposure Amount for Repo-Style
Transactions, Eligible Margin Loans,
and Collateralized OTC Derivatives
Under the collateral haircut approach,
a banking organization would set the
exposure amount equal to the greater of
zero and the sum of three quantities:
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(i) The value of the exposure less the
value of the collateral (for eligible
margin loans and repo-style
transactions, the value of the exposure
is the sum of the current market values
of all instruments, gold, and cash the
banking organization has lent, sold
subject to repurchase, or posted as
collateral to the counterparty under the
transaction (or netting set); for
collateralized OTC derivative contracts,
the value of the exposure is the
exposure amount that is calculated
under section 35(c) or (d) of this
proposed rule; the value of the collateral
is the sum of the current market values
of all instruments, gold and cash the
banking organization has borrowed,
purchased subject to resale, or taken as
collateral from the counterparty under
the transaction (or netting set));
(ii) The absolute value of the net
position in a given instrument or in gold
(where the net position in a given
instrument or in gold equals the sum of
the current market values of the
instrument or gold the banking
organization has lent, sold subject to
repurchase, or posted as collateral to the
counterparty minus the sum of the
current market values of that same
instrument or gold the banking
organization has borrowed, purchased
subject to resale, or taken as collateral
from the counterparty) multiplied by the
market price volatility haircut
appropriate to the instrument or gold;
and
(iii) The sum of the absolute values of
the net position of any cash or
instruments in each currency that is
different from the settlement currency
multiplied by the haircut appropriate to
each currency mismatch.
To determine the appropriate
haircuts, a banking organization may
choose to use standard supervisory
haircuts or, with prior written approval
from its primary Federal supervisor, its
own estimates of haircuts. After
determining the exposure amount, the
banking organization would risk weight
the exposure amount according to the
obligor or guarantor if applicable.
For purposes of the collateral haircut
approach, a given instrument would
include, for example, all securities with
a single Committee on Uniform
Securities Identification Procedures
(CUSIP) number and would not include
securities with different CUSIP
numbers, even if issued by the same
issuer with the same maturity date.
For purposes of this calculation, the
net position in a given currency equals
the sum of the current market values of
any instruments or cash in the currency
the banking organization has lent, sold
subject to repurchase, or posted as
collateral to the counterparty minus the
44005
sum of the current market values of any
instruments or cash in the currency the
banking organization has borrowed,
purchased subject to resale, or taken as
collateral from the counterparty.
(f) Standard Supervisory Haircuts
Under this NPR, if a banking
organization chooses to use standard
supervisory haircuts, it would use an
8.0 percent haircut for each currency
mismatch and use the market price
volatility haircut appropriate to each
security in Table 11 below. These
haircuts are based on the ten-businessday holding period for eligible margin
loans and collateralized OTC derivative
contracts and may be multiplied by the
square root of 1⁄2 to convert the standard
supervisory haircuts to the fivebusiness-day minimum holding period
for repo-style transactions (unless the
collateral is conforming residential
mortgages, in which case the banking
organization must use a minimum tenbusiness-day holding period). A banking
organization would adjust the standard
supervisory haircuts upward on the
basis of a holding period longer than ten
business days for eligible margin loans
and collateralized OTC derivative
contracts or five business days for repostyle transactions where and as
appropriate to take into account the
illiquidity of an instrument.
TABLE 11.—STANDARD SUPERVISORY HAIRCUTS BASED ON MARKET PRICE VOLATILITY 1
Applicable external rating grade category for debt securities
Residual maturity for debt
securities
Two highest investment grade rating categories for long-term ratings/highest investment grade rating category for short-term ratings.
≤ 1 year ........................................
>1 year, ≤ 5 years .......................
>5 years .......................................
.005
.02
.04
.01
.04
.08
Two lowest investment grade rating categories for both short- and
long-term ratings.
≤ 1 year ........................................
>1 year, ≤ 5 years .......................
> 5 years ......................................
.01
.03
.06
.02
.06
.12
One rating category below investment grade .....................................
All .................................................
.15
.25
Main index equities 37 (including convertible bonds) and gold .....................................................................
.15
.15
Other publicly traded equities (including convertible bonds), conforming residential mortgages, and nonfinancial collateral.
.25
.25
Mutual funds ..................................................................................................................................................
Sovereign entity
issuers 2
(1) Highest haircut applicable to any
security in which the fund can invest.
Cash on deposit with the bank (including a certificate of deposit issued by the banking organization) ......
1
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2
Other issuers
0
0
The market price volatility haircuts in Table 11 are based on a ten-business-day holding period.
This column includes the haircuts for MDBs and foreign PSEs that would receive a zero percent risk weight.
As an example, if a banking
organization that uses standard
supervisory haircuts has extended an
eligible margin loan of $100 that is
collateralized by five-year U.S. Treasury
37 The proposed rule defines a ‘‘main index’’ as
the S&P 500 Index, the FTSE All-World Index, and
any other index for which the bank demonstrates
to the satisfaction of its primary Federal supervisor
that the equities represented in the index have
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comparable liquidity, depth of market, and size of
bid-ask spreads as equities in the S&P 500 Index
and the FTSE All-World Index.
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notes with a market value of $100, the
value of the exposure less the value of
the collateral would be zero, and the net
position in the security ($100) times the
supervisory haircut (.02) would be $2.
There is no currency mismatch.
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Therefore, the exposure amount would
be $0 + $2 = $2.
(g) Own Estimates of Haircuts
With the prior written approval of the
banking organization’s primary Federal
supervisor, a banking organization
could calculate market price volatility
and currency mismatch haircuts using
its own internal estimates of market
price volatility and foreign exchange
volatility. The banking organization’s
primary Federal supervisor would base
approval to use internally estimated
haircuts on the satisfaction of certain
minimum qualitative and quantitative
standards. These standards include: (i)
The banking organization would use a
99th percentile one-tailed confidence
interval and a minimum five-businessday holding period for repo-style
transactions and a minimum tenbusiness-day holding period for all
other transactions; (ii) the banking
organization would adjust holding
periods upward where and as
appropriate to take into account the
illiquidity of an instrument; (iii) the
banking organization would select a
historical observation period for
calculating haircuts of at least one year;
and (iv) the banking organization would
update its data sets and compute
haircuts no less frequently than
quarterly and would update its data sets
and compute haircuts whenever market
prices change materially. A banking
organization would estimate
individually the volatilities of the
exposure, the collateral, and foreign
exchange rates and may not take into
account the correlations between them.
A banking organization that uses
internally estimated haircuts would
have to adhere to the following rules.
The banking organization could
calculate internally estimated haircuts
for categories of debt securities that
have an applicable external or
applicable inferred rating of at least
investment grade. The haircut for a
category of securities would have to be
representative of the internal volatility
estimates for securities in that category
that the banking organization has
actually lent, sold subject to repurchase,
posted as collateral, borrowed,
purchased subject to resale, or taken as
collateral. In determining relevant
categories, the banking organization
would at a minimum have to take into
account (i) the type of issuer of the
security; (ii) the applicable external
rating of the security; (iii) the maturity
of the security; and (iv) the interest rate
sensitivity of the security. A banking
organization would calculate a separate
internally estimated haircut for each
individual debt security that has an
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applicable external rating below
investment grade and for each
individual equity security. In addition,
a banking organization would estimate a
separate currency mismatch haircut for
its net position in each mismatched
currency based on estimated volatilities
for foreign exchange rates between the
mismatched currency and the
settlement currency where an exposure
or collateral (whether in the form of
cash or securities) is denominated in a
currency that differs from the settlement
currency.
When a banking organization
calculates an internally estimated
haircut on a TN-day holding period,
which is different from the minimum
holding period for the transaction type,
the banking organization would have to
calculate the applicable haircut (HM)
using the following square root of time
formula:
HM = HN
TM
,
TN
Where:
(i) TM = five for repo-style transactions and
ten for eligible margin loans and OTC
derivatives;
(ii) TN = holding period used by the banking
organization to derive HN; and
(iii) HN = haircut based on the holding period
TN.
(h) Simple VaR Method
With the prior written approval of its
primary Federal supervisor, a banking
organization could estimate the
exposure amount for repo-style
transactions and eligible margin loans
subject to a single-product qualifying
master netting agreement using a VaR
model. Under the simple VaR method,
a banking organization’s exposure
amount for transactions subject to such
a netting agreement would be equal to
the value of the exposures minus the
value of the collateral plus a VaR-based
estimate of the PFE. The value of the
exposures would be the sum of the
current market values of all instruments,
gold, and cash the banking organization
has lent, sold subject to repurchase, or
posted as collateral to a counterparty
under the netting set. The value of the
collateral would be the sum of the
current market values of all instruments,
gold, and cash the banking organization
has borrowed, purchased subject to
resale, or taken as collateral from a
counterparty under the netting set. The
VaR-based estimate of the PFE would be
an estimate of the banking
organization’s maximum exposure on
the netting set over a fixed time horizon
with a high level of confidence.
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To qualify for the simple VaR
approach, a banking organization’s VaR
model would have to estimate the
banking organization’s 99th percentile,
one-tailed confidence interval for an
increase in the value of the exposures
minus the value of the collateral (SE ¥
SC) over a five-business-day holding
period for repo-style transactions or
over a ten-business-day holding period
for eligible margin loans using a
minimum one-year historical
observation period of price data
representing the instruments that the
banking organization has lent, sold
subject to repurchase, posted as
collateral, borrowed, purchased subject
to resale, or taken as collateral. The
main ongoing qualification requirement
for using a VaR model is that the
banking organization would have to
validate its VaR model by establishing
and maintaining a rigorous and regular
backtesting regime. In this NPR,
backtesting means the comparison of a
banking organization’s internal
estimates with actual outcomes during a
sample period not used in model
development.
(i) Zero H Approach
The New Accord includes an
additional approach, the Zero H
approach, to recognize the risk
mitigating benefits of certain collateral
types in repo-style transactions
conducted with a limited group of
counterparties. The Zero H approach
permits a banking organization that uses
the collateral haircut approach to apply
a haircut of zero percent to financial
collateral in repo-style transactions that
meet the criteria described below and
are conducted with core market
participants. Under the New Accord, the
definition of core market participants
includes sovereign entities, central
banks, PSEs, banks and securities firms,
other financial companies eligible for a
20 percent risk weight, regulated mutual
funds, regulated pension funds, and
recognized clearing organizations. A
repo-style transaction conducted with a
core market participant qualifies for the
Zero H approach if: (i) Both the
exposure and the collateral are cash or
a sovereign or PSE security that
qualifies for a zero percent risk weight
and are denominated in the same
currency; (ii) following a counterparty’s
failure to remargin, the time required
between the last mark-to-market before
the failure to remargin and the
liquidation 38 of the collateral is no more
than four business days; (iii) the
38 The banking organization does not have to
liquidate the collateral, but it would have to be able
to do so within the time frame.
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transaction is settled across a settlement
system proven for that type of
transaction; (iv) the documentation
covering the agreement is standard
market documentation for repo-style
transactions in the securities concerned;
(v) the transaction is governed by
documentation specifying that if the
counterparty fails to satisfy an
obligation to deliver cash or securities
or to deliver margin or otherwise
defaults, then the transaction is
immediately terminable; and (vi) upon
any default event, regardless of whether
the counterparty is insolvent or
bankrupt, the banking organization has
the unfettered, legally enforceable right
to immediately seize and liquidate the
collateral for its benefit.
The New Accord also includes a
variation of the Zero H approach for
banking organizations that use the
simple approach to recognize financial
collateral. For repo-style transactions
that meet the Zero H criteria and are
conducted with core market
participants, the banking organization
would assign a risk weight of zero
percent. A banking organization would
assign a risk weight of 10 percent to
repo-style transaction exposures that
meet the criteria and are conducted with
non-core market participants.
The agencies have decided not to
include the Zero H approach and the
variation for the simple approach in this
proposal because the agencies believe
that doing so would add unnecessary
complexity. In the New Accord, a
banking organization must choose to use
either the simple approach or the
comprehensive approach 39 for all its
collateralized transactions. The agencies
have proposed a more flexible treatment
that would permit a banking
organization to select its approach to
collateral based on transaction type.
This flexibility allows for more risk
sensitivity in the capital calculation for
repo-style transactions. For example, a
banking organization could choose the
collateral haircut or simple VaR
approach for repo-style transactions and
the simple approach for other
transaction types. Additionally, the
agencies question whether the capital
requirements prescribed by the Zero H
approach adequately address the credit
risk of repo-style transactions. In both
this proposal and the New Accord,
banking organizations would be subject
to the operational risk capital
requirement for these transactions.
Question 16: The agencies seek
comment on whether these Zero H
approaches should be included in the
standardized framework. Additionally,
the agencies seek comment on whether
the Zero H approaches would
adequately address the credit risk of
repo-style transactions that would
qualify for those approaches.
(j) Internal Models Methodology
The advanced approaches final rule
includes an internal models
methodology for the calculation of the
exposure amount for the counterparty
credit exposure for OTC derivatives,
eligible margin loans, and repo-style
transactions. This methodology requires
a risk model that captures counterparty
credit risk and estimates the exposure
amount at the level of a netting set. A
banking organization may use the
internal models methodology for OTC
derivatives, eligible margin loans, and
repo-style transactions.
The internal models methodology is
fully discussed in the advanced
approaches final rule.40 The specific
references in the advanced approaches
final rule’s preamble and common rule
text are: (i) Preamble; 41 (ii) section 22(c)
and certain other paragraphs in section
22 of the common rule text,42 such as
paragraphs (a)(2) and (3), (i), (j), and (k),
which discuss the qualification
requirements for the advanced systems
in general and therefore would apply to
the expected positive exposure
modeling approach (EPE) as part of the
internal models methodology; (iii)
section 32(c) and (d) of the common rule
text; 43 (iv) applicable definitions in
Section 2 of the common rule text; 44
and (v) applicable disclosure
requirements in Tables 11.6 and 11.7 of
the common rule text.45
Although the internal models
methodology is not part of this proposed
rule, the standardized approach in the
New Accord does incorporate an
internal models methodology for credit
risk mitigants. Therefore, the agencies
are considering whether to implement
the internal models methodology in a
final rule consistent with the
requirements in the advanced
approaches final rule.
Question 17: The agencies request
comment on the appropriateness of
including the internal models
methodology for calculating exposure
amounts for OTC derivatives, eligible
40 See
72 FR 69288 (December 7, 2007).
at 69346–49 and 69302–21.
42 Id. at 69407–08.
43 Id. at 69413–16.
44 Id. at 69397–405.
45 Id. at 69443.
41 Id.
39 The comprehensive approach in the New
Accord includes the collateral haircut approaches,
the simple VaR approach, and the internal models
approach.
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44007
margin loans, and repo-style
transactions in any final rule
implementing the standardized
framework. The agencies also requested
comment on the extent to which
banking organizations contemplating
implementing the standardized
framework believe they can meet the
associated advanced modeling and
systems requirements. (For purposes of
reviewing the internal models
methodology in the advanced
approaches final rule, commenters
should substitute the term ‘‘exposure
amount’’ for the term ‘‘exposure at
default’’ and ‘‘EAD’’ each time these
terms appear in the advanced
approaches final rule.)
L. Unsettled Transactions
Consistent with the New Accord and
the advanced approaches final rule, the
agencies propose to institute a more
risk-sensitive risk-based capital
requirement for unsettled and failed
securities, foreign exchange, and
commodities transactions.
The proposed capital requirement,
however, would not apply to certain
transaction types, including:
(i) Transactions accepted by a
qualifying central counterparty 46 that
are subject to daily marking-to-market
and daily receipt and payment of
variation margin (which do not have a
risk-based capital requirement);
(ii) Repo-style transactions;
(iii) One-way cash payments on OTC
derivative contracts; and
(iv) Transactions with a contractual
settlement period that is longer than the
normal settlement period as defined
below. (Such transactions would be
treated as OTC derivative contracts and
assessed a risk-based capital
requirement under section 31 of the
proposed rule.) This proposed rule also
provides that, in the case of a systemwide failure of a settlement or clearing
system, the banking organization’s
primary Federal supervisor could waive
risk-based capital requirements for
unsettled and failed transactions until
the situation is rectified.
This NPR contains separate
treatments for delivery-versus-payment
46 Qualifying central counterparty would be
defined as a counterparty that: (i) Facilitates trades
between counterparties in one or more financial
markets by either guaranteeing trades or novating
contracts; (ii) requires all participants in its
arrangements to be fully collateralized on a daily
basis; and (iii) the banking organization
demonstrates to the satisfaction of the agency is in
sound financial condition and is subject to effective
oversight by a national supervisory authority. The
agencies consider a qualifying central counterparty
to be the functional equivalent of an exchange and
have long exempted exchange-traded contracts from
risk-based capital requirements.
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(DvP) and payment-versus-payment
(PvP) transactions with a normal
settlement period, and non-DvP/nonPvP transactions with a normal
settlement period. This NPR provides
the following definitions of a DvP
transaction, a PvP transaction, and a
normal settlement period:
• A DvP transaction is a securities or
commodities transaction in which the
buyer is obligated to make payment only
if the seller has made delivery of the
securities or commodities and the seller
is obligated to deliver the securities or
commodities only if the buyer has made
payment.
• A PvP transaction is a foreign
exchange transaction in which each
counterparty is obligated to make a final
transfer of one or more currencies only
if the other counterparty has made a
final transfer of one or more currencies.
• A transaction has a normal
settlement period if the contractual
settlement period for the transaction is
equal to or less than the market standard
for the instrument underlying the
transaction and equal to or less than five
business days.
A banking organization would have to
hold risk-based capital against a DvP or
PvP transaction with a normal
settlement period if the banking
organization’s counterparty has not
made delivery or payment within five
business days after the settlement date.
The banking organization would
determine its risk-weighted asset
amount for such a transaction by
multiplying the positive current
exposure of the transaction for the
banking organization by the appropriate
risk weight in Table 12. The positive
current exposure of a transaction of a
banking organization would be the
difference between the transaction value
at the agreed settlement price and the
current market price of the transaction,
if the difference results in a credit
exposure of the banking organization to
the counterparty.
TABLE 12.—RISK WEIGHTS FOR UNSETTLED DVP AND PVP TRANSACTIONS
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Number of business days
after contractual settlement
date
From
From
From
46 or
5 to 15 .......................
16 to 30 .....................
31 to 45 .....................
more ..........................
Risk weight to
be applied to
positive current
exposure
(in percent)
100.0
625.0
937.5
1,250.0
A banking organization would hold
risk-based capital against any non-DvP/
non-PvP transaction with a normal
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settlement period if the banking
organization delivered cash, securities,
commodities, or currencies to its
counterparty but has not received its
corresponding deliverables by the end
of the same business day. The banking
organization would continue to hold
risk-based capital against the transaction
until the banking organization received
its corresponding deliverables. From the
business day after the banking
organization made its delivery until five
business days after the counterparty
delivery is due, the banking
organization would calculate its riskbased capital requirement for the
transaction by risk weighting the current
market value of the deliverables owed to
the banking organization using the risk
weight appropriate for an exposure to
the counterparty.
If, in a non-DvP/non-PvP transaction
with a normal settlement period, the
banking organization has not received
its deliverables by the fifth business day
after the counterparty delivery due date,
the banking organization would deduct
the current market value of the
deliverables owed to the banking
organization 50 percent from tier 1
capital and 50 percent from tier 2
capital.
M. Risk-Weighted Assets for
Securitization Exposures
Under the agencies’ general risk-based
capital rules, a banking organization
may use external ratings issued by
NRSROs to assign risk weights to certain
recourse obligations, residual interests,
direct credit substitutes, and asset- and
mortgage-backed securities. Exposures
to securitization transactions may also
be subject to capital requirements that
can result in effective risk weights of
1,250 percent, or a dollar-for-dollar
capital requirement. A banking
organization must deduct certain CEIOs
from tier 1 capital.47
(1) Securitization Overview and
Definitions
The securitization framework in this
NPR is designed to address the credit
risk of exposures that involve the
tranching of the credit risk of one or
more underlying financial exposures.
The agencies believe that requiring all
or substantially all of the underlying
exposures for a securitization to be
financial exposures creates an important
boundary between the general credit
risk framework and the securitization
framework. Examples of financial
exposures are loans, commitments,
47 12 CFR part 3, Appendix A, section 4 (OCC);
12 CFR parts 208 and 225, Appendix A, section
III.B.3 (Board); 12 CFR part 325, Appendix A
section II.B.1 (FDIC); and 12 CFR 567.6(b) (OTS).
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receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, equity securities, or credit
derivatives. Based on their cash flow
characteristics, for purposes of this
proposal, the agencies would also
consider asset classes such as lease
residuals and entertainment royalties to
be financial assets. The securitization
framework is designed to address the
tranching of the credit risk of financial
exposures and is not designed, for
example, to apply to tranched credit
exposures to commercial or industrial
companies or nonfinancial assets.
Accordingly, under this NPR, a
specialized loan to finance the
construction or acquisition of large-scale
projects (for example, airports or power
plants), objects (for example, ships,
aircraft, or satellites), or commodities
(for example, reserves, inventories,
precious metals, oil, or natural gas)
generally would not be a securitization
exposure because the assets backing the
loan typically are nonfinancial assets
(the facility, object, or commodity being
financed).
Consistent with the advanced
approaches final rule, this NPR would
define a securitization exposure as an
on-balance sheet or off-balance sheet
credit exposure that arises from a
traditional or synthetic securitization
(including credit-enhancing
representations and warranties). A
traditional securitization means a
transaction in which: (i) All or a portion
of the credit risk of one or more
underlying exposures is transferred to
one or more third parties other than
through the use of credit derivatives or
guarantees; (ii) the credit risk associated
with the underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
(iii) the performance of the
securitization exposures depends upon
the performance of the underlying
exposures; (iv) all or substantially all of
the underlying exposures are financial
exposures (such as loans, commitments,
credit derivatives, guarantees,
receivables, asset-backed securities,
mortgage-backed securities, other debt
securities, or equity securities); (v) the
underlying exposures are not owned by
an operating company; (vi) the
underlying exposures are not owned by
a small business investment company
described in section 302 of the Small
Business Investment Act of 1958 (15
U.S.C. 682); and (vii) (a) for banks and
bank holding companies, the underlying
exposures are not owned by a firm an
investment in which qualifies as a
community development investment
under 12 U.S.C. 24 (Eleventh); or (b) for
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savings associations, the underlying
exposures are not owned by a firm an
investment in which is designed
primarily to promote community
welfare, including the welfare of lowand moderate-income communities or
families, such as by providing services
or employment.
In this proposed rule, operating
companies would not fall under the
definition of a traditional securitization
(even if substantially all of their assets
are financial exposures). For purposes of
this proposed rule’s definition of a
traditional securitization, operating
companies generally are companies that
produce goods or provide services
beyond the business of investing,
reinvesting, holding, or trading in
financial assets. Examples of operating
companies are depository institutions,
bank holding companies, securities
brokers and dealers, insurance
companies, and non-bank mortgage
lenders. Accordingly, an equity
investment in an operating company,
such as a bank, generally would be an
equity exposure under the proposed
rule. Investment firms, which generally
do not produce goods or provide
services beyond the business of
investing, reinvesting, holding, or
trading in financial assets, would not be
operating companies for purposes of
this proposed rule and would not
qualify for this general exclusion from
the definition of traditional
securitization. Examples of investment
firms would include companies that are
exempted from the definition of an
investment company under section 3(a)
of the Investment Company Act of 1940
(15 U.S.C. 80a–3(a)) by either section
3(c)(1) (15 U.S.C. 80a–3(c)(1)) or section
3(c)(7) (15 U.S.C. 80a–3(c)(7)) of the Act.
Under this proposed rule, a primary
Federal supervisor of a banking
organization would have the discretion
to exclude from the definition of
traditional securitization transactions in
which the underlying exposures are
owned by investment firms that exercise
substantially unfettered control over the
size and composition of their assets,
liabilities, and off-balance sheet
transactions. The agencies would
consider a number of factors in the
exercise of this discretion, including the
assessment of the investment firm’s
leverage, risk profile, and economic
substance. This supervisory exclusion
would give the primary Federal
supervisor the discretion to distinguish
structured finance transactions, to
which the securitization framework was
designed to apply, from those of flexible
investment firms such as many hedge
funds and private equity funds. Only
investment firms that can easily change
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the size and composition of their capital
structure, as well as the size and
composition of their assets and offbalance sheet exposures, would be
eligible for the exclusion from the
definition of traditional securitization
under this provision. The agencies do
not consider managed collateralized
debt obligation vehicles, structured
investment vehicles, and similar
structures, which allow considerable
management discretion regarding asset
composition but are subject to
substantial restrictions regarding capital
structure, to have substantially
unfettered control. Thus, such
transactions would meet the definition
of traditional securitization.
The agencies are concerned that the
line between securitization exposures
and non-securitization exposures may
be difficult to draw in some
circumstances. In addition to the
supervisory exclusion from the
definition of traditional securitization
described above, a primary Federal
supervisor may scope certain
transactions into the securitization
framework if justified by the economics
of the transaction. Similar to the
analysis for excluding an investment
firm from treatment as a traditional
securitization, the agencies would
consider the economic substance,
leverage, and risk profile of transactions
to ensure that the appropriate risk-based
capital classification is made. The
agencies would consider a number of
factors when assessing the economic
substance of a transaction including, for
example, the amount of equity in the
structure, overall leverage (whether onor off-balance sheet), whether
redemption rights attach to the equity
investor, and the ability of the junior
tranches to absorb losses without
interrupting contractual payments to
more senior tranches.
A synthetic securitization means a
transaction in which: (i) All or a portion
of the credit risk of one or more
underlying exposures is transferred to
one or more third parties through the
use of one or more credit derivatives or
guarantees (other than a guarantee that
transfers only the credit risk of an
individual retail exposure); (ii) the
credit risk associated with the
underlying exposures has been
separated into at least two tranches
reflecting different levels of seniority;
(iii) performance of the securitization
exposures depends upon the
performance of the underlying
exposures; and (iv) all or substantially
all of the underlying exposures are
financial exposures (such as loans,
commitments, credit derivatives,
guarantees, receivables, asset-backed
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44009
securities, mortgage-backed securities,
other debt securities, or equity
securities).
Both the designation of exposures as
securitization exposures and the
calculation of risk-based capital
requirements for securitization
exposures would be guided by the
economic substance of a transaction
rather than its legal form. Provided there
is a tranching of credit risk,
securitization exposures could include,
among other things, asset-backed and
mortgage-backed securities, loans, lines
of credit, liquidity facilities, financial
standby letters of credit, credit
derivatives and guarantees, loan
servicing assets, servicer cash advance
facilities, reserve accounts, creditenhancing representations and
warranties, and CEIOs. Securitization
exposures also could include assets sold
with retained tranches. Mortgage-backed
pass-through securities, for example,
those guaranteed by Fannie Mae or
Freddie Mac, do not meet the proposed
definition of securitization exposure
because they do not involve a tranching
of credit risk. Rather, only those
mortgage-backed securities that involve
tranching of credit risk would be
securitization exposures. Banking
organizations are encouraged to consult
with their primary Federal supervisor
about transactions that require
additional guidance.
(2) Operational Requirements
(a) Operational Requirements for
Traditional Securitizations
In a traditional securitization, an
originating banking organization
typically transfers a portion of the credit
risk of exposures to third parties by
selling them to a securitization special
purpose entity (SPE). Under this NPR, a
banking organization would be an
originating banking organization if it:
(i) Directly or indirectly originated or
securitized the underlying exposures
included in the securitization; or (ii)
serves as an asset-backed commercial
paper (ABCP) program sponsor to the
securitization. Under the proposed rule,
a banking organization that engages in a
traditional securitization would exclude
the underlying exposures from the
calculation of risk-weighted assets only
if each of the following conditions are
met: (i) the transfer is a sale under
GAAP; (ii) the originating banking
organization transfers to one or more
third parties credit risk associated with
the underlying exposures; and (iii) any
clean-up calls relating to the
securitization are eligible clean-up calls
(as discussed below). An originating
banking organization that meets these
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conditions would hold regulatory
capital against any securitization
exposures it retains in connection with
the securitization. An originating
banking organization that fails to meet
these conditions would instead hold
regulatory capital against the transferred
exposures as if they had not been
securitized and would deduct from tier
1 capital any after-tax gain-on-sale
resulting from the transaction.
Consistent with the general risk-based
capital rules, the above operational
requirements refer specifically to GAAP
for the purpose of determining whether
a securitization transaction should be
treated as an asset sale or a financing.
In contrast, the New Accord stipulates
guiding principles for determining
whether sale treatment is warranted.
The agencies believe that the conditions
currently outlined under GAAP to
qualify for sale treatment are broadly
consistent with the guiding principles
enumerated in the New Accord.
However, if GAAP in this area were to
materially change, the agencies would
reassess, and possibly revise, the
operational standards.
(b) Clean-Up Calls
To satisfy the operational
requirements for securitizations and
enable an originating banking
organization to exclude the underlying
exposures from the calculation of its
risk-based capital requirements, any
clean-up call associated with a
securitization must be an eligible cleanup call. The proposed rule defines a
clean-up call as a contractual provision
that permits an originating banking
organization or servicer to call
securitization exposures (for example,
asset-backed securities) before the stated
maturity or call date. In the case of a
traditional securitization, a clean-up call
is generally accomplished by
repurchasing the remaining
securitization exposures once the
amount of underlying exposures or
outstanding securitization exposures
falls below a specified level. In the case
of a synthetic securitization, the cleanup call may take the form of a clause
that extinguishes the credit protection
once the amount of underlying
exposures has fallen below a specified
level.
Under the proposed rule, an eligible
clean-up call is a clean-up call that:
(i) Is exercisable solely at the
discretion of the originating banking
organization or servicer;
(ii) Is not structured to avoid
allocating losses to securitization
exposures held by investors or
otherwise structured to provide credit
enhancement to the securitization (for
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example, to purchase non-performing
underlying exposures); and
(iii)(a) For a traditional securitization,
is only exercisable when 10 percent or
less of the principal amount of the
underlying exposures or securitization
exposures (determined as of the
inception of the securitization) is
outstanding; or
(b) For a synthetic securitization, is
only exercisable when 10 percent or less
of the principal amount of the reference
portfolio of underlying exposures
(determined as of the inception of the
securitization) is outstanding.
Where a securitization SPE is
structured as a master trust, a clean-up
call with respect to a particular series or
tranche issued by the master trust
would meet criteria (iii)(a) and (iii)(b) as
long as the outstanding principal
amount in that series was 10 percent or
less of its original amount at the
inception of the series.
(c) Operational Requirements for
Synthetic Securitizations
In general, the proposed rule’s
treatment of synthetic securitizations is
similar to that of traditional
securitizations. The operational
requirements for synthetic
securitizations, however, are more
rigorous to ensure that the originating
banking organization has truly
transferred credit risk of the underlying
exposures to one or more third-party
protection providers.
For synthetic securitizations, an
originating banking organization would
recognize the use of credit risk
mitigation to hedge, or transfer credit
risk associated with, underlying
exposures for risk-based capital
purposes only if each of the following
conditions were satisfied:
(i) The credit risk mitigant is financial
collateral, an eligible credit derivative,
or an eligible guarantee.
(ii) The banking organization transfers
credit risk associated with the
underlying exposures to one or more
third parties, and the terms and
conditions in the credit risk mitigants
do not include provisions that:
(a) Allow for the termination of the
credit protection due to deterioration in
the credit quality of the underlying
exposures;
(b) Require the banking organization
to alter or replace the underlying
exposures to improve the credit quality
of the underlying exposures;
(c) Increase the banking organization’s
cost of credit protection in response to
deterioration in the credit quality of the
underlying exposures;
(d) Increase the yield payable to
parties other than the banking
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organization in response to a
deterioration in the credit quality of the
underlying exposures; or
(e) Provide for increases in a retained
first loss position or credit enhancement
provided by the banking organization
after the inception of the securitization.
(iii) The banking organization obtains
a well-reasoned opinion from legal
counsel that confirms the enforceability
of the credit risk mitigant in all relevant
jurisdictions.
(iv) Any clean-up calls relating to the
securitization are eligible clean-up calls
(as discussed above).
Failure to meet the above operational
requirements for a synthetic
securitization would prevent the
originating banking organization from
using this securitization framework and
would require the originating banking
organization to hold risk-based capital
against the underlying exposures as if
they had not been synthetically
securitized. A banking organization that
provides credit protection to a synthetic
securitization would use the
securitization framework to compute
risk-based capital requirements for its
exposures to the synthetic securitization
even if the originating banking
organization failed to meet one or more
of the operational requirements for a
synthetic securitization.
(3) Hierarchy of Approaches
Under the proposed rule a banking
organization generally would determine
the amount of a traditional or synthetic
securitization exposure and then
determine the risk-based capital
requirement for the securitization
exposure according to two general
approaches: A ratings-based approach
(RBA) and an approach for exposures
that do not qualify for the RBA.
Although synthetic securitizations
typically employ credit derivatives, a
banking organization must first apply
the securitization framework when
calculating risk-based capital
requirements for a synthetic
securitization exposure. Under this
proposed rule, a banking organization
could ultimately be redirected to the
securitization CRM rules to adjust the
securitization framework capital
requirement for an exposure to reflect
the CRM technique used in the
transaction.
(a) Exposure Amount of a Securitization
Exposure
Under this proposed rule, the amount
of an on-balance sheet securitization
exposure that is not a repo-style
transaction, eligible margin loan, or
OTC derivative contract (other than a
credit derivative) would be the banking
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organization’s carrying value minus any
unrealized gains and plus any
unrealized losses on the exposure if the
exposure were a security classified as
available-for-sale, or the banking
organization’s carrying value if the
exposure were not a security classified
as available-for-sale.
The amount of an off-balance sheet
securitization exposure that is not an
eligible ABCP liquidity facility, a repostyle transaction, or an OTC derivative
contract (other than a credit derivative)
would be the notional amount of the
exposure.
This NPR defines an eligible ABCP
liquidity facility as a liquidity facility
supporting ABCP, in form or in
substance, that is subject to an asset
quality test at the time of draw that
precludes funding against assets that are
90 days or more past due or in default.
In addition, if the assets or exposures
that an eligible ABCP liquidity facility
is required to fund against are externally
rated assets or exposures at the
inception of the facility, the facility can
be used to fund only those assets or
exposures with an applicable external
rating of at least investment grade at the
time of funding. Notwithstanding these
eligibility requirements, a liquidity
facility will be considered an eligible
ABCP liquidity facility if the assets or
exposures funded under the liquidity
facility and that do not meet the
eligibility requirements are guaranteed,
either conditionally or unconditionally,
by a sovereign entity with an issuer
rating in one of the three highest
investment grade rating categories.
Consistent with the New Accord, the
exposure amount of an eligible ABCP
liquidity facility would be the notional
amount of the exposure multiplied by (i)
a 20 percent CCF, for a facility with an
original maturity of one year or less that
does not qualify for the RBA; (ii) a 50
percent CCF, for a facility with an
original maturity of over one year that
does not qualify for the RBA; or (iii) 100
percent, for a facility that qualifies for
the RBA. The proposed CCF for eligible
ABCP liquidity facilities with an
original maturity of less than one year
is greater than the 10 percent CCF
prescribed under the general risk-based
capital rules. The agencies believe the
credit risk of eligible ABCP liquidity
facilities is similar to that of other shortterm commitments to lend or purchase
assets, and believe that a 20 percent CCF
is appropriate for both eligible ABCP
liquidity facilities and nonsecuritization commitments with an
original maturity of one year or less.
Under this proposed rule, when a
securitization exposure to an ABCP
program is a commitment, such as a
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liquidity facility, the notional amount
could be reduced to the maximum
potential amount that the banking
organization could be required to fund
given the ABCP program’s current
underlying assets (calculated without
regard to the current credit quality of
those assets). Thus, if $100 is the
maximum amount that could be drawn
given the current volume and current
credit quality of the program’s assets,
but the maximum potential draw against
these same assets could increase to as
much as $200 under some scenarios if
their credit quality were to deteriorate,
then the exposure amount is $200.
The amount of securitization
exposure that is a repo-style transaction,
eligible margin loan, or an OTC
derivative (other than a credit
derivative) would be the exposure
amount as calculated in section 35 or 37
of this proposed rule.
(b) Gains-on-Sale and CEIOs
Under the proposed rule, a banking
organization would first deduct from
tier 1 capital any after-tax gain-on-sale
resulting from a securitization and
would deduct from total capital any
portion of a CEIO that does not
constitute an after-tax gain-on-sale, as
described in section 21 of the proposed
rule. Thus, if the after-tax gain-on-sale
associated with a securitization equaled
$100 while the amount of CEIOs
associated with that same securitization
equaled $120, the banking organization
would deduct $100 from tier 1 capital
and $20 from total capital ($10 from tier
1 capital and $10 from tier 2 capital).
The agencies believe these deductions
are appropriate given historical
supervisory concerns with the
subjectivity involved in valuations of
gains-on-sale and CEIOs. Furthermore,
although the treatments of gains-on-sale
and CEIOs can increase an originating
banking organization’s risk-based
capital requirement following a
securitization, the agencies believe that
such anomalies will be rare where a
securitization transfers significant credit
risk from the originating banking
organization to third parties.
(c) Ratings-Based Approach
If a securitization exposure is not a
gain-on-sale or CEIO, a banking
organization would apply the RBA to a
securitization exposure if the exposure
qualifies for the RBA.48 Generally, an
exposure would qualify for the RBA if
the exposure has an external rating from
an NRSRO or has an inferred rating (that
48A securitization exposure held by an originating
bank must have two or more external ratings or
inferred ratings to qualify for the RBA.
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44011
is, the exposure is senior to another
securitization exposure in the
transaction that has an external rating
from an NRSRO).
(d) Securitization Exposures That Do
Not Qualify for the RBA
If a securitization exposure is not a
gain-on-sale or CEIO and does not
qualify for the RBA, a banking
organization generally would be
required to deduct the exposure from
total capital. However, there are several
situations in the approach for unrated
exposures described below and in
section 44 of the proposed rule in which
an alternative risk-based capital
treatment is permitted.
(e) Exceptions to the General Hierarchy
of Approaches
There are four exceptions to the
general approach described above that
parallel the agencies’ general risk-based
capital rules. First, an interest-only
mortgage-backed security would be
assigned a risk weight that is no less
than 100 percent. The agencies believe
that a minimum risk weight of 100
percent is prudent in light of the
uncertainty implied by the substantial
price volatility of these securities.
Second, a sponsoring banking
organization that qualifies as a primary
beneficiary and must consolidate an
ABCP program as a variable interest
entity under GAAP could exclude the
consolidated ABCP program assets from
risk-weighted assets.49 In such cases, the
banking organization would hold riskbased capital against any of its
securitization exposures to the ABCP
program. Third, as required by Federal
statute, a special set of rules would
continue to apply to transfers of smallbusiness loans and leases with recourse
by well-capitalized depository
institutions.50 Finally, under this NPR,
if a securitization exposure is an OTC
derivative contract (other than a credit
derivative) that has a first priority claim
on the cash flows from the underlying
exposures (notwithstanding amounts
due under interest rate or currency
derivative contracts, fees due, or other
similar payments), a banking
organization may choose to apply an
49 See Financial Accounting Standards Board,
‘‘Interpretation No. 46(R): Consolidation of Certain
Variable Interest Entities’’ (December 2003).
50 See 12 U.S.C. 1835, which places a cap on the
risk-based capital requirement applicable to a wellcapitalized depository institution that transfers
small-business loans with recourse. The final rule
does not expressly state that the agencies may
permit adequately capitalized banks to use the
small business recourse rule on a case-by-case basis
because the agencies may do this under the general
reservation of authority contained in section 1 of
the rule.
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effective 100 percent risk weight to the
exposure rather than the general
securitization hierarchy of approaches.
This treatment would be subject to
supervisory approval.
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(f) Overlapping Exposures
This proposal also includes
provisions to limit the double counting
of risks in situations involving
overlapping securitization exposures. If
a banking organization has multiple
securitization exposures that provide
duplicative coverage to the underlying
exposures of a securitization (such as
when a banking organization provides a
program-wide credit enhancement and
multiple pool-specific liquidity facilities
to an ABCP program), the banking
organization is not required to hold
duplicative risk-based capital against
the overlapping position. Instead, the
banking organization would apply to the
overlapping position the applicable riskbased capital treatment under the
securitization framework that results in
the highest capital requirement. If
different banking organizations have
overlapping exposures to a
securitization, however, each banking
organization would hold capital against
the entire maximum amount of its
exposure. Although duplication of
capital requirements will not occur for
an individual banking organization,
some systemic duplication would occur
where multiple banking organizations
have overlapping exposures to the same
securitization.
(g) Servicer Cash Advances
A traditional securitization typically
employs a servicing banking
organization that, on a day-to-day basis,
collects principal, interest, and other
payments from the underlying
exposures of the securitization and
forwards such payments to the
securitization SPE or to investors in the
securitization. Such servicing banking
organizations often provide a credit
facility to the securitization under
which the servicing banking
organization could advance cash to
ensure an uninterrupted flow of
payments to investors in the
securitization (including advances made
to cover foreclosure costs or other
expenses to facilitate the timely
collection of the underlying exposures).
These servicer cash advance facilities
are securitization exposures.
Under the proposed rule, a servicing
banking organization would determine
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its risk-based capital requirement for
any advances under such a facility using
either the RBA or the approach for
securitization exposures that do not
qualify for the RBA as described below.
The treatment of the undrawn portion of
the facility would depend on whether
the facility is an ‘‘eligible’’ servicer cash
advance facility. An eligible servicer
cash advance facility would be defined
as a servicer cash advance facility in
which: (i) The servicer is entitled to full
reimbursement of advances (except that
a servicer could be obligated to make
non-reimbursable advances for a
particular underlying exposure if any
such advance is contractually limited to
an insignificant amount of the
outstanding principal balance of that
exposure); (ii) the servicer’s right to
reimbursement is senior in right of
payment to all other claims on the cash
flows from the underlying exposures of
the securitization; and (iii) the servicer
has no legal obligation to, and does not,
make advances to the securitization if
the servicer concludes the advances are
unlikely to be repaid. Consistent with
the general risk-based capital rules with
respect to residential mortgage servicer
cash advances, a servicing banking
organization would not be required to
hold risk-based capital against the
undrawn portion of an eligible servicer
cash advance facility. A banking
organization that provides a non-eligible
servicer cash advance facility would
determine its risk-based capital
requirement for the undrawn portion of
the facility in the same manner as the
banking organization would determine
its risk-based capital requirement for
any other off-balance sheet
securitization exposure.
(h) Implicit Support
The proposed rule also specifies the
regulatory capital consequence if a
banking organization provides support
to a securitization in excess of the
banking organization’s predetermined
contractual obligation. First, consistent
with the general risk-based capital rules,
a banking organization that provides
such implicit support would have to
hold regulatory capital against all of the
underlying exposures associated with
the securitization as if the exposures
had not been securitized, and would
deduct from tier 1 capital any after-tax
gain-on-sale resulting from the
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securitization.51 Second, the banking
organization would have to disclose
publicly (i) that it has provided implicit
support to the securitization, and (ii) the
regulatory capital impact to the banking
organization of providing the implicit
support. The banking organization’s
primary Federal supervisor also could
require the banking organization to hold
regulatory capital against all the
underlying exposures associated with
some or all of the banking organization’s
other securitizations as if the exposures
had not been securitized, and to deduct
from tier 1 capital any after-tax gain-onsale resulting from such securitizations.
Over the last several years, the
agencies have published a significant
amount of supervisory guidance to
assist banking organizations with the
capital treatment of securitization
exposures. In general, the agencies
expect banking organizations to
continue to use this guidance, most of
which would remain applicable to the
standardized securitization framework.
(4) Ratings-Based Approach
Under this NPR, a banking
organization would determine the riskweighted asset amount for a
securitization exposure that is eligible
for the RBA by multiplying the exposure
amount by the appropriate risk weight
provided in Table 13 or Table 14.
Banking organizations would deduct
from total capital exposures that have
applicable long-term ratings of two
categories or more below investment
grade and applicable short-term ratings
below the lowest investment grade
rating.
Under the proposal, whether a
securitization exposure is eligible for
the RBA would depend on whether the
banking organization holding the
securitization exposure is an originating
banking organization or an investing
banking organization. An originating
banking organization would be required
to use the RBA for a securitization
exposure if (i) the exposure has two or
more external ratings, or (ii) the
exposure has two or more external or
inferred ratings. In contrast, an investing
banking organization would be required
to use the RBA for a securitization
exposure if the exposure has one or
more external or inferred ratings.
51 ‘‘Interagency Guidance on Implicit Recourse in
Asset Securitizations,’’ May 23, 2002. OCC Bulletin
2002–20 (OCC); SR02–15 (Board); FIL–52–2002
(FDIC); and CEO Memo No. 162 (OTS).
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44013
TABLE 13.—LONG-TERM CREDIT RATING RISK WEIGHTS UNDER THE RBA
Applicable external rating or applicable inferred rating of a securitization exposure
Example
Highest investment grade rating ...................................................................................
Second-highest investment grade rating ......................................................................
Third-highest investment grade rating ..........................................................................
Lowest investment grade rating ....................................................................................
One category below investment grade .........................................................................
Two categories below investment grade ......................................................................
Three categories or more below investment grade ......................................................
AAA ...........................................................
AA ..............................................................
A ................................................................
BBB ...........................................................
BB ..............................................................
B ................................................................
CCC ...........................................................
Risk weight
(in percent)
20.
20.
50.
100.
350.
Deduction.
Deduction.
TABLE 14.—SHORT-TERM CREDIT RATING RISK WEIGHTS UNDER THE RBA
Example
Highest investment grade rating ...................................................................................
Second-highest investment grade rating ......................................................................
Lowest investment grade rating ....................................................................................
All other ratings .............................................................................................................
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Applicable external or applicable inferred rating of a securitization exposure
A–1/P–1 .....................................................
A–2/P–2 .....................................................
A–3/P–3 .....................................................
N/A ............................................................
Under the proposed rule,
securitization exposures with an
inferred rating are treated the same as
securitization exposures with an
identical external rating. However, the
proposed rule includes a different
provision for determining inferred
ratings for securitization exposures than
for other types of exposures. A
securitization exposure that does not
have an external rating (an unrated
securitization exposure) would have an
inferred rating equal to the external
rating of a securitization exposure that
is issued by the same issuer and secured
by the same underlying exposures and
(i) has an external rating; (ii) is
subordinate in all respects to the
unrated securitization exposure; (iii)
does not benefit from any credit
enhancement that is not available to the
unrated securitization exposure; (iv) has
an effective remaining maturity that is
equal to or longer than the unrated
securitization exposure; and (v) is the
most immediately subordinated
exposure to the unrated securitization
exposure that meets the criteria in (i)
through (iv) above. For example, a
securitization might issue three tranches
of securities designated as senior,
mezzanine, and subordinated. If the
senior tranche is unrated, the mezzanine
tranche is rated A and meets the criteria
in (i) through (iv) above, and the
subordinated tranche is rated BB, the
senior tranche could receive an inferred
rating of A based on the rating of the
mezzanine tranche, regardless of the
rating of the subordinated tranche. If the
mezzanine tranche has two ratings, the
senior tranche could receive an
applicable inferred rating based only on
the lowest of the ratings on the
mezzanine tranche. If a securitization
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exposure has multiple inferred ratings,
the applicable inferred rating is the
lowest inferred rating.
Banking organizations would not be
permitted to assign an inferred rating
based on the ratings of the underlying
exposures in a securitization, even
when the unrated securitization
exposure is secured by a single,
externally rated security. Such an
approach would fail to meet the
requirements that the rated reference
exposure be issued by the same issuer,
secured by the same underlying assets,
and subordinated in all respects to the
unrated securitization exposure.
(5) Exposures That Do Not Qualify for
the RBA
A banking organization would
generally be required to deduct from
total capital securitization exposures
that do not qualify for the RBA, with the
following exceptions that apply
provided that the banking organization
knows the composition of the
underlying exposures at all times: (i)
Eligible ABCP liquidity facilities, (ii)
first priority securitization exposures,
and (iii) exposures in a second loss
position or better to an ABCP program.
(a) Eligible ABCP Liquidity Facilities
In this NPR, consistent with the New
Accord, the exposure amount of an
eligible ABCP liquidity facility would
be assigned to the highest risk weight
applicable to any of the underlying
individual exposures covered by the
liquidity facility.
(b) First-Priority Securitization
Exposures
If a first-priority securitization
exposure does not qualify for the RBA,
a banking organization could determine
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Risk weight
(in percent)
20.
50.
100.
Deduction.
the risk weight of the exposure by
‘‘looking through’’ the exposure to its
underlying assets. The risk-weighted
asset amount would be the weightedaverage risk weight of the underlying
exposures multiplied by the exposure
amount of the first-priority
securitization exposure. If a banking
organization is unable to determine the
risk weights of the underlying credit
risk exposures, the first-priority
securitization exposure would be
deducted from total capital.
First-priority securitization exposure
would be defined as a securitization
exposure that has a first-priority claim
on the cash flows from the underlying
exposures and that is not an eligible
ABCP liquidity facility. When
determining whether a securitization
exposure has a first-priority claim on
the cash flows from the underlying
exposures, a banking organization
would not be required to consider
amounts due under interest rate or
currency derivative contracts, fees due,
or other similar payments. Generally,
only the most senior tranche of a
securitization would be a first-priority
securitization exposure.
(c) Securitization Exposures in a Second
Loss Position or Better to an ABCP
Program
This NPR would define an ABCP
program as a program that primarily
issues commercial paper that has an
external rating and is backed by
underlying exposures held in a
bankruptcy-remote securitization SPE.
In this NPR, a banking organization
would not be required to deduct from
total capital a securitization exposure to
an ABCP program that does not qualify
for the RBA and is not an eligible ABCP
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liquidity facility or a first-priority
securitization exposure, provided that it
satisfies the following requirements: (i)
The exposure must be economically in
a second loss position or better and the
first loss position must provide
significant credit protection to the
second loss position, (ii) the credit risk
associated with the exposure must be
the equivalent of investment grade or
better,52 and (iii) the banking
organization holding the exposure must
not retain or provide the first loss
position.
If the exposure meets the above
requirements, the risk weight would be
the higher of 100 percent or the highest
risk weight assigned to any of the
individual exposures covered by the
ABCP program. The agencies believe
that this approach, which is consistent
with the New Accord, appropriately and
conservatively assesses the credit risk of
non-first loss exposures to ABCP
programs.
Under the agencies’ general risk-based
capital rules, certain securitization
exposures that are not rated by an
NRSRO may be risk weighted based on
alternative methods. These methods
include internal risk ratings for ABCP
programs, program ratings, and
computer program ratings and are not
included in this NPR.
Question 18: The agencies solicit
comment on the decision not to include
internal risk ratings for ABCP programs,
program ratings, and computer program
ratings in this proposal.
(6) CRM for Securitization Exposures
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The proposed treatment of CRM for
securitization exposures differs slightly
from the CRM treatment of other
exposures. An originating banking
organization that has obtained a credit
risk mitigant to hedge its securitization
exposure to a synthetic or traditional
securitization that satisfies the
operational criteria in section 41 of the
proposed rule could recognize the credit
risk mitigant, but only as provided in
section 45. An investing banking
organization that has obtained a credit
risk mitigant to hedge a securitization
exposure also could recognize the credit
52 Interagency guidance on assessing whether a
banking organization’s internal risk rating system
used in measuring risk exposures in ABCP
programs is adequate and reasonably corresponds to
the NRSRO’s rating categories is set forth in
‘‘Interagency Guidance on assisting in the
determination of the appropriate risk-based capital
treatment to be applied to direct credit substitutes
issued in connection with asset-backed commercial
paper programs.’’ March 31, 2005. OCC Bulletin
2005–12 (OCC); SR 05–6 (Board); FIL–26–2005
(FDIC); and CEO Letter #217, dated April 1, 2005
(OTS).
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risk mitigant, but only as provided in
section 45.
In general, to recognize the risk
mitigating effects of financial collateral
or an eligible guarantee or an eligible
credit derivative for a securitization
exposure, a banking organization could
use the approaches for collateralized
transactions or the substitution
treatment for guarantees and credit
derivatives described in section 36.
However, section 45 of the proposed
rule contains specific provisions a
banking organization would have to
follow when applying those approaches
to securitization exposures.
In this NPR, a banking organization
that determines its risk-based capital
requirement for a securitization
exposure based on external or inferred
rating(s) that reflect the benefits of a
particular credit risk mitigant provided
to the associated securitization or that
supports some or all of the underlying
exposures, could not use the credit risk
mitigation rules to further reduce its
risk-based capital requirement for the
exposure based on the credit risk
mitigant. For example, a banking
organization that owns an AAA-rated
asset-backed security that benefits,
along with all the other securities issued
by the securitization SPE, from an
insurance wrap that is part of the
securitization transaction would
calculate its risk-based capital
requirement for the security strictly
using the RBA. No additional credit
would be given for the presence of the
insurance wrap. In contrast, if a banking
organization owns a BBB-rated assetbacked security and obtains a credit
default swap from a AAA-rated
counterparty to protect the banking
organization from losses on the security,
the banking organization would be able
to apply the securitization CRM rules to
recognize the risk mitigating effects of
the credit default swap and determine
the risk-based capital requirement for
the position.
For purposes of this section, a
banking organization may only
recognize an eligible guarantee or
eligible credit derivative from an
eligible guarantor if the guarantor: (i) Is
a sovereign entity, the Bank for
International Settlements, the
International Monetary Fund, the
European Central Bank, the European
Commission, a Federal Home Loan
Bank, Farmer Mac, an MDB, a
depository institution, a foreign bank, a
credit union, a bank holding company,
or a savings and loan holding company;
or (ii) has issued and has outstanding an
unsecured long-term debt security
without credit enhancement that has a
long-term applicable external rating in
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one of the three highest investment
grade rating categories.
With respect to eligible guarantees
and credit derivatives, in the context of
a synthetic securitization, when an
eligible guarantee or eligible credit
derivative covers multiple hedged
exposures that have different residual
maturities, the banking organization
must use the longest residual maturity
of any of the hedged exposures as the
residual maturity of all the hedged
exposures.
(a) Nth-to-Default Credit Derivatives
Credit derivatives that provide credit
protection only for the nth defaulting
reference exposure in a group of
reference exposures (nth-to-default
credit derivatives) are similar to
synthetic securitizations that provide
credit protection only after the first-loss
tranche has defaulted or become a loss.
A simplified treatment would be
available to banking organizations that
purchase and provide such credit
protection. A banking organization that
obtains credit protection on a group of
underlying exposures through a first-todefault credit derivative would
determine its risk-based capital
requirement for the underlying
exposures as if the banking organization
had synthetically securitized only the
underlying exposure with the lowest
capital requirement and had obtained
no credit risk mitigant on the other
(higher capital requirement) underlying
exposures. If the banking organization
purchased credit protection on a group
of underlying exposures through an nthto-default credit derivative (other than a
first-to-default credit derivative), it
would only recognize the credit
protection for risk-based capital
purposes either if it had obtained credit
protection on the same underlying
exposures in the form of first-through(n-1)-to-default credit derivatives, or if
n-1 of the underlying exposures have
already defaulted. In such a case, the
banking organization would determine
its risk-based capital requirement for the
underlying exposures as if the banking
organization had only synthetically
securitized the n-1 underlying
exposures with the lowest capital
requirement and had obtained no credit
risk mitigant on the other underlying
exposures.
A banking organization that provides
credit protection on a group of
underlying exposures through a first-todefault credit derivative would
determine its risk-weighted asset
amount for the derivative by applying
the risk weights in Table 13 or 14 (if the
derivative qualifies for the RBA) or, by
setting its risk-weighted asset amount
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for the derivative equal to the product
of (i) the protection amount of the
derivative; and (ii) the sum of the risk
weights of the individual underlying
exposures, up to a maximum of 1,250
percent.
If a banking organization provides
credit protection on a group of
underlying exposures through an nth-todefault credit derivative (other than a
first-to-default credit derivative), the
banking organization would determine
its risk-weighted asset amount for the
derivative by applying the risk weights
in Table 13 or 14 (if the derivative
qualifies for the RBA) or, by setting the
risk-weighted asset amount for the
derivative equal to the product of (i) the
protection amount of the derivative and
(ii) the sum of the risk weights of the
individual underlying exposures
(excluding the n-1 underlying exposures
with the lowest risk-based capital
requirements), up to a maximum of
1,250 percent.
For example, a banking organization
provides credit protection in the form of
a second-to-default credit derivative on
a basket of five reference exposures. The
derivative is unrated and the protection
amount of the derivative is $100. The
risk weights for the underlying
exposures are 20 percent, 50 percent,
100 percent, 100 percent, and 150
percent. The risk-weighted asset amount
of the derivative would be $100 × (50%
+ 100% + 100% + 150%) or $400. If the
derivative were externally rated one
category below investment grade, the
risk-weighted asset amount would be
$100 × 350% or $350.
(7) Risk-Weighted Assets for Early
Amortization Provisions
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Many securitizations of revolving
credit facilities (for example, credit card
receivables) contain provisions that
require the securitization to wind down
and repay investors if the excess spread
falls below a certain threshold.53 This
decrease in excess spread may, in some
cases, be caused by deterioration in the
credit quality of the underlying
exposures. An early amortization event
can increase a banking organization’s
capital needs if the banking organization
would have to finance new draws on the
revolving credit facilities with onbalance sheet sources of funding. The
payment allocations a banking
53 The NPR defines excess spread for a period as
gross finance charge collections (including market
interchange fees) and other income received by the
SPE over the period minus interest paid to holders
of securitization exposures, servicing fees, chargeoffs, and other senior trust similar expenses of the
SPE over the period, all divided by the principal
balance of the underlying exposures at the end of
the period.
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organization uses to distribute principal
and finance charge collections during
the amortization phase of these
transactions also can expose it to greater
risk of loss than in other securitization
transactions. Consistent with the New
Accord, this NPR includes a risk-based
capital requirement that, in general, is
linked to the likelihood of an early
amortization event to address the risks
that early amortization of a
securitization poses to originating
banking organizations.
The proposed rule defines an early
amortization as a provision in a
securitization’s governing
documentation that, when triggered,
causes investors in the securitization
exposures to be repaid before the
original stated maturity of the
securitization exposure, unless the
provision is triggered solely by events
not related to the performance of the
underlying exposures or the originating
banking organization (for example,
material changes in tax laws or
regulations) or leaves investors exposed
to future draws by obligors on the
underlying exposures even after the
provision is triggered.
Under the NPR, an originating
banking organization would hold
regulatory capital against its own
interest and the investors’ interest in a
securitization that (i) includes one or
more underlying exposures in which the
borrower is permitted to vary the drawn
amount within an agreed line of credit,
and (ii) contains an early amortization
provision. Investors’ interest means,
with respect to a securitization, the
exposure amount of the underlying
exposures multiplied by the ratio of (i)
the total amount of securitization
exposures issued by the securitization
special purpose entity (SPE); divided by
(ii) the outstanding principal amount of
the underlying exposures. A banking
organization would compute the riskweighted asset amount for its interest
using the hierarchy of approaches for
securitization exposures described
above. An originating banking
organization would calculate the riskweighted asset amount for the investors’
interest in the securitization as the
product of (i) the investors’ interest, (ii)
the appropriate conversion factor (CF),
(iii) the weighted-average risk weight
that would apply under this NPR to the
underlying exposure type if the
underlying exposures had not been
securitized, and (iv) the proportion of
the underlying exposures in which the
borrower is permitted to vary the drawn
amount within an agreed limit under a
line of credit.
The CF would differ according to
whether the securitized exposures are
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44015
revolving retail credit facilities (for
example, credit card receivables) or
other revolving credit facilities (for
example, revolving corporate credit
facilities) and whether the early
amortization provision is controlled or
non-controlled; and whether the line is
committed or uncommitted. A line
would qualify as uncommitted if it were
unconditionally cancelable to the extent
permitted under applicable law.
(a) Controlled Early Amortization
Under the proposed rule, a controlled
early amortization provision would
have to meet each of the following
conditions: (i) The originating banking
organization has appropriate policies
and procedures to ensure that it has
sufficient capital and liquidity available
in the event of an early amortization; (ii)
throughout the duration of the
securitization (including the early
amortization period) there is the same
pro rata sharing of interest, principal,
expenses, losses, fees, recoveries, and
other cash flows from the underlying
exposures, based on the originating
banking organizations’ and the
investors’ relative shares of the
underlying exposures outstanding
measured on a consistent monthly basis;
(iii) the amortization period is sufficient
for at least 90 percent of the total
underlying exposures outstanding at the
beginning of the early amortization
period to have been repaid or
recognized as in default; and (iv) the
schedule for repayment of investor
principal is not more rapid than would
be allowed by straight-line amortization
over an 18-month period. An early
amortization provision that does not
meet any of the above criteria would be
a ‘‘non-controlled’’ early amortization
provision.
To calculate the appropriate CF for a
securitization of uncommitted revolving
retail exposures that contains a
controlled early amortization provision,
a banking organization would compare
the three-month average annualized
excess spread for the securitization to
the point at which the banking
organization has to trap excess spread
under the securitization transaction. In
securitizations that do not require
trapping of excess spread, or that
specify a trapping point based primarily
on performance measures other than the
three-month average annualized excess
spread, the excess spread trapping point
would be 4.5 percent. The banking
organization would divide the threemonth average excess spread level by
the excess spread trapping point and
apply the appropriate CF from Table 15.
A banking organization would apply
a 90 percent CF for all other revolving
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underlying exposures (that is,
committed exposures and non-retail
exposures) in securitizations with a
controlled early amortization provision.
The proposed CFs for uncommitted
revolving retail credit lines are much
lower than for committed retail credit
lines or for non-retail credit lines
because banking organizations have
demonstrated the ability to monitor and,
when appropriate, to curtail
uncommitted retail credit lines
promptly when a customer’s credit
quality deteriorates. Such account
management tools are unavailable for
committed lines, and banking
organizations may be less proactive
about using such tools in the case of
uncommitted non-retail credit lines
owing to lender liability concerns and
the prominence of broad-based, longerterm customer relationships.
TABLE 15.—CONVERSION FACTORS FOR CONTROLLED EARLY AMORTIZATION
Uncommitted
CF
(in percent)
3-month average excess spread
Retail Credit Lines:
Greater than or equal to 133.33% of trapping point ........................................................................................
Less than 133.33% to 100% of trapping point .................................................................................................
Less than 100% to 75% of trapping point ........................................................................................................
Less than 75% to 50% of trapping point ..........................................................................................................
Less than 50% to 25% of trapping point ..........................................................................................................
Less than 25% of trapping point ......................................................................................................................
Non-retail credit lines ...............................................................................................................................................
(b) Non-Controlled Early Amortization
To calculate the appropriate CF for
securitizations of uncommitted
revolving retail exposures that contain a
non-controlled early amortization
provision, a banking organization would
have to perform the excess spread
calculations described in the controlled
early amortization section above and
then apply the CFs in Table 16.
A banking organization would use a
100 percent CF for all other revolving
underlying exposures (that is,
committed exposures and non-retail
exposures) in securitizations with a
non-controlled early amortization
provision. In other words, no risk
transference would be recognized for
these transactions.
Where a securitization contains a mix
of retail and non-retail exposures or a
mix of committed and uncommitted
exposures, a banking organization could
take a pro-rata approach to determining
0
1
2
10
20
40
90
Committed
CF
(in percent)
90
........................
........................
........................
........................
........................
90
the risk-based capital requirement for
the securitization’s early amortization
provision. If a pro-rata approach were
not feasible, a banking organization
would treat a securitization with an
underlying exposure that is non-retail as
a securitization of non-retail exposures
and would treat the securitization as a
securitization of committed exposures if
a single underlying exposure is a
committed exposure.
TABLE 16.—CONVERSION FACTORS FOR NON-CONTROLLED EARLY AMORTIZATION
Uncommitted
CF
(in percent)
3-month average excess spread
Retail Credit Lines:
Greater than or equal to 133.33% of trapping point ........................................................................................
Less than 133.33% to 100% of trapping point .................................................................................................
Less than 100% to 75% of trapping point ........................................................................................................
Less than 75% to 50% of trapping point ..........................................................................................................
Less than 50% of trapping point ......................................................................................................................
Non-retail credit lines ...............................................................................................................................................
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(c) Revolving Residential Mortgage
Exposures
Unlike credit card securitizations,
HELOC securitizations in the United
States typically do not generate material
excess spread and typically are
structured with credit enhancements
and early amortization triggers based on
other factors, such as portfolio loss
rates. Under the New Accord, a banking
organization would have to hold capital
against the potential early amortization
of most U.S. HELOC securitizations at
their inception, rather than only if the
credit quality of the underlying
exposures deteriorated. Although the
securitization framework in the New
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Accord does not provide an alternative
methodology in such cases, the agencies
have concluded that the features of the
U.S. HELOC securitization market
would warrant an alternative approach.
Accordingly, the proposed rule allows a
banking organization the option of
applying either (i) the CFs in Tables 15
and 16, as appropriate, or (ii) a fixed CF
of 10 percent to its securitizations for
which all or substantially all of the
underlying exposures are revolving
residential mortgage exposures. If a
banking organization chooses the fixed
CF of 10 percent, it would have to use
that CF for all securitizations for which
all or substantially all of the underlying
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0
5
15
50
100
100
Committed
CF
(in percent)
100
........................
........................
........................
........................
100
exposures are revolving residential
mortgage exposures.
(8) Maximum Capital Requirement
The total capital requirement for a
banking organization’s exposures to a
single securitization with an early
amortization provision is subject to a
maximum capital requirement equal to
the greater of (i) the capital requirement
for the retained securitization exposures
or (ii) the capital requirement for the
underlying exposures that would apply
if the banking organization directly held
the underlying exposures on its balance
sheet.
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N. Equity Exposures
(1) Introduction and Exposure
Measurement
Under the FDIC, OCC, and Board’s
general risk-based capital rules, a
banking organization must deduct a
portion of non-financial equity
investments from tier 1 capital. This
deduction depends upon the aggregate
adjusted carrying value of all nonfinancial equity investments held
directly or indirectly by the banking
organization as a percentage of its tier 1
capital. By contrast, OTS rules require
the deduction of most equity securities
from total capital.54
Under this proposed rule, a banking
organization would use the simple riskweight approach (SRWA) for equity
exposures that are not exposures to an
investment fund. This approach is
consistent with the SRWA for equity
exposures and investment fund
approach provided in the advanced
approaches final rule. A banking
organization could use the various lookthrough approaches for equity
exposures to an investment fund.
This NPR defines an equity exposure
as:
(i) A security or instrument (whether
voting or non-voting) that represents a
direct or indirect ownership interest in,
and is a residual claim on, the assets
and income of a company, unless:
(a) The issuing company is
consolidated with the banking
organization under GAAP;
(b) The banking organization is
required to deduct the ownership
interest from tier 1 or tier 2 capital
under this appendix;
(c) The ownership interest
incorporates a payment or other similar
obligation on the part of the issuing
company (such as an obligation to make
periodic payments); or
(d) The ownership interest is a
securitization exposure;
(ii) A security or instrument that is
mandatorily convertible into a security
or instrument described in paragraph (i)
of this definition;
(iii) An option or warrant that is
exercisable for a security or instrument
described in paragraph (i) of this
definition; or
(iv) Any other security or instrument
(other than a securitization exposure) to
the extent the return on the security or
instrument is based on the performance
of a security or instrument described in
paragraph (i) of this definition.
Under the proposed SRWA, a banking
organization generally would assign a
300 percent risk weight to publicly
54 See
preamble discussion at section II.E.
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traded equity exposures, a 400 percent
risk weight to non-publicly traded
equity exposures, and a 600 percent risk
weight to certain equity exposures to
investment firms as described below.
Certain equity exposures to sovereign
entities, supranational entities, MDBs,
PSEs, and others would have a risk
weight of zero percent, 20 percent, or
100 percent; and certain community
development equity exposures, the
effective portion of hedged pairs, and,
up to certain limits, non-significant
equity exposures would receive a 100
percent risk weight.
The proposed rule defines publicly
traded to mean traded on: (i) Any
exchange registered with the SEC as a
national securities exchange under
section 6 of the Securities Exchange Act
of 1934 (15 U.S.C. 78f); or (ii) any nonU.S.-based securities exchange that is
registered with, or approved by, a
national securities regulatory authority
and that provides a liquid, two-way
market for the exposure (that is, there
are enough independent bona fide offers
to buy and sell so that a sales price is
reasonably related to the last sales price
or current bona fide competitive bid and
offer quotations can be determined
promptly and a trade can be settled at
such a price within five business days).
A banking organization using the
SRWA would determine the adjusted
carrying value for each equity exposure.
The proposed rule defines the adjusted
carrying value of an equity exposure as:
(i) For the on-balance sheet component
of an equity exposure, the banking
organization’s carrying value of the
exposure reduced by any unrealized
gains on the exposure that are reflected
in such carrying value but excluded
from the banking organization’s tier 1
and tier 2 capital; 55 and (ii) for the offbalance sheet component of an equity
exposure that is not an equity
commitment, the effective notional
principal amount of the exposure, the
size of which is equivalent to a
hypothetical on-balance sheet position
in the underlying equity instrument that
would evidence the same change in fair
value (measured in dollars) for a given
small change in the price of the
underlying equity instrument, minus
the adjusted carrying value of the onbalance sheet component of the
exposure as calculated above in (i).
For an unfunded equity commitment
that is unconditional, the adjusted
carrying value is the effective notional
55 The potential downward adjustment to the
carrying value of an equity exposure reflects the fact
that 100 percent of the unrealized gains on
available-for-sale equity exposures are included in
carrying value but only up to 45 percent of any such
unrealized gains are included in regulatory capital.
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44017
principal multiplied by a 100 percent
conversion factor. If the unfunded
equity commitment is conditional, the
adjusted carrying value is the effective
notional principal amount of the
commitment multiplied by a 20 percent
conversion factor for a commitment
with a maturity of one year or less or
multiplied by a 50 percent conversion
factor to the effective notional principal
amount for a commitment with a
maturity of over one year.
The agencies created the concept of
the effective notional principal amount
of the off-balance sheet portion of an
equity exposure to provide a uniform
method for banking organizations to
measure the on-balance sheet equivalent
of an off-balance sheet exposure. For
example, if the value of a derivative
contract referencing the common stock
of company X changes the same amount
as the value of 150 shares of common
stock of company X, for a small (for
example, 1.0 percent) change in the
value of the common stock of company
X, the effective notional principal
amount of the derivative contract is the
current value of 150 shares of common
stock of company X regardless of the
number of shares the derivative contract
references. The adjusted carrying value
of the off-balance sheet component of
the derivative is the current value of 150
shares of common stock of company X
minus the adjusted carrying value of
any on-balance sheet amount associated
with the derivative.
(2) Hedge Transactions
The agencies are proposing specific
rules for recognizing hedged equity
exposures. For purposes of determining
risk-weighted assets under the SRWA, a
banking organization may identify
hedge pairs, which would be defined as
two equity exposures that form an
effective hedge provided each equity
exposure is publicly traded or has a
return that is primarily based on a
publicly traded equity exposure. A
banking organization may risk weight
only the effective and ineffective
portions of a hedge pair rather than the
entire adjusted carrying value of each
exposure that makes up the pair. Two
equity exposures form an effective
hedge if the exposures either have the
same remaining maturity or each has a
remaining maturity of at least three
months; the hedge relationship is
documented formally before the banking
organization acquires at least one of the
equity exposures; the documentation
specifies the measure of effectiveness
(E) (defined below) the banking
organization would use for the hedge
relationship throughout the life of the
transaction; and the hedge relationship
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has an E greater than or equal to 0.8. A
banking organization would measure E
at least quarterly and would use one of
three alternative measures of E: The
dollar-offset method, the variabilityreduction method, or the regression
method.
It is possible that only part of a
banking organization’s exposure to a
particular equity instrument is part of a
hedge pair. For example, assume a
banking organization has an equity
exposure A with a $300 adjusted
carrying value and chooses to hedge a
portion of that exposure with an equity
exposure B with an adjusted carrying
value of $100. Also assume that the
combination of equity exposure B and
$100 of the adjusted carrying value of
equity exposure A form an effective
hedge with an E of 0.8. In this situation
the banking organization would treat
$100 of equity exposure A and $100 of
equity exposure B as a hedge pair, and
the remaining $200 of its equity
exposure A as a separate, stand-alone
equity position.
The effective portion of a hedge pair
would be E multiplied by the greater of
the adjusted carrying values of the
equity exposures forming the hedge
pair, and the ineffective portion would
be (1–E) multiplied by the greater of the
adjusted carrying values of the equity
exposures forming the hedge pair. In the
above example, the effective portion of
the hedge pair would be 0.8 × $100 =
$80 and the ineffective portion of the
hedge pair would be (1 ¥ 0.8) × $100
= $20.
(3) Measures of Hedge Effectiveness
Under the dollar-offset method of
measuring effectiveness, the banking
organization would determine the ratio
of the cumulative sum of the periodic
changes in the value of one equity
exposure to the cumulative sum of the
periodic changes in the value of the
other equity exposure, termed the ratio
of value change (RVC). If the changes in
the values of the two exposures
perfectly offset each other, the RVC
would be ¥1.0. If RVC is positive,
implying that the values of the two
equity exposures move in the same
direction, the hedge is not effective and
E = 0. If RVC is negative and greater
than or equal to ¥1.0 (that is, between
zero and ¥1.0), then E would equal the
absolute value of RVC. If RVC is
negative and less than ¥1.0, then E
would equal 2.0 plus RVC.
The variability-reduction method of
measuring effectiveness compares
changes in the value of the combined
position of the two equity exposures in
the hedge pair (labeled X) to changes in
the value of one exposure as though that
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one exposure were not hedged (labeled
A). This measure of E expresses the
time-series variability in X as a
proportion of the variability of A. As the
variability described by the numerator
becomes small relative to the variability
described by the denominator, the
measure of effectiveness improves, but
is bounded from above by a value of
one. E would be computed as:
T
E = 1−
∑( X
t =1
T
t
− X t −1 )
∑ ( At − At −1 )
2
,
2
t =1
Where:
Xt = At ¥ Bt
At = the value at time t of the one exposure
in a hedge pair, and
Bt = the value at time t of the other exposure
in the hedge pair.
The value of t would range from zero
to T, where T is the length of the
observation period for the values of A
and B, and is comprised of shorter
values each labeled t.
The regression method of measuring
effectiveness is based on a regression in
which the change in value of one
exposure in a hedge pair is the
dependent variable and the change in
value of the other exposure in the hedge
pair is the independent variable. E
would equal the coefficient of
determination of this regression, which
is the proportion of the variation in the
dependent variable explained by
variation in the independent variable.
However, if the estimated regression
coefficient is positive, then the value of
E is zero. The closer the relationship
between the values of the two
exposures, the higher E will be.
(4) Simple Risk-Weight Approach
(SRWA)
Under the SRWA, a banking
organization would determine the riskweighted asset amount for each equity
exposure, other than an equity exposure
to an investment fund, by multiplying
the adjusted carrying value of the equity
exposure, or the effective portion and
ineffective portion of a hedge pair as
described above, by the lowest
applicable risk weight in Table 17. A
banking organization would determine
the risk-weighted asset amount for an
equity exposure to an investment fund
under section 52 of the proposed rule.
The banking organization’s aggregate
risk-weighted asset amount for its equity
exposures (other than equity exposures
to investment funds) would be equal to
the sum of the risk-weighted asset
amounts for each of the banking
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organization’s individual equity
exposures.
(5) Non-Significant Equity Exposures
Under the SRWA, a banking
organization may apply a 100 percent
risk weight to non-significant equity
exposures. The proposed rule defines
non-significant equity exposures as
equity exposures 56 to the extent that the
aggregate adjusted carrying value of the
exposures does not exceed 10 percent of
the banking organization’s tier 1 capital
plus tier 2 capital.
When computing the aggregate
adjusted carrying value of a banking
organization’s equity exposures for
determining non-significance, the
banking organization may exclude (i)
equity exposures that receive less than
a 300 percent risk weight under the
SRWA (other than equity exposures
determined to be non-significant); (ii)
the equity exposure in a hedge pair with
the smaller adjusted carrying value; and
(iii) a proportion of each equity
exposure to an investment fund equal to
the proportion of the assets of the
investment fund that are not equity
exposures or that qualify as community
development equity exposures. If a
banking organization does not know the
actual holdings of the investment fund,
the banking organization may calculate
the proportion of the assets of the fund
that are not equity exposures based on
the terms of the prospectus, partnership
agreement, or similar contract that
defines the fund’s permissible
investments. If the sum of the
investment limits for all exposure
classes within the fund exceeds 100
percent, the banking organization would
assume that the investment fund invests
to the maximum extent possible in
equity exposures.
When determining which of a banking
organization’s equity exposures qualify
for a 100 percent risk weight based on
non-significance, a banking organization
first would include equity exposures to
unconsolidated small business
investment companies, or those held
through consolidated small business
investment companies described in
section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682),
then would include publicly traded
equity exposures (including those held
indirectly through investment funds),
and then would include non-publicly
traded equity exposures (including
those held indirectly through
investment funds).
56 Excluding exposures to an investment firm that
would meet the definition of traditional
securitization were it not for the primary Federal
supervisor’s application of paragraph (8) of that
definition and has greater than immaterial leverage.
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As discussed above in the
Securitization section of this NPR, the
agencies would have discretion under
the proposed rule to exclude from the
definition of a traditional securitization
those investment firms that exercise
substantially unfettered control over the
size and composition of their assets,
liabilities, and off-balance sheet
exposures. Equity exposures to
investment firms that would otherwise
be a traditional securitization were it
not for the specific agency exclusion are
leveraged exposures to the underlying
financial assets of the investment firm.
The agencies believe that equity
exposure to such firms with greater than
immaterial leverage warrant a 600
percent risk weight under the SRWA,
due to their particularly high risk.
44019
Moreover, the agencies believe that the
100 percent risk weight assigned to nonsignificant equity exposures is
inappropriate for equity exposures to
investment firms with greater than
immaterial leverage.
The SRWA is summarized in Table
17:
TABLE 17.—SIMPLE RISK-WEIGHT APPROACH
Risk weight
(in percent)
Equity exposure
0 ...........................................
An equity exposure to a sovereign entity, the Bank for International Settlements, the European Central Bank, the
European Commission, the International Monetary Fund, a MDB, a PSE, and any other entity whose credit exposures receive a zero percent risk weight under section 33 of this proposed rule that may be assigned a zero
percent risk weight.
An equity exposure to a Federal Home Loan Bank or Farmer Mac.
• Community development equity exposures.57
• The effective portion of a hedge pair.
• Non-significant equity exposures to the extent less than 10 percent of tier 1 plus tier 2 capital.
A publicly traded equity exposure (other than an equity exposure that receives a 600 percent risk weight and including the ineffective portion of a hedge pair).
An equity exposure that is not publicly traded (other than an equity exposure that receives a 600 percent risk
weight).
An equity exposure to an investment firm that (1) would meet the definition of a traditional securitization were it
not for the primary Federal supervisor’s application of paragraph (8) of that definition and (2) has greater than
immaterial leverage.
20 .........................................
100 .......................................
300 .......................................
400 .......................................
600 .......................................
mstockstill on PROD1PC66 with PROPOSALS2
(6) Equity Exposures to Investment
Funds
Under the agencies’ general risk-based
capital rules, exposures to investments
funds are captured through one of two
methods. These methods are similar to
the alternative modified look-through
approach and the simple modified lookthrough approach described below. The
agencies propose two additional options
in this NPR, the full look-through
approach and money market fund
approach.
The agencies are proposing a separate
treatment for equity exposures to an
investment fund to prevent banks from
arbitraging the proposed rule’s riskbased capital requirements for certain
high-risk exposures and to ensure that
banking organizations do not receive a
57 The proposed rule generally defines these
exposures as exposures that would qualify as
community development investments under 12
U.S.C. 24 (Eleventh), excluding equity exposures to
an unconsolidated small business investment
company and equity exposures held through a
consolidated small business investment company
described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682). For savings
associations, community development investments
would be defined to mean equity investments that
are designed primarily to promote community
welfare, including the welfare of low- and
moderate-income communities or families, such as
by providing services or jobs, and excluding equity
exposures to an unconsolidated small business
investment company and equity exposures held
through a consolidated small business investment
company described in section 302 of the Small
Business Investment Act of 1958 (15 U.S.C. 682).
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punitive risk-based capital requirement
for equity exposures to investment
funds that hold only low-risk assets.
Under this proposal, the agencies would
define an investment fund as a company
(i) all or substantially all of the assets of
which are financial assets and (ii) that
has no material liabilities. As proposed,
a banking organization would determine
the risk-weighted asset amount for
equity exposures to investment funds
using one of four approaches: The full
look-through approach, the simple
modified look-through approach, the
alternative modified look-through
approach, or for qualifying investment
funds, the money market fund
approach, unless the equity exposure to
an investment fund is a community
development equity exposure. Such
community development equity
exposures would be subject to a 100
percent risk weight. If an equity
exposure to an investment fund is part
of a hedge pair, a banking organization
could use the ineffective portion of the
hedge pair as the adjusted carrying
value for the equity exposure to the
investment fund. The risk-weighted
asset amount of the effective portion of
the hedge pair would be equal to its
adjusted carrying value. A banking
organization could choose to apply a
different approach among the four
alternatives to different equity
exposures to investment funds.
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(7) Full Look-Through Approach
A banking organization may use the
full look-through approach only if the
banking organization is able to compute
a risk-weighted asset amount for each of
the exposures held by the investment
fund. Under the proposed rule, a
banking organization would be required
to calculate the risk-weighted asset
amount for each of the exposures held
by the investment fund as if the
exposures were held directly by the
banking organization. Depending on the
exposure type, a banking organization
would apply the appropriate proposed
rule treatment to an equity exposure to
an investment fund. The banking
organization’s risk-weighted asset
amount for the fund would be equal to
the total risk-weighted amount for the
exposures held by the fund multiplied
by the banking organization’s
proportional interest in the fund.
(8) Simple Modified Look-Through
Approach
Under the proposed simple modified
look-through approach, a banking
organization would set the riskweighted asset amount for its equity
exposure to an investment fund equal to
the adjusted carrying value of the equity
exposure multiplied by the highest risk
weight that applies to any exposure the
fund is permitted to hold under its
prospectus, partnership agreement, or
similar contract that defines the fund’s
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permissible investments. The banking
organization could exclude derivative
contracts held by the fund that are used
for hedging, not speculative purposes,
and do not constitute a material portion
of the fund’s exposures.
(9) Alternative Modified Look-Through
Approach
Under this approach, a banking
organization may assign the adjusted
carrying value of an equity exposure to
an investment fund on a pro rata basis
to risk-weight categories based on the
investment limits in the fund’s
prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments. The riskweighted amount for the banking
organization’s equity exposure to the
investment fund would be equal to the
sum of each portion of the adjusted
carrying value assigned to an exposure
class multiplied by the applicable risk
weight. If the sum of the investment
limits for all exposure classes within the
fund exceeds 100 percent, the banking
organization must assume that the fund
invests to the maximum extent
permitted under its investment limits in
the exposure class with the highest risk
weight in this proposed rule, and
continues to make investments in the
order of the exposure class with the next
highest risk weight until the maximum
total investment level is reached. If
more than one exposure class applies to
an exposure, the banking organization
would use the highest applicable risk
weight. A banking organization could
exclude derivative contracts held by the
fund that are used for hedging, not
speculative, purposes and do not
constitute a material portion of the
fund’s exposures.
(10) Money Market Fund Approach
Under this proposed rule, a banking
organization may apply a seven percent
risk weight to an equity exposure to a
money market fund that is subject to
SEC rule 2a–7 and that has an
applicable external rating in the highest
investment-grade category.
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O. Operational Risk
(1) Basic Indicator Approach (BIA)
The general risk-based capital rules
do not include an explicit capital charge
for operational risk. Rather, the general
risk-based capital rules were designed to
focus on credit risk. However, due to
their broad-brush nature, the rules
implicitly cover other types of risks
such as operational risk. The more risksensitive treatment under the
standardized approach for credit risk
sharpens the capital measure for that
element of the risk-based capital charge
and lessens the implicit capital buffer
for other risks.
The agencies recognize that
operational risk is an important risk and
that a number of factors are driving
increases in operational risk. These
factors include greater use of automated
technology; proliferation of new and
highly complex products; growth of ebanking transactions and related
business applications; large-scale
acquisitions, mergers and
consolidations; and greater use of
outsourcing arrangements. These
factors, and in light of the agencies’ goal
to promote improved risk measurement
processes support the inclusion of an
explicit capital requirement for
operational risk for those institutions
that adopt the proposed rule.
Consistent with the New Accord, the
agencies propose to implement the BIA
for determining a banking organization’s
risk-based capital requirement for
operational risk. The operational risk
capital requirement would cover the
risk of loss resulting from inadequate or
failed internal processes, people, and
systems or from external events.
Operational risk includes legal risk,
which is the risk of loss (including
litigation costs, settlements, and
regulatory fines) resulting from the
failure of the banking organization to
comply with laws, regulations, prudent
ethical standards, and contractual
obligations in any aspect of the banking
organization’s business, but excludes
strategic and reputational risks.
Under the BIA, a banking
organization’s risk-weighted assets for
operational risk would equal 15 percent
of its average positive annual gross
income over the previous three years
multiplied by 12.5. The calculation of
average positive annual gross income is
based on annual gross income as
reported by the banking organization in
its regulatory financial reports over the
three most recent calendar years as
discussed below. Gross income is a
proxy for the scale of a banking
organization’s operational risk exposure
and can, in some instances (for example,
for a banking organization with low
margins or profitability) underestimate
the banking organization’s capital needs
for operational risk. Therefore, a
banking organization using the BIA
should manage its operational risk
consistent with the Basel Committee’s
‘‘Sound Practices for the Management
and Supervision of Operational Risk’’
guidance, which includes a set of
principles for the effective management
of operational risk.58
The proposed rule defines average
positive annual gross income as the sum
of the banking organization’s positive
annual gross income, as described
below, over the three most recent
calendar years. This calculation would
not include any amounts from any year
in which annual gross income is
negative or zero; that is, it is the sum of
its positive annual gross income divided
by the number of years in which its
annual gross income was positive.
Annual gross income would equal:
(i) For a bank, its net interest income
plus its total noninterest income minus
its underwriting income from insurance
and reinsurance activities as reported on
the bank’s year-end Consolidated
Reports of Condition and Income (Call
Report).
(ii) For a bank holding company, its
net interest income plus its total
noninterest income minus its
underwriting income from insurance
and reinsurance activities as reported on
the bank holding company’s
Consolidated Financial Statements for
Bank Holding Companies (Y9–C
Report).
(iii) For a savings association, its net
interest income (expense) before
provision for losses on interest-bearing
assets, plus total noninterest income,
minus the portion of its other fees and
charges that represents income derived
from insurance and reinsurance
underwriting activities, minus (plus) its
income (loss) from the sale of assets
held-for-sale and available-for-sale
securities to include only the profit or
loss from the disposition of availablefor-sale securities pursuant to FASB
Statement No. 115, minus (plus) its
income (loss) from the sale of securities
held-to-maturity, all as reported on the
savings association’s year-end Thrift
Financial Report (TFR).
58 See the February 2003 BCBS publication
entitled ‘‘Sound Practices for the Management and
Supervision of Operational Risk.’’
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Table 18 illustrates the relevant
components of average positive annual
gross income from regulatory reports.
TABLE 18.—CALCULATION OF GROSS INCOME FOR BIA
For Bank FFIEC 031/041, BHC Y–9C, and TFR reporting
Call report
Item No. from
Schedules RI and HI
Description
1 ...............
2 ...............
3 ...............
3. ..................................
5.m ...............................
5.d.(4) ...........................
4 ...............
5 ...............
n/a ................................
n/a ................................
6 ...............
7 ...............
n/a ................................
n/a ................................
Net interest income ............................................
Total noninterest income ....................................
Underwriting income from insurance and reinsurance activities.
Other fees and charges ......................................
Sale of assets held-for-sale and of available-forsale securities.
Sale of securities held-to-maturity ......................
Gross income for BIA .........................................
1 Include
2 Include
BHC K
SO
+
¥
4074
4079
C386
4074
4079
C386
SO312
SO42
n/a
¥
¥
n/a
n/a
n/a
n/a
2 SO430
¥
n/a
........................
n/a
........................
SO467
........................
1 SO420
only the portion of SO420 that represents income derived from insurance and reinsurance underwriting activities.
only ‘‘profit or loss from the disposition of available-for-sale securities pursuant to FASB Statement No. 115’’ from SO430.
Question 19: The agencies solicit
comment on this proposed treatment of
operational risk, and, in particular, on
the appropriateness of the proposed
average positive gross income
calculation.
mstockstill on PROD1PC66 with PROPOSALS2
TFR
RIAD
Item No.
Y–9C
(2) Advanced Measurement Approaches
(AMA)
Under the AMA framework of the
New Accord, a banking organization
that meets the qualifying criteria for
AMA would use its internal operational
risk quantifications system to calculate
its risk-based capital requirement for
operational risk. The AMA framework is
fully discussed in the advanced
approaches final rule. The specific
references in the advanced approaches
final rule’s preamble and common rule
text are: (i) Preamble; 59 (ii) section 22(c)
and certain other paragraphs in section
22 of the common rule text,60 such as
(a)(2) and (3), (i), (j), and (k), which
discuss advanced systems in general
and therefore would apply to AMA; (iii)
sections 22(h), 61, and 62 of the
common rule text; 61 (iv) applicable
definitions in section 2 of the common
rule text; 62 and (v) applicable disclosure
requirements in Table 11.9 of the
common rule text. 63
Under the New Accord, the AMA
option may be made available for
banking organizations that apply any of
the New Accord’s approaches to credit
risk. The agencies are considering
whether to implement the AMA option
in a standardized framework final rule
consistent with the requirements in the
59 See 72 FR 69302–21, 69382–84, and 69293–94
(December 7, 2007).
60 Id. at 69407–08.
61 Id. at 69407–08 and 69428–29.
62 Id. at 69397–405.
63 Id. at 69436.
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advanced approaches final rule.
Accordingly, the agencies would like to
know whether any banking
organizations that would be eligible to
opt in to a standardized framework
believe that they can meet the advance
systems requirements that would
qualify them to use the more complex
AMA approach for calculating their
risk-based capital requirement for
operational risk.
Question 20: The agencies therefore
solicit comment on the appropriateness
of including the AMA for calculating the
risk-based capital requirement for
operational risk in any final rule
implementing the standardized
framework and the extent to which
banking organizations implementing the
standardized approach believe they can
meet the associated advanced modeling
and systems requirements.
P. Supervisory Oversight and Internal
Capital Adequacy Assessment
One of the objectives of the New
Accord is to provide incentives for
banking organizations to develop and
apply better techniques for measuring
and managing risks and ensuring that
capital is adequate to support those
risks, not just to meet minimum
regulatory capital requirements.
Consistent with the agencies’ general
risk-based capital rules and Pillar 2 of
the New Accord, the proposed rule
would require a banking organization to
hold capital that is commensurate with
the level and nature of all risks to which
the banking organization is exposed,
and to have both a rigorous process for
assessing its overall capital adequacy in
relation to its risk profile and a
comprehensive strategy for maintaining
appropriate capital levels.
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Consistent with existing supervisory
practice, a banking organization’s
primary Federal supervisor would
evaluate a banking organization’s
compliance with the minimum capital
requirements and also evaluate how
well the banking organization is
assessing its capital needs relative to its
risks and capital goals. Also, consistent
with existing supervisory practice, a
primary Federal supervisor may require
a banking organization under its
jurisdiction to increase its capital levels
or reduce its risk exposures if capital is
deemed inadequate relative to a banking
organization’s risk profile.
Q. Market Discipline
(1) Overview
The general risk-based capital rules
do not require disclosures beyond the
filing of the risk-based capital section of
the agencies’ regulatory reports (that is,
FR Y9–C, Call Reports, TFR, etc). The
agencies, however, have long supported
meaningful public disclosure by
banking organizations to improve
market discipline. The agencies
recognize the importance of market
discipline in encouraging sound risk
management practices and fostering
financial stability.
Pillar 3 of the New Accord, market
discipline, complements the minimum
capital requirements and the
supervisory review process by
encouraging market discipline through
enhanced and meaningful public
disclosure. These proposed public
disclosure requirements are intended to
allow market participants to assess key
information about a banking
organization’s risk profile and its
associated level of capital.
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With enhanced transparency,
investors can better evaluate a banking
organization’s capital structure, risk
exposures, and capital adequacy. With
sufficient and relevant information,
market participants can better evaluate
a banking organization’s risk
management performance, earnings
potential, and financial strength.
Improvements in public disclosures
come not only from regulatory
standards, but also through efforts by a
banking organization’s management to
improve communications to public
shareholders and other market
participants. In this regard,
improvements to risk management
processes and internal reporting systems
provide opportunities to improve
significantly public disclosures over
time. Accordingly, the agencies strongly
encourage the management of each
banking organization to review regularly
its public disclosures and enhance these
disclosures, where appropriate, to
identify clearly all significant risk
exposures, whether on- or off-balance
sheet, and their effects on the banking
organization’s financial condition and
performance, cash flow, and earnings
potential.
(2) General Requirements
The proposed public disclosure
requirements apply to the top-tier legal
entity that is a banking organization
within a consolidated banking group
(that is, the top-tier banking
organization). In general, a banking
organization that is a subsidiary of a
bank holding company (BHC) or another
banking organization would not be
subject to the disclosure requirements,
except that every banking organization
would have to disclose total and tier 1
capital ratios and their components,
similar to current requirements. If a
banking organization is not a subsidiary
of a BHC or another banking
organization that must make the full set
of disclosures, the banking organization
would have to make these disclosures.
A banking organization’s exposure to
risk and the techniques that it uses to
identify, measure, monitor, and control
those risks are important factors that
market participants consider in their
assessment of the institution.
Accordingly, each banking organization
that is subject to the disclosure
requirements would have a formal
disclosure policy approved by its board
of directors that addresses the banking
organization’s approach for determining
the disclosures it should make. The
policy should address the associated
internal controls and disclosure controls
and procedures. The board of directors
and senior management would have to
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ensure that appropriate review of the
disclosures takes place and that
effective internal controls and
disclosure controls and procedures are
maintained.
A banking organization should decide
which disclosures are relevant for it
based on a materiality concept.
Information would be regarded as
material if its omission or misstatement
could change or influence the
assessment or decision of a user relying
on that information for the purpose of
making investment decisions.
A banking organization may be able to
fulfill some of the proposed disclosure
requirements by relying on similar
disclosures made in accordance with
accounting standards or SEC mandates.
In these situations, a banking
organization must explain material
differences between the accounting or
other disclosures and the disclosures
required under this proposed rule.
(3) Frequency/Timeliness
Consistent with longstanding
requirements in the United States for
robust quarterly disclosures in financial
and regulatory reports, and considering
the potential for rapid changes in risk
profiles, this NPR would require that
quantitative disclosures be made
quarterly. However, qualitative
disclosures that provide a general
summary of a banking organization’s
risk management objectives and
policies, reporting system, and
definitions may be disclosed annually,
provided any significant changes to
these are disclosed in the interim. The
disclosures must be timely, that is,
made by the reporting deadline for
financial reports (for example SEC forms
10–Q and 10–K) or 45 days after the
calendar quarter-end. When these
deadlines differ, the later deadline
should be used.
In some cases, management may
determine that a significant change has
occurred, such that the most recent
reported amounts do not reflect the
banking organization’s capital adequacy
and risk profile. In those cases, a
banking organization would have to
disclose the general nature of these
changes and briefly describe how they
are likely to affect public disclosures
going forward. A banking organization
would make these interim disclosures as
soon as practicable after the
determination that a significant change
has occurred.
(4) Location of Disclosures and Audit/
Certification Requirements
The disclosures would have to be
publicly available (for example,
included on a public Web site) for each
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of the last three years or such shorter
time period since the banking
organization opted into the standardized
framework. Except as discussed below,
management would have some
discretion to determine the appropriate
medium and location of the disclosure.
Furthermore, a banking organization
would have flexibility in formatting its
public disclosures.
The agencies encourage management
to provide all of the required disclosures
in one place on the entity’s public Web
site. The public Web site address would
be reported in a regulatory report.
Alternatively, banking organizations
would be permitted to provide the
disclosures in more than one place, as
some of them may be included in public
financial reports (for example, in
Management’s Discussion and Analysis
included in SEC filings) or other
regulatory reports. The agencies would
encourage such banking organizations to
provide a summary table on their public
Web site that specifically indicates
where all the disclosures may be found
(for example, regulatory report
schedules, pages numbers in annual
reports).
Disclosures of tier 1 and total capital
ratios would be tested by external
auditors as part of the financial
statement audit, if the banking
organization is required to obtain
financial statement audits. Disclosures
that are not included in the footnotes to
the audited financial statements are not
subject to external audit reports for
financial statements or internal control
reports from management and the
external auditor. Due to the importance
of reliable disclosures, the agencies
would require one or more senior
officers to attest that the disclosures
would meet the proposed disclosure
requirements. The senior officer may be
the chief financial officer, the chief risk
officer, an equivalent senior officer, or a
combination thereof.
(5) Proprietary and Confidential
Information
The agencies believe that the
proposed requirements strike an
appropriate balance between the need
for meaningful disclosure and the
protection of proprietary and
confidential information.64 Accordingly,
the agencies believe that banking
organizations would be able to provide
64 Proprietary information encompasses
information that, if shared with competitors, would
render a banking organization’s investment in these
products/systems less valuable, and, hence, could
undermine its competitive position. Information
about customers is often confidential, in that it is
provided under the terms of a legal agreement or
counterparty relationship.
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all of these disclosures without
revealing proprietary and confidential
information. Only in rare circumstances
might disclosure of certain items of
information required by the proposed
rule compel a banking organization to
reveal confidential and proprietary
information. In these unusual situations,
the agencies propose that if a banking
organization believes that disclosure of
specific commercial or financial
information would prejudice seriously
the position of the banking organization
by making public information that is
either proprietary or confidential in
nature, the banking organization need
not disclose those specific items.
Instead, the banking organization must
disclose more general information about
the subject matter of the requirement,
together with the fact that, and the
reason why, the specific items of
information have not been disclosed.
This provision would apply only to
those disclosures included in this NPR
and does not apply to disclosure
requirements imposed by accounting
standards or other regulatory agencies.
Question 21: The agencies seek
commenters’ views on all of the
elements of the proposed public
disclosure requirements. In particular,
the agencies seek comment on the
extent to which the proposed
disclosures balance providing market
participants with sufficient information
to appropriately assess the risk profile
and capital strength of individual
institutions, fostering comparability
across banking organizations, and
minimizing burden on the banking
organizations that are reporting the
information. The agencies further
request comment on whether certain
banking organizations (for example,
those not publicly listed or not required
to have audited financial statements)
should be exempt or have more limited
disclosure requirements and, if so, how
to preserve competitive equity with
banking organizations required to make
a full set of disclosures.
(6) Summary of Specific Public
Disclosure Requirements
The public disclosure requirements
described in the tables in the proposed
rule provide important information to
market participants on the scope of
application, capital, risk exposures, risk
assessment processes, and, hence, the
capital adequacy of the banking
organization. The table numbers below
refer to the table numbers in the
proposed rule. For each separate risk
area described in Table 15.4 through
15.10, the banking organization would
be required to describe its risk
management objectives and policies.
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The agencies expect that these
objectives and policies would include:
(i) Strategies and processes; (ii) the
structure and organization of the
relevant risk management function; (iii)
the scope and nature of risk reporting
and/or measurement systems; and (iv)
policies for hedging and/or mitigating
risk and strategies and processes for
monitoring the continuing effectiveness
of hedges/mitigants.
A banking organization should focus
on the substantive content of the tables,
not the tables themselves. The proposed
disclosures are:
• Table 15.1, Scope of Application,
would include a description of the level
in the banking organization to which the
disclosures apply and an outline of any
differences in consolidation for
accounting and regulatory capital
purposes, as well as a description of any
restrictions on the transfer of funds and
capital within the banking organization.
These disclosures provide the basic
context underlying regulatory capital
calculations.
• Table 15.2, Capital Structure, would
provide information on various
components of regulatory capital
available to absorb losses and allow for
an evaluation of the quality of the
capital available to absorb losses within
the banking organization.
• Table 15.3, Capital Adequacy,
would provide information about how a
banking organization assesses the
adequacy of its capital and set
requirements that the banking
organization disclose its risk-weighted
asset amounts for various asset
categories. The table also requires
disclosure of the regulatory capital
ratios of the consolidated group and
each DI subsidiary. Such disclosures
provide insight into the overall
adequacy of capital based on the risk
profile of the banking organization.
• Tables 15.4 and 15.6, Credit Risk,
would provide information for different
types and concentrations of a banking
organization’s exposure to credit risk
and the techniques the banking
organization uses to measure, monitor,
and mitigate that risk.
• Table 15.5, General Disclosures for
Counterparty Credit Risk-Related
Exposures, would provide information
related to counterparty credit riskrelated exposures.
• Table 15.7, Securitization, would
provide information to market
participants on the amount of credit risk
transferred and retained by the banking
organization through securitization
transactions and the types of products
securitized by the organization. These
disclosures provide users a better
understanding of how securitization
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transactions impact the credit risk of the
banking organization.
• Table 15.8, Operational Risk, would
provide insight into the banking
organization’s operational risk exposure.
• Table 15.9, Equities Not Subject to
the Market Risk Rule, would provide
market participants with an
understanding of the types of equity
securities held by the banking
organization and how they are valued.
This disclosure also would provide
information on the capital allocated to
different equity products and the
amount of unrealized gains and losses.
• Table 15.10, Interest Rate Risk in
Non-Trading Activities, would provide
information about the potential risk of
loss that may result from changes in
interest rates and how the banking
organization measures such risk.
III. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
Pursuant to section 605(b) of the
Regulatory Flexibility Act, 5 U.S.C.
605(b) (RFA), the regulatory flexibility
analysis otherwise required under
section 604 of the RFA is not required
if an agency certifies that the rule will
not have a significant economic impact
on a substantial number of small entities
(defined for purposes of the RFA to
include banking organizations with
assets less than or equal to $165 million)
and publishes its certification and a
short, explanatory statement in the
Federal Register along with its rule.
Pursuant to section 605(b) of the RFA,
the agencies certify that this proposed
rule will not have a significant
economic impact on a substantial
number of small entities. Accordingly, a
regulatory flexibility analysis is not
needed. The amendments to the
agencies’ regulations described above
are elective. They will apply only to
banking organizations that opt to take
advantage of the proposed revisions to
the existing domestic risk-based capital
framework and that will not be required
to use the advanced approaches
contained in the advanced approaches
final rule. The agencies believe that
banking organizations that elect to adopt
these proposals will generally be able to
do so with data they currently use as
part of their credit approval and
portfolio management processes.
Banking organizations not exercising
this option would remain subject to the
current capital framework. The proposal
does not impose any new mandatory
requirements or burdens. Moreover,
industry groups representing small
banking organizations that commented
on the Basel IA NPR noted that small
banking organizations typically hold
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more capital than is required by the
capital rules and would prefer to remain
under the general risk-based capital
rules. For these reasons, the proposal
will not result in a significant economic
impact on a substantial number of small
entities.
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B. OCC Executive Order 12866
Determination
Executive Order 12866 requires
federal agencies to prepare a regulatory
impact analysis for agency actions that
are found to be ‘‘significant regulatory
actions’’. Significant regulatory actions
include, among other things,
rulemakings that ‘‘have an annual effect
on the economy of $100 million or more
or adversely affect in a material way the
economy, a sector of the economy,
productivity, competition, jobs, the
environment, public health or safety, or
state, local, or tribal governments or
communities.’’ 65 Regulatory actions
that satisfy one or more of these criteria
are referred to as ‘‘economically
significant regulatory actions.’’
Based on the OCC’s estimate of the
number of national banks likely to adopt
this proposal and the proposal’s total
cost of approximately $74 million, the
proposed rule would not have an annual
effect on the economy of $100 million
or more. In light of certain unique
features of the proposal, the OCC has
nevertheless prepared this regulatory
impact analysis. Specifically, this
proposal affords most national banks the
option to apply this approach, which
results in additional uncertainty in
estimating the total costs.
In conducting the regulatory analysis
for an economically significant
regulatory action, Executive Order
12866 requires each federal agency to
provide to the Administrator of the
Office of Management and Budget’s
Office of Information and Regulatory
Affairs (OIRA):
• The text of the draft regulatory
action, together with a reasonably
detailed description of the need for the
regulatory action and an explanation of
how the regulatory action will meet that
need;
• An assessment of the potential costs
and benefits of the regulatory action,
65 Executive Order 12866 (September 30, 1993),
58 FR 51735 (October 4, 1993), as amended by
Executive Order 13258, 67 FR 9385 (February 28,
2002) and by Executive Order 13422, 72 FR 2763
(January 23, 2007). For the complete text of the
definition of ‘‘significant regulatory action,’’ see
E.O. 12866 at § 3(f). A ‘‘regulatory action’’ is ‘‘any
substantive action by an agency (normally
published in the Federal Register) that promulgates
or is expected to lead to the promulgation of a final
rule or regulation, including notices of inquiry,
advance notices of proposed rulemaking, and
notices of proposed rulemaking.’’ E.O. 12866 at
§ 3(e).
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including an explanation of the manner
in which the regulatory action is
consistent with a statutory mandate and,
to the extent permitted by law, promotes
the President’s priorities and avoids
undue interference with state, local, and
tribal governments in the exercise of
their governmental functions;
• An assessment, including the
underlying analysis, of benefits
anticipated from the regulatory action
(such as, but not limited to, the
promotion of the efficient functioning of
the economy and private markets, the
enhancement of health and safety, the
protection of the natural environment,
and the elimination or reduction of
discrimination or bias) together with, to
the extent feasible, a quantification of
those benefits;
• An assessment, including the
underlying analysis, of costs anticipated
from the regulatory action (such as, but
not limited to, the direct cost both to the
government in administering the
regulation and to businesses and others
in complying with the regulation, and
any adverse effects on the efficient
functioning of the economy, private
markets (including productivity,
employment, and competitiveness),
health, safety, and the natural
environment), together with, to the
extent feasible, a quantification of those
costs; and
• An assessment, including the
underlying analysis, of costs and
benefits of potentially effective and
reasonably feasible alternatives to the
planned regulation, identified by the
agencies or the public (including
improving the current regulation and
reasonably viable nonregulatory
actions), and an explanation why the
planned regulatory action is preferable
to the identified potential alternatives.
Set forth below is a summary of the
OCC’s regulatory impact analysis, which
can be found in its entirety at https://
www.occ.treas.gov/law/basel.htm under
the link of ‘‘Regulatory Impact Analysis
for Risk-Based Capital Guidelines;
Capital Adequacy Guidelines; Capital
Maintenance: Standardized Risk-Based
Capital Rules (Basel II: Standardized
Option), Office of the Comptroller of the
Currency, International and Economic
Affairs (2008)’’.
I. The Need for the Regulatory Action
Federal banking law directs federal
banking agencies, including the Office
of the Comptroller of the Currency
(OCC), to require banking organizations
to hold adequate capital. The law
authorizes federal banking agencies to
set minimum capital levels to ensure
that banking organizations maintain
adequate capital. The law also gives
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federal banking agencies broad
discretion with respect to capital
regulation by authorizing them to also
use any other methods that they deem
appropriate to ensure capital adequacy.
Capital regulation seeks to address
market failures that stem from several
sources. Asymmetric information about
the risk in a banking organization’s
portfolio creates a market failure by
hindering the ability of creditors and
outside monitors to discern a banking
organization’s actual risk and capital
adequacy. Moral hazard creates market
failure in which the banking
organization’s creditors fail to restrain
the banking organization from taking
excessive risks because deposit
insurance either fully or partially
protects them from losses. Public policy
addresses these market failures because
individual banks fail to adequately
consider the positive externality or
public benefit that adequate capital
brings to financial markets and the
economy as a whole.
Capital regulations cannot be static.
Innovation in and transformation of
financial markets require periodic
reassessments of what may count as
capital and what amount of capital is
adequate. Continuing changes in
financial markets create both a need and
an opportunity to refine capital
standards in banking. The proposed
revisions to U.S. risk-based capital
rules, ‘‘Risk-Based Capital Guidelines;
Capital Adequacy Guidelines; Capital
Maintenance: Standardized Risk-Based
Capital Rules’’ (standardized option),
which we address in this impact
analysis, provide a new option for
determining risk-based capital for
banking organizations not required to
operate under ‘‘Risk-Based Capital
Standards: Advanced Capital Adequacy
Framework’’ (advanced approaches).
The standardized option and the
advanced approaches reflect the
implementation in the United States of
the Basel Committee on Banking
Supervision’s ‘‘International
Convergence of Capital Measurement
and Capital Standards: A Revised
Framework’’ (New Accord).
II. Regulatory Background
The proposed capital regulation
examined in this analysis would apply
to commercial banks and savings
associations (collectively, banks). Three
banking agencies, the OCC, the Board of
Governors of the Federal Reserve
System (Board), and the Federal Deposit
Insurance Corporation (FDIC) regulate
commercial banks, while the Office of
Thrift Supervision (OTS) regulates all
federally chartered and many statechartered savings associations.
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Throughout this document, the four are
jointly referred to as the federal banking
agencies.
The New Accord comprises three
mutually reinforcing ‘‘pillars’’ as
summarized below.
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1. Minimum Capital Requirements
(Pillar 1)
The first pillar establishes a method
for calculating minimum regulatory
capital. It sets new requirements for
assessing credit risk and operational risk
while generally retaining the approach
to market risk as developed in the 1996
amendments to the 1988 Accord.
The New Accord offers banks a choice
of three methodologies for calculating
the capital charge for credit risk. The
first approach, called the standardized
approach, essentially refines the riskweighting framework of the 1988
Accord. The other two approaches are
variations on an internal ratings-based
(IRB) approach that leverages banks’
internal credit-rating systems: A
‘‘foundation’’ methodology, whereby
banks estimate the probability of
borrower or obligor default, and an
‘‘advanced’’ approach, whereby
organizations also supply other inputs
needed for the capital calculation. In
addition, the new framework uses more
risk-sensitive methods for dealing with
collateral, guarantees, credit derivatives,
securitizations, and receivables.
The New Accord also introduces an
explicit capital requirement for
operational risk.66 The New Accord
offers banking organizations a choice of
three methodologies for calculating their
capital charge for operational risk. The
first method, called the basic indicator
approach, requires banks to hold capital
for operational risk equal to 15 percent
of annual gross income (averaged over
the most recent three years). The second
option, called the standardized
approach, uses a formula that divides a
banking organization’s activities into
eight business lines, calculates the
capital charge for each business line as
a fixed percentage of gross income (12
percent, 15 percent, or 18 percent
depending on the nature of the business,
again averaged over the most recent
three years), and then sums across
business lines. The third option, called
the advanced measurement approaches
(AMA), uses an institution’s internal
operational risk measurement system to
determine the capital requirement.
66 Operational risk is the risk of loss resulting
from inadequate or failed processes, people, and
systems or from external events. It includes legal
risk but excludes strategic risk and reputation risk.
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2. Supervisory Review Process (Pillar 2)
The second pillar calls upon banking
organizations to have an internal capital
assessment process and banking
supervisors to evaluate each banking
organization’s overall risk profile as
well as its risk management and internal
control processes. This pillar establishes
an expectation that banking
organizations hold capital beyond the
minimums computed under Pillar 1,
including additional capital for any
risks that are not adequately captured
under Pillar 1. It encourages banking
organizations to develop better risk
management techniques for monitoring
and managing their risks. Pillar 2 also
charges supervisors with the
responsibility to ensure that banking
organizations using advanced Pillar 1
techniques, such as the advanced IRB
approach to credit risk and the AMA for
operational risk, comply with the
minimum standards and disclosure
requirements of those methods, and take
action promptly if capital is not
adequate.
3. Market Discipline (Pillar 3)
The third pillar of the New Accord
sets minimum disclosure requirements
for banking organizations. The
disclosures, covering the composition
and structure of the banking
organization’s capital, the nature of its
risk exposures, its risk management and
internal control processes, and its
capital adequacy, are intended to
improve transparency and strengthen
market discipline. By establishing a
common set of disclosure requirements,
Pillar 3 seeks to provide a consistent
and understandable disclosure
framework that market participants can
use to assess key pieces of information
on the risks and capital adequacy of a
banking organization.
4. U.S. Implementation
The proposed standardized option
rule seeks to improve the risk sensitivity
of existing risk-based capital rules. The
standardized option would be voluntary
and available to banking organizations
not subject to the advanced approaches
rule. Any institution that is not an
advanced approaches bank would be
able to remain under the existing riskbased capital rules or elect to adopt the
standardized option. The standardized
option would:
1. Include a capital requirement for
operational risk.
2. Use external credit ratings to risk
weight sovereign, public sector entity,
corporate, and securitization exposures.
3. Use the risk weight of the
appropriate sovereign to assign risk
weights for exposures to banks.
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4. Use loan-to-value ratios to riskweight residential mortgages.
5. Lower the risk weights for some
retail exposures and small loans to
businesses.
6. Expand the range of credit risk
mitigation techniques that are
recognized for risk-based capital
purposes, including expanding the
range of recognized collateral and
eligible guarantors.
7. Increase the credit conversion
factor for certain commitments with an
original maturity of one year or less that
are not unconditionally cancelable.
8. Revise the risk weights for
securitization exposures and assess a
capital charge for early amortizations in
securitizations of revolving exposures.
9. Remove the 50 percent limit on the
risk weight for certain derivative
transactions.
10. Revise the risk-based capital
treatment for unsettled and failed trades
for securities, foreign exchange, and
commodities.
11. Expand the range of
methodologies available to banking
organizations for measuring
counterparty credit risk.
The Agencies would continue to
reserve the authority to require banking
organizations to hold additional capital
where appropriate.
III. Cost-Benefit Analysis of the
Proposed Rule
A cost-benefit analysis considers the
costs and benefits of a proposal as they
relate to society as a whole. The social
benefits of a proposal are benefits that
accrue directly to those subject to a
proposal plus benefits that might accrue
indirectly to the rest of society.
Similarly, the overall social costs of a
proposal are costs incurred directly by
those subject to the rule and costs
incurred indirectly by others. In the case
of the Standardized Option, direct costs
and benefits are those that apply to the
banking organizations that are subject to
the proposal. Indirect costs and benefits
then stem from banks and other
financial institutions that are not subject
to the proposal, bank customers, and,
through the safety and soundness
externality, society as a whole.
The broad social and economic
benefit that derives from a safe and
sound banking system supported by
vigorous and comprehensive
supervision, including ensuring
adequate capital, clearly dwarfs any
direct benefits that might accrue to
institutions adopting the Standardized
Option. Similarly, the social and
economic cost of any reduction in the
safety and soundness of the banking
system would dramatically overshadow
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any cost borne by banking organizations
subject to the rule. The banking agencies
are confident that the enhanced risk
sensitivity of the proposed rule could
allow banking organizations to more
effectively achieve objectives that are
consistent with a safe and sound
banking system.
Beyond this societal benefit from
maintaining a safe and sound banking
system, we do not anticipate additional
benefits outside of those accruing
directly to the banking organizations
that elect to adopt the Standardized
Option. Because many factors besides
regulatory capital requirements affect
pricing and lending decisions, we do
not expect the adoption or non-adoption
of the Standardized Option to affect
pricing or lending. Hence, we do not
anticipate any costs or benefits affecting
the customers or competitors of
institutions adopting the Standardized
Option. For these reasons, the cost and
benefit analysis of the Standardized
Option is primarily an analysis of the
costs and benefits directly attributable
to institutions that might elect to adopt
its capital rules.
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A. Organizations Affected by the
Proposed Rule 67
As of December 31, 2007, twelve
banking organizations meet the criteria
that would require them to adopt the
U.S. implementation of the New
Accord’s advanced approaches.
Removing those twelve mandatory
advanced approaches institutions from
the 7,415 FDIC-insured banking
organizations active in December 2007
leaves 7,403 organizations that would be
eligible to adopt the Standardized
Option. Seven of the twelve mandatory
advanced approaches institutions are
national banks. Out of 1,421 banking
organizations with national banks, 1,414
national banking organizations would
thus be eligible to adopt the
Standardized Option.
B. Benefits of the Proposed Rule
The proposed rule aims to enhance
safety and soundness by improving the
risk sensitivity of regulatory capital
requirements. The proposed rule:
1. Enhances the risk sensitivity of
capital charges.
2. Facilitates more efficient use of
required bank capital.
3. Recognizes new developments in
financial markets.
4. Mitigates potential distortions in
minimum regulatory capital
requirements between Advanced
67 Unless otherwise noted, the population of
banks and thrifts used in this analysis consists of
all FDIC-insured institutions. Banking organizations
are aggregated to the top holding company level.
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Approaches banking organizations and
other banking organizations.
5. Better aligns capital and
operational risk and encourages banking
organizations to mitigate operational
risk.
6. Enhances supervisory feedback.
7. Promotes market discipline through
enhanced disclosure.
8. Preserves the benefits of
international consistency and
coordination achieved with the 1988
Basel Accord.
9. Offers long-term flexibility to
banking organizations by providing the
ability to opt in to the standardized
approach.
C. Costs of the Proposed Rule
As with any rule, the costs of the
proposal include necessary
expenditures by banks and thrifts
necessary to comply with the new
regulation and costs to the federal
banking agencies of implementing the
new rules. Because of a lack of cost
estimates from banking organizations,
the OCC found it necessary to use a
scope-of-work comparison with the
Advanced Approaches in order to arrive
at a cost estimate for the Standardized
Option. Based on this rough assessment,
we estimate that implementation costs
for the Standardized Option could range
from $200,000 at smaller institutions to
$5 million at larger institutions.
1. Costs to Banking Organizations
Explicit costs of implementing the
proposed rule at banking organizations
fall into two categories: Setup costs and
ongoing costs. Setup costs are typically
one-time expenses associated with
introducing the new programs and
procedures necessary to achieve initial
compliance with the proposed rule.
Setup costs may also involve expenses
related to tracking and retrieving data
needed to implement the proposed rule.
Ongoing costs are also likely to reflect
data costs associated with retrieving and
preserving data.
The total cost of the standardized
option depends entirely on the number
and size of institutions that elect to
adopt the voluntary rule. Obviously, if
the number of institutions adopting the
standardized option is zero, then the
cost to banks will be zero. Based on
comment letters and discussions with
bank supervision staff, we sought to
identify national banks that would be
most likely to adopt the standardized
option. Because one of the principal
changes in the standardized option
affects the risk weighting for residential
mortgages, we selected national banks
with significant mortgage holdings as
the more likely adopters of the new rule.
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In particular, our list of more likely
adopters includes national banks where
one-to-four family first-lien mortgages
comprise over 30 percent of all assets if
the institution has less than $1 billion
in assets and where the mortgage to
asset ratio is over 20 percent at larger
institutions. We also include the few
national banks that do not meet the
well-capitalized threshold for their risk
based capital-to-assets ratio as of
December 31, 2007. Using those criteria,
we identified 113 national banks, which
if they adopted the standardized option
would result in a total cost to national
banks of approximately $74 million.
Over time, the standardized option may
become more appealing to a larger
number of banks. The total cost of the
proposed rule would consequently
increase to the extent that more
institutions opt into the standardized
option over time. At present, it is
unclear how many national banks will
ultimately elect to adopt the
standardized option. The standardized
option’s provision for an explicit charge
for operational risk is another important
factor that national banks will
undoubtedly consider in assessing
whether to adopt the standardized
option. Although we are unable to
estimate how many of our estimated
adopters might be dissuaded from the
standardized option because of an
operational risk capital charge, we do
believe that the explicit charge for
operational risk could significantly
reduce the number of likely adopters.68
2. Government Administrative Costs
Like the banking organizations subject
to new requirements, the costs to
government agencies of implementing
the proposed rule also involve both
startup and ongoing costs. Startup costs
include expenses related to the
development of the regulatory
proposals, costs of establishing new
programs and procedures, and costs of
initial training of bank examiners in the
new programs and procedures. Ongoing
costs include maintenance expenses for
any additional examiners and analysts
needed to regularly apply the new
supervisory processes. In the case of the
standardized option, because modest
changes to Call Reports will capture
most of the rule changes, these ongoing
costs are likely to be minor.
OCC expenditures fall into three
broad categories: Training, guidance,
68 If the advanced measurement approach (AMA)
option for operational risk were to be made
available as part of the standardized option, we
believe that its considerable startup requirements
and accompanying costs would dissuade almost all
institutions with less than $10 billion in assets from
pursuing the AMA operational risk option.
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these costs and benefits, we normalize
the baseline costs and benefits to zero
and estimate the costs and benefits of
the proposed rule and alternative as
deviations from this zero baseline.
1. Baseline Scenario: Current capital
standards based on the 1988 Basel
Accord continue to apply.
3. Total Cost Estimate of Proposed Rule
The OCC’s estimate of the total cost of
the proposed rule includes expenditures
by banking organizations and the OCC
from the present through 2011. Based on
our estimate that approximately 113
national banks will adopt the
standardized option at a cost to each
institution of between $200,000 and $5
million depending on the size of the
institution, we estimate that national
banks will spend approximately $74
million on the standardized option.
Combining expenditures provides an
estimate of $81 million for the total cost
of the proposed rule for the OCC and
national banks.
mstockstill on PROD1PC66 with PROPOSALS2
and supervision. Training includes
expenses for workshops and other
training courses and seminars for
examiners. Guidance expenses reflect
expenditures on the development of
standardized option guidance.
Supervision expenses reflect
organization-specific supervisory
activities. We estimate that OCC
expenses for the standardized option
will be approximately $4.3 million
through 2008. We also expect
expenditures of $1 million per year
between 2009 and 2011. Applying a five
percent discount rate to future
expenditures, past expenses ($4.3
million) plus the present value of future
expenditures ($2.7 million) equals total
OCC expenditures of $7 million on the
standardized option.
Change in Benefits: Baseline Scenario
Staying with current capital rules
instead of adopting the standardized
option proposal would eliminate the
nine benefits of the proposed rule listed
above. Under the baseline, banking
organizations not subject to the
advanced approaches would not be
given the option of voluntarily selecting
the standardized option. Institutions
that would have adopted the
standardized option would not be able
to take advantage of the enhanced risk
sensitivity of its capital charges and the
more efficient use of bank capital that
implies.
Without the standardized option, an
institution would have to choose
between the advanced approaches and
the status quo. The baseline without the
standardized option would leave a level
playing field for all the non-core banks.
However, the absence of an opportunity
to mitigate potential distortions in
minimum required capital would likely
diminish this benefit in the eyes of an
institution concerned about potential
distortions created by the
implementation of the advanced
approaches.
IV. Analysis of Baseline and
Alternatives
In order to place the costs and
benefits of the proposed rule in context,
Executive Order 12866 requires a
comparison between the proposed rule,
a baseline of what the world would look
like without the proposed rule, and a
reasonable alternative to the proposed
rule. In this regulatory impact analysis,
we analyze one baseline and one
alternative to the proposed rule. The
baseline considers the possibility that
the proposed standardized option rule is
not adopted and current capital
standards continue to apply.
The baseline scenario appears in this
analysis in order to estimate the effects
of adopting the proposed rule relative to
a hypothetical regulatory regime that
might exist without the Standardized
Option. Because the baseline scenario
considers costs and benefits as if the
proposed rule never existed, we set the
costs and benefits of the baseline
scenario to zero. Obviously, banking
organizations face compliance costs and
reap the benefits of a well-capitalized
banking system even under the baseline.
However, because we cannot quantify
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Description of Baseline Scenario
Under the Baseline Scenario, current
capital rules would continue to apply to
all banking organizations in the United
States that are not subject to the U.S.
implementation of the advanced
approaches. Under this scenario, the
United States would not adopt the
proposed standardized option, but the
implementation of the advanced
approaches final rule would continue.
Changes in Costs: Baseline Scenario
Continuing to use current capital
rules eliminates the benefits and the
costs of adopting the proposed rule. As
discussed above, under the proposed
rule we estimate that organizations
would spend up to $74 million on
implementation-related expenditures.
Retaining current capital rules would
eliminate any costs associated with the
proposed rule, even though banking
organizations would only incur those
costs if they elected to do so.
2. Alternative: Require all U.S.
banking organizations not subject to the
Advanced Approaches rule to adopt the
Standardized Option.
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Description of Alternative
The only change between the
proposed rule and the alternative is that
adoption of the proposed rule would be
mandatory under the alternative rather
than voluntary. Under this alternative,
the provisions of the proposed rule
would remain intact and apply to all
national banks that are not subject to the
advanced approaches rule, i.e.,
mandatory advanced approaches
institutions and those institutions that
elect to adopt the advanced approaches
framework.
Change in Benefits: Alternative
Because there are no changes to the
elements of the proposed rule under the
alternative, the list of benefits remains
the same. Among these benefits, only
one benefit is lost by making the
proposed rule mandatory: The benefit
derived from the fact that the proposed
rule is voluntary. As for the benefits
relating to the enhanced risk sensitivity
of capital charges, because adoption of
the standardized option is mandatory
under the alternative, more banks will
be subject to the standardized option
provisions and the aggregate level of
benefits will be higher. Because we
estimate that 113 national banks would
adopt the standardized option
voluntarily, the difference in the
aggregate benefit level could be
considerable.
Changes in Costs: Alternative
Clearly the most significant drawback
to the alternative is the dramatically
increased cost of applying a new set of
capital rules to almost all U.S. banking
organizations. Under the alternative,
direct costs would increase for every
U.S. banking organization that would
have elected to continue to use current
capital rules under the proposed rule.
The cost estimate for the alternative is
the total cost estimate for a 100 percent
adoption rate of the standardized
option. With 1,414 national banking
organizations eligible for the
standardized option, we estimate that
the cost to national banking
organizations of the alternative is
approximately $740 million. The actual
cost may be somewhat less depending
on the number of national banks that
elect to adopt the advanced approaches
rule, but it is much greater than our cost
estimate of $74 million for the proposed
rule.
3. Overall Comparison of Proposed
Rule with Baseline and Alternative.
The New Accord and its U.S.
implementation seek to incorporate risk
measurement and risk management
advances into capital requirements.
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Risk-sensitive capital requirements are
integral to ensuring an adequate capital
cushion to absorb financial losses at
financial institutions. In implementing
the standardized option in the United
States, the agencies’ intent is to enhance
risk sensitivity while maintaining a
regulatory capital regime that is as
rigorous as the current system. Total
capital requirements under the
standardized option, including capital
for operational risk, will better allocate
capital in the system. A better allocation
will occur regardless of whether the
minimum required capital at a
particular institution is greater or less
than it would be under current capital
rules.
The objective of the proposed rule is
to enhance the risk sensitivity of capital
charges for institutions not subject to
the advanced approaches rule. The
proposal also seeks to mitigate any
potential distortions in minimum
regulatory capital requirements that the
implementation of the advanced
approaches rule might create between
large and small banking organizations.
Like the Advanced Approaches rule, the
anticipated benefits of the standardized
option proposal are difficult to quantify
in dollar terms. Nevertheless, the OCC
believes that the proposed rule provides
benefits associated with enhanced risk
sensitivity and preserves the safety and
soundness of the banking industry and
the security of the Federal Deposit
Insurance system. To offset the costs of
the proposed rule, its voluntary nature
offers regulatory flexibility that will
allow institutions to adopt the
standardized option on a bank-by-bank
basis when an institution’s anticipated
benefits exceed the anticipated costs of
adopting this regulation.
The banking agencies are confident
that the proposed rule could serve to
strengthen institutions electing to adopt
the standardized option while the safety
and soundness of institutions electing to
forgo the standardized option and the
advanced approaches rule will not
diminish. On the basis of our analysis,
we believe that the benefits of the
proposed rule are sufficient to offset the
costs of implementing the proposed
rule. However, with safety and
soundness secure under either capital
rule, we believe it is best to make the
proposed rule voluntary in order to let
each national bank decide whether it is
in that institution’s best interest to
adopt the standardized option. This will
help to ensure that the costs associated
with implementation of the
standardized option do not rise
precipitously and outweigh the benefits.
Because adoption is voluntary, the
proposed rule offers an improvement
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over the baseline scenario and the
alternative. The proposed rule offers an
important degree of flexibility
unavailable with either the baseline or
the alternative. The baseline does not
give banking organizations a way into
the standardized option and the
alternative does not offer them a way
out. The alternative for mandatory
adoption would compel most banking
organizations to follow a new set of
capital rules and require them to
undertake the time and expense of
adjusting to these new rules. The
proposed rule offers a better balance
between costs and benefits than either
the baseline or the alternative. Overall,
the OCC believes that the benefits of the
proposed rule justify its potential costs.
C. OTS Executive Order 12866
Determination
OTS concurs with OCC’s RIA. Rather
than replicate that analysis, OTS drafted
an RIA incorporating OCC’s analysis by
reference and adding appropriate
material reflecting unique aspects of the
thrift industry. The full text of OTS’s
RIA is available at the locations
designated for viewing the OTS docket,
which are indicated in the ADDRESSES
section above. OTS believes that its
analysis meets the requirements of
Executive Order 12866. The following
discussion supplements OCC’s
summary of its RIA.
OTS is the primary federal regulator
for 826 federal- and state-chartered
savings associations with assets of $1.51
trillion as of December 31, 2007. OTSregulated savings association assets are
highly concentrated in residential
mortgage-related assets, with
approximately 67 percent of total assets
in residential mortgage-related assets.
By contrast, OCC-regulated institutions
tend to concentrate their assets in
commercial loans, non-interest earning
deposits, and other kinds of nonmortgage loans, with only 35 percent of
total assets in residential mortgagerelated assets. Accordingly, OTS’s
analysis focuses on the impact on
proposed changes to the capital
treatment of residential mortgages.
Benefit-Cost Analysis
Overall, OTS believes that the benefits
of the proposed rule justify its costs.
OTS notes, however, that measuring
costs and benefits of changes in
minimum capital requirements pose
considerable challenges. Costs can be
difficult to attribute to particular
expenditures because institutions are
likely to incur some of the costs as part
of their ongoing efforts to improve risk
measurement and management systems.
The measurement of benefits is more
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problematic because the benefits of the
NPR are more qualitative than
quantitative. Further, measurement
problems exist even for those factors
that ostensibly may have measurable
effects, such as a lower capital
requirement. Savings associations,
particularly smaller institutions,
generally hold capital well above
regulatory minimums for a variety of
reasons. Thus, the effect of reducing the
regulatory capital requirement is
uncertain and likely to vary across
regulated savings associations.
Nonetheless, OTS anticipates that a
more risk sensitive allocation of
regulatory capital may have a slight
marginal effect on pricing and lending
of adopting savings associations, but
may not have a measurable effect on
pricing and lending in the market at a
whole.
Under OTS’s analysis, direct costs
and benefits include costs and benefits
to the approximately 180 savings
associations that opt in to the proposed
rule.69 Direct costs and benefits also
include OTS’s costs of implementing
the proposed rule.
1. Benefits
OTS concurs with the OCC analysis
identifying the benefits associated with
the proposed rule. Among the benefits
cited by OCC was the enhanced risk
sensitivity of minimum regulatory
capital requirements. Because savings
associations have a greater
concentration of their assets in first-lien
mortgages, the most significant change
for savings associations will involve the
risk weighting of residential mortgages.
Under the general risk-based capital
rules, most prudently underwritten
residential mortgages with LTV ratios at
origination of less than 90 percent are
risk weighed at 50 percent. Most other
residential mortgages receive a risk
weight of 100 percent. Under the
proposed rule, risk-weights for
residential mortgages would increase as
the LTV ratios increase. Thus, the
benefits of opting in to the new rules
will be greater for savings associations
to the extent that their lending and
portfolio practices include lower LTV
mortgages. OTS believes that this aspect
of the proposed rule is likely to be the
69 OTS identified potential opt-in savings
associations based on asset size, asset composition,
and complexity. Specifically, OTS identified
savings associations with total assets in excess of
$500 million as an appropriate threshold for opting
in to the new framework. It further estimated that
savings associations would opt in to the new
framework if the institution has a concentration of
first-lien mortgages equal to 30 percent (for savings
associations with total assets between $500 million
and $1 billion) and 20 percent (for savings
associations with assets in excess of $1 billion).
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2. Costs
OTS anticipates that the total direct
costs of implementing the proposed rule
will be $143.8 million. This estimate
includes direct costs of $137.6 million
for approximately 180 savings
associations that would opt in to the
proposed rule.70 OTS further estimated
that the direct costs for OTS
implementation expenses would be $6.2
million.
3. Uncertainty of Costs and Benefits
OTS concurs with the OCC discussion
regarding the uncertainty of costs and
benefits. To the extent that undesirable
competitive inequities may emerge, the
banking agencies have the power to
respond to them through many
channels, including, but not limited to
suitable changes to capital adequacy
regulation.
2. Alternative Scenario
In its analysis of the alternative
scenario, OCC concludes that the
aggregate benefits would considerably
increase because 1,414 national banks,
rather than 113, would implement the
alternative. Under the alternative
scenario, OTS estimates that the
aggregate costs to savings associations
would also increase considerably.
Specifically, OTS estimates that these
costs would increase from $137.6
million (for 180 savings associations) to
$339.8 million (for 820 savings
associations).71
D. OCC Executive Order 13132
Determination
The OCC has determined that this
proposed rule does not have any
Federalism implications, as required by
Executive Order 13132.
major factor in a savings association’s
decision to adopt the proposed rule.
Analysis of Baseline and Alternatives.
The OCC analysis includes a
comparison between the NPR, a baseline
scenario of what the world would look
like without the NPR, and an alternative
to the NPR. The selected alternative
would require all banking organizations
that are not subject to the advanced
approaches rule to apply the NPR. OTS
concurs in the OCC analysis and finds
analogous results for savings
associations. Specifically, OTS agrees
with the OCC conclusion that the NPR
could strengthen savings associations
electing to opt in to the NPR and would
not diminish the safety and soundness
of savings associations that elect to
forego the NPR or the advanced
approaches.
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1. Baseline Scenario
In its analysis of the baseline scenario,
which would leave the current riskbased capital rules unchanged, OCC
determines that national banks could
avoid $74 million of implementationrelated expenditures that would
otherwise be required by the NPR. As
noted above, OTS estimates that 180
savings associations would spend up to
$137.6 million to implement the NPR.
Retaining the current capital rules
without adopting the NPR would permit
these savings associations to avoid these
new expenditures.
70 The estimated cost per institution increased
with the size of the total assets. OTS estimated that
savings associations would have implementation
costs of $500,000 (for savings associations with total
assets between $500 million and $1 billion); $1
million (for savings associations with total assets
between $1 billion and $10 billion); and $5 million
(for savings associations with total assets in excess
of $10 billion.
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E. Paperwork Reduction Act
(1) Request for Comment on Proposed
Information Collection
In accordance with the requirements
of the Paperwork Reduction Act of 1995,
the agencies may not conduct or
sponsor, and the respondent is not
required to respond to, an information
collection unless it displays a currently
valid Office of Management and Budget
(OMB) control number. The agencies are
requesting comment on a proposed
information collection. The agencies are
also giving notice that the proposed
collection of information has been
submitted to OMB for review and
approval.
Comments are invited on:
(a) Whether the collection of
information is necessary for the proper
performance of the agencies’ functions,
including whether the information has
practical utility;
(b) The accuracy of the estimates of
the burden of the information
collection, including the validity of the
methodology and assumptions used;
(c) Ways to enhance the quality,
utility, and clarity of the information to
be collected;
(d) Ways to minimize the burden of
the information collection on
respondents, including through the use
of automated collection techniques or
other forms of information technology;
and
(e) Estimates of capital or startup costs
and costs of operation, maintenance,
and purchase of services to provide
information.
Commenters may submit comments
on aspects of this notice that may affect
71 Six of the 826 savings associations could not
apply the NPR because they are subject to the
advanced approaches rule.
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reporting and disclosure requirements
to the addresses listed in the ADDRESSES
section of this NPR. Paperwork burden
comments directed to the OCC should
reference ‘‘OMB Control No. 1557–
NEW’’ instead of the Docket ID.
(2) Proposed Information Collection
Title of Information Collection: RiskBased Capital Guidelines; Standardized
Risk-Based Capital Rules
Frequency of Response: eventgenerated and quarterly.
Affected Public:
OCC: National banks.
Board: State member banks and bank
holding companies.
FDIC: Insured nonmember banks,
insured state branches of foreign banks,
and certain subsidiaries of these
entities.
OTS: Savings associations and certain
of their subsidiaries.
Abstract: The proposed rule sets forth
revisions to the agencies’ existing riskbased capital rules based on the
provisions in the Standardized
Approach for credit risk and the Basic
Indicator Approach for operational risk
contained in the capital adequacy
framework titled ‘‘International
Convergence of Capital Measurement
and Capital Standards: A Revised
Framework’’ published by the Basel
Committee on Banking Supervision in
June 2004.
The new information collection
requirements in the proposed rule are
found in Sections 1, 37, 42, and 71. The
collections of information are necessary
in order to implement the proposed
standardized capital adequacy
framework.
Section 1 requires banking
organizations to provide written
notification prior to using the appendix
to calculate their risk-based capital
requirements (opt-in letter) or ceasing
its use (opt-out letter). It also requires
written notification prior to applying
the principle of conservatism for a
particular exposure. Section 37 requires
a banking organization’s prior written
notification before it can calculate its
own collateral haircuts using its own
internal estimates. It also requires a
banking organization’s prior written
notification before it can estimate an
exposure amount for a single-product
netting set of repo-style transactions and
eligible margin loans when recognizing
the risk-mitigating effects of financial
collateral using the simple VaR
methodology. The agencies believe that
the notifications in Section 37 would in
most cases be included in the opt-in
letter discussed in Section 1. Section 42
requires certain public disclosures if a
banking organization provides support
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to a securitization in excess of its
contractual obligation. Section 71
requires a number of qualitative and
quantitative disclosures regarding a
banking organization’s risk-based
capital ratios and their components.
Estimated Burden: The burden
estimates below exclude any regulatory
reporting burden associated with
changes to the Consolidated Reports of
Income and Condition for banks (FFIEC
031 and FFIEC 031; OMB Nos. 7100–
0036, 3064–0052, 1557–0081), the Thrift
Financial Report for thrifts (TFR; OMB
No. 1550–0023), and the Financial
Statements for Bank Holding Companies
(FR Y–9; OMB No. 7100–0128). The
agencies are still considering whether to
revise these information collections or
to implement a new information
collection for the regulatory reporting
requirements. In either case, a separate
notice would be published for comment
on the regulatory reporting
requirements.
The burden associated with this
collection of information may be
summarized as follows:
estimating and reporting to OMB the
total paperwork burden for the
institutions for which they have
administrative enforcement authority.
They may, but are not required to, use
the same methodology to determine
their burden estimates.
OTS
F. OCC Unfunded Mandates Reform Act
of 1995 Determination
The Unfunded Mandates Reform Act
of 1995 (Pub. L. 104–4) (UMRA)
requires cost-benefit and other analyses
for a rule that would include any
Federal mandate that may result in the
expenditure by state, local, and tribal
governments, in the aggregate, or by the
private sector of $100 million or more
(adjusted annually for inflation) in any
one year. The current inflation-adjusted
expenditure threshold is $119.6 million.
The requirements of the UMRA include
assessing a rule’s effects on future
compliance costs; particular regions or
state, local, or tribal governments;
communities; segments of the private
sector; productivity; economic growth;
full employment; creation of productive
jobs; and the international
competitiveness of U.S. goods and
services. The proposed rule qualifies as
a significant regulatory action under the
UMRA because its Federal mandates
may result in the expenditure by the
private sector of $119.6 or more in any
one year. As permitted by section 202(c)
of the UMRA, the required analyses
have been prepared in conjunction with
the Executive Order 12866 analysis
document titled Regulatory Impact
Analysis for Risk-Based Capital
Guidelines; Capital Adequacy
Guidelines; Capital Maintenance:
Standardized Risk-Based Capital Rules
(Basel II: Standardized Option). The
analysis is available on the Internet at
https://www.occ.treas.gov/law/basel.htm
under the link of ‘‘Regulatory Impact
Analysis for Risk-Based Capital
Guidelines; Capital Adequacy
Guidelines; Capital Maintenance:
Standardized Risk-Based Capital Rules
(Basel II: Standardized Option), Office
of the Comptroller of the Currency,
International and Economic Affairs
(2008).’’
Number of Respondents: 180.
Estimated Burden Per Respondent:
Opt-in letter, 0.5 hours; prior approvals,
2.5 hours; opt-out letter, 1 hour; and
disclosures, 144 hours.
Total Estimated Annual Burden:
26,120 hours.
The agencies’ estimates represent an
average across all respondents and
reflect variations between institutions
based on their size, complexity, and
practices. Each agency is responsible for
G. OTS Unfunded Mandates Reform Act
of 1995 Determination
The Unfunded Mandates Reform Act
of 1995 (Pub. L. 104–4) (UMRA)
requires cost-benefit and other analyses
for a rule that would include any
Federal mandate that may result in the
expenditure by state, local, and tribal
governments, in the aggregate, or by the
private sector of $100 million or more
(adjusted annually for inflation) in any
one year. The current inflation-adjusted
OCC
Number of Respondents: 113.
Estimated Burden Per Respondent:
Opt-in letter and prior approvals, 3
hours; opt-out letter, 1 hour; and
disclosures, 144 hours.
Total Estimated Annual Burden:
16,272 hours.
Board
Number of Respondents: 60.
Estimated Burden Per Respondent:
Opt-in letter and prior approvals, 3
hours; opt-out letter, 1 hour; and
disclosures, 144 hours.
Total Estimated Annual Burden: 8,880
hours.
FDIC
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Number of Respondents: 61.
Estimated Burden Per Respondent:
Opt-in letter and prior approvals, 3
hours; opt-out letter, 1 hour; and
disclosures, 144 hours.
Total Estimated Annual Burden: 9,032
hours.
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expenditure threshold is $119.6 million.
The requirements of the UMRA include
assessing a rule’s effects on future
compliance costs; particular regions or
State, local, or tribal governments;
communities; segments of the private
sector; productivity; economic growth;
full employment; creation of productive
jobs; and the international
competitiveness of U.S. goods and
services. The proposed rule qualifies as
a significant regulatory action under the
UMRA because its Federal mandates
may result in the expenditure by the
private sector of $119.6 or more in any
one year. As permitted by section 202(c)
of the UMRA, the required analyses
have been prepared in conjunction with
the Executive Order 12866 analysis
document titled Regulatory Impact
Analysis for Risk-Based Capital
Standards: Capital Adequacy
Guidelines; Capital Maintenance;
Domestic Capital Modifications (Basel
II: Standardized Option). The analysis is
available at the locations designated for
viewing the OTS docket indicated in the
ADDRESSES section above.
H. Solicitation of Comments on Use of
Plain Language
Section 722 of the GLBA required the
Federal banking agencies to use plain
language in all proposed and final rules
published after January 1, 2000. The
Federal banking agencies invite
comment on how to make this proposed
rule easier to understand. For example:
• Have we organized the material to
suit your needs? If not, how could the
rule be more clearly stated?
• Are the requirements in the rule
clearly stated? If not, how could the rule
be more clearly stated?
• Do the regulations contain technical
language or jargon that is not clear? If
so, which language requires
clarification?
• Would a different format (grouping
and order of sections, use of headings,
paragraphing) make the regulation
easier to understand? If so, what
changes would make the regulation
easier to understand?
• Would more, but shorter, sections
be better? If so, which sections should
be changed?
• What else could we do to make the
regulation easier to understand?
Text of Common Appendix (All
Agencies)
The text of the agencies’ common
appendix appears below:
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Appendix [l] to Part [l]—Capital
Adequacy Guidelines for [Banks]: 72
Standardized Framework
Part I General Provisions
Section 1 Purpose, Applicability, Election
Procedures, and Reservation of Authority
Section 2 Definitions
Section 3 Minimum Risk-Based Capital
Requirements and Overall Capital
Adequacy
Section 4 Merger and Acquisition
Transitional Arrangements
Part II Qualifying Capital
Section 21 Modifications to Tier 1 and
Tier 2 Capital
Part III Risk-Weighted Assets for General
Credit Risk
Section 31 Mechanics for Calculating
Risk-Weighted Assets for General Credit
Risk
Section 32 Inferred Ratings for General
Credit Risk
Section 33 General Risk Weights
Section 34 Off-Balance Sheet Exposures
Section 35 OTC Derivative Contracts
Section 36 Guarantees and Credit
Derivatives: Substitution Treatment
Section 37 Collateralized Transactions
Section 38 Unsettled Transactions
Part IV Risk-Weighted Assets for
Securitization Exposures
Section 41 Operational Requirements for
Securitization Exposures
Section 42 Risk-Weighted Assets for
Securitization Exposures
Section 43 Ratings-Based Approach
(RBA)
Section 44 Securitization Exposures That
Do Not Qualify for the RBA
Section 45 Recognition of Credit Risk
Mitigants for Securitization Exposures
Section 46 Risk-Weighted Assets for
Securitizations With Early Amortization
Provisions
Part V Risk-Weighted Assets for Equity
Exposures
Section 51 Introduction and Exposure
Measurement
Section 52 Simple Risk-Weight Approach
(SRWA)
Section 53 Equity Exposures to
Investment Funds
Part VI Risk-Weighted Assets for
Operational Risk
Section 61 Basic Indicator Approach
Part VII Disclosure
Section 71 Disclosure Requirements
Part I. General Provisions
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Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
(a) Purpose. This appendix establishes:
72 For simplicity, and unless otherwise noted, this
NPR uses the term [BANK] to include banks,
savings associations, and bank holding companies.
The term [agency] refers to the primary Federal
supervisor of the bank applying the rule. The term
[the general risk-based capital rules] refers to each
agency’s existing non-internal ratings based capital
rules. The term [the advanced approaches riskbased capital rules] refers to each agency’s existing
internal ratings based capital rules. The term [the
market risk rule] refers to the agencies’ existing
market risk capital rules.
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(1) Methodologies for the calculation of
risk-based capital requirements for [BANK]s
that elect to use this appendix; and
(2) Operational and public disclosure
requirements for such [BANK]s.
(b) Applicability. This appendix applies to
a [BANK] that:
(1) Elects to use this appendix to calculate
its risk-based capital requirements;
(2) Must use this appendix based on a
determination by the [agency] under
paragraph (c)(3) of this section;
(3) Is a subsidiary of or controls a
depository institution that uses 12 CFR part
3, appendix D; 12 CFR part 208, appendix G;
12 CFR part 325, appendix E; or 12 CFR part
567, appendix B to calculate it risk-based
capital requirements; or
(4) Is a subsidiary of a bank holding
company that uses 12 CFR part 225,
appendix H, to calculate its risk-based capital
requirements.
(c) Election procedures. (1) Opt-in
procedures. (i) Except for a [BANK] that is
required under section 1(b)(1) of [the
advanced approaches risk-based capital
rules] to use that capital framework (other
than a [BANK] that is exempt under section
1(b)(3) of [the advanced approaches riskbased capital rules]), any [BANK] may elect
to use this appendix to calculate its riskbased capital requirements.
(ii) Unless otherwise waived by the
[agency], a [BANK] must notify the [agency]
of its intent to use this appendix in writing
at least 60 days before the beginning of the
calendar quarter in which it first uses this
appendix. This notice must contain a list of
any affiliated depository institutions or bank
holding companies, if applicable, that seek
not to apply this appendix under section
1(c)(2)(iii) of 12 CFR part 3, appendix D; 12
CFR part 208, appendix G; 12 CFR part 225,
appendix H; 12 CFR part 325, appendix E; or
12 CFR part 567, appendix B.
(2) Opt-out procedures. (i) A [BANK] that
uses this appendix to calculate its risk-based
capital requirements may instead elect to use
the [the general risk-based capital rules] or
[the advanced approaches risk-based capital
rules].
(ii) Unless otherwise waived by the
[agency], a [BANK] must notify the [agency]
of its intent to cease the use of this appendix
in writing at least 60 days before the
beginning of the calendar quarter in which it
plans to cease the use of this appendix. Such
notice must include an explanation of the
[BANK]’s rationale for ceasing the use of this
appendix and a statement regarding the
appendix or rules the [BANK] plans to use
to calculate its risk-based capital
requirements.
(iii) A [BANK] that otherwise would be
required to apply this appendix under
paragraph (b)(3) or (b)(4) of this section may
continue to use [the general risk-based
capital rules] if the [agency] determines in
writing that application of this appendix is
not appropriate in light of the [BANK]’s asset
size, level of complexity, risk profile, or
scope of operations.
(3) Supervisory application of this
appendix and exclusion. (i) The [agency]
may apply this appendix to any [BANK] if
the [agency] determines that application of
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44031
this appendix is appropriate in light of the
[BANK]’s asset size, level of complexity, risk
profile, or scope of operations.
(ii) The [agency] may exclude a [BANK]
that has opted-in under paragraph (c)(1) of
this section from using this appendix if the
[agency] determines that application of this
appendix is not appropriate in light of the
[BANK]’s asset size, level of complexity, risk
profile, or scope of operations.
(d) Reservation of authority. (1) Additional
capital in the aggregate. The [agency] may
require a [BANK] to hold an amount of
capital greater than otherwise required under
this appendix if the [agency] determines that
the [BANK]’s risk-based capital requirement
under this appendix is not commensurate
with the [BANK]’s credit, market,
operational, or other risks.
(2) Risk-weighted asset amounts. (i) If the
[agency] determines that the risk-weighted
asset amount calculated under this appendix
by the [BANK] for one or more exposures is
not commensurate with the risks associated
with those exposures, the [agency] may
require the [BANK] to assign a different riskweighted asset amount to the exposure(s) or
to deduct the amount of the exposure from
capital.
(ii) If the [agency] determines that the riskweighted asset amount for operational risk
produced by the [BANK] under this appendix
is not commensurate with the operational
risks of the [BANK], the [agency] may require
the [BANK] to assign a different riskweighted asset amount for operational risk.
(3) Other supervisory authority. Nothing in
this appendix limits the authority of the
[agency] under any other provision of law or
regulation to take supervisory or enforcement
action, including action to address unsafe or
unsound practices or conditions, deficient
capital levels, or violations of law.
(e) Notice and response procedures. In
making a determination under paragraph
(c)(2)(iii), (c)(3), or (d) of this section, the
[agency] will apply notice and response
procedures in the same manner as the notice
and response procedures in 12 CFR 3.12 (for
national banks), 12 CFR 263.202 (for bank
holding companies and state member banks),
12 CFR 325.6(c) (for state nonmember banks),
and 12 CFR 567.3(d) (for savings
associations).
(f) Principle of conservatism.
Notwithstanding the requirements of this
appendix, a [BANK] may choose not to apply
a provision of this appendix to one or more
exposures, provided that:
(1) The [BANK] can demonstrate on an
ongoing basis to the satisfaction of the
[agency] that not applying the provision
would, in all circumstances, unambiguously
generate a risk-based capital requirement for
each such exposure greater than that which
would otherwise be required under this
appendix;
(2) The [BANK] appropriately manages the
risk of each such exposure;
(3) The [BANK] notifies the [agency] in
writing prior to applying this principle to
each such exposure; and
(4) The exposures to which the [BANK]
applies this principle are not, in the
aggregate, material to the [BANK].
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Section 2. Definitions
For the purposes of this appendix, the
following definitions apply:
Affiliate with respect to a company means
any company that controls, is controlled by,
or is under common control with, the
company.
Applicable external rating. (1) With respect
to an exposure, applicable external rating
means:
(i) If the exposure has a single external
rating, the external rating; and
(ii) If the exposure has multiple external
ratings, the lowest external rating.
(2) See also external rating.
Applicable inferred rating. (1) With respect
to an exposure, applicable inferred rating
means:
(i) If the exposure has a single inferred
rating, the inferred rating; and
(ii) If the exposure has multiple inferred
ratings, the lowest inferred rating.
(2) See also external rating, inferred rating.
Asset-backed commercial paper (ABCP)
program means a program that primarily
issues commercial paper that:
(1) Has an external rating; and
(2) Is backed by underlying exposures held
in a bankruptcy-remote securitization special
purpose entity (SPE).
Asset-backed commercial paper (ABCP)
program sponsor means a [BANK] that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to
participate in an ABCP program;
(3) Approves the exposures to be
purchased by an ABCP program; or
(4) Administers the ABCP program by
monitoring the underlying exposures,
underwriting or otherwise arranging for the
placement of debt or other obligations issued
by the program, compiling monthly reports,
or ensuring compliance with the program
documents and with the program’s credit and
investment policy.
Carrying value means, with respect to an
asset, the value of the asset on the balance
sheet of the [BANK] determined in
accordance with generally accepted
accounting principles (GAAP).
Clean-up call means a contractual
provision that permits an originating [BANK]
or servicer to call securitization exposures
before their stated maturity or call date. (See
also eligible clean-up call.)
Commitment means any legally binding
arrangement that obligates a [BANK] to
extend credit or to purchase assets.
Commodity derivative contract means a
commodity-linked swap, purchased
commodity-linked option, forward
commodity-linked contract, or any other
instrument linked to commodities that gives
rise to similar counterparty credit risks.
Company means a corporation,
partnership, limited liability company,
business trust, special purpose entity,
depository institution, association, or similar
organization.
Control. A person or company controls a
company if it:
(1) Owns, controls, or holds with power to
vote 25 percent or more of a class of voting
securities of the company; or
(2) Consolidates the company for financial
reporting purposes.
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Controlled early amortization provision
means an early amortization provision that
meets all the following conditions:
(1) The originating [BANK] has appropriate
policies and procedures to ensure that it has
sufficient capital and liquidity available in
the event of an early amortization;
(2) Throughout the duration of the
securitization (including the early
amortization period), there is the same pro
rata sharing of interest, principal, expenses,
losses, fees, recoveries, and other cash flows
from the underlying exposures based on the
originating [BANK]’s and the investors’
relative shares of the underlying exposures
outstanding measured on a consistent
monthly basis;
(3) The amortization period is sufficient for
at least 90 percent of the total underlying
exposures outstanding at the beginning of the
early amortization period to be repaid or
recognized as in default; and
(4) The schedule for repayment of investor
principal is not more rapid than would be
allowed by straight-line amortization over an
18-month period.
Corporate exposure means a credit
exposure to a natural person or a company
(including an industrial development bond,
an exposure to a government-sponsored
entity (GSE), or an exposure to a securities
broker or dealer) that is not:
(1) An exposure to a sovereign entity, the
Bank for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, a multilateral development bank
(MDB), a depository institution, a foreign
bank, a credit union, or a public sector entity
(PSE);
(2) A regulatory retail exposure;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A securitization exposure; or
(7) An equity exposure.
Credit derivative means a financial contract
executed under standard industry credit
derivative documentation that allows one
party (the protection purchaser) to transfer
the credit risk of one or more exposures
(reference exposure) to another party (the
protection provider). (See also eligible credit
derivative.)
Credit-enhancing interest-only strip (CEIO)
means an on-balance sheet asset that, in form
or in substance:
(1) Represents a contractual right to receive
some or all of the interest and no more than
a minimal amount of principal due on the
underlying exposures of a securitization; and
(2) Exposes the holder to credit risk
directly or indirectly associated with the
underlying exposures that exceeds a pro rata
share of the holder’s claim on the underlying
exposures, whether through subordination
provisions or other credit-enhancement
techniques.
Credit-enhancing representations and
warranties means representations and
warranties that are made or assumed in
connection with a transfer of underlying
exposures (including loan servicing assets)
and that obligate a [BANK] to protect another
party from losses arising from the credit risk
of the underlying exposures. Credit-
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enhancing representations and warranties
include provisions to protect a party from
losses resulting from the default or
nonperformance of the obligors of the
underlying exposures or from an
insufficiency in the value of the collateral
backing the underlying exposures. Creditenhancing representations and warranties do
not include:
(1) Early default clauses and similar
warranties that permit the return of, or
premium refund clauses that cover, loans
secured by a first lien on one-to-four family
residential property for a period not to
exceed 120 days from the date of transfer,
provided that the date of transfer is within
one year of origination of the residential
mortgage exposure;
(2) Premium refund clauses that cover
underlying exposures guaranteed, in whole
or in part, by the U.S. Government, a U.S.
Government Agency, or a GSE, provided that
the clauses are for a period not to exceed 120
days from the date of transfer; or
(3) Warranties that permit the return of
underlying exposures in instances of
misrepresentation, fraud, or incomplete
documentation.
Credit risk mitigant means collateral, a
credit derivative, or a guarantee.
Depository institution means a depository
institution as defined in section 3 of the
Federal Deposit Insurance Act (12 U.S.C.
1813).
Derivative contract means a financial
contract whose value is derived from the
values of one or more underlying assets,
reference rates, or indices of asset values or
reference rates. Derivative contracts include
interest rate derivative contracts, exchange
rate derivative contracts, equity derivative
contracts, commodity derivative contracts,
credit derivative contracts, and any other
instrument that poses similar counterparty
credit risks. Derivative contracts also include
unsettled securities, commodities, and
foreign exchange transactions with a
contractual settlement or delivery lag that is
longer than the lesser of the market standard
for the particular instrument or five business
days.
Early amortization provision means a
provision in the documentation governing a
securitization that, when triggered, causes
investors in the securitization exposures to
be repaid before the original stated maturity
of the securitization exposures, unless the
provision:
(1) Is triggered solely by events not directly
related to the performance of the underlying
exposures or the originating [BANK] (such as
material changes in tax laws or regulations);
or
(2) Leaves investors fully exposed to future
draws by obligors on the underlying
exposures even after the provision is
triggered. (See also controlled early
amortization provision.)
Effective notional amount means, for an
eligible guarantee or eligible credit
derivative, the lesser of the contractual
notional amount of the credit risk mitigant or
the exposure amount of the hedged exposure,
multiplied by the percentage coverage of the
credit risk mitigant. For example, the
effective notional amount of an eligible
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guarantee that covers, on a pro rata basis, 40
percent of any losses on a $100 bond would
be $40.
Eligible asset-backed commercial paper
(ABCP) liquidity facility means a liquidity
facility supporting ABCP, in form or in
substance, that is subject to an asset quality
test at the time of draw that precludes
funding against assets that are 90 days or
more past due or in default. If the assets or
exposures that an eligible ABCP liquidity
facility is required to fund against are
externally rated at the inception of the
facility, the facility can be used to fund only
those assets or exposures with an applicable
external rating of at least investment grade at
the time of funding. Notwithstanding the two
preceding sentences, a liquidity facility is an
eligible ABCP liquidity facility if the assets
or exposures funded under the liquidity
facility that do not meet the eligibility
requirements are guaranteed by a sovereign
entity with an issuer rating in one of the
three highest investment grade rating
categories.
Eligible clean-up call means a clean-up call
that:
(1) Is exercisable solely at the discretion of
the originating [BANK] or servicer;
(2) Is not structured to avoid allocating
losses to securitization exposures held by
investors or otherwise structured to provide
credit enhancement to the securitization; and
(3)(i) For a traditional securitization, is
only exercisable when 10 percent or less of
the principal amount of the underlying
exposures or securitization exposures
(determined as of the inception of the
securitization) is outstanding; or
(ii) For a synthetic securitization, is only
exercisable when 10 percent or less of the
principal amount of the reference portfolio of
underlying exposures (determined as of the
inception of the securitization) is
outstanding.
Eligible credit derivative means a credit
derivative in the form of a credit default
swap, nth-to-default swap, total return swap,
or any other form of credit derivative
approved by the [agency], provided that:
(1) The contract meets the requirements of
an eligible guarantee and has been confirmed
by the protection purchaser and the
protection provider;
(2) Any assignment of the contract has
been confirmed by all relevant parties;
(3) If the credit derivative is a credit default
swap or nth-to-default swap, the contract
includes the following credit events:
(i) Failure to pay any amount due under
the terms of the reference exposure, subject
to any applicable minimal payment threshold
that is consistent with standard market
practice and with a grace period that is
closely in line with the grace period of the
reference exposure; and
(ii) Bankruptcy, insolvency, or inability of
the obligor on the reference exposure to pay
its debts, or its failure or admission in
writing of its inability generally to pay its
debts as they become due, and similar events;
(4) The terms and conditions dictating the
manner in which the contract is to be settled
are incorporated into the contract;
(5) If the contract allows for cash
settlement, the contract incorporates a robust
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valuation process to estimate loss reliably
and specifies a reasonable period for
obtaining post-credit event valuations of the
reference exposure;
(6) If the contract requires the protection
purchaser to transfer an exposure to the
protection provider at settlement, the terms
of at least one of the exposures that is
permitted to be transferred under the contract
provide that any required consent to transfer
may not be unreasonably withheld;
(7) If the credit derivative is a credit default
swap or nth-to-default swap, the contract
clearly identifies the parties responsible for
determining whether a credit event has
occurred, specifies that this determination is
not the sole responsibility of the protection
provider, and gives the protection purchaser
the right to notify the protection provider of
the occurrence of a credit event; and
(8) If the credit derivative is a total return
swap and the [BANK] records net payments
received on the swap as net income, the
[BANK] records offsetting deterioration in the
value of the hedged exposure (through
reductions in fair value).
Eligible guarantee means a guarantee from
an eligible guarantor that:
(1) Is written;
(2) Is either unconditional, or a contingent
obligation of the United States Government
or its agencies, the validity of which to the
beneficiary is dependent upon some
affirmative action on the part of the
beneficiary of the guarantee or a third party
(for example, servicing requirements);
(3) Covers all or a pro rata portion of all
contractual payments of the obligor on the
reference exposure;
(4) Gives the beneficiary a direct claim
against the protection provider;
(5) Is not unilaterally cancelable by the
protection provider for reasons other than the
breach of the contract by the beneficiary;
(6) Is legally enforceable against the
protection provider in a jurisdiction where
the protection provider has sufficient assets
against which a judgment may be attached
and enforced;
(7) Requires the protection provider to
make payment to the beneficiary on the
occurrence of a default (as defined in the
guarantee) of the obligor on the reference
exposure in a timely manner without the
beneficiary first having to take legal actions
to pursue the obligor for payment;
(8) Does not increase the beneficiary’s cost
of credit protection on the guarantee in
response to deterioration in the credit quality
of the reference exposure; and
(9) Is not provided by an affiliate of the
[BANK], unless the affiliate is an insured
depository institution, foreign bank,
securities broker or dealer, or insurance
company that:
(i) Does not control the [BANK]; and
(ii) Is subject to consolidated supervision
and regulation comparable to that imposed
on U.S. depository institutions, securities
brokers or dealers, or insurance companies
(as the case may be).
Eligible guarantor means:
(1) A sovereign entity, the Bank for
International Settlements, the International
Monetary Fund, the European Central Bank,
the European Commission, a Federal Home
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Loan Bank, the Federal Agricultural Mortgage
Corporation (Farmer Mac), an MDB, a
depository institution, a foreign bank, a
credit union, a bank holding company (as
defined in section 2 of the Bank Holding
Company Act (12 U.S.C. 1841)), or a savings
and loan holding company (as defined in 12
U.S.C. 1467a) provided all or substantially all
of the holding company’s activities are
permissible for a financial holding company
under 12 U.S.C. 1843(k); or
(2) Any other entity (other than a SPE) if
at the time the entity issued the guarantee or
credit derivative or any time thereafter, the
entity has issued and outstanding an
unsecured debt security without credit
enhancement that has an applicable external
rating based on a long-term rating.
Eligible margin loan means an extension of
credit where:
(1) The extension of credit is collateralized
exclusively by liquid and readily marketable
debt or equity securities, gold, or conforming
residential mortgage exposures;
(2) The collateral is marked-to-market
daily, and the transaction is subject to daily
margin maintenance requirements;
(3) The extension of credit is conducted
under an agreement that provides the
[BANK] the right to accelerate and terminate
the extension of credit and to liquidate or set
off collateral promptly upon an event of
default (including upon an event of
bankruptcy, insolvency, or similar
proceeding) of the counterparty, provided
that, in any such case, any exercise of rights
under the agreement will not be stayed or
avoided under applicable law in the relevant
jurisdictions; 73 and
(4) The [BANK] has conducted sufficient
legal review to conclude with a well-founded
basis (and maintains sufficient written
documentation of that legal review) that the
agreement meets the requirements of
paragraph (3) of this definition and is legal,
valid, binding, and enforceable under
applicable law in the relevant jurisdictions.
Eligible servicer cash advance facility
means a servicer cash advance facility in
which:
(1) The servicer is entitled to full
reimbursement of advances, except that a
servicer may be obligated to make nonreimbursable advances for a particular
underlying exposure if any such advance is
contractually limited to an insignificant
amount of the outstanding principal balance
of that exposure;
(2) The servicer’s right to reimbursement is
senior in right of payment to all other claims
on the cash flows from the underlying
exposures of the securitization; and
(3) The servicer has no legal obligation to,
and does not, make advances to the
73 This requirement is met where all transactions
under the agreement are (i) executed under U.S. law
and (ii) constitute ‘‘securities contracts’’ under
section 555 of the Bankruptcy Code (11 U.S.C. 555),
qualified financial contracts under section 11(e)(8)
of the Federal Deposit Insurance Act (12 U.S.C.
1821(e)(8)), or netting contracts between or among
financial institutions under sections 401–407 of the
Federal Deposit Insurance Corporation
Improvement Act of 1991 (12 U.S.C. 4401–4407) or
the Federal Reserve Board’s Regulation EE (12 CFR
part 231).
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securitization if the servicer concludes the
advances are unlikely to be repaid.
Equity derivative contract means an equitylinked swap, purchased equity-linked option,
forward equity-linked contract, or any other
instrument linked to equities that gives rise
to similar counterparty credit risks.
Equity exposure means:
(1) A security or instrument (whether
voting or non-voting) that represents a direct
or indirect ownership interest in, and is a
residual claim on, the assets and income of
a company, unless:
(i) The issuing company is consolidated
with the [BANK] under GAAP;
(ii) The [BANK] is required to deduct the
ownership interest from tier 1 or tier 2 capital
under this appendix;
(iii) The ownership interest incorporates a
payment or other similar obligation on the
part of the issuing company (such as an
obligation to make periodic payments); or
(iv) The ownership interest is a
securitization exposure;
(2) A security or instrument that is
mandatorily convertible into a security or
instrument described in paragraph (1) of this
definition;
(3) An option or warrant that is exercisable
for a security or instrument described in
paragraph (1) of this definition; or
(4) Any other security or instrument (other
than a securitization exposure) to the extent
the return on the security or instrument is
based on the performance of a security or
instrument described in paragraph (1) of this
definition.
Exchange rate derivative contract means a
cross-currency interest rate swap, forward
foreign-exchange contract, currency option
purchased, or any other instrument linked to
exchange rates that gives rise to similar
counterparty credit risks.
Exposure amount means:
(1) For the on-balance sheet component of
an exposure (other than an OTC derivative
contract; a repo-style transaction or an
eligible margin loan for which the [BANK]
determines the exposure amount under
paragraph (c) or (d) of section 37 of this
appendix; or a securitization exposure),
exposure amount means:
(i) If the exposure is a security classified
as available-for-sale, the [BANK]’s carrying
value of the exposure, less any unrealized
gains on the exposure, plus any unrealized
losses on the exposure.
(ii) If the exposure is not a security
classified as available-for-sale, the [BANK]’s
carrying value of the exposure.
(2) For the off-balance sheet component of
an exposure (other than an OTC derivative
contract; a repo-style transaction or an
eligible margin loan for which the [BANK]
calculates the exposure amount under
paragraph (c) or (d) of section 37 of this
appendix; or a securitization exposure),
exposure amount means the notional amount
of the off-balance sheet component
multiplied by the appropriate credit
conversion factor (CCF) in section 34 of this
appendix.
(3) If the exposure is an OTC derivative
contract, the exposure amount determined
under section 35 or 37 of this appendix.
(4) If the exposure is an eligible margin
loan or repo-style transaction for which the
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[BANK] calculates the exposure amount as
provided in paragraph (c) or (d) of section 37
of this appendix, the exposure amount
determined under section 37.
(5) If the exposure is a securitization
exposure, the exposure amount determined
under section 42 of this appendix.
External rating means a credit rating that
is assigned by a nationally recognized
statistical rating organization (NRSRO) to an
exposure, provided:
(1) The credit rating fully reflects the entire
amount of credit risk with regard to all
payments owed to the holder of the exposure.
If a holder is owed principal and interest on
an exposure, the credit rating must fully
reflect the credit risk associated with timely
repayment of principal and interest. If a
holder is owed only principal on an
exposure, the credit rating must fully reflect
only the credit risk associated with timely
repayment of principal; and
(2) The credit rating is published in an
accessible form and is or will be included in
the transition matrices made publicly
available by the NRSRO that summarize the
historical performance of positions rated by
the NRSRO. (See also applicable external
rating, applicable inferred rating, inferred
rating, issuer rating.)
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the [BANK]
(including cash held for the [BANK] by a
third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that have an
applicable external rating of one category
below investment grade or higher;
(iv) Short-term debt instruments that have
an applicable external rating of at least
investment grade;
(v) Equity securities that are publicly
traded;
(vi) Convertible bonds that are publicly
traded;
(vii) Money market mutual fund shares and
other mutual fund shares if a price for the
shares is publicly quoted daily; or
(viii) Conforming residential mortgage
exposures; and
(2) In which the [BANK] has a perfected,
first priority security interest or, outside of
the United States, the legal equivalent thereof
(with the exception of cash on deposit and
notwithstanding the prior security interest of
any custodial agent).
Financial standby letter of credit means a
letter of credit or similar arrangement that
represents an irrevocable obligation of a
[BANK] to a third-party beneficiary:
(1) To repay money borrowed by, or
advanced to, or for the account of, a second
party (the account party); or
(2) To make payment on behalf of the
account party, in the event that the account
party fails to fulfill its financial obligation to
the beneficiary.
First-lien residential mortgage exposure
means a residential mortgage exposure
secured by a first lien or a residential
mortgage exposure secured by first and junior
lien(s) where no other party holds an
intervening lien. (See also residential
mortgage exposure.)
Foreign bank means a foreign bank as
defined in § 211.2 of the Federal Reserve
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Board’s Regulation K (12 CFR 211.2) other
than a depository institution. (See also
depository institution.)
GAAP means generally accepted
accounting principles as used in the United
States.
Gain-on-sale means an increase in the
equity capital (as reported on Schedule RC of
the Consolidated Statement of Condition and
Income (Call Report), Schedule HC of the FR
Y–9C Report, or Schedule SC of the Thrift
Financial Report) of a [BANK] that results
from a securitization (other than an increase
in equity capital that results from the
[BANK]’s receipt of cash in connection with
the securitization). (See also securitization.)
Guarantee means a financial guarantee,
letter of credit, insurance, or other similar
financial instrument (other than a credit
derivative) that allows one party (beneficiary)
to transfer the credit risk of one or more
specific exposures (reference exposure) to
another party (protection provider). (See also
eligible guarantee.)
Inferred rating. (1) Securitization
exposures. A securitization exposure has an
inferred rating equal to the external rating of
the securitization exposure referenced in
paragraph (1)(ii) of this definition if:
(i) The securitization exposure does not
have an external rating; and
(ii) Another securitization exposure issued
by the same obligor and secured by the same
underlying exposures:
(A) Has an external rating;
(B) Is subordinated in all respects to the
exposure with no external rating;
(C) Does not benefit from any credit
enhancement that is not available to the
exposure with no external rating;
(D) Has an effective remaining maturity
that is equal to or longer than that of the
exposure with no external rating; and
(E) Is the most immediately subordinated
exposure to the exposure with no external
rating that meets the requirements of
paragraph (1)(ii)(A) through (1)(ii)(D) of this
definition.
(2) Other exposures. With respect to an
exposure to a sovereign entity, an exposure
to a PSE, or a corporate exposure, inferred
rating means an inferred rating based on an
issuer rating and an inferred rating based on
a specific issue as determined under section
32 of this appendix. (See also applicable
external rating, applicable inferred rating,
external rating, issuer rating.)
Interest rate derivative contract means a
single-currency interest rate swap, basis
swap, forward rate agreement, purchased
interest rate option, when-issued securities,
or any other instrument linked to interest
rates that gives rise to similar counterparty
credit risks.
Investing [BANK] means, with respect to a
securitization, a [BANK] that assumes the
credit risk of a securitization exposure (other
than an originating [BANK] of the
securitization). In a typical synthetic
securitization, the investing [BANK] sells
credit protection on a pool of underlying
exposures to the originating [BANK].
Investment fund means a company:
(1) All or substantially all of the assets of
which are financial assets; and
(2) That has no material liabilities.
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Issuer rating means a credit rating that is
assigned by an NRSRO to an entity, provided:
(1) The credit rating reflects the entity’s
capacity and willingness to satisfy all of its
financial obligations; and
(2) The credit rating is published in an
accessible form and is or will be included in
the transition matrices made publicly
available by the NRSRO that summarize the
historical performance of the NRSRO’s
ratings. (See also applicable external rating,
applicable inferred rating.)
Junior-lien residential mortgage exposure
means a residential mortgage exposure that is
not a first-lien residential mortgage exposure.
(See also first-lien residential mortgage
exposure, residential mortgage exposure.)
Main index means the Standard & Poor’s
500 Index, the FTSE All-World Index, and
any other index for which the [BANK] can
demonstrate to the satisfaction of the
[agency] that the equities represented in the
index have comparable liquidity, depth of
market, and size of bid-ask spreads as
equities in the Standard & Poor’s 500 Index
and FTSE All-World Index.
Multi-lateral development bank (MDB)
means the International Bank for
Reconstruction and Development, the
International Finance Corporation, the InterAmerican Development Bank, the Asian
Development Bank, the African Development
Bank, the European Bank for Reconstruction
and Development, the European Investment
Bank, the European Investment Fund, the
Nordic Investment Bank, the Caribbean
Development Bank, the Islamic Development
Bank, the Council of Europe Development
Bank, and any other multilateral lending
institution or regional development bank in
which the U.S. government is a shareholder
or contributing member or which the
[agency] determines poses comparable credit
risk.
Nationally recognized statistical rating
organization (NRSRO) means an entity
registered with the Securities and Exchange
Commission (SEC) as a nationally recognized
statistical rating organization under section
15E of the Securities Exchange Act of 1934
(15 U.S.C. 78o–7).
Netting set means a group of transactions
with a single counterparty that is subject to
a qualifying master netting agreement.
Nth-to-default credit derivative means a
credit derivative that provides credit
protection only for the nth-defaulting
reference exposure in a group of reference
exposures.
Operational risk means the risk of loss
resulting from inadequate or failed internal
processes, people, and systems or from
external events (including legal risk but
excluding strategic and reputational risk).
Original maturity with respect to an offbalance sheet commitment means the length
of time between the date a commitment is
issued and:
(1) For a commitment that is not subject to
extension or renewal, the stated expiration
date of the commitment; or
(2) For a commitment that is subject to
extension or renewal, the earliest date on
which the [BANK] can, at its option,
unconditionally cancel the commitment.
Originating [BANK], with respect to a
securitization, means a [BANK] that:
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(1) Directly or indirectly originated or
securitized the underlying exposures
included in the securitization; or
(2) Serves as an ABCP program sponsor to
the securitization.
Over-the-counter (OTC) derivative contract
means a derivative contract that is not traded
on an exchange that requires the daily receipt
and payment of cash-variation margin.
Performance standby letter of credit (or
performance bond) means an irrevocable
obligation of a [BANK] to pay a third-party
beneficiary when a customer (account party)
fails to perform on any contractual
nonfinancial or commercial obligation. To
the extent permitted by law or regulation,
performance standby letters of credit include
arrangements backing, among other things,
subcontractors’ and suppliers’ performance,
labor and materials contracts, and
construction bids.
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and under 12 CFR
part 3, appendix A, section 3(a)(3)(iv) (for
national banks); 12 CFR part 208, appendix
A, section III.C.3. (for state member banks);
12 CFR part 225, appendix A, section III.C.3.
(for bank holding companies); 12 CFR part
325, appendix A, section II.C. (for state
nonmember banks), and that is not 90 days
or more past due or on nonaccrual; or 12 CFR
567.1 (definition of ‘‘qualifying residential
construction loan’’) (for savings associations),
and that is not on nonaccrual.
Protection amount (P) means, with respect
to an exposure hedged by an eligible
guarantee or eligible credit derivative, the
effective notional amount of the guarantee or
credit derivative as reduced to reflect any
currency mismatch, maturity mismatch, or
lack of restructuring coverage (as provided in
section 36 of this appendix).
Publicly traded means traded on:
(1) Any exchange registered with the SEC
as a national securities exchange under
section 6 of the Securities Exchange Act of
1934 (15 U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange
that:
(i) Is registered with, or approved by, a
national securities regulatory authority; and
(ii) Provides a liquid, two-way market for
the instrument in question, meaning that
there are enough independent bona fide
offers to buy and sell so that a sales price
reasonably related to the last sales price or
current bona fide competitive bid and offer
quotations can be determined promptly and
a trade can be settled at such a price within
five business days.
Public sector entity (PSE) means a state,
local authority, or other governmental
subdivision below the sovereign entity level.
Qualifying master netting agreement means
any written, legally enforceable bilateral
netting agreement, provided that:
(1) The agreement creates a single legal
obligation for all individual transactions
covered by the agreement upon an event of
default, including bankruptcy, insolvency, or
similar proceeding, of the counterparty;
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(2) The agreement provides the [BANK] the
right to accelerate, terminate, and close out
on a net basis all transactions under the
agreement and to liquidate or set off
collateral promptly upon an event of default,
including upon an event of bankruptcy,
insolvency, or similar proceeding, of the
counterparty, provided that, in any such
case, any exercise of rights under the
agreement will not be stayed or avoided
under applicable law in the relevant
jurisdictions;
(3) The [BANK] has conducted sufficient
legal review to conclude with a well-founded
basis (and has maintained sufficient written
documentation of that legal review) that:
(i) The agreement meets the requirements
of paragraph (2) of this definition; and
(ii) In the event of a legal challenge
(including one resulting from default or from
bankruptcy, insolvency, or similar
proceeding) the relevant court and
administrative authorities would find the
agreement to be legal, valid, binding, and
enforceable under the law of the relevant
jurisdictions;
(4) The [BANK] establishes and maintains
procedures to monitor possible changes in
relevant law and to ensure that the agreement
continues to satisfy the requirements of this
definition; and
(5) The agreement does not contain a
walkaway clause (that is, a provision that
permits a non-defaulting counterparty to
make a lower payment than it would make
otherwise under the agreement, or no
payment at all, to a defaulter or the estate of
a defaulter, even if the defaulter or the estate
of the defaulter is a net creditor under the
agreement).
Regulatory retail exposure means an
exposure that meets the following
requirements:
(1) The [BANK]’s aggregate exposure to a
single obligor does not exceed $1 million;
(2) The exposure is part of a well
diversified portfolio; and
(3) The exposure is not:
(i) An exposure to a sovereign entity, the
Bank for International Settlements, the
European Central Bank, the European
Commission, the International Monetary
Fund, an MDB, a depository institution, a
foreign bank, a credit union, or a PSE;
(ii) An acquisition, development, and
construction loan;
(iii) A residential mortgage exposure;
(iv) A pre-sold construction loan;
(v) A statutory multifamily mortgage;
(vi) A securitization exposure;
(vii) An equity exposure; or
(viii) A debt security.
Repo-style transaction means a repurchase
or reverse repurchase transaction, or a
securities borrowing or securities lending
transaction, including a transaction in which
the [BANK] acts as agent for a customer and
indemnifies the customer against loss,
provided that:
(1) The transaction is based solely on
liquid and readily marketable securities,
cash, gold, or conforming residential
mortgage exposures;
(2) The transaction is marked-to-market
daily and subject to daily margin
maintenance requirements;
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(3)(i) The transaction is a ‘‘securities
contract’’ or ‘‘repurchase agreement’’ under
section 555 or 559, respectively, of the
Bankruptcy Code (11 U.S.C. 555 or 559), a
qualified financial contract under section
11(e)(8) of the Federal Deposit Insurance Act
(12 U.S.C. 1821(e)(8)), or a netting contract
between or among financial institutions
under sections 401–407 of the Federal
Deposit Insurance Corporation Improvement
Act of 1991 (12 U.S.C. 4401–4407) or the
Federal Reserve Board’s Regulation EE (12
CFR part 231); or
(ii) If the transaction does not meet the
criteria in paragraph (3)(i) of this definition,
then either:
(A) The transaction is executed under an
agreement that provides the [BANK] the right
to accelerate, terminate, and close out the
transaction on a net basis and to liquidate or
set off collateral promptly upon an event of
default (including upon an event of
bankruptcy, insolvency, or similar
proceeding) of the counterparty, provided
that, in any such case, any exercise of rights
under the agreement will not be stayed or
avoided under applicable law in the relevant
jurisdictions; or
(B) The transaction is:
(I) Either overnight or unconditionally
cancelable at any time by the [BANK]; and
(II) Executed under an agreement that
provides the [BANK] the right to accelerate,
terminate, and close out the transaction on a
net basis and to liquidate or set off collateral
promptly upon an event of counterparty
default; and
(4) The [BANK] has conducted sufficient
legal review to conclude with a well-founded
basis (and maintains sufficient written
documentation of that legal review) that the
agreement meets the requirements of
paragraph (3) of this definition and is legal,
valid, binding, and enforceable under
applicable law in the relevant jurisdictions.
Residential mortgage exposure means an
exposure (other than a pre-sold construction
loan) that is primarily secured by one-to-four
family residential property. (See also firstlien residential mortgage exposure, juniorlien residential mortgage exposure.)
Securities and Exchange Commission
(SEC) means the U.S. Securities and
Exchange Commission.
Securitization means a traditional
securitization or a synthetic securitization.
Securitization exposure means an onbalance sheet or off-balance sheet credit
exposure that arises from a traditional or
synthetic securitization (including creditenhancing representations and warranties).
(See also synthetic securitization, traditional
securitization.)
Securitization special purpose entity
(securitization SPE) means a corporation,
trust, or other entity organized for the
specific purpose of holding underlying
exposures of a securitization, the activities of
which are limited to those appropriate to
accomplish this purpose, and the structure of
which is intended to isolate the underlying
exposures held by the entity from the credit
risk of the seller of the underlying exposures
to the entity.
Servicer cash advance facility means a
facility under which the servicer of the
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underlying exposures of a securitization may
advance cash to ensure an uninterrupted
flow of payments to investors in the
securitization, including advances made to
cover foreclosure costs or other expenses to
facilitate the timely collection of the
underlying exposures. (See also eligible
servicer cash advance facility.)
Sovereign entity means a central
government (including the U.S. Government)
or an agency, department, ministry, or central
bank of a central government.
Sovereign of incorporation means the
country where an entity is incorporated,
chartered, or similarly established.
Statutory multifamily mortgage means any
multifamily residential mortgage that:
(1) Meets the requirements under section
618(b)(1) of the RTCRRI Act, and under 12
CFR part 3, appendix A, section 3(a)(3)(v) (for
national banks); 12 CFR part 208, appendix
A, section III.C.3. (for state member banks);
12 CFR part 225, appendix A, section III.C.3.
(for bank holding companies); 12 CFR part
325, appendix A, section II.C. (for state
nonmember banks); or 12 CFR 567.1
(definition of ‘‘qualifying multifamily
mortgage loan’’) and 12 CFR 567.6(a)(1)(iii)
(for savings associations); and
(2) Is not on nonaccrual.
Subsidiary means, with respect to a
company, a company controlled by that
company.
Synthetic securitization means a
transaction in which:
(1) All or a portion of the credit risk of one
or more underlying exposures is transferred
to one or more third parties through the use
of one or more credit derivatives or
guarantees (other than a guarantee that
transfers only the credit risk of an individual
retail exposure);
(2) The credit risk associated with the
underlying exposures has been separated into
at least two tranches reflecting different
levels of seniority;
(3) Performance of the securitization
exposures depends upon the performance of
the underlying exposures; and
(4) All or substantially all of the underlying
exposures are financial exposures (such as
loans, commitments, credit derivatives,
guarantees, receivables, asset-backed
securities, mortgage-backed securities, other
debt securities, or equity securities).
Tier 1 capital has the same meaning as in
[the general risk-based capital rules], except
as modified in part II of this appendix.
Tier 2 capital has the same meaning as in
[the general risk-based capital rules], except
as modified in part II of this appendix.
Total qualifying capital means the sum of
tier 1 capital and tier 2 capital, after all
deductions required in this appendix.
Total risk-weighted assets means the sum
of a [BANK]’s:
(1) Total risk-weighted assets for general
credit risk as calculated under section 31 of
this appendix;
(2) Total risk-weighted assets for unsettled
transactions as calculated under paragraph (f)
of section 38 of this appendix;
(3) Total risk-weighted assets for
securitization exposures as calculated under
paragraph (b) of section 42 of this appendix;
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(4) Total risk-weighted assets for equity
exposures as calculated under paragraph (a)
of section 52 of this appendix; and
(5) Risk-weighted assets for operational
risk as calculated under section 61 of this
appendix.
Traditional securitization means a
transaction in which:
(1) All or a portion of the credit risk of one
or more underlying exposures is transferred
to one or more third parties other than
through the use of credit derivatives or
guarantees.
(2) The credit risk associated with the
underlying exposures has been separated into
at least two tranches reflecting different
levels of seniority.
(3) Performance of the securitization
exposures depends upon the performance of
the underlying exposures.
(4) All or substantially all of the underlying
exposures are financial exposures (such as
loans, commitments, credit derivatives,
guarantees, receivables, asset-backed
securities, mortgage-backed securities, other
debt securities, or equity securities).
(5) The underlying exposures are not
owned by an operating company.
(6) The underlying exposures are not
owned by a small business investment
company described in section 302 of the
Small Business Investment Act of 1958 (15
U.S.C. 682).
(7)(i) For banks and bank holding
companies, the underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under 12 U.S.C. 24 (Eleventh); or
(ii) For savings associations, the underlying
exposures are not owned by a firm an
investment in which is designed primarily to
promote community welfare, including the
welfare of low- and moderate-income
communities or families, such as by
providing services or employment.
(8) The [agency] may determine that a
transaction in which the underlying
exposures are owned by an investment firm
that exercises substantially unfettered control
over the size and composition of its assets,
liabilities, and off-balance sheet exposures is
not a traditional securitization based on the
transaction’s leverage, risk profile, or
economic substance.
(9) The [agency] may deem a transaction
that meets the definition of a traditional
securitization, notwithstanding paragraph
(5), (6), or (7) of this definition, to be a
traditional securitization based on the
transaction’s leverage, risk profile, or
economic substance.
Unconditionally cancelable means with
respect to a commitment that a [BANK] may,
at any time, with or without cause, refuse to
extend credit under the facility (to the extent
permitted under applicable law).
Underlying exposures means one or more
exposures that have been securitized in a
securitization transaction.
Value-at-Risk (VaR) means the estimate of
the maximum amount that the value of one
or more exposures could decline due to
market price or rate movements during a
fixed holding period within a stated
confidence interval.
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Section 3. Minimum Risk-Based Capital
Requirements and Overall Capital Adequacy
(a) Except as modified by paragraph (c) of
this section, each [BANK] must meet a
minimum ratio of:
(1) Total qualifying capital to total riskweighted assets of 8.0 percent; and
(2) Tier 1 capital to total risk-weighted
assets of 4.0 percent.
(b) Each [BANK] must hold capital
commensurate with the level and nature of
all risks to which the [BANK] is exposed.
(c) When a [BANK] subject to [the market
risk rule] calculates its risk-based capital
requirements under this appendix, the
[BANK] must also refer to [the market risk
rule] for supplemental rules to calculate riskbased capital requirements adjusted for
market risk.
(d) A [BANK] must have a rigorous process
for assessing its overall capital adequacy in
relation to its risk profile and a
comprehensive strategy for maintaining an
appropriate level of capital.
Section 4. Merger and Acquisition
Transitional Arrangements
(a) Mergers and acquisitions of companies
that use the general risk-based capital rules.
If a [BANK] that uses this appendix merges
with or acquires a company that uses the
general risk-based capital rules (12 CFR part
3, appendix A; 12 CFR part 208, appendix A;
12 CFR part 225, appendix A; 12 CFR part
325, appendix A; or 12 CFR part 567, subpart
B), the [BANK] may use the general riskbased capital rules to calculate the riskweighted asset amounts for, and the
deductions from capital associated with, the
merged or acquired company’s exposures for
up to 12 months after the last day of the
calendar quarter during which the merger or
acquisition consummates. The risk-weighted
assets of the merged or acquired company
calculated under the general risk-based
capital rules are included in the [BANK]’s
total risk-weighted assets. Deductions
associated with the exposures of the merged
or acquired company are deducted from the
[BANK]’s tier 1 capital and tier 2 capital. If
a [BANK] relies on this paragraph, the
[BANK] separately must disclose publicly the
amounts of risk-weighted assets and total
qualifying capital calculated under this
appendix for the acquiring [BANK] and
under the general risk-based capital rules for
the acquired company.
(b) Mergers and acquisitions of companies
that use the standardized risk-based capital
rules. If a [BANK] that uses this appendix
merges with or acquires a company that uses
different aspects of the standardized riskbased capital rules (12 CFR part 3, appendix
D; 12 CFR part 208, appendix G; 12 CFR part
225, appendix H; 12 CFR part 325, appendix
E; or 12 CFR part 567, appendix B), the
[BANK] may continue to use the merged or
acquired company’s systems to determine the
risk-weighted asset amounts for, and
deductions from capital associated with, the
merged or acquired company’s exposures for
up to 12 months after the last day of the
calendar quarter during which the merger or
acquisition consummates. The risk-weighted
assets of the merged or acquired company are
included in the [BANK]’s total risk-weighted
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assets. Deductions associated with the
exposures of the merged or acquired
company are deducted from the [BANK]’s
tier 1 capital and tier 2 capital. If a [BANK]
relies on this paragraph, the [BANK]
separately must disclose publicly the
amounts of risk-weighted assets and total
qualifying capital for the acquiring [BANK]
and for the merged or acquired company
under the standardized risk-based capital
rules.
(c) Mergers and acquisitions of companies
that use the advanced approaches risk-based
capital rules. If a [BANK] that uses this
appendix merges with or acquires a company
that uses the advanced approaches risk-based
capital rules (12 CFR part 3, appendix C; 12
CFR part 208, appendix F; 12 CFR part 225,
appendix G; 12 CFR part 325, appendix D; or
12 CFR part 567, appendix C), the [BANK]
may use the advanced approaches risk-based
capital rules to determine the risk-weighted
asset amounts for, and deductions from
capital associated with, the merged or
acquired company’s exposures for up to 12
months after the last day of the calendar
quarter during which the merger or
acquisition consummates. During the period
when the advanced approaches risk-based
capital rules apply to the merged or acquired
company, any ALLL associated with the
merged or acquired company’s exposures
must be excluded from the [BANK]’s tier 2
capital. Any excess eligible credit reserves
associated with the merged or acquired
company’s exposures may be included in the
acquiring [BANK]’s tier 2 capital up to 0.6
percent of the acquired company’s riskweighted assets. (Excess eligible credit
reserves must be determined according to
paragraph (a)(2) of section 13 of the advanced
approaches risk-based capital rules.) If a
[BANK] relies on this paragraph, the [BANK]
separately must disclose publicly the
amounts of risk-weighted assets and
qualifying capital calculated under this
appendix for the acquiring [BANK] and
under the advanced approaches risk-based
capital rules for the acquired company.
Part II. Qualifying Capital
Section 21. Modifications to Tier 1 and Tier
2 Capital
(a) Modifications to tier 1 and tier 2
capital. A [BANK] that uses this appendix
must make the same deductions from its tier
1 capital and tier 2 capital required in [the
general risk-based capital rules], except that:
(1) A [BANK] is not required to make the
deductions from capital for CEIOs in 12 CFR
part 3, appendix A, section 2(c)(1)(iv) (for
national banks); 12 CFR part 208, appendix
A, section II.B.1.e. (for state member banks);
12 CFR part 225, appendix A, section II.B.1.e.
(for bank holding companies); 12 CFR part
325, appendix A, section II.B.5. (for state
nonmember banks); and 12 CFR
567.5(a)(2)(iii) and 567.12(e) (for savings
associations);
(2)(i) A bank or bank holding company is
not required to make the deductions from
capital for nonfinancial equity investments in
12 CFR part 3, appendix A, section 2(c)(1)(v)
(for national banks); 12 CFR part 208,
appendix A, section II.B.5. (for state member
banks); 12 CFR part 225, appendix A, section
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44037
II.B.5. (for bank holding companies); and 12
CFR part 325, appendix A, section II.B. (for
state nonmember banks);
(ii) A savings association is not required to
deduct investments in equity securities from
capital under 12 CFR 567.5(c)(2)(ii).
However, it must continue to deduct equity
investments in real estate under that section.
See 12 CFR 567.1, which defines equity
investments, including equity securities and
equity investments in real estate; and
(3) A [BANK] must make the additional
deductions from capital required by
paragraphs (b) and (c) of this section.
(b) Deductions from tier 1 capital. In
accordance with paragraph (a) of section 41
and paragraph (a)(1) of section 42, a [BANK]
must deduct any after-tax gain-on-sale
resulting from a securitization from tier 1
capital.
(c) Deductions from tier 1 and tier 2
capital. A [BANK] must deduct the exposures
specified in paragraphs (c)(1) through (c)(3)
in this section 50 percent from tier 1 capital
and 50 percent from tier 2 capital. If the
amount deductible from tier 2 capital
exceeds the [BANK]’s actual tier 2 capital,
however, the [BANK] must deduct the excess
amount from tier 1 capital.
(1) Credit-enhancing interest-only strips
(CEIOs). In accordance with paragraphs (a)(1)
and (c) of section 42, any CEIO that does not
constitute after-tax gain-on-sale.
(2) Certain securitization exposures. In
accordance with paragraphs (a)(3) and (c) of
section 42 and sections 43 and 44, certain
securitization exposures that are required to
be deducted from capital.
(3) Certain unsettled transactions. In
accordance with paragraph (e)(3) of section
38, the [BANK]’s exposure on certain
unsettled transactions.
Part III. Risk-Weighted Assets for General
Credit Risk
Section 31. Mechanics for Calculating RiskWeighted Assets for General Credit Risk
A [BANK] must risk weight its assets and
exposures as follows:
(a) A [BANK] must determine the exposure
amount of each on-balance sheet asset, each
OTC derivative contract, and each off-balance
sheet commitment, trade and transactionrelated contingency, guarantee, repurchase
agreement, securities lending and borrowing
transaction, financial standby letter of credit,
forward agreement, or other similar
transaction that is not:
(1) An unsettled transaction subject to
section 38;
(2) A securitization exposure; or
(3) An equity exposure (other than an
equity derivative contract).
(b) A [BANK] must multiply each exposure
amount identified under paragraph (a) of this
section by the risk weight appropriate to the
exposure based on the obligor or exposure
type, eligible guarantor, or financial collateral
to determine the risk-weighted asset amount
for each exposure.
(c) Total risk-weighted assets for general
credit risk equals the sum of the riskweighted asset amounts calculated under
paragraph (b) of this section.
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Section 32. Inferred Ratings for General
Credit Risk
(a) General. This section describes two
kinds of inferred ratings, an inferred rating
based on an issuer rating and an inferred
rating based on a specific issue. This section
applies to an exposure to a sovereign entity,
an exposure to a PSE, and a corporate
exposure, except as otherwise provided in
this appendix.
(b) Inferred rating based on an issuer
rating. If a senior exposure to an obligor (that
is, an exposure that ranks pari passu with an
obligor’s general creditors in the event of
bankruptcy, insolvency, or other similar
proceeding) has no external rating and the
obligor has one or more issuer ratings, the
senior exposure has inferred rating(s) equal
to the issuer rating(s) of the obligor that
reflects the currency in which the exposure
is denominated.
(c) Inferred rating based on a specific issue.
(1) An exposure with no external rating (the
unrated exposure) has inferred rating(s)
based on a specific issue equal to the external
rating in paragraph (c)(1)(ii), if another
exposure issued by the same obligor and
secured by the same collateral (if any):
(i) Ranks pari passu with the unrated
exposure (or at the [BANK]’s option, is
subordinated in all respects to the unrated
exposure);
(ii) Has an external rating based on a longterm rating;
(iii) Does not benefit from any credit
enhancement that is not available to the
unrated exposure;
(iv) Has an effective remaining maturity
that is equal to or longer than that of the
unrated exposure; and
(v) Is denominated in the same currency as
the unrated exposure. This requirement does
not apply where the unrated exposure is
denominated in a foreign currency that arises
from a [BANK]’s participation in a loan
extended or guaranteed by an MDB against
convertibility and transfer risk. If the
[BANK]’s participation is only partially
guaranteed against convertibility and transfer
risk by an MDB, the [BANK] may only use
the external rating denominated in the
foreign currency for the portion of the
participation that benefits from the MDB’s
guarantee.
(2) An unrated exposure has inferred
rating(s) equal to the external rating(s) based
on any long-term rating of low-quality
exposure(s) that are issued by the same
obligor and that are senior in all respects to
the unrated exposure. For the purposes of
this paragraph, a low-quality exposure is an
exposure that would receive a risk weight of
150 percent (for an exposure to a sovereign
entity or a corporate exposure) or 100 percent
or greater (for an exposure to a PSE) under
section 33.
Section 33. General Risk Weights
(a) Exposures to sovereign entities. (1) A
[BANK] must assign a risk weight to an
exposure to a sovereign entity using the risk
weight that corresponds to its applicable
external or applicable inferred rating in Table
1.
(2) Notwithstanding paragraph (a)(1) of this
section, a [BANK] may assign a risk weight
that is lower than the applicable risk weight
in Table 1 to an exposure to a sovereign
entity if:
(i) The exposure is denominated in the
sovereign entity’s currency;
(ii) The [BANK] has at least an equivalent
amount of liabilities in that currency; and
(iii) The sovereign entity allows banks
under its jurisdiction to assign the lower risk
weight to the same exposures to the
sovereign entity.
TABLE 1.—EXPOSURES TO SOVEREIGN ENTITIES
Applicable external or applicable inferred rating of an exposure to a sovereign entity
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
(b) Certain supranational entities and
multilateral development banks. A [BANK]
may assign a zero percent risk weight to an
exposure to the Bank for International
Settlements, the European Central Bank, the
European Commission, the International
Monetary Fund, or an MDB.
(c) Exposures to depository institutions,
foreign banks, and credit unions. (1) Except
as provided in paragraph (c)(2) of this
section, a [BANK] must assign a risk weight
to an exposure to a depository institution, a
foreign bank, or a credit union using the risk
weight that corresponds to the lowest issuer
rating of the entity’s sovereign of
incorporation in Table 2.
(2) A [BANK] must assign a risk weight of
at least 100 percent to an exposure to a
depository institution or a foreign bank that
is includable in the depository institution’s
Risk weight
(in percent)
0
0
20
50
100
100
150
100
or foreign bank’s regulatory capital and that
is not subject to deduction as a reciprocal
holding pursuant to 12 CFR part 3, appendix
A, section 2(c)(6)(ii) (national banks); 12 CFR
part 208, appendix A, section II.B.3 (state
member banks); 12 CFR part 225, appendix
A, section II.B.3 (bank holding companies);
12 CFR part 325, appendix A, section I.B.(4)
(state nonmember banks); and 12 CFR part
567.5(c)(2)(i) (savings associations).
TABLE 2.—EXPOSURES TO DEPOSITORY INSTITUTIONS, FOREIGN BANKS, AND CREDIT UNIONS
mstockstill on PROD1PC66 with PROPOSALS2
Lowest issuer rating of the sovereign of incorporation
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No issuer rating .............................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
(d) Exposures to public sector entities. (1)
Subject to the limitation in paragraph (d)(2)
of this section, a [BANK]:
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(i) Must risk weight an exposure to a PSE
with an applicable external or applicable
inferred rating based on a long-term rating
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Risk weight
(in percent)
20
20
50
100
100
100
150
100
using the risk weight that corresponds to the
applicable external or applicable inferred
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rating based on a long-term rating in Table
3.
(ii) Must assign a 50 percent risk weight to
an exposure to a PSE with no applicable
external rating based on a long-term rating
and no applicable inferred rating based on a
long-term rating.
(iii) May assign a lower risk weight than
would otherwise apply under Table 3 to an
exposure to a foreign PSE if:
(A) The PSE’s sovereign of incorporation
allows banks under its jurisdiction to assign
the lower risk weight; and
(B) The risk weight is not lower than the
risk weight that corresponds to the lowest
44039
issuer rating of the PSE’s sovereign of
incorporation in Table 1.
(2) A [BANK] may not assign an exposure
to a PSE with no external rating a risk weight
that is lower than the risk weight that
corresponds to the lowest issuer rating of the
PSE’s sovereign of incorporation in Table 1.
TABLE 3.—EXPOSURES TO PUBLIC SECTOR ENTITIES: LONG-TERM CREDIT RATING
Applicable external or applicable inferred rating of an exposure to a PSE
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
(e) Corporate exposures. A [BANK] must
use one of the following approaches to assign
risk weights to corporate exposures:
(1) 100 percent risk weight approach. A
[BANK] that chooses this approach must
assign a 100 percent risk weight to all
corporate exposures.
(2) Ratings approach. (i) Subject to the
limitations in paragraph (e)(2)(ii) of this
section, a [BANK] that chooses this approach:
(A) Must assign a risk weight to a corporate
exposure with an applicable external or
applicable inferred rating based on a longterm rating using the risk weight that
corresponds to the applicable external or
applicable inferred rating based on a longterm rating in Table 4.
(B) Must assign a risk weight to a corporate
exposure with an applicable external rating
based on a short-term rating using the risk
weight that corresponds to the applicable
external rating based on a short-term rating
in Table 5.
(C) Must assign a 100 percent risk weight
to all corporate exposures with no external
rating and no inferred rating.
(ii) Limitations. (A) A [BANK] may not
assign a corporate exposure with no external
Risk weight
(in percent)
20
20
50
50
100
100
150
50
rating a risk weight that is lower than the risk
weight that corresponds to the lowest issuer
rating of the obligor’s sovereign of
incorporation in Table 1.
(B) If an obligor has any exposure with an
external rating based on a short-term rating
that corresponds to a risk weight of 150
percent under Table 5, a [BANK] must assign
a 150 percent risk weight to a corporate
exposure to that obligor with no external
rating and that ranks pari passu with or is
subordinated to the externally rated
exposure.
TABLE 4.—CORPORATE EXPOSURES: LONG-TERM CREDIT RATING
Applicable external or applicable inferred rating of the corporate exposure
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Lowest investment grade rating ....................................................................................................
One category below investment grade .........................................................................................
Two categories below investment grade ......................................................................................
Three categories or more below investment grade ......................................................................
No applicable rating ......................................................................................................................
AAA ..........................................
AA ............................................
A ..............................................
BBB ..........................................
BB ............................................
B ..............................................
CCC .........................................
N/A ...........................................
Risk weight
(in percent)
20
20
50
100
100
150
150
100
TABLE 5.—CORPORATE EXPOSURES: SHORT-TERM CREDIT RATING
Example
Highest investment grade rating ...................................................................................................
Second-highest investment grade rating ......................................................................................
Third-highest investment grade rating ..........................................................................................
Below investment grade ................................................................................................................
No applicable external rating ........................................................................................................
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external rating of the corporate exposure
A–1/P–1 ...................................
A–2/P–2 ...................................
A–3/P–3 ...................................
B, C and non-prime .................
N/A ...........................................
(f) Regulatory retail exposures. A [BANK]
must assign a 75 percent risk weight to a
regulatory retail exposure.
(g) Residential mortgage exposures. (1)
First-lien residential mortgage exposures. (i)
A [BANK] must assign the applicable risk
weight in Table 6, using the loan-to-value
ratio (LTV ratio) as described in paragraph
(g)(3) of this section, to a first-lien residential
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mortgage exposure that is secured by
property that is owner-occupied or rented, is
prudently underwritten, is not 90 days or
more past due, and is not on nonaccrual. A
first-lien residential mortgage exposure that
has been restructured may receive a risk
weight lower than 100 percent only if the
[BANK] updates the LTV ratio at the time of
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Risk weight
(in percent)
20
50
100
150
100
restructuring as provided under paragraph
(g)(3) of this section.
(ii) If a first-lien residential mortgage
exposure does not satisfy these requirements,
the [BANK] must assign a 100 percent risk
weight to the exposure if the LTV ratio is 90
percent or less, and must assign a 150
percent risk weight if the LTV ratio is greater
than 90 percent.
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TABLE 6.—RISK WEIGHTS FOR FIRSTLIEN RESIDENTIAL MORTGAGE EXPOSURES
Loan-to-value ratio
(in percent)
Risk weight
(in percent)
Less than or equal to 60 ......
Greater than 60 and less
than or equal to 80 ...........
Greater than 80 and less
than or equal to 85 ...........
Greater than 85 and less
than or equal to 90 ...........
Greater than 90 and less
than or equal to 95 ...........
Greater than 95 ....................
20
35
50
75
100
150
(2) Junior-lien residential mortgage
exposures. (i) A [BANK] must assign the
applicable risk weight in Table 7, using the
LTV ratio described in paragraph (g)(3) of
this section, to a junior-lien residential
mortgage exposure that is not 90 days or
more past due or on nonaccrual.
(ii) If a junior-lien residential mortgage
exposure is 90 days or more past due or on
nonaccrual, a [BANK] must assign a 150
percent risk weight to the exposure.
TABLE 7.—RISK WEIGHTS FOR JUNIOR-LIEN RESIDENTIAL MORTGAGE
EXPOSURES
Loan-to-value ratio
(in percent)
Risk weight
(in percent)
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Less than or equal to 60 ......
Greater than 60 and less
than or equal to 90 ...........
Greater than 90 ....................
75
100
150
(3) LTV ratio calculation. To determine the
appropriate risk weight for a residential
mortgage exposure under this paragraph (g),
a [BANK] must calculate the LTV ratio (that
is, the loan amount of the exposure divided
by the value of the property) as described in
this paragraph. A [BANK] must calculate a
separate LTV ratio for the funded and
unfunded portions of a residential mortgage
exposure and must assign a risk weight to the
exposure amount of each portion according
to its respective LTV ratio.
(i) Loan amount for calculating the LTV
ratio of the funded portion of a residential
mortgage exposure.
(A) First-lien residential mortgage
exposure. The loan amount of the funded
portion of a first-lien residential mortgage
exposure is the principal amount of the
exposure.
(B) Junior-lien residential mortgage
exposure. The loan amount of the funded
portion of a junior-lien residential mortgage
exposure is the principal amount of the
exposure plus the principal amounts of all
senior exposures secured by the same
residential property on the date of origination
of the junior-lien residential mortgage
exposure plus the unfunded portion of the
maximum contractual amount of any senior
exposure(s) secured by the same residential
property.
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(ii) Loan amount for calculating the LTV
ratio of the unfunded portion of a residential
mortgage exposure. The loan amount of the
unfunded portion of a residential mortgage
exposure is:
(A) The amount calculated under
paragraph (g)(3)(i) of this section; plus
(B) The unfunded portion of the maximum
contractual amount of the exposure.
(iii) PMI. A [BANK] may reduce the loan
amount in the LTV ratio up to the amount
covered by loan-level private mortgage
insurance (PMI). The loan-level PMI must
protect the [BANK] in the event of borrower
default up to a predetermined amount of the
residential mortgage exposure, and may not
have a pool-level cap that would effectively
reduce coverage below the predetermined
amount of the exposure. Loan-level PMI must
be provided by a regulated mortgage
insurance company that is not an affiliate of
the [BANK], and that:
(A) Has issued long-term senior debt
(without credit enhancement) that has an
external rating that is in at least the thirdhighest investment grade rating category; or
(B) Has a claims-paying rating that is in at
least the third-highest investment grade
rating category.
(iv) Value. (A) The value of the property is
the lesser of the actual acquisition cost (for
a purchase transaction) or the estimate of the
property’s value at the origination of the loan
or, at the [BANK]’s option, at the time of
restructuring.
(B) A [BANK] must base all estimates of a
property’s value on an appraisal or
evaluation of the property that satisfies
subpart C of 12 CFR part 34 (national banks);
subpart E of 12 CFR part 208 (state member
banks); 12 CFR part 323 (state nonmember
banks); and 12 CFR part 564 (savings
associations).
(h) Pre-sold residential construction loans.
A [BANK] must assign a 50 percent risk
weight to a pre-sold construction loan unless
the purchase contract is cancelled. A [BANK]
must assign a 100 percent risk weight to such
loan if the purchase contract is cancelled.
(i) Statutory multifamily mortgages. A
[BANK] must assign a 50 percent risk weight
to a statutory multifamily mortgage.
(j) Past due exposures. Except for a
residential mortgage exposure, if an exposure
is 90 days or more past due or on nonaccrual:
(1) A [BANK] must assign a 150 percent
risk weight to the portion of the exposure
that does not have a guarantee or that is
unsecured.
(2) A [BANK] may assign a risk weight to
the collateralized portion of the exposure
based on the risk weight of the collateral
under this section if the collateral meets the
requirements of paragraph (b)(1) of section 37
of this appendix.
(3) A [BANK] may assign a risk weight to
the guaranteed portion of the exposure based
on the risk weight that would apply under
section 36 of this appendix if the guarantee
or credit derivative meets the requirements of
that section.
(k) Other assets. (1) A [BANK] may assign
a zero percent risk weight to cash owned and
held in all offices of the [BANK] or in transit;
to gold bullion held in the [BANK]’s own
vaults or held in another depository
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institution’s vaults on an allocated basis, to
the extent the gold bullion assets are offset
by gold bullion liabilities; and to derivative
contracts that are publicly traded on an
exchange that requires the daily receipt and
payment of cash-variation margin.
(2) A [BANK] may assign a 20 percent risk
weight to cash items in the process of
collection.
(3) A [BANK] must apply a 100 percent
risk weight to all assets not specifically
assigned a different risk weight under this
appendix (other than exposures that are
deducted from tier 1 or tier 2 capital).
Section 34. Off-Balance Sheet Exposures
(a) General. (1) A [BANK] must calculate
the exposure amount of an off-balance sheet
exposure using the credit conversion factors
(CCFs) in paragraph (b) of this section.
(2) Where a [BANK] commits to provide a
commitment, the [BANK] may apply the
lower of the two applicable CCFs.
(3) Where a [BANK] provides a
commitment structured as a syndication or
participation, the [BANK] is only required to
calculate the exposure amount for its pro rata
share of the commitment.
(b) Credit conversion factors. (1) Zero
percent CCF. A [BANK] must apply a zero
percent CCF to the unused portion of
commitments that are unconditionally
cancelable.
(2) 20 percent CCF. A [BANK] must apply
a 20 percent CCF to the following offbalance-sheet exposures:
(i) Commitments with an original maturity
of one year or less that are not
unconditionally cancelable.
(ii) Self-liquidating, trade-related
contingent items that arise from the
movement of goods, with an original
maturity of one year or less.
(3) 50 percent CCF. A [BANK] must apply
a 50 percent CCF to the following offbalance-sheet exposures:
(i) Commitments with an original maturity
of more than one year that are not
unconditionally cancelable by the [BANK].
(ii) Transaction-related contingent items,
including performance bonds, bid bonds,
warranties, and performance standby letters
of credit.
(4) 100 percent CCF. A [BANK] must apply
a 100 percent CCF to the following offbalance-sheet items and other similar
transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance
sheet component of which equals the sum of
the current market values of all positions the
[BANK] has sold subject to repurchase);
(iii) Off-balance sheet securities lending
transactions (the off-balance sheet
component of which equals the sum of the
current market values of all positions the
[BANK] has lent under the transaction);
(iv) Off-balance sheet securities borrowing
transactions (the off-balance sheet
component of which equals the sum of the
current market values of all non-cash
positions the [BANK] has posted as collateral
under the transaction);
(v) Financial standby letters of credit; and
(vi) Forward agreements. Forward
agreements are legally binding contractual
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obligations to purchase assets with certain
drawdown at a specified future date. Such
obligations do not include commitments to
make residential mortgage loans or forward
foreign exchange contracts.
Section 35. OTC Derivative Contracts
A [BANK] must calculate the exposure
amount of an OTC derivative contract under
this section.
(a) A [BANK] must determine the exposure
amount for an OTC derivative contract that
is not subject to a qualifying master netting
agreement using the single OTC derivative
contract calculation in paragraph (c) of this
section.
(b) A [BANK] must determine the exposure
amount for multiple OTC derivative contracts
that are subject to a qualifying master netting
agreement using the multiple OTC derivative
contracts calculation in paragraph (d) of this
section.
(c) Single OTC derivative contract. Except
as modified by paragraph (e) of this section,
the exposure amount for a single OTC
derivative contract that is not subject to a
qualifying master netting agreement is equal
to the sum of the [BANK]’s current credit
exposure and potential future credit exposure
(PFE) on the derivative contract.
(1) Current credit exposure. The current
credit exposure for a single OTC derivative
contract is the greater of the mark-to-market
value of the derivative contract or zero.
(2) PFE. The PFE for a single OTC
derivative contract, including an OTC
derivative contract with a negative mark-tomarket value, is calculated by multiplying
the notional principal amount of the
derivative contract by the appropriate
conversion factor in Table 8. For purposes of
calculating either the PFE under this
paragraph or the gross PFE under paragraph
(d) of this section for exchange rate contracts
and other similar contracts in which the
notional principal amount is equivalent to
the cash flows, notional principal amount is
the net receipts to each party falling due on
each value date in each currency. For any
OTC derivative contract that does not fall
within one of the specified categories in
Table 8, the PFE must be calculated using the
appropriate ‘‘other’’ conversion factor. A
[BANK] must use an OTC derivative
contract’s effective notional principal amount
(that is, its apparent or stated notional
principal amount multiplied by any
multiplier in the OTC derivative contract)
rather than its apparent or stated notional
principal amount in calculating PFE. PFE of
the protection provider of a credit derivative
is capped at the net present value of the
amount of unpaid premiums.
TABLE 8.—CONVERSION FACTOR MATRIX FOR OTC DERIVATIVE CONTRACTS 1
Remaining maturity 2
Foreign
exchange rate
and gold
Credit (investment-grade
reference
obligor) 3
Credit (noninvestmentgrade reference obligor)
0.00
0.01
0.05
0.10
0.06
0.07
0.10
0.005
0.05
0.05
0.10
0.08
0.07
0.12
0.015
0.075
0.05
0.10
0.10
0.08
0.15
Interest rate
One year or less ......
Greater than one
year and less than
or equal to five
years .....................
Greater than five
years .....................
Precious
metals (except
gold)
Equity
Other
1 For
mstockstill on PROD1PC66 with PROPOSALS2
an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments
in the derivative contract.
2 For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so
that the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
3 A [BANK] must use the column labeled ‘‘Credit (investment-grade reference obligor)’’ for a credit derivative whose reference obligor has an
outstanding unsecured debt security that has an applicable external rating based on a long-term rating of at least investment grade without credit
enhancement. A [BANK] must use the column labeled ‘‘Credit (non-investment grade reference obligor)’’ for all other credit derivatives.
(d) Multiple OTC derivative contracts
subject to a qualifying master netting
agreement. Except as modified by paragraph
(e) of this section, the exposure amount for
multiple OTC derivative contracts subject to
a qualifying master netting agreement is
equal to the sum of the net current credit
exposure and the adjusted sum of the PFE for
all OTC derivative contracts subject to the
qualifying master netting agreement.
(1) Net current credit exposure. The net
current credit exposure is the greater of the
net sum of all positive and negative mark-tomarket values of the individual OTC
derivative contracts subject to the qualifying
master netting agreement or zero.
(2) Adjusted sum of the PFE. The adjusted
sum of the PFE, Anet, is calculated as
Anet = (0.4 × Agross) + (0.6 × NGR × Agross),
Where:
(i) Agross = the gross PFE (that is, the sum
of the PFE amounts (as determined
under paragraph (c)(2) of this section) for
each individual OTC derivative contract
subject to the qualifying master netting
agreement); and
(ii) NGR = the net to gross ratio (that is, the
ratio of the net current credit exposure
to the gross current credit exposure). In
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calculating the NGR, the gross current
credit exposure equals the sum of the
positive current credit exposures (as
determined under paragraph (c)(1) of this
section) of all individual OTC derivative
contracts subject to the qualifying master
netting agreement.
(e) Collateralized OTC derivative contracts.
A [BANK] may recognize the credit risk
mitigation benefits of financial collateral that
secures an OTC derivative contract or
multiple OTC derivatives subject to a
qualifying master netting agreement (netting
set) by using the simple approach in
paragraph (b) of section 37 of this appendix.
Alternatively, a [BANK] may recognize the
credit risk mitigation benefits of financial
collateral that secures such a contract or
netting set if the financial collateral is
marked-to-market on a daily basis and
subject to a daily margin maintenance
requirement by applying a risk weight to the
exposure as if it is uncollateralized and
adjusting the exposure amount calculated
under paragraph (c) or (d) of this section
using the collateral haircut approach in
paragraph (c) of section 37 of this appendix.
The [BANK] must substitute the exposure
amount calculated under paragraph (c) or (d)
of this section for SE in the equation in
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paragraph (c)(3) of section 37 and must use
a 10-business-day minimum holding period
(TM = 10).
(f) Counterparty credit risk for credit
derivatives. (1) A [BANK] that purchases a
credit derivative that is recognized under
section 36 of this appendix as a credit risk
mitigant for an exposure that is not a covered
position under [the market risk rule] is not
required to compute a separate counterparty
credit risk capital requirement under section
31 of this appendix provided that the [BANK]
does so consistently for all such credit
derivatives and either includes all or
excludes all such credit derivatives that are
subject to a qualifying master netting
agreement from any measure used to
determine counterparty credit risk exposure
to all relevant counterparties for risk-based
capital purposes.
(2) A [BANK] that is the protection
provider in a credit derivative must treat the
credit derivative as an exposure to the
reference obligor and is not required to
compute a counterparty credit risk capital
requirement for the credit derivative under
section 31 of this appendix provided that it
does so consistently for all such credit
derivatives and either includes all or
excludes all such credit derivatives that are
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subject to a qualifying master netting
agreement from any measure used to
determine counterparty credit risk exposure
to all relevant counterparties for risk-based
capital purposes (unless the [BANK] is
treating the credit derivative as a covered
position under [the market risk rule], in
which case the [BANK] must compute a
supplemental counterparty credit risk capital
requirement under this section).
(g) Counterparty credit risk for equity
derivatives. (1) A [BANK] must treat an
equity derivative contract as an equity
exposure and compute a risk-weighted asset
amount for the equity derivative contract
under part V of this appendix (unless the
[BANK] is treating the contract as a covered
position under [the market risk rule]).
(2) In addition, the [BANK] must also
calculate a risk-based capital requirement for
the counterparty credit risk of an equity
derivative contract under this part if the
[BANK] is treating the contract as a covered
position under [the market risk rule].
(3) If the [BANK] risk weights the contract
under the Simple Risk-Weight Approach
(SRWA) in section 52 of this appendix, a
[BANK] may choose not to hold risk-based
capital against the counterparty credit risk of
the equity derivative contract, as long as it
does so for all such contracts. Where the
equity derivative contracts are subject to a
qualified master netting agreement, a [BANK]
using the SRWA must either include all or
exclude all of the contracts from any measure
used to determine counterparty credit risk
exposure.
Section 36. Guarantees and Credit
Derivatives: Substitution Treatment
(a) Scope. (1) General. A [BANK] may
recognize the credit risk mitigation benefits
of an eligible guarantee or eligible credit
derivative by substituting the risk weight
associated with a protection provider for the
risk weight assigned to an exposure, as
provided under this section.
(2) This section applies to exposures for
which:
(i) Credit risk is fully covered by an eligible
guarantee or eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis
(that is, on a basis in which the [BANK] and
the protection provider share losses
proportionately) by an eligible guarantee or
eligible credit derivative.
(3) Exposures on which there is a tranching
of credit risk (reflecting at least two different
levels of seniority) generally are
securitization exposures subject to the
securitization framework in part IV of this
appendix.
(4) If multiple eligible guarantees or
eligible credit derivatives cover a single
exposure described in paragraph (a)(2) of this
section, a [BANK] may treat the hedged
exposure as multiple separate exposures each
covered by a single eligible guarantee or
eligible credit derivative and may calculate a
separate risk-weighted asset amount for each
separate exposure as described in paragraph
(c) of this section.
(5) If a single eligible guarantee or eligible
credit derivative covers multiple hedged
exposures described in paragraph (a)(2) of
this section, a [BANK] must treat each
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hedged exposure as covered by a separate
eligible guarantee or eligible credit derivative
and must calculate a separate risk-weighted
asset amount for each exposure as described
in paragraph (c) of this section.
(6) If a [BANK] calculates the risk-weighted
asset amount under section 31 for an
exposure whose applicable external or
applicable inferred rating reflects the benefits
of a credit risk mitigant provided to the
exposure, the [BANK] may not use the credit
risk mitigation rules in this section to further
reduce the risk-weighted asset amount for the
exposure to reflect that credit risk mitigant.
(b) Rules of recognition. (1) A [BANK] may
only recognize the credit risk mitigation
benefits of eligible guarantees and eligible
credit derivatives.
(2) A [BANK] may only recognize the
credit risk mitigation benefits of an eligible
credit derivative to hedge an exposure that is
different from the credit derivative’s
reference exposure used for determining the
derivative’s cash settlement value,
deliverable obligation, or occurrence of a
credit event if:
(i) The reference exposure ranks pari passu
with or is subordinated to the hedged
exposure; and
(ii) The reference exposure and the hedged
exposure are to the same legal entity, and
legally enforceable cross-default or crossacceleration clauses are in place to assure
payments under the credit derivative are
triggered when the obligor fails to pay under
the terms of the hedged exposure.
(c) Substitution approach. (1) Full
coverage. If an eligible guarantee or eligible
credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the
protection amount (P) of the guarantee or
credit derivative is greater than or equal to
the exposure amount of the hedged exposure,
a [BANK] may recognize the guarantee or
credit derivative in determining the riskweighted asset amount for the hedged
exposure by substituting the risk weight
applicable to the guarantee or credit
derivative under section 33 for the risk
weight assigned to the exposure. If the
[BANK] determines that full substitution
under this paragraph leads to an
inappropriate degree of risk mitigation, the
[BANK] may substitute a higher risk weight
than that applicable to the guarantee or credit
derivative.
(2) Partial coverage. If an eligible guarantee
or eligible credit derivative meets the
conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the
guarantee or credit derivative is less than the
exposure amount of the hedged exposure, the
[BANK] must treat the hedged exposure as
two separate exposures (protected and
unprotected) in order to recognize the credit
risk mitigation benefit of the guarantee or
credit derivative.
(i) The [BANK] may calculate the riskweighted asset amount for the protected
exposure under section 31 of this appendix,
where the applicable risk weight is the risk
weight applicable to the guarantee or credit
derivative. If the [BANK] determines that full
substitution under this paragraph leads to an
inappropriate degree of risk mitigation, the
[BANK] may use a higher risk weight than
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that applicable to the guarantee or credit
derivative.
(ii) The [BANK] must calculate the riskweighted asset amount for the unprotected
exposure under section 31 of this appendix,
where the applicable risk weight is that of the
hedged exposure.
(iii) The treatment in this paragraph (c)(2)
is applicable when the credit risk of an
exposure is covered on a partial pro rata basis
and may be applicable when an adjustment
is made to the effective notional amount of
the guarantee or credit derivative under
paragraph (d), (e), or (f) of this section.
(d) Maturity mismatch adjustment. (1) A
[BANK] that recognizes an eligible guarantee
or eligible credit derivative in determining
the risk-weighted asset amount for a hedged
exposure must adjust the effective notional
amount of the credit risk mitigant to reflect
any maturity mismatch between the hedged
exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the
residual maturity of a credit risk mitigant is
less than that of the hedged exposure(s).
(3) The residual maturity of a hedged
exposure is the longest possible remaining
time before the obligor is scheduled to fulfil
its obligation on the exposure. If a credit risk
mitigant has embedded options that may
reduce its term, the [BANK] (protection
purchaser) must use the shortest possible
residual maturity for the credit risk mitigant.
If a call is at the discretion of the protection
provider, the residual maturity of the credit
risk mitigant is at the first call date. If the call
is at the discretion of the [BANK] (protection
purchaser), but the terms of the arrangement
at origination of the credit risk mitigant
contain a positive incentive for the [BANK]
to call the transaction before contractual
maturity, the remaining time to the first call
date is the residual maturity of the credit risk
mitigant. For example, where there is a stepup in cost in conjunction with a call feature
or where the effective cost of protection
increases over time even if credit quality
remains the same or improves, the residual
maturity of the credit risk mitigant will be
the remaining time to the first call.
(4) A credit risk mitigant with a maturity
mismatch may be recognized only if its
original maturity is greater than or equal to
one year and its residual maturity is greater
than three months.
(5) When a maturity mismatch exists, the
[BANK] must apply the following adjustment
to reduce the effective notional amount of the
credit risk mitigant:
Pm = E × (t¥0.25)/(T¥0.25),
where:
(i) Pm = effective notional amount of the
credit risk mitigant, adjusted for maturity
mismatch;
(ii) E = effective notional amount of the credit
risk mitigant;
(iii) t = the lesser of T or the residual
maturity of the credit risk mitigant,
expressed in years; and
(iv) T = the lesser of five or the residual
maturity of the hedged exposure,
expressed in years.
(e) Adjustment for credit derivatives
without restructuring as a credit event. If a
[BANK] recognizes an eligible credit
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29JYP2
derivative that does not include as a credit
event a restructuring of the hedged exposure
involving forgiveness or postponement of
principal, interest, or fees that results in a
credit loss event (that is, a charge-off, specific
provision, or other similar debit to the profit
and loss account), the [BANK] must apply
the following adjustment to reduce the
effective notional amount of the credit
derivative:
Pr = Pm × 0.60,
where:
(1) Pr = effective notional amount of the
credit risk mitigant, adjusted for lack of
restructuring event (and maturity
mismatch, if applicable); and
(2) Pm = effective notional amount of the
credit risk mitigant (adjusted for
maturity mismatch, if applicable).
(f) Currency mismatch adjustment. (1) If a
[BANK] recognizes an eligible guarantee or
eligible credit derivative that is denominated
in a currency different from that in which the
hedged exposure is denominated, the
[BANK] must apply the following formula to
the effective notional amount of the
guarantee or credit derivative:
Pc = Pr × (1¥HFX),
where:
(i) Pc = effective notional amount of the credit
risk mitigant, adjusted for currency
mismatch (and maturity mismatch and
lack of restructuring event, if applicable);
(ii) Pr = effective notional amount of the
credit risk mitigant (adjusted for
maturity mismatch and lack of
restructuring event, if applicable); and
(iii) HFX = haircut appropriate for the
currency mismatch between the credit
risk mitigant and the hedged exposure.
(2) A [BANK] must set HFX equal to eight
percent unless it qualifies for the use of and
uses its own internal estimates of foreign
exchange volatility based on a 10-businessday holding period and daily marking-tomarket and remargining. A [BANK] qualifies
for the use of its own internal estimates of
foreign exchange volatility if it qualifies for:
(i) The own-estimates haircuts in
paragraph (c)(5) of section 37; or
(ii) The simple VaR methodology in
paragraph (d) of section 37.
(3) A [BANK] must adjust HFX calculated
in paragraph (f)(2) of this section upward if
the [BANK] revalues the guarantee or credit
derivative less frequently than once every 10
business days using the following square root
of time formula:
mstockstill on PROD1PC66 with PROPOSALS2
HM = HN
TM
,
TN
where:
(i) TM equals the greater of 10 or the number
of days between revaluation;
(ii) TN equals the holding period used by the
[BANK] to derive HN; and
(iii) HN equals the haircut based on the
holding period TN.
Section 37. Collateralized Transactions
(a) General. (1) This section provides three
approaches that a [BANK] may use to
recognize the risk-mitigating effects of
financial collateral:
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(i) The simple approach. A [BANK] may
use the simple approach for any exposure.
(ii) The collateral haircut approach. A
[BANK] may use the collateral haircut
approach for repo-style transactions, eligible
margin loans, collateralized OTC derivative
contracts, and single-product netting sets of
such transactions.
(iii) The simple VaR methodology. A
[BANK] may use the simple VaR
methodology for single-product netting sets
of repo-style transactions and eligible margin
loans.
(2) A [BANK] may use any approach
described in this section that is valid for a
particular type of exposure or transaction;
however, it must use the same approach for
similar exposures or transactions.
(3) If a [BANK] calculates its risk-weighted
asset amount under section 31 for an
exposure whose applicable external or
applicable inferred rating reflects the benefits
of financial collateral to the exposure, the
[BANK] may not use the credit risk
mitigation rules in this section to further
reduce the risk-weighted asset amount for the
exposure to reflect that financial collateral.
(b) The simple approach. (1) General
requirements. (i) A [BANK] may recognize
the credit risk mitigation benefits of financial
collateral that secures any exposure or any
collateral that secures a repo-style transaction
that is included in the [BANK]’s VaR-based
measure under [the market risk rule].
(ii) To qualify for the simple approach the
collateral must meet the following
requirements:
(A) The collateral must be subject to a
collateral agreement for at least the life of the
exposure;
(B) The collateral must be revalued at least
every six months; and
(C) The collateral (other than gold) and the
exposure must be denominated in the same
currency.
(2) Risk weight substitution. (i) A [BANK]
may risk weight the portion of an exposure
that is secured by the market value of
collateral (that meets the requirements of
paragraph (b)(1) of this section) based on the
risk weight assigned to the collateral under
this appendix. For repurchase agreements,
reverse repurchase agreements, and securities
lending and borrowing transactions, the
collateral is the instruments, gold, and cash
the [BANK] has borrowed, purchased subject
to resale, or taken as collateral from the
counterparty under the transaction. Except as
provided in paragraph (b)(3) of this section,
the risk weight assigned to the collateralized
portion of the exposure may not be less than
20 percent.
(ii) A [BANK] must risk weight the
unsecured portion of the exposure based on
the risk weight assigned to the exposure
under this appendix.
(3) Exceptions to the 20 percent risk-weight
floor and other requirements.
Notwithstanding paragraph (b)(2)(i) of this
section:
(i) A [BANK] may assign a zero percent risk
weight to an exposure to an OTC derivative
contract that is marked-to-market on a daily
basis and subject to a daily margin
maintenance requirement, to the extent the
contract is collateralized by cash on deposit.
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44043
(ii) A [BANK] may assign a 10 percent risk
weight to an exposure to an OTC derivative
contract that is marked-to-market on a daily
basis and subject to a daily margin
maintenance requirement, to the extent that
the contract is collateralized by a sovereign
security or a PSE security that qualifies for
a zero percent risk weight under section 33
of this appendix.
(iii) A [BANK] may assign a zero percent
risk weight to the collateralized portion of an
exposure where:
(A) The financial collateral is cash on
deposit; or
(B) The financial collateral is a sovereign
security or a PSE security, the security
qualifies for a zero percent risk weight under
section 33, and the [BANK] has discounted
the market value of the collateral by 20
percent.
(iv) If a [BANK] recognizes collateral in the
form of a conforming residential mortgage,
the [BANK] must risk weight the portion of
the exposure that is secured by the
conforming residential mortgage at 50
percent.
(c) Collateral haircut approach. (1)
General. A [BANK] may recognize the credit
risk mitigation benefits of financial collateral
that secures an eligible margin loan, repostyle transaction, collateralized OTC
derivative contract, or single-product netting
set of such transactions, and of any collateral
that secures a repo-style transaction that is
included in the [BANK]’s VaR-based measure
under [the market risk rule] by using the
collateral haircut approach in this paragraph
(c).
(2) Approaches for the calculation of
collateral haircuts. There are two ways to
calculate collateral haircuts: the standard
supervisory haircuts approach and the own
internal estimates for haircuts approach. For
exposures other than repo-style transactions
included in the [BANK]’s VaR-based measure
under the [the market risk rule], a [BANK]
must use the standard supervisory haircut
approach with a minimum 10-business-day
holding period if it chooses to recognize in
the exposure amount the benefits of collateral
in the form of a conforming residential
mortgage.
(3) Exposure amount equation. Under
either collateral haircut approach, a [BANK]
must determine the exposure amount for an
eligible margin loan, repo-style transaction,
collateralized OTC derivative contract, or a
single-product netting set of such
transactions by setting the exposure amount
equal to max {0, [(SE¥SC) + S(Es × Hs) +
S(Efx × Hfx)]}, where:
(i)(A) For eligible margin loans and repostyle transactions, SE equals the value of the
exposure (the sum of the current market
values of all instruments, gold, and cash the
[BANK] has lent, sold subject to repurchase,
or posted as collateral to the counterparty
under the transaction (or netting set)); and
(B) For collateralized OTC derivative
contracts and netting sets thereof, SE equals
the exposure amount of the OTC derivative
contract (or netting set) calculated under
paragraph (c) or (d) of section 35 of this
appendix;
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(ii) SC equals the value of the collateral
(the sum of the current market values of all
instruments, gold and cash the [BANK] has
borrowed, purchased subject to resale, or
taken as collateral from the counterparty
under the transaction (or netting set));
(iii) Es equals the absolute value of the net
position in a given instrument or in gold
(where the net position in a given instrument
or in gold equals the sum of the current
market values of the instrument or gold the
[BANK] has lent, sold subject to repurchase,
or posted as collateral to the counterparty
minus the sum of the current market values
of that same instrument or gold the [BANK]
has borrowed, purchased subject to resale, or
taken as collateral from the counterparty);
(iv) Hs equals the market price volatility
haircut appropriate to the instrument or gold
referenced in Es;
(v) Efx equals the absolute value of the net
position of instruments and cash in a
currency that is different from the settlement
currency (where the net position in a given
currency equals the sum of the current
market values of any instruments or cash in
the currency the [BANK] has lent, sold
subject to repurchase, or posted as collateral
to the counterparty minus the sum of the
current market values of any instruments or
cash in the currency the [BANK] has
borrowed, purchased subject to resale, or
taken as collateral from the counterparty);
and
(vi) Hfx equals the haircut appropriate to
the mismatch between the currency
referenced in Efx and the settlement
currency.
(4) Standard supervisory haircuts. Under
the standard supervisory haircuts approach:
(i) A [BANK] must use the haircuts for
market price volatility (Hs) in Table 9, as
adjusted in certain circumstances as
provided under in paragraph (c)(4)(iii) and
(iv) of this section:
TABLE 9.—STANDARD SUPERVISORY MARKET PRICE VOLATILITY HAIRCUTS 1
Applicable external rating grade category for debt securities
Residual maturity for debt
securities
Sovereign
entities 2
Two highest investment-grade rating categories for long-term ratings/
highest investment-grade rating category for short-term ratings.
≤ 1 year ..........................................
> 1 year, ≤ 5 years .........................
> 5 years ........................................
0.005
0.02
0.04
0.01
0.04
0.08
Two lowest investment-grade rating categories for both short- and longterm ratings.
≤ 1 year ..........................................
> 1 year, ≤ 5 years .........................
> 5 years ........................................
0.01
0.03
0.06
0.02
0.06
0.12
One rating category below investment grade ..........................................
All ....................................................
0.15
0.25
Other issuers
Main index equities (including convertible bonds) and gold .................................................................................
0.15
Other publicly traded equities (including convertible bonds), conforming residential mortgages, and nonfinancial collateral.
0.25
Mutual funds ..........................................................................................................................................................
Highest haircut applicable to any
security in which the fund can
invest.
Cash on deposit with the [BANK] (including a certificate of deposit issued by the [BANK]) ...............................
0
1 The
(ii) For currency mismatches, a [BANK]
must use a haircut for foreign exchange rate
volatility (Hfx) of 8.0 percent, as adjusted in
certain circumstances as provided under
paragraph (c)(4)(iii) and (iv) of this section.
(iii) For repo-style transactions, a [BANK]
may multiply the standard supervisory
haircuts provided in paragraphs (c)(4)(i) and
(ii) of this section by the square root of 1⁄2
(which equals 0.707107).
(iv) A [BANK] must adjust the standard
supervisory haircuts provided in paragraphs
(c)(4)(i) and (ii) of this section upward on the
basis of a holding period longer than 10
business days (for eligible margin loans and
OTC derivative contracts) or five business
days (for repo-style transactions) where and
as appropriate to take into account the
illiquidity of an instrument.
(5) Own internal estimates for haircuts.
With the prior written approval of the
[agency], a [BANK] may calculate haircuts
(Hs and Hfx) using its own internal estimates
of the volatilities of market prices and foreign
exchange rates.
(i) To receive [agency] approval to use its
own internal estimates, a [BANK] must
satisfy the following minimum quantitative
standards:
(A) A [BANK] must use a 99th percentile
one-tailed confidence interval.
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(B) The minimum holding period for a
repo-style transaction is five business days
and for an eligible margin loan or OTC
derivative contract is 10 business days. When
a [BANK] calculates an own-estimates
haircut on a TN-day holding period, which is
different from the minimum holding period
for the transaction type, the applicable
haircut (HM) is calculated using the following
square root of time formula:
HM = HN
TM
,
TN
where:
(1) TM equals 5 for repo-style transactions
and 10 for eligible margin loans and OTC
derivative contracts;
(2) TN equals the holding period used by the
[BANK] to derive HN; and
(3) HN equals the haircut based on the
holding period TN.
(C) A [BANK] must adjust holding periods
upward where and as appropriate to take into
account the illiquidity of an instrument.
(D) The historical observation period must
be at least one year.
(E) A [BANK] must update its data sets and
recompute haircuts no less frequently than
quarterly and must also reassess data sets and
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haircuts whenever market prices change
materially.
(ii) With respect to debt securities that
have an applicable external rating of
investment grade, a [BANK] may calculate
haircuts for categories of securities. For a
category of securities, the [BANK] must
calculate the haircut on the basis of internal
volatility estimates for securities in that
category that are representative of the
securities in that category that the [BANK]
has lent, sold subject to repurchase, posted
as collateral, borrowed, purchased subject to
resale, or taken as collateral. In determining
relevant categories, the [BANK] must at a
minimum take into account:
(A) The type of issuer of the security;
(B) The applicable external rating of the
security;
(C) The maturity of the security; and
(D) The interest rate sensitivity of the
security.
(iii) With respect to debt securities that
have an applicable external rating of below
investment grade and equity securities, a
[BANK] must calculate a separate haircut for
each individual security.
(iv) Where an exposure or collateral
(whether in the form of cash or securities) is
denominated in a currency that differs from
the settlement currency, the [BANK] must
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market price volatility haircuts in Table 9 are based on a 10-business-day holding period.
2 This column includes the haircuts for MDBs and foreign PSEs that receive a zero percent risk weight under section 33 of this appendix.
44045
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calculate a separate currency mismatch
haircut for its net position in each
mismatched currency based on estimated
volatilities of foreign exchange rates between
the mismatched currency and the settlement
currency.
(v) A [BANK]’s own estimates of market
price and foreign exchange rate volatilities
may not take into account the correlations
among securities and foreign exchange rates
on either the exposure or collateral side of a
transaction (or netting set) or the correlations
among securities and foreign exchange rates
between the exposure and collateral sides of
the transaction (or netting set).
(d) Simple VaR methodology. (1) With the
prior written approval of the [agency], a
[BANK] may estimate the exposure amount
for a single-product netting set of repo-styletransactions or eligible margin loans using a
VaR model that meets the requirements in
paragraph (d)(3) of this section. However, a
[BANK] may not use the VaR model
described below to recognize in the exposure
amount the benefits of collateral in the form
of a conforming residential mortgage (other
than for repo-style transactions included in
the [BANK]’s VaR-based measure under [the
market risk rule]).
(2) The [BANK] must set the exposure
amount equal to max
{0, [(SE ¥ SC) + PFE]},
where:
(i) SE equals the value of the exposure (the
sum of the current market values of all
instruments, gold, and cash the [BANK]
has lent, sold subject to repurchase, or
posted as collateral to the counterparty
under the netting set);
(ii) SC equals the value of the collateral (the
sum of the current market values of all
instruments, gold, and cash the [BANK]
has borrowed, purchased subject to
resale, or taken as collateral from the
counterparty under the netting set); and
(iii) PFE equals the [BANK]’s empirically
based best estimate of the 99th
percentile, one-tailed confidence interval
for an increase in the value of (SE ¥ SC)
over a five-business-day holding period
for repo-style transactions or over a 10business-day holding period for eligible
margin loans using a minimum one-year
historical observation period of price
data representing the instruments that
the [BANK] has lent, sold subject to
repurchase, posted as collateral,
borrowed, purchased subject to resale, or
taken as collateral.
(3) The [BANK] must validate its VaR
model, including by establishing and
maintaining a rigorous and regular
backtesting regime. For the purposes of this
section, backtesting means a comparison of a
[BANK]’s internal estimates with actual
outcomes during a sample period not used in
model development.
Section 38. Unsettled Transactions
(a) Definitions. For purposes of this
section:
(1) Delivery-versus-payment (DvP)
transaction means a securities or
commodities transaction in which the buyer
is obligated to make payment only if the
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seller has made delivery of the securities or
commodities and the seller is obligated to
deliver the securities or commodities only if
the buyer has made payment.
(2) Payment-versus-payment (PvP)
transaction means a foreign exchange
transaction in which each counterparty is
obligated to make a final transfer of one or
more currencies only if the other
counterparty has made a final transfer of one
or more currencies.
(3) Qualifying central counterparty means
a counterparty (for example, a clearing
house) that:
(i) Facilitates trades between
counterparties in one or more financial
markets by either guaranteeing trades or
novating contracts;
(ii) Requires all participants in its
arrangements to be fully collateralized on a
daily basis; and
(iii) The [BANK] demonstrates to the
satisfaction of the [agency] is in sound
financial condition and is subject to effective
oversight by a national supervisory authority.
(4) Normal settlement period. A transaction
has a normal settlement period if the
contractual settlement period for the
transaction is equal to or less than the market
standard for the instrument underlying the
transaction and equal to or less than five
business days.
(5) Positive current exposure. The positive
current exposure of a [BANK] for a
transaction is the difference between the
transaction value at the agreed settlement
price and the current market price of the
transaction, if the difference results in a
credit exposure of the [BANK] to the
counterparty.
(b) Scope. This section applies to all
transactions involving securities, foreign
exchange instruments, and commodities that
have a risk of delayed settlement or delivery.
This section does not apply to:
(1) Transactions accepted by a qualifying
central counterparty that are subject to daily
marking-to-market and daily receipt and
payment of variation margin;
(2) Repo-style transactions, including
unsettled repo-style transactions;
(3) One-way cash payments on OTC
derivative contracts; or
(4) Transactions with a contractual
settlement period that is longer than the
normal settlement period (which are treated
as OTC derivative contracts as provided in
section 35).
(c) System-wide failures. In the case of a
system-wide failure of a settlement or
clearing system, the [agency] may waive riskbased capital requirements for unsettled and
failed transactions until the situation is
rectified.
(d) Delivery-versus-payment (DvP) and
payment-versus-payment (PvP) transactions.
A [BANK] must hold risk-based capital
against any DvP or PvP transaction with a
normal settlement period if the [BANK]’s
counterparty has not made delivery or
payment within five business days after the
settlement date. The [BANK] must determine
its risk-weighted asset amount for such a
transaction by multiplying the positive
current exposure of the transaction for the
[BANK] by the appropriate risk weight in
Table 10.
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TABLE 10.—RISK WEIGHTS FOR UNSETTLED DVP AND PVP TRANSACTIONS
Number of business days
after contractual settlement
date
From
From
From
46 or
Risk weight to
be applied to
positive
current
exposure
(in percent)
5 to 15 .........................
16 to 30 .......................
31 to 45 .......................
more ............................
100.0
625.0
937.5
1,250.0
(e) Non-DvP/non-PvP (non-delivery-versuspayment/non-payment-versus-payment)
transactions. (1) A [BANK] must hold riskbased capital against any non-DvP/non-PvP
transaction with a normal settlement period
if the [BANK] has delivered cash, securities,
commodities, or currencies to its
counterparty but has not received its
corresponding deliverables by the end of the
same business day. The [BANK] must
continue to hold risk-based capital against
the transaction until the [BANK] has received
its corresponding deliverables.
(2) From the business day after the [BANK]
has made its delivery until five business days
after the counterparty delivery is due, the
[BANK] must calculate the risk-weighted
asset amount for the transaction by treating
the current market value of the deliverables
owed to the [BANK] as an exposure to the
counterparty and using the applicable
counterparty risk weight in section 33 of this
appendix.
(3) If the [BANK] has not received its
deliverables by the fifth business day after
counterparty delivery was due, the [BANK]
must deduct the current market value of the
deliverables owed to the [BANK] 50 percent
from tier 1 capital and 50 percent from tier
2 capital.
(f) Total risk-weighted assets for unsettled
transactions. Total risk-weighted assets for
unsettled transactions is the sum of the riskweighted asset amounts of all DvP, PvP, and
non-DvP/non-PvP transactions.
Part IV. Risk-Weighted Assets for
Securitization Exposures
Section 41. Operational Requirements for
Securitization Exposures
(a) Operational criteria for traditional
securitizations. A [BANK] that transfers
exposures it has originated or purchased to
a securitization SPE or other third party in
connection with a traditional securitization
may exclude the exposures from the
calculation of its risk-weighted assets only if
each condition in this paragraph (a) is
satisfied. A [BANK] that meets these
conditions must hold risk-based capital
against any securitization exposures it retains
in connection with the securitization. A
[BANK] that fails to meet these conditions
must instead hold risk-based capital against
the transferred exposures as if they had not
been securitized and must deduct from tier
1 capital any after-tax gain-on-sale resulting
from the transaction. The conditions are:
(1) The transfer is considered a sale under
GAAP;
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(2) The [BANK] has transferred to one or
more third parties credit risk associated with
the underlying exposures; and
(3) Any clean-up calls relating to the
securitization are eligible clean-up calls.
(b) Operational criteria for synthetic
securitizations. For synthetic securitizations,
a [BANK] may recognize for risk-based
capital purposes the use of a credit risk
mitigant to hedge underlying exposures only
if each condition in this paragraph (b) is
satisfied. A [BANK] that fails to meet these
conditions must instead hold risk-based
capital against the underlying exposures as if
they had not been synthetically securitized.
The conditions are:
(1) The credit risk mitigant is financial
collateral, an eligible credit derivative, or an
eligible guarantee;
(2) The [BANK] transfers credit risk
associated with the underlying exposures to
one or more third parties, and the terms and
conditions in the credit risk mitigants
employed do not include provisions that:
(i) Allow for the termination of the credit
protection due to deterioration in the credit
quality of the underlying exposures;
(ii) Require the [BANK] to alter or replace
the underlying exposures to improve the
credit quality of the pool of underlying
exposures;
(iii) Increase the [BANK]’s cost of credit
protection in response to deterioration in the
credit quality of the underlying exposures;
(iv) Increase the yield payable to parties
other than the [BANK] in response to a
deterioration in the credit quality of the
underlying exposures; or
(v) Provide for increases in a retained first
loss position or credit enhancement provided
by the [BANK] after the inception of the
securitization;
(3) The [BANK] obtains a well-reasoned
opinion from legal counsel that confirms the
enforceability of the credit risk mitigant in all
relevant jurisdictions; and
(4) Any clean-up calls relating to the
securitization are eligible clean-up calls.
Section 42. Risk-Weighted Assets for
Securitization Exposures
(a) Hierarchy of approaches. Except as
provided elsewhere in this section or in
section 41:
(1) A [BANK] must deduct from tier 1
capital any after-tax gain-on-sale resulting
from a securitization and must deduct from
total capital in accordance with paragraph (c)
of this section the portion of any CEIO that
does not constitute after-tax gain-on-sale.
(2) If a securitization exposure does not
require deduction under paragraph (a)(1) of
this section and qualifies for the RatingsBased Approach (RBA) in section 43 of this
appendix, a [BANK] must apply the RBA to
the exposure.
(3) If a securitization exposure does not
require deduction under paragraph (a)(1) of
this section and does not qualify for the RBA,
a [BANK] must apply the treatments in
section 44.
(4) If a securitization exposure is an OTC
derivative contract (other than a credit
derivative) that has a first priority claim on
the cash flows from the underlying exposures
(notwithstanding amounts due under interest
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rate or currency derivative contracts, fees
due, or other similar payments), with
approval of the [agency], a [BANK] may
choose to set the risk-weighted asset amount
of the exposure equal to the amount of the
exposure as determined in paragraph (d) of
this section rather than apply the hierarchy
of approaches described in paragraphs (a)(1)
through (3) of this section.
(b) Total risk-weighted assets for
securitization exposures. A [BANK]’s total
risk-weighted assets for securitization
exposures equals the sum of the riskweighted asset amount for securitization
exposures that the [BANK] risk weights
under section 43, 44, or 45 of this appendix
plus any risk-weighted asset amount
calculated under section 46 of this appendix,
as modified by paragraphs (e) through (k) of
this section.
(c) Deductions. (1) If a [BANK] must
deduct a securitization exposure from total
capital, the [BANK] must take the deduction
50 percent from tier 1 capital and 50 percent
from tier 2 capital. If the amount deductible
from tier 2 capital exceeds the [BANK]’s tier
2 capital, the [BANK] must deduct the excess
from tier 1 capital.
(2) A [BANK] may calculate any deduction
from tier 1 capital and tier 2 capital for a
securitization exposure net of any deferred
tax liabilities associated with the
securitization exposure.
(d) Exposure amount of a securitization
exposure. (1) On-balance sheet securitization
exposures. The exposure amount of an onbalance sheet securitization exposure that is
not a repo-style transaction, eligible margin
loan, or OTC derivative contract (other than
a credit derivative) is:
(i) The [BANK]’s carrying value minus any
unrealized gains and plus any unrealized
losses on the exposure, if the exposure is a
security classified as available-for-sale; or
(ii) The [BANK]’s carrying value, if the
exposure is not a security classified as
available-for-sale.
(2) Off-balance sheet securitization
exposures. (i) The exposure amount of an offbalance sheet securitization exposure that is
not a repo-style transaction or an OTC
derivative contract (other than a credit
derivative) is the notional amount of the
exposure. For an off-balance sheet
securitization exposure to an ABCP program,
such as a liquidity facility, the notional
amount may be reduced to the maximum
potential amount that the [BANK] could be
required to fund given the ABCP program’s
current underlying assets (calculated without
regard to the current credit quality of those
assets).
(ii) A [BANK] must determine the exposure
amount of an eligible ABCP liquidity facility
by multiplying the notional amount of the
exposure by the appropriate CCF:
(A) 20 percent, for an eligible ABCP
liquidity facility with an original maturity of
one year or less that does not qualify for the
RBA.
(B) 50 percent, for an eligible ABCP
liquidity facility with an original maturity of
over one year that does not qualify for the
RBA.
(C) 100 percent, for an eligible ABCP
liquidity facility that qualifies for the RBA.
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(3) Repo-style transactions, eligible margin
loans, and OTC derivative contracts. The
exposure amount of a securitization exposure
that is a repo-style transaction, eligible
margin loan, or OTC derivative contract
(other than a credit derivative) is the
exposure amount of the transaction as
calculated under section 35 or 37 of this
appendix.
(e) Overlapping exposures. If a [BANK] has
multiple securitization exposures that
provide duplicative coverage to the
underlying exposures of a securitization
(such as when a [BANK] provides a programwide credit enhancement and multiple poolspecific liquidity facilities to an ABCP
program), the [BANK] is not required to hold
duplicative risk-based capital against the
overlapping position. Instead, the [BANK]
may apply to the overlapping position the
applicable risk-based capital treatment that
results in the highest risk-based capital
requirement.
(f) Implicit support. If a [BANK] provides
support to a securitization in excess of the
[BANK]’s contractual obligation to provide
credit support to the securitization (implicit
support):
(1) The [BANK] must hold regulatory
capital against all of the underlying
exposures associated with the securitization
as if the exposures had not been securitized
and must deduct from tier 1 capital any aftertax gain-on-sale resulting from the
securitization; and
(2) The [BANK] must disclose publicly:
(i) That it has provided implicit support to
the securitization; and
(ii) The regulatory capital impact to the
[BANK] of providing such implicit support.
(g) Undrawn portion of an eligible servicer
cash advance facility. Regardless of any other
provision of this part, a [BANK] is not
required to hold risk-based capital against the
undrawn portion of an eligible servicer cash
advance facility.
(h) Interest-only mortgage-backed
securities. Regardless of any other provisions
of this part, the risk weight for a non-creditenhancing interest-only mortgage-backed
security may not be less than 100 percent.
(i) Small-business loans and leases on
personal property transferred with recourse.
(1) Regardless of any other provisions of this
appendix, a [BANK] that has transferred
small-business loans and leases on personal
property (small-business obligations) with
recourse must include in risk-weighted assets
only the contractual amount of retained
recourse if all the following conditions are
met:
(i) The transaction is a sale under GAAP.
(ii) The [BANK] establishes and maintains,
pursuant to GAAP, a non-capital reserve
sufficient to meet the [BANK]’s reasonably
estimated liability under the recourse
arrangement.
(iii) The loans and leases are to businesses
that meet the criteria for a small-business
concern established by the Small Business
Administration under section 3(a) of the
Small Business Act (15 U.S.C. 632).
(iv) The [BANK] is well capitalized, as
defined in the [agency]’s prompt corrective
action regulation—12 CFR part 6 (for national
banks); 12 CFR part 208, subpart D (for state
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member banks or bank holding companies);
12 CFR part 325, subpart B (for state
nonmember banks); and 12 CFR part 565 (for
savings associations). For purposes of
determining whether a [BANK] is well
capitalized for purposes of this paragraph,
the [BANK]’s capital ratios must be
calculated without regard to the capital
treatment for transfers of small-business
obligations with recourse specified in this
paragraph (i)(1).
(2) The total outstanding amount of
recourse retained by a [BANK] on transfers of
small-business obligations receiving the
capital treatment specified in paragraph (i)(1)
of this section cannot exceed 15 percent of
the [BANK]’s total qualifying capital.
(3) If a [BANK] ceases to be well
capitalized or exceeds the 15 percent capital
limitation, the capital treatment specified in
paragraph (i)(1) of this section will continue
to apply to any transfers of small-business
obligations with recourse that occurred
during the time that the [BANK] was well
capitalized and did not exceed the capital
limit.
(4) The risk-based capital ratios of the
[BANK] must be calculated without regard to
the capital treatment for transfers of smallbusiness obligations with recourse specified
in paragraph (i)(1) of this section as provided
in 12 CFR part 3, appendix A (for national
banks); 12 CFR part 208, appendix A (for
state member banks); 12 CFR part 225,
appendix A (for bank holding companies); 12
CFR part 325, appendix A (for state
nonmember banks); and 12 CFR
567.6(b)(5)(v) (for savings associations).
(j) Consolidated ABCP programs. (1) A
[BANK] that qualifies as a primary
beneficiary and must consolidate an ABCP
program as a variable interest entity under
GAAP may exclude the consolidated ABCP
program assets from risk-weighted assets if
the [BANK] is the sponsor of the ABCP
program. If a [BANK] excludes such
consolidated ABCP program assets from riskweighted assets, the [BANK] must hold riskbased capital against any securitization
exposures of the [BANK] to the ABCP
program in accordance with this part.
(2) If a [BANK] either is not permitted, or
elects not, to exclude consolidated ABCP
program assets from its risk-weighted assets,
the [BANK] must hold risk-based capital
against the consolidated ABCP program
assets in accordance with this appendix but
is not required to hold risk-based capital
against any securitization exposures of the
[BANK] to the ABCP program.
(k) Nth-to-default credit derivatives. (1)
First-to-default credit derivatives. (i)
Protection purchaser. A [BANK] that obtains
credit protection on a group of underlying
exposures through a first-to-default credit
derivative must determine its risk-based
capital requirement for the underlying
exposures as if the [BANK] synthetically
securitized the underlying exposure with the
lowest risk-based capital requirement and
had obtained no credit risk mitigant on the
other underlying exposures.
(ii) Protection provider. A [BANK] that
provides credit protection on a group of
underlying exposures through a first-todefault credit derivative must determine its
risk-weighted asset amount for the derivative
by applying the RBA or, if the derivative does
not qualify for the RBA, by setting its riskweighted asset amount for the derivative
equal to the product of:
(A) The protection amount of the
derivative; and
(B) The sum of the risk weights of the
individual underlying exposures, up to a
maximum of 1,250 percent.
(2) Second-or-subsequent-to-default credit
derivatives. (i) Protection purchaser. (A) A
[BANK] that obtains credit protection on a
group of underlying exposures through an
nth-to-default credit derivative (other than a
first-to-default credit derivative) may
recognize the credit risk mitigation benefits
of the derivative only if:
(1) The [BANK] also has obtained credit
protection on the same underlying exposures
in the form of first-through-(n-1)-to-default
credit derivatives; or
(2) If n-1 of the underlying exposures have
already defaulted.
(B) If a [BANK] satisfies the requirements
of paragraph (k)(2)(i)(A) of this section, the
[BANK] must determine its risk-based capital
requirement for the underlying exposures as
if the [BANK] had only synthetically
securitized the underlying exposure with the
nth lowest risk-based capital requirement
and had obtained no credit risk mitigant on
the other underlying exposures.
(ii) Protection provider. A [BANK] that
provides credit protection on a group of
underlying exposures through an nth-to-
44047
default credit derivative (other than a first-todefault credit derivative) must determine its
risk-weighted asset amount for the derivative
by applying the RBA in section 43 of this
appendix (if the derivative qualifies for the
RBA) or, if the derivative does not qualify for
the RBA, by setting its risk-weighted asset
amount for the derivative equal to the
product of:
(A) The protection amount of the
derivative; and
(B) The sum of the risk weights of the
individual underlying exposures (excluding
the n-1 underlying exposures with the lowest
risk-based capital requirement), up to a
maximum of 1,250 percent.
Section 43. Ratings-Based Approach (RBA)
(a) Eligibility requirements for use of the
RBA. (1) Originating [BANK]. An originating
[BANK] must use the RBA to calculate its
risk-based capital requirement for a
securitization exposure if the exposure has
two or more external or inferred ratings (and
may not use the RBA if the exposure has
fewer than two external or inferred ratings).
(2) Investing [BANK]. An investing [BANK]
must use the RBA to calculate the risk-based
capital requirement for a securitization
exposure if the exposure has one or more
external or inferred ratings (and may not use
the RBA if the exposure has no external
rating or inferred rating).
(b) Ratings-based approach. (1) A [BANK]
must determine its risk-based capital
requirement for a securitization exposure not
required to be deducted under Table 11 or 12
by multiplying the exposure amount (as
determined in paragraph (d) of section 42) by
the risk weight that corresponds to the
applicable external or applicable inferred
rating provided in Table 11 or 12. If the
applicable table requires deduction, the
exposure amount must be deducted from
total capital in accordance with paragraph (c)
of section 42 of this appendix.
(2) A [BANK] must apply the risk weights
in Table 11 when the securitization
exposure’s applicable external or applicable
inferred rating represents a long-term credit
rating, and must apply the risk weights in
Table 12 when the securitization exposure’s
applicable external or applicable inferred
rating represents a short-term credit rating.
TABLE 11.—LONG-TERM CREDIT RATING RISK WEIGHTS UNDER THE RBA
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external or applicable inferred rating of a securitization exposure
Example
Highest investment grade rating ....................................................................................................
Second-highest investment grade rating .......................................................................................
Third-highest investment grade rating ...........................................................................................
Lowest investment grade rating .....................................................................................................
One category below investment grade ..........................................................................................
Two categories below investment grade .......................................................................................
Three categories or more below investment grade .......................................................................
AAA ..........................................
AA .............................................
A ...............................................
BBB ..........................................
BB .............................................
B ...............................................
CCC ..........................................
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Risk weight
(in percent)
20.
20.
50.
100.
350.
Deduction.
Deduction.
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TABLE 12.—SHORT-TERM CREDIT RATING RISK WEIGHTS UNDER THE RBA
Example
Highest investment grade rating ....................................................................................................
Second-highest investment grade rating .......................................................................................
Third-highest investment grade rating ...........................................................................................
All other ratings ..............................................................................................................................
mstockstill on PROD1PC66 with PROPOSALS2
Applicable external or applicable inferred rating of a securitization exposure
A–1/P–1 ....................................
A–2/P–2 ....................................
A–3/P–3 ....................................
N/A ...........................................
Section 44. Securitization Exposures That Do
Not Qualify for the RBA
A [BANK] must deduct from total capital
all securitization exposures that do not
qualify for the RBA in section 43 of this
appendix with the following exceptions,
provided that the [BANK] knows the
composition of the underlying exposures at
all times:
(a) An eligible ABCP liquidity facility. A
[BANK] may determine the risk-weighted
asset amount of an eligible ABCP liquidity
facility by multiplying the exposure amount
by the highest risk weight applicable to any
of the individual underlying exposures
covered by the facility.
(b) A first priority securitization exposure.
A [BANK] may determine the risk-weighted
asset amount of a first priority securitization
exposure by multiplying the exposure
amount by the weighted-average risk weight
of the underlying exposures. For purposes of
this section, a first priority securitization
exposure is a securitization exposure that has
a first priority claim on the cash flows from
the underlying exposures and that is not an
eligible ABCP liquidity facility. When
determining whether a securitization
exposure has a first priority claim on the cash
flows from the underlying exposures, a
[BANK] is not required to consider amounts
due under interest rate or currency derivative
contracts, fees due, or other similar
payments.
(c) A securitization exposure in a second
loss position or better in an ABCP program.
(1) A [BANK] may determine the riskweighted asset amount of a securitization
exposure that is in a second loss position or
better in an ABCP program that meets the
requirements of paragraph (c)(2) of this
section by multiplying the exposure amount
by the higher of the following risk weights:
(i) 100 percent; or
(ii) The highest risk weight applicable to
any of the individual underlying exposures
of the ABCP program.
(2) Requirements. (i) The exposure is not a
first priority securitization exposure or an
eligible ABCP liquidity facility;
(ii) The exposure must be economically in
a second loss position or better, and the first
loss position must provide significant credit
protection to the second loss position;
(iii) The credit risk of the exposure must
be the equivalent of investment grade or
better; and
(iv) The [BANK] holding the exposure
must not retain or provide the first loss
position.
Section 45. Recognition of Credit Risk
Mitigants for Securitization Exposures
(a) General. (1) An originating [BANK] that
has obtained a credit risk mitigant to hedge
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its securitization exposure to a synthetic or
traditional securitization that satisfies the
operational criteria in section 41 of this
appendix may recognize the credit risk
mitigant under section 36 or 37 of this
appendix, but only as provided in this
section.
(2) An investing [BANK] that has obtained
a credit risk mitigant to hedge a
securitization exposure may recognize the
credit risk mitigant under section 36 or 37 of
this appendix, but only as provided in this
section.
(3) A [BANK] that has used section 43 or
section 44 to calculate its risk-based capital
requirement for a securitization exposure
based on external or inferred ratings that
reflect the benefits of a credit risk mitigant
provided to the associated securitization or
that supports some or all of the underlying
exposures may not use the credit risk
mitigation rules in this section to further
reduce its risk-based capital requirement for
the exposure to reflect that credit risk
mitigant.
(b) Eligible guarantors for securitization
exposures. A [BANK] may only recognize an
eligible guarantee or eligible credit derivative
from an eligible guarantor that:
(1) Is described in paragraph (1) of the
definition of eligible guarantor; or
(2) Has issued and outstanding an
unsecured debt security without credit
enhancement that has an applicable external
rating based on a long-term rating in one of
the three highest investment grade rating
categories.
(c) Mismatches. A [BANK] must make
applicable adjustments to the protection
amount of an eligible guarantee or credit
derivative as required in paragraphs (d), (e),
and (f) of section 36 of this appendix for any
hedged securitization exposure. In the
context of a synthetic securitization, when an
eligible guarantee or eligible credit derivative
covers multiple hedged exposures that have
different residual maturities, the [BANK]
must use the longest residual maturity of any
of the hedged exposures as the residual
maturity of all the hedged exposures.
Section 46. Risk-Weighted Assets for
Securitizations with Early Amortization
Provisions
(a) General. (1) An originating [BANK]
must hold risk-based capital against the sum
of the originating [BANK]’s interest and the
investors’ interest in a securitization that:
(i) Includes one or more underlying
exposures in which the borrower is permitted
to vary the drawn amount within an agreed
limit under a line of credit; and
(ii) Contains an early amortization
provision.
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Risk Weight
(in percent)
20.
50.
100.
Deduction.
(2) The total capital requirement for a
[BANK]’s exposures to a single securitization
with an early amortization provision is
subject to a maximum capital requirement
equal to the greater of:
(i) The capital requirement for retained
securitization exposures, or
(ii) The capital requirement for the
underlying exposures that would apply if the
[BANK] directly held the underlying
exposures.
(3) For securitizations described in
paragraph (a)(1) of this section, an originating
[BANK] must calculate the risk-based capital
requirement for the originating [BANK]’s
interest under sections 42 through 45 of this
appendix, and the risk-weighted asset
amount for the investors’ interest under
paragraph (c) of this section.
(b) Definitions. For purposes of this
section:
(1) Investors’ interest means, with respect
to a securitization, the exposure amount of
the underlying exposures multiplied by the
ratio of:
(i) The total amount of securitization
exposures issued by the securitization SPE;
divided by
(ii) The outstanding principal amount of
the underlying exposures.
(2) Excess spread for a period means:
(i) Gross finance charge collections and
other income received by a securitization
SPE (including market interchange fees) over
a period minus interest paid to the holders
of the securitization exposures, servicing
fees, charge-offs, and other senior trust or
similar expenses of the SPE over the period;
divided by
(ii) The principal balance of the underlying
exposures at the end of the period.
(c) Risk-weighted asset amount for
investors’ interest. The originating [BANK]’s
risk-weighted asset amount for the investors’
interest in the securitization is equal to the
product of the following four quantities:
(1) The investors’ interest;
(2) The appropriate conversion factor in
paragraph (d) of this section;
(3) The weighted-average risk weight that
would apply under this appendix to the
underlying exposures if the underlying
exposures had not been securitized; and
(4) The proportion of the underlying
exposures in which the borrower is permitted
to vary the drawn amount within an agreed
limit under a line of credit.
(d) Conversion factors. (1)(i) Except as
provided in paragraph (d)(2) of this section,
to calculate the appropriate conversion
factor, a [BANK] must use Table 13 for a
securitization that contains a controlled early
amortization provision and must use Table
14 for a securitization that contains a noncontrolled early amortization provision. In
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circumstances where a securitization
contains a mix of retail and nonretail
exposures or a mix of committed and
uncommitted exposures, a [BANK] may take
a pro rata approach to determining the
conversion factor for the securitization’s
early amortization provision. If a pro rata
approach is not feasible, a [BANK] must treat
the mixed securitization as a securitization of
nonretail exposures if a single underlying
exposure is a nonretail exposure and must
treat the mixed securitization as a
securitization of committed exposures if a
single underlying exposure is a committed
exposure.
(ii) To find the appropriate conversion
factor in the tables, a [BANK] must divide the
three-month average annualized excess
spread of the securitization by the excess
spread trapping point in the securitization
structure. In securitizations that do not
require excess spread to be trapped, or that
specify trapping points based primarily on
performance measures other than the threemonth average annualized excess spread, the
excess spread trapping point is 4.5 percent.
TABLE 13.—CONTROLLED EARLY AMORTIZATION PROVISIONS
Uncommitted
CF
(in percent)
3-month average annualized excess spread
Retail Credit Lines:
Greater than or equal to 133.33% of trapping point ........................................................................................
Less than 133.33% to 100% of trapping point .................................................................................................
Less than 100% to 75% of trapping point ........................................................................................................
Less than 75% to 50% of trapping point ..........................................................................................................
Less than 50% to 25% of trapping point ..........................................................................................................
Less than 25% of trapping point ......................................................................................................................
Non-retail credit lines ...............................................................................................................................................
0
1
2
10
20
40
90
Committed
CF
(in percent)
90
........................
........................
........................
........................
........................
90
TABLE 14.—NON-CONTROLLED EARLY AMORTIZATION PROVISIONS
Uncommitted
CF
(in percent)
3-month average annualized excess spread
Retail Credit Lines:
Greater than or equal to 133.33% of trapping point ........................................................................................
Less than 133.33% to 100% of trapping point .................................................................................................
Less than 100% to 75% of trapping point ........................................................................................................
Less than 75% to 50% of trapping point ..........................................................................................................
Less than 50% of trapping point ......................................................................................................................
Non-retail credit lines ...............................................................................................................................................
(2) For a securitization for which all or
substantially all of the underlying exposures
are secured by liens on one-to-four family
residential property, a [BANK] may calculate
the appropriate conversion factor discussed
in paragraph (c)(2) of this section using
paragraph (d)(1) of this section or may use a
conversion factor of 10 percent. If the
[BANK] chooses to use a conversion factor of
10 percent, it must use that conversion factor
for all securitizations for which all or
substantially all of the underlying exposures
are secured by liens on one-to-four family
residential property.
mstockstill on PROD1PC66 with PROPOSALS2
Part V. Risk-Weighted Assets for Equity
Exposures
Section 51. Introduction and Exposure
Measurement
(a) General. To calculate its risk-weighted
asset amounts for equity exposures that are
not equity exposures to investment funds, a
[BANK] must use the Simple Risk-Weight
Approach (SRWA) in section 52. A [BANK]
must use the look-through approaches in
section 53 to calculate its risk-weighted asset
amounts for equity exposures to investment
funds.
(b) Adjusted carrying value. For purposes
of this part, the adjusted carrying value of an
equity exposure is:
(1) For the on-balance sheet component of
an equity exposure, the [BANK]’s carrying
value of the exposure reduced by any
unrealized gains on the exposure that are
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reflected in such carrying value but excluded
from the [BANK]’s tier 1 and tier 2 capital;
and
(2) For the off-balance sheet component of
an equity exposure that is not an equity
commitment, the effective notional principal
amount of the exposure, the size of which is
equivalent to a hypothetical on-balance sheet
position in the underlying equity instrument
that would evidence the same change in fair
value (measured in dollars) for a given small
change in the price of the underlying equity
instrument, minus the adjusted carrying
value of the on-balance sheet component of
the exposure as calculated in paragraph (b)(1)
of this section.
(3) For a commitment to acquire an equity
exposure (an equity commitment), the
effective notional principal amount of the
exposure multiplied by the following
conversion factors (CFs):
(i) Conditional equity commitments with
an original maturity of one year or less
receive a CF of 20 percent.
(ii) Conditional equity commitments with
an original maturity of over one year receive
a CF of 50 percent.
(iii) Unconditional equity commitments
receive a CF of 100 percent.
Section 52. Simple Risk-Weight Approach
(SRWA)
(a) General. Under the SRWA, a [BANK]’s
total risk-weighted assets for equity
exposures equals the sum of the risk-
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0
5
15
50
100
100
Committed
CF
(in percent)
100
........................
........................
........................
........................
100
weighted asset amounts for each of the
[BANK]’s individual equity exposures (other
than equity exposures to an investment fund)
as determined in this section and the riskweighted asset amounts for each of the
[BANK]’s individual equity exposures to an
investment fund as determined in section 53.
(b) SRWA computation for individual
equity exposures. A [BANK] must determine
the risk-weighted asset amount for an
individual equity exposure (other than an
equity exposure to an investment fund) by
multiplying the adjusted carrying value of
the equity exposure or the effective portion
and ineffective portion of a hedge pair (as
defined in paragraph (c) of this section) by
the lowest applicable risk weight in this
paragraph (b).
(1) Zero percent risk weight equity
exposures. An equity exposure to a sovereign
entity, the Bank for International Settlements,
the European Central Bank, the European
Commission, the International Monetary
Fund, an MDB, a PSE, and any other entity
whose credit exposures receive a zero
percent risk weight under section 33 may be
assigned a zero percent risk weight.
(2) 20 percent risk weight equity exposures.
An equity exposure to a Federal Home Loan
Bank or Federal Agricultural Mortgage
Corporation (Farmer Mac) is assigned a 20
percent risk weight.
(3) 100 percent risk weight equity
exposures. The following equity exposures
are assigned a 100 percent risk weight:
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(i) Community development equity
exposures. (A) For banks and bank holding
companies, an equity exposure that qualifies
as a community development investment
under 12 U.S.C. 24 (Eleventh), excluding
equity exposures to an unconsolidated small
business investment company and equity
exposures held through a consolidated small
business investment company described in
section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682).
(B) For savings associations, an equity
exposure that is designed primarily to
promote community welfare, including the
welfare of low- and moderate-income
communities or families, such as by
providing services or employment, and
excluding equity exposures to an
unconsolidated small business investment
company and equity exposures held through
a small business investment company
described in section 302 of the Small
Business Investment Act of 1958 (15 U.S.C.
682).
(ii) Effective portion of hedge pairs. The
effective portion of a hedge pair.
(iii) Non-significant equity exposures.
Equity exposures, excluding exposures to an
investment firm that would meet the
definition of a traditional securitization were
it not for the [agency]’s application of
paragraph (8) of that definition and has
greater than immaterial leverage, to the
extent that the aggregate adjusted carrying
value of the exposures does not exceed 10
percent of the [BANK]’s tier 1 capital plus
tier 2 capital.
(A) To compute the aggregate adjusted
carrying value of a [BANK]’s equity
exposures for purposes of this paragraph
(b)(3)(iii), the [BANK] may exclude equity
exposures described in paragraphs (b)(1),
(b)(2), (b)(3)(i), and (b)(3)(ii) of this section,
the equity exposure in a hedge pair with the
smaller adjusted carrying value, and a
proportion of each equity exposure to an
investment fund equal to the proportion of
the assets of the investment fund that are not
equity exposures or that meet the criterion of
paragraph (b)(3)(i) of this section. If a [BANK]
does not know the actual holdings of the
investment fund, the [BANK] may calculate
the proportion of the assets of the fund that
are not equity exposures based on the terms
of the prospectus, partnership agreement, or
similar contract that defines the fund’s
permissible investments. If the sum of the
investment limits for all exposure classes
within the fund exceeds 100 percent, the
[BANK] must assume for purposes of this
paragraph (b)(3)(iii) that the investment fund
invests to the maximum extent possible in
equity exposures.
(B) When determining which of a [BANK]’s
equity exposures qualify for a 100 percent
risk weight under this paragraph, a [BANK]
first must include equity exposures to
unconsolidated small business investment
companies or held through consolidated
small business investment companies
described in section 302 of the Small
Business Investment Act of 1958 (15 U.S.C.
682), then must include publicly traded
equity exposures (including those held
indirectly through investment funds), and
then must include non-publicly traded equity
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exposures (including those held indirectly
through investment funds).
(4) 300 percent risk weight equity
exposures. A publicly traded equity exposure
(other than an equity exposure described in
paragraph (b)(6) of this section and including
the ineffective portion of a hedge pair) is
assigned a 300 percent risk weight.
(5) 400 percent risk weight equity
exposures. An equity exposure (other than an
equity exposure described in paragraph (b)(6)
of this section) that is not publicly traded is
assigned a 400 percent risk weight.
(6) 600 percent risk weight equity
exposures. An equity exposure to an
investment firm that:
(i) Would meet the definition of a
traditional securitization were it not for the
[agency]’s application of paragraph (8) of that
definition, and
(ii) Has greater than immaterial leverage is
assigned a 600 percent risk weight.
(c) Hedge transactions. (1) Hedge pair. A
hedge pair is two equity exposures that form
an effective hedge so long as each equity
exposure is publicly traded or has a return
that is primarily based on a publicly traded
equity exposure.
(2) Effective hedge. Two equity exposures
form an effective hedge if the exposures
either have the same remaining maturity or
each has a remaining maturity of at least
three months; the hedge relationship is
formally documented in a prospective
manner (that is, before the [BANK] acquires
at least one of the equity exposures); the
documentation specifies the measure of
effectiveness (E) the [BANK] will use for the
hedge relationship throughout the life of the
transaction; and the hedge relationship has
an E greater than or equal to 0.8. A [BANK]
must measure E at least quarterly and must
use one of three alternative measures of E:
(i) Under the dollar-offset method of
measuring effectiveness, the [BANK] must
determine the ratio of value change (RVC).
The RVC is the ratio of the cumulative sum
of the periodic changes in value of one equity
exposure to the cumulative sum of the
periodic changes in the value of the other
equity exposure. If RVC is positive, the hedge
is not effective and E equals 0. If RVC is
negative and greater than or equal to ¥1 (that
is, between zero and ¥1), then E equals the
absolute value of RVC. If RVC is negative and
less than ¥1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method
of measuring effectiveness:
T
E = 1−
∑( X
t
− X t −1 )
∑ ( At
− A t −1 )
t =1
T
t =1
2
,
2
where:
(A) Xt = At ¥ Bt;
(B) At = the value at time t of one exposure
in a hedge pair; and
(C) Bt = the value at time t of the other
exposure in a hedge pair.
(iii) Under the regression method of
measuring effectiveness, E equals the
coefficient of determination of a regression in
which the change in value of one exposure
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in a hedge pair is the dependent variable and
the change in value of the other exposure in
a hedge pair is the independent variable.
However, if the estimated regression
coefficient is positive, then the value of E is
zero.
(3) The effective portion of a hedge pair is
E multiplied by the greater of the adjusted
carrying values of the equity exposures
forming a hedge pair.
(4) The ineffective portion of a hedge pair
is (1¥E) multiplied by the greater of the
adjusted carrying values of the equity
exposures forming a hedge pair.
Section 53. Equity Exposures to Investment
Funds
(a) Available approaches. (1) Unless the
exposure meets the requirements for a
community development equity exposure in
paragraph (b)(3)(i) of section 52, a [BANK]
must determine the risk-weighted asset
amount of an equity exposure to an
investment fund under the Full LookThrough Approach in paragraph (b) of this
section, the Simple Modified Look-Through
Approach in paragraph (c) of this section, the
Alternative Modified Look-Through
Approach in paragraph (d) of this section, or,
if the investment fund qualifies for the
Money Market Fund Approach, the Money
Market Fund Approach in paragraph (e) of
this section.
(2) The risk-weighted asset amount of an
equity exposure to an investment fund that
meets the requirements for a community
development equity exposure in paragraph
(b)(3)(i) of section 52 is its adjusted carrying
value.
(3) If an equity exposure to an investment
fund is part of a hedge pair and the [BANK]
does not use the Full Look-Through
Approach, the [BANK] may use the
ineffective portion of the hedge pair as
determined under paragraph (c) of section 52
as the adjusted carrying value for the equity
exposure to the investment fund. The riskweighted asset amount of the effective
portion of the hedge pair is equal to its
adjusted carrying value.
(b) Full Look-Through Approach. A
[BANK] that is able to calculate a riskweighted asset amount for its proportional
ownership share of each exposure held by
the investment fund (as calculated under this
appendix as if the proportional ownership
share of each exposure were held directly by
the [BANK]) may set the risk-weighted asset
amount of the [BANK]’s exposure to the fund
equal to the product of:
(1) The aggregate risk-weighted asset
amounts of the exposures held by the fund
as if they were held directly by the [BANK];
and
(2) The [BANK]’s proportional ownership
share of the fund.
(c) Simple Modified Look-Through
Approach. Under this approach, the riskweighted asset amount for a [BANK]’s equity
exposure to an investment fund equals the
adjusted carrying value of the equity
exposure multiplied by the highest risk
weight that applies to any exposure the fund
is permitted to hold under its prospectus,
partnership agreement, or similar contract
that defines the fund’s permissible
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investments (excluding derivative contracts
that are used for hedging rather than
speculative purposes and that do not
constitute a material portion of the fund’s
exposures).
(d) Alternative Modified Look-Through
Approach. Under this approach, a [BANK]
may assign the adjusted carrying value of an
equity exposure to an investment fund on a
pro rata basis to different risk weight
categories under this appendix based on the
investment limits in the fund’s prospectus,
partnership agreement, or similar contract
that defines the fund’s permissible
investments. The risk-weighted asset amount
for the [BANK]’s equity exposure to the
investment fund equals the sum of each
portion of the adjusted carrying value
assigned to an exposure class multiplied by
the applicable risk weight under this
appendix. If the sum of the investment limits
for exposure classes within the fund exceeds
100 percent, the [BANK] must assume that
the fund invests to the maximum extent
permitted under its investment limits in the
exposure class with the highest applicable
risk weight under this appendix and
continues to make investments in order of
the exposure class with the next highest
applicable risk weight under this appendix
until the maximum total investment level is
reached. If more than one exposure class
applies to an exposure, the [BANK] must use
the highest applicable risk weight. A [BANK]
may exclude derivative contracts held by the
fund that are used for hedging rather than for
speculative purposes and do not constitute a
material portion of the fund’s exposures.
(e) Money Market Fund Approach. The
risk-weighted asset amount for a [BANK]’s
equity exposure to an investment fund that
is a money market fund subject to 17 CFR
270.2a–7 and that has an applicable external
rating in the highest investment-grade rating
category equals the adjusted carrying value of
the equity exposure multiplied by seven
percent.
Part VI. Risk-Weighted Assets for
Operational Risk
Section 61. Basic Indicator Approach
(a) Risk-weighted assets for operational
risk. Risk-weighted assets for operational risk
equals 15 percent of a [BANK]’s average
positive annual gross income multiplied by
12.5.
(b) Average positive annual gross income.
A [BANK]’s average positive annual gross
income equals the sum of the [BANK]’s
positive annual gross income, as described
below, over the three most recent calendar
years divided by the number of those years
in which its annual gross income is positive.
A [BANK] must exclude from this calculation
amounts from any year in which the annual
gross income is negative or zero.
(c) Annual gross income equals:
(1) For a [BANK], its net interest income
plus its total noninterest income minus its
underwriting income from insurance and
reinsurance activities as reported on the
[BANK]’s Call Report.
(2) For a bank holding company, its net
interest income plus its total noninterest
income minus its underwriting income from
insurance and reinsurance activities as
reported on the bank holding company’s
Y9–C Report.
(3) For a savings association, its net interest
income (expense) before provision for losses
on interest-bearing assets, plus total
noninterest income, minus the portion of its
other fees and charges that represents income
derived from insurance and reinsurance
underwriting activities, minus (plus) its
income (loss) from the sale of assets held for
sale and available-for-sale securities to
include only the profit or loss from the
disposition of available-for-sale securities
pursuant to FASB Statement No. 115, minus
(plus) its income (loss) from the sale of
securities held-to-maturity, all as reported on
the savings association’s year-end Thrift
Financial Report.
Part VII. Disclosure
Section 71. Disclosure Requirements
(a) Each [BANK] must publicly disclose
each quarter its total and tier 1 risk-based
capital ratios and their components (that is,
tier 1 capital, tier 2 capital, total qualifying
capital, and total risk-weighted assets).74
(b) A [BANK] must comply with paragraph
(c) of this section unless it is a consolidated
subsidiary of a bank holding company or
depository institution that is subject to these
disclosure requirements.
44051
(c) (1) Each [BANK] that is not a subsidiary
of a non-U.S. banking organization that is
subject to comparable public disclosure
requirements in its home jurisdiction must
provide timely public disclosures each
calendar quarter of the information in tables
15.1–15.10 below. If a significant change
occurs, such that the most recent reported
amounts are no longer reflective of the
[BANK]’s capital adequacy and risk profile,
then a brief discussion of this change and its
likely impact must be provided as soon as
practicable thereafter. Qualitative disclosures
that typically do not change each quarter (for
example, a general summary of the [BANK]’s
risk management objectives and policies,
reporting system, and definitions) may be
disclosed annually, provided any significant
changes to these are disclosed in the interim.
Management is encouraged to provide all of
the disclosures required by this appendix in
one place on the [BANK]’s public Web site.75
The [BANK] must make these disclosures
publicly available for each of the last three
years (that is, twelve quarters) or such shorter
period [beginning on the effective date of a
[BANK]’s election to use this appendix].
(2) Each [BANK] is required to have a
formal disclosure policy approved by the
board of directors that addresses its approach
for determining the disclosures it makes. The
policy must address the associated internal
controls and disclosure controls and
procedures. The board of directors and senior
management are responsible for establishing
and maintaining an effective internal control
structure over financial reporting, including
the disclosures required by this appendix,
and must ensure that appropriate review of
the disclosures takes place. One or more
senior officers of the [BANK] must attest that
the disclosures meet the requirements of this
appendix.
(3) If a [BANK] believes that disclosure of
specific commercial or financial information
would prejudice seriously its position by
making public information that is either
proprietary or confidential in nature, the
[BANK] need not disclose those specific
items, but must disclose more general
information about the subject matter of the
requirement, together with the fact that, and
the reason why, the specific items of
information have not been disclosed.
TABLE 15.1.—SCOPE OF APPLICATION
Qualitative Disclosures .........
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Quantitative Disclosures ......
(a) The name of the top corporate entity in the group to which the appendix applies.
(b) An outline of differences in the basis of consolidation for accounting and regulatory purposes, with a brief description of the entities 1 within the group:
(1) that are fully consolidated;
(2) that are deconsolidated and deducted;
(3) for which the regulatory capital requirement is deducted; and
(4) that are neither consolidated nor deducted (for example, where the investment is risk weighted).
(c) Any restrictions, or other major impediments, on transfer of funds or regulatory capital within the group.
(d) The aggregate amount of surplus capital of insurance subsidiaries included in the regulatory capital of the
consolidated group.
74 Other public disclosure requirements continue
to apply—for example, Federal securities law and
regulatory reporting requirements.
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75 Alternatively, a [BANK] may provide the
disclosures in more than one place, as some of them
may be included in public financial reports (for
example, in Management’s Discussion and Analysis
included in SEC filings) or other regulatory reports.
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The [BANK] must publicly provide a summary table
that specifically indicates where all the disclosures
may be found (for example, regulatory report
schedules, page numbers in annual reports).
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TABLE 15.1.—SCOPE OF APPLICATION—Continued
(e) The aggregate amount by which actual regulatory capital is less than the minimum regulatory capital requirement in all subsidiaries with regulatory capital requirements and the name(s) of the subsidiaries with such deficiencies.
1 Entities include securities, insurance and other financial subsidiaries, commercial subsidiaries (where permitted), significant minority equity investments in insurance, financial and commercial entities.
TABLE 15.2.—CAPITAL STRUCTURE
Qualitative Disclosures .........
Quantitative Disclosures ......
(a) Summary information on the terms and conditions of the main features of all capital instruments, especially in
the case of innovative, complex or hybrid capital instruments.
(b) The amount of tier 1 capital, with separate disclosure of:
(1) common stock/surplus;
(2) retained earnings;
(3) minority interests in the equity of subsidiaries;
(4) restricted core capital elements as defined in [the general risk-based capital rules];
(5) amounts deducted from tier 1 capital, including goodwill and certain intangibles.
(c) The total amount of tier 2 capital, with a separate disclosure of amounts deducted from tier 2 capital.
(d) Other deductions from capital.
(e) Total eligible capital.
TABLE 15.3.—CAPITAL ADEQUACY
Qualitative Disclosures .........
Quantitative Disclosures ......
1 Risk-weighted
(a) A summary discussion of the [BANK]’s approach to assessing the adequacy of its capital to support current
and future activities.
(b) Risk-weighted assets for:
(1) Exposures to sovereign entities;
(2) Exposures to certain supranational entities and MDBs;
(3) Exposures to depository institutions, foreign banks, and credit unions;
(4) Exposures to PSEs;
(5) Corporate exposures;
(6) Regulatory retail exposures;
(7) Residential mortgage exposures;
(8) Statutory multifamily mortgages and pre-sold construction loans;
(9) Past due loans;
(10) Other assets;
(11) Securitization exposures; and
(12) Equity exposures.
(c) Risk-weighted assets for market risk as calculated under [the market risk rule]: 1
(1) Standardized specific risk charge; and
(2) Internal models approach for specific risk.
(d) Risk-weighted assets for operational risk.
(e) Total and tier 1 risk-based capital ratios:
(1) For the top consolidated group; and
(2) For each [BANK] subsidiary.
(f) Total risk-weighted assets.
assets determined under [the market risk rule] are to be disclosed only for the approaches used.
General qualitative disclosure requirement
For each separate risk area described in
tables 15.4 through 15.10, the [BANK] must
describe its risk management objectives and
policies.
TABLE 15.4.1—CREDIT RISK: GENERAL DISCLOSURES
Qualitative Disclosures .........
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(a) The general qualitative disclosure requirement with respect to credit risk (excluding counterparty credit risk
disclosed in accordance with Table 16.5), including:
(1) Definitions of past due and impaired (for accounting purposes);
(2) Description of approaches followed for allowances, including statistical methods used where applicable;
(3) Discussion of the [BANK]’s credit risk management policy.
(b) Total gross credit risk exposures and average credit risk exposures, after accounting offsets in accordance
with GAAP,2 and without taking into account the effects of credit risk mitigation techniques (for example, collateral and netting), over the period broken down by major types of credit exposure. For example, [BANK]s could
apply a breakdown similar to that used for accounting purposes. Such a breakdown might, for instance, be
loans, off-balance sheet commitments, and other non-derivative off-balance sheet exposures; debt securities;
and OTC derivatives
(c) Geographic 3 distribution of exposures, broken down in significant areas by major types of credit exposure.
(d) Industry or counterparty type distribution of exposures, broken down by major types of credit exposure.
(e) Remaining contractual maturity breakdown (for example, one year or less) of the whole portfolio, broken down
by major types of credit exposure.
(f)(1) By major industry or counterparty type:
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TABLE 15.4.1—CREDIT RISK: GENERAL DISCLOSURES—Continued
(2) Amount of impaired loans;
(3) Amount of past due loans; 4
(4) Allowances; and
(5) Charge-offs during the period.
(g) Amount of impaired loans and, if available, the amount of past due loans broken down by significant geographic areas including, if practical, the amounts of allowances related to each geographical area.5
(h) Reconciliation of changes in the allowance for loan and lease losses.6
1 Table
15.4 does not include equity exposures.
example, FASB Interpretations 39 and 41.
areas may comprise individual countries, groups of countries, or regions within countries. A [BANK] might choose to define the
geographical areas based on the way the [BANK]’s portfolio is geographically managed. The criteria used to allocate the loans to geographical
areas must be specified.
4 A [BANK] is encouraged also to provide an analysis of the aging of past-due loans.
5 The portion of general allowance that is not allocated to a geographical area should be disclosed separately.
6 The reconciliation should include the following: a description of the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or reversed) for estimated probable loan losses during the period; any other adjustments (for example, exchange rate differences, business combinations, acquisitions and disposals of subsidiaries), including transfers between
allowances; and the closing balance of the allowance. Charge-offs and recoveries that have been recorded directly to the income statement
should be disclosed separately.
2 For
3 Geographical
TABLE 15.5.—GENERAL DISCLOSURE FOR COUNTERPARTY CREDIT RISK-RELATED EXPOSURES
Qualitative Disclosures .........
Quantitative Disclosures ......
(a) The general qualitative disclosure requirement with respect to OTC derivatives, eligible margin loans, and
repo-style transactions, including:
(1) Discussion of methodology used to assign economic capital and credit limits for counterparty credit exposures;
(2) Discussion of policies for securing collateral, valuing and managing collateral, and establishing credit reserves;
(3) Discussion of the primary types of collateral taken;
(4) Discussion of policies with respect to wrong-way risk exposures; and
(5) Discussion of the impact of the amount of collateral the [BANK] would have to provide given a credit rating downgrade.
(b) Gross positive fair value of contracts, netting benefits, netted current credit exposure, collateral held (including
type, for example, cash, government securities), and net unsecured credit exposure.1 Also report the notional
value of credit derivative hedges purchased for counterparty credit risk protection and the distribution of current
credit exposure by types of credit exposure.2
(c) Notional amount of purchased and sold credit derivatives, segregated between use for the [BANK]’s own credit portfolio, as well as in its intermediation activities, including the distribution of the credit derivative products
used, broken down further by protection bought and sold within each product group.
1 Net unsecured credit exposure is the credit exposure after considering both the benefits from legally enforceable netting agreements and collateral arrangements without taking into account haircuts for price volatility, liquidity, etc.
2 This may include interest rate derivative contracts, foreign exchange derivative contracts, equity derivative contracts, credit derivatives, commodity or other derivative contracts, repo-style transactions, and eligible margin loans.
TABLE 15.6.—CREDIT RISK MITIGATION 1, 2, 3
Qualitative Disclosures .........
Quantitative Disclosures ......
(a) The general qualitative disclosure requirement with respect to credit risk mitigation including:
(1) policies and processes for, and an indication of the extent to which the [BANK] uses, on- and off-balance
sheet netting;
(2) policies and processes for collateral valuation and management;
(3) a description of the main types of collateral taken by the [BANK];
(4) the main types of guarantors/credit derivative counterparties and their creditworthiness; and
(5) information about (market or credit) risk concentrations within the mitigation taken.
(b) For each separately disclosed portfolio, the total exposure (after, where applicable, on-or off-balance sheet
netting) that is covered by guarantees/credit derivatives and the risk-weighted asset amount associated with
that exposure.
1 At a minimum, a [BANK] must give the disclosures in Table 15.6 in relation to credit risk mitigation that has been recognized for the purposes
of reducing capital requirements under this appendix. Where relevant, [BANK]s are encouraged to give further information about mitigants that
have not been recognized for that purpose.
2 Credit derivatives that are treated, for the purposes of this appendix, as synthetic securitization exposures should be excluded from the credit
risk mitigation disclosures and included within those relating to securitization.
3 Counterparty credit risk-related exposures disclosed pursuant to Table 15.5 should be excluded from the credit risk mitigation disclosures in
Table 15.6.
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TABLE 15.7.—SECURITIZATION
Qualitative Disclosures .........
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19:12 Jul 28, 2008
(a) The general qualitative disclosure requirement with respect to securitization (including synthetic
securitizations), including a discussion of:
(1) the [BANK]’s objectives relating to securitization activity, including the extent to which these activities
transfer credit risk of the underlying exposures away from the [BANK] to other entities;
(2) the roles played by the [BANK] in the securitization process 1 and an indication of the extent of the
[BANK]’s involvement in each of them.
(b) Summary of the [BANK]’s accounting policies for securitization activities, including:
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TABLE 15.7.—SECURITIZATION—Continued
Quantitative Disclosures ......
(1) whether the transactions are treated as sales or financings;
(2) recognition of gain-on-sale;
(3) key assumptions for valuing retained interests, including any significant changes since the last reporting
period and the impact of such changes; and
(4) treatment of synthetic securitizations.
(c) Names of NRSROs used for securitizations and the types of securitization exposure for which each organization is used.
(d) The total outstanding exposures securitized by the [BANK] in securitizations that meet the operation criteria in
Section 41 (broken down into traditional/synthetic), by underlying exposure type.2 3 4
(e) For exposures securitized by the [BANK] in securitizations that meet the operational criteria in Section 41:
(1) amount of securitized assets that are impaired/past due; and
(2) losses recognized by the [BANK] during the current period 5 broken down by exposure type.
(f) Aggregate amount of securitization exposures broken down by underlying exposure type.
(g) Aggregate amount of securitization exposures and the associated capital charges for these exposures by riskweight category. Exposures that have been deducted from capital should be disclosed separately by type of
underlying asset.
(h) For securitizations subject to the early amortization treatment, the following items by underlying asset type for
securitized facilities:
(1) the aggregate drawn exposures attributed to the seller’s and investors’ interests; and
(2) the aggregate capital charges incurred by the [BANK] against the investor’s shares of drawn balances
and undrawn lines.
(i) Summary of current year’s securitization activity, including the amount of exposures securitized (by exposure
type), and recognized gain-or loss-on-sale by asset type.
1 For example: originator, investor, servicer, provider of credit enhancement, sponsor of asset-backed commercial paper facility, liquidity provider, swap provider.
2 Underlying exposure types may include, for example, mortgage loans secured by liens on one-to-four family residential property, home equity
lines, credit card receivables, and auto loans.
3 Securitization transactions in which the originating [BANK] does not retain any securitization exposure should be shown separately but need
only be reported for the year of inception.
4 Where relevant, a [BANK] is encouraged to differentiate between exposures resulting from activities in which they act only as sponsors, and
exposures that result from all other [BANK] securitization activities.
5 For example, charge-offs/allowances (if the assets remain on the [BANK]’s balance sheet) or write-downs of I/O strips and other residual
interests.
TABLE 15.8.—OPERATIONAL RISK
Qualitative disclosures .........
(a) The general qualitative disclosure requirement for operational risk.
(b) A description of the use of insurance for the purpose of mitigating operational risk.
TABLE 15.9.—EQUITIES NOT SUBJECT TO MARKET RISK RULE
Qualitative Disclosures .........
Quantitative Disclosures ......
1 Unrealized
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2 Unrealized
(a) The general qualitative disclosure requirement with respect to equity risk, including:
(1) differentiation between holdings on which capital gains are expected and those taken under other objectives including for relationship and strategic reasons; and
(2) discussion of important policies covering the valuation of and accounting for equity holdings in the banking book. This includes the accounting techniques and valuation methodologies used, including key assumptions and practices affecting valuation as well as significant changes in these practices.
(b) Value disclosed in the balance sheet of investments, as well as the fair value of those investments; for quoted
securities, a comparison to publicly-quoted share values where the share price is materially different from fair
value.
(c) The types and nature of investments, including the amount that is:
(1) Publicly traded; and
(2) Non-publicly traded.
(d) The cumulative realized gains (losses) arising from sales and liquidations in the reporting period.
(e)(1) Total unrealized gains (losses) 1
(2) Total latent revaluation gains (losses) 2
(3) Any amounts of the above included in tier 1 and/or tier 2 capital.
(f) Capital requirements broken down by appropriate equity groupings, consistent with the [BANK]’s methodology,
as well as the aggregate amounts and the type of equity investments subject to any supervisory transition regarding regulatory capital requirements.
gains (losses) recognized in the balance sheet but not through earnings.
gains (losses) not recognized either in the balance sheet or through earnings.
TABLE 15.10.—INTEREST RATE RISK FOR NON-TRADING ACTIVITIES
Qualitative disclosures .........
Quantitative disclosures .......
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(a) The general qualitative disclosure requirement, including the nature of interest rate risk for non-trading activities and key assumptions, including assumptions regarding loan prepayments and behavior of non-maturity deposits, and frequency of measurement of interest rate risk for non-trading activities.
(b) The increase (decline) in earnings or economic value (or relevant measure used by management) for upward
and downward rate shocks according to management’s method for measuring interest rate risk for non-trading
activities, broken down by currency (as appropriate).
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END OF COMMON RULE.
[END OF COMMON TEXT]
List of Subjects
12 CFR Part 3
Administrative practices and
procedure, Capital, National banks,
Reporting and recordkeeping
requirements, Risk.
12 CFR Part 208
Confidential business information,
Crime, Currency, Federal Reserve
System, Mortgages, Reporting and
recordkeeping requirements, Securities.
12 CFR Part 225
Administrative practice and
procedure, Banks, banking, Federal
Reserve System, Holding companies,
Reporting and recordkeeping
requirements, Securities.
Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
*
12 CFR Part 325
Administrative practice and
procedure, Banks, banking, Capital
Adequacy, Reporting and recordkeeping
requirements, Savings associations,
State nonmember banks.
12 CFR Part 567
Capital, Reporting and recordkeeping
requirements, Savings associations.
Proposed Adoption of Common
Appendix
The proposed adoption of the
common rules by the agencies, as
modified by agency-specific text, is set
forth below:
Department of the Treasury
Office of the Comptroller of the
Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common
preamble, the Office of the Comptroller
of the Currency amends Part 3 of
chapter I of Title 12, Code of Federal
Regulations as follows:
PART 3—MINIMUM CAPITAL RATIOS;
ISSUANCE OF DIRECTIVES
1. The authority citation for part 3
continues to read as follows:
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Authority: 12 U.S.C. 93a, 161, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907,
and 3909.
2. New Appendix D to part 3 is added
as set forth at the end of the common
preamble.
3. Appendix D to part 3 is amended
as set forth below:
a. Remove ‘‘[agency]’’ and add ‘‘OCC’’
in its place wherever it appears.
b. Remove ‘‘[BANK]’’ and add ‘‘bank’’
in its place wherever it appears, and
VerDate Aug<31>2005
18:35 Jul 28, 2008
Jkt 214001
remove ‘‘[Banks]’’ and add ‘‘Banks’’ in
its place wherever it appears.
c. Remove ‘‘[Appendixlto Partl]’’
and add ‘‘Appendix D to Part 3’’ in its
place wherever it appears.
d. Remove ‘‘[the general risk-based
capital rules]’’ and add ‘‘12 CFR part 3,
appendix A’’ in its place wherever it
appears.
e. Remove ‘‘[the market risk rule]’’
and add ‘‘12 CFR part 3, appendix B’’
in its place wherever it appears.
f. Remove ‘‘[the advanced approaches
risk-based capital rules]’’ and add ‘‘12
CFR part 3, appendix C’’ in its place
wherever it appears.
g. In section 1, revise paragraph (e) to
read as follows:
*
*
*
*
(e) Notice and response procedures. In
making a determination under paragraphs
(c)(3) or (d) of this section, the OCC will
apply notice and response procedures in the
same manner as the notice and response
procedures in 12 CFR 3.12.
*
*
*
*
*
h. In section 2, revise the definitions
of gain-on-sale, pre-sold construction
loan, statutory multifamily mortgage,
and paragraph (7) of the definition of
traditional securitization to read as
follows:
*
*
*
*
Gain-on-sale means an increase in the
equity capital (as reported on Schedule RC of
the Consolidated Statement of Condition and
Income (Call Report)) of a bank that results
from a securitization (other than an increase
in equity capital that results from the bank’s
receipt of cash in connection with the
securitization). (See also securitization.)
*
*
*
*
*
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and under 12 CFR
part 3, appendix A, section 3(a)(3)(iv).
*
*
*
*
*
Statutory multifamily mortgage means any
multifamily residential mortgage meeting the
requirements under section 618(b)(1) of the
RTCRRI Act, and under 12 CFR part 3,
appendix A, section 3(a)(3)(v).
*
*
*
*
*
Traditional securitization * * *
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under 12 U.S.C. 24(Eleventh);
*
*
*
*
*
i. In section 21, revise paragraph (a)(1)
and (a)(2) to read as follows:
PO 00000
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Fmt 4701
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*
*
*
*
*
j. In section 33, revise paragraphs
(c)(2) and (g)(3)(iv)(B) to read as follows:
Section 33. General Risk Weights
*
*
*
*
*
(c)* * *
(2) A bank must assign a risk weight of at
least 100 percent to an exposure to a
depository institution or a foreign bank that
is includable in the depository institution’s
or foreign bank’s regulatory capital and that
is not subject to deduction as a reciprocal
holding pursuant to 12 CFR part 3, appendix
A, section 2(c)(6)(ii).
*
*
*
*
*
(g) * * *
(3) * * *
(iv) * * *
(B) A bank must base all estimates of a
property’s value on an appraisal or
evaluation of the property that satisfies
subpart C of 12 CFR part 34.
*
*
*
*
*
k. Revise paragraph (i)(1)(iv) and
paragraph (i)(4) of section 42 to read as
follows:
Section 42. Risk-Weighted Assets for
Securitization Exposures
Section 2. Definitions
*
Section 21. Modifications to Tier 1 and Tier
2 Capital
(a) * * *
(1) A bank is not required to make the
deductions from capital for CEIOs in 12 CFR
part 3, appendix A, section 2(c)(1)(iv).
(2) A bank is not required to make the
deductions from capital for nonfinancial
equity investments in 12 CFR part 3,
appendix A, section 2(c)(1)(v).
*
*
*
*
*
(i) * * *
(1) * * *
(iv) The bank is well capitalized, as
defined in the OCC’s prompt corrective
action regulation at 12 CFR part 6. For
purposes of determining whether a bank is
well capitalized for purposes of this
paragraph, the bank’s capital ratios must be
calculated without regard to the capital
treatment for transfers of small-business
obligations with recourse specified in
paragraph (i)(1) of this section.
*
*
*
*
*
(4) The risk-based capital ratios of the bank
must be calculated without regard to the
capital treatment for transfers of smallbusiness obligations with recourse specified
in paragraph (i)(1) of this section as provided
in 12 CFR part 3, appendix A.
*
*
*
*
*
l. In section 52, revise paragraph
(b)(3)(i) to read as follows:
Section 52. Simple Risk-Weight Approach
(SRWA)
*
*
*
*
*
(b) * * *
(3) * * *
(i) Community development exposures. An
equity exposure that qualifies as a
community development investment under
12 U.S.C. 24(Eleventh), excluding equity
exposures to an unconsolidated small
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29JYP2
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business investment company and equity
exposures held through a consolidated small
business investment company described in
section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682).
*
*
*
*
*
m. In section 61, revise paragraph (c)
to read as follows:
Section 61. Basic Indicator Approach
*
*
*
*
*
(c) Annual gross income. A bank’s annual
gross income equals its net interest income
plus its total noninterest income minus its
underwriting income from insurance and
reinsurance activities as reported on the
bank’s Call Report.
*
*
*
*
*
n. In section 71, revise paragraph (b)
to read as follows:
Section 71. Disclosure Requirements
*
*
*
*
*
(b) A bank must comply with paragraph (c)
of section 71 of appendix H to the Federal
Reserve Board’s Regulation Y (12 CFR part
225, appendix H), including Tables 15.1—
15.10, unless it is a consolidated subsidiary
of a bank holding company or depository
institution that is subject to these
requirements.
*
*
*
*
*
o. In section 71, remove paragraph (c)
and Tables 15.1–15.10.
Board of Governors of the Federal
Reserve System
12 CFR Chapter II
Authority and Issuance
For the reasons stated in the common
preamble, the Board of Governors of the
Federal Reserve System amends parts
208 and 225 of chapter II of title 12 of
the Code of Federal Regulations as
follows:
PART 208—MEMBERSHIP OF STATE
BANKING INSTITUTIONS IN THE
FEDERAL RESERVE SYSTEM
(REGULATION H)
1. The authority citation for part 208
continues to read as follows:
mstockstill on PROD1PC66 with PROPOSALS2
Authority: 12 U.S.C. 24, 36, 92a, 93a,
248(a), 248(c), 321–338a, 371d, 461, 481–486,
601, 611, 1814, 1816, 1818, 1820(d)(9),
1823(j), 1828(o), 1831, 1831o, 1831p–1,
1831r–1, 1835a, 1882, 2901–2907, 3105,
3310, 3331–3351, and 3906–3909; 15 U.S.C.
78b, 78l(b), 78l(g), 78l(i), 78o–4(c)(5), 78q,
78q–1, and 78w, 6801, and 6805; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106,
and 4128.
2. New Appendix G to part 208 is
added as set forth at the end of the
common preamble.
3. Appendix G to part 208 is amended
as set forth below:
a. Remove ‘‘[agency]’’ and add
‘‘Federal Reserve’’ in its place wherever
it appears.
VerDate Aug<31>2005
18:35 Jul 28, 2008
Jkt 214001
b. Remove ‘‘[BANK]’’ and add ‘‘bank’’
in its place wherever it appears, and
remove ‘‘[Banks]’’ and add ‘‘Banks’’ in
its place wherever it appears.
c. Remove ‘‘[Appendix l to Part l]’’
and add ‘‘Appendix G to Part 208’’ in its
place wherever it appears.
d. Remove ‘‘[the general risk-based
capital rules]’’ and add ‘‘12 CFR part
208, appendix A’’ in its place wherever
it appears.
e. Remove ‘‘[the market risk rule]’’
and add ‘‘12 CFR part 208, appendix E’’
in its place wherever it appears.
f. Remove ‘‘[the advanced approaches
risk-based capital rules]’’ and add ‘‘12
CFR part 208, appendix F’’ in its place
wherever it appears.
g. In section 1, revise paragraph (e) to
read as follows:
Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
*
*
*
*
*
(e) Notice and response procedures. In
making a determination under paragraphs
(c)(3) or (d) of this section, the Federal
Reserve will apply notice and response
procedures in the same manner as the notice
and response procedures in 12 CFR 263.202.
*
*
*
*
*
h. In section 2, revise the definitions
of gain-on-sale, pre-sold construction
loan, statutory multifamily mortgage,
and paragraph (7) of the definition of
traditional securitization to read as
follows:
Section 2. Definitions
*
*
*
*
*
*
*
*
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and under 12 CFR
part 208, appendix A, section III.C.3.
*
*
*
*
*
Statutory multifamily mortgage means any
multifamily residential mortgage meeting the
requirements under section 618(b)(1) of the
RTCRRI Act and under 12 CFR part 208,
appendix A, section III.C.3.
*
*
*
*
*
Traditional securitization * * *
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under 12 U.S.C. 24 (Eleventh);
*
*
*
*
*
i. In section 21, revise paragraphs
(a)(1) and (2) to read as follows:
PO 00000
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Fmt 4701
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*
*
*
*
*
j. In section 33, revise paragraphs
(c)(2) and (g)(3)(iv)(B) to read as follows:
Section 33. General Risk Weights
*
*
*
*
*
(c) * * *
(2) A bank must assign a risk weight of at
least 100 percent to an exposure to a
depository institution or a foreign bank that
is includable in the depository institution’s
or foreign bank’s regulatory capital and that
is not subject to deduction as a reciprocal
holding pursuant to 12 CFR part 208,
appendix A, section II.B.3.
*
*
*
*
*
(g) * * *
(3) * * *
(iv) * * *
(B) A bank must base all estimates of a
property’s value on an appraisal or
evaluation of the property that satisfies
subpart E of 12 CFR part 208.
*
*
*
*
*
k. Revise paragraph (i)(1)(iv) and
paragraph (i)(4) of section 42 to read as
follows:
Section 42. Risk-Weighted Assets for
Securitization Exposures
*
*
Gain-on-sale means an increase in the
equity capital (as reported on Schedule RC of
the Consolidated Statement of Condition and
Income (Call Report)) of a bank that results
from a securitization (other than an increase
in equity capital that results from the bank’s
receipt of cash in connection with the
securitization). (See also securitization.)
*
Section 21. Modifications to Tier 1 and Tier
2 Capital
(a) * * *
(1) A bank is not required to make the
deductions from capital for CEIOs in 12 CFR
part 208, appendix A, section II.B.1.e.
(2) A bank is not required to make the
deductions from capital for nonfinancial
equity investments in 12 CFR part 208,
appendix A, section II.B.5.
*
*
*
*
(i) * * *
(1) * * *
(iv) The bank is well capitalized, as
defined in the Federal Reserve’s prompt
corrective action regulation at 12 CFR part
208, Subpart D. For purposes of determining
whether a bank is well capitalized for
purposes of this paragraph, the bank’s capital
ratios must be calculated without regard to
the capital treatment for transfers of smallbusiness obligations with recourse specified
in paragraph (i)(1) of this section.
*
*
*
*
*
(4) The risk-based capital ratios of the bank
must be calculated without regard to the
capital treatment for transfers of smallbusiness obligations with recourse specified
in paragraph (i)(1) of this section as provided
in 12 CFR part 208, appendix A.
*
*
*
*
*
l. In section 52, revise paragraph
(b)(3)(i) to read as follows:
Section 52. Simple Risk-Weight Approach
(SRWA)
*
*
*
*
*
(b) * * *
(3) * * *
(i) Community development exposures. An
equity exposure that qualifies as a
community development investment under
12 U.S.C. 24 (Eleventh), excluding equity
exposures to an unconsolidated small
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Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
business investment company and equity
exposures held through a consolidated small
business investment company described in
section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682).
CFR part 225, appendix G’’ in its place
wherever it appears.
g. In section 1, revise paragraphs (b)
and (e) to read as follows:
*
Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
*
*
*
*
m. In section 61, revise paragraph (c)
to read as follows:
Section 61. Basic Indicator Approach
*
*
*
*
*
(c) Annual gross income. A bank’s annual
gross income equals its net interest income
plus its total noninterest income minus its
underwriting income from insurance and
reinsurance activities as reported on the
bank’s Call Report.
*
*
*
*
*
(b) Applicability. This appendix applies to
a bank holding company that elects to use
this appendix to calculate its risk-based
capital requirements and that is not a
consolidated subsidiary of another bank
holding company that uses this appendix to
calculate its risk-based capital requirements.
*
*
*
*
*
Section 71. Disclosure Requirements
(e) Notice and response procedures. In
making a determination under paragraphs
(c)(3) or (d) of this section, the Federal
Reserve will apply notice and response
procedures in the same manner as the notice
and response procedures in 12 CFR 263.202.
*
*
*
*
*
*
*
n. In section 71, revise paragraph (b)
to read as follows:
*
*
*
*
(b) A bank must comply with paragraph (c)
of section 71 of appendix H to the Federal
Reserve Board’s Regulation Y (12 CFR part
225, appendix H), including Tables 15.1–
15.10, unless it is a consolidated subsidiary
of a bank holding company or depository
institution that is subject to these
requirements.
*
*
*
*
o. In section 71, remove paragraph (c)
and remove Tables 15.1–15.10.
*
*
*
*
h. In section 2, revise the definitions
of gain-on-sale, pre-sold construction
loan, statutory multifamily mortgage,
and paragraph (7) of the definition of
traditional securitization to read as
follows:
Section 2. Definitions
*
*
PART 225—BANK HOLDING
COMPANIES AND CHANGE IN BANK
CONTROL (REGULATION Y)
Gain-on-sale means an increase in the
equity capital (as reported on Schedule HC
of the FR Y–9C Report) of a bank holding
company that results from a securitization
(other than an increase in equity capital that
results from the bank holding company’s
receipt of cash in connection with the
securitization). (See also securitization.)
1. The authority citation for part 225
continues to read as follows:
mstockstill on PROD1PC66 with PROPOSALS2
Authority: 12 U.S.C. 1817(j)(13), 1818,
1828(o), 1831i, 1831p–1, 1843(c)(8), 1844(b),
1972(1), 3106, 3108, 3310, 3331–3351, 3907,
and 3909; 15 U.S.C. 6801 and 6805.
2. New Appendix H to part 225 is
added as set forth at the end of the
common preamble.
3. Appendix H to part 225 is amended
as set forth below:
a. Remove ‘‘[agency]’’ and add
‘‘Federal Reserve’’ in its place wherever
it appears.
b. Remove ‘‘[BANK]’’ and add in its
place ‘‘bank holding company’’
wherever it appears, and remove
‘‘[Banks]’’ and add ‘‘Bank Holding
Companies’’ in its place wherever it
appears.
c. Remove ‘‘[Appendix l to Part l]’’
and add ‘‘Appendix H to Part 225’’ in
its place wherever it appears.
d. Remove ‘‘[the general risk-based
capital rules]’’ and add ‘‘12 CFR part
225, appendix A’’ in its place wherever
it appears.
e. Remove ‘‘[the market risk rule]’’
and add ‘‘12 CFR part 225, appendix E’’
in its place wherever it appears.
f. Remove ‘‘[the advanced approaches
risk-based capital rules]’’ and add ‘‘12
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*
*
*
*
*
*
*
*
*
*
*
*
Statutory multifamily mortgage means any
multifamily residential mortgage meeting the
requirements under section 618(b)(1) of the
RTCRRI Act and under 12 CFR part 225,
appendix A, section III.C.3.
*
*
*
*
*
*
*
*
*
(c) * * *
(4) A bank holding company must also
deduct an amount equal to the minimum
regulatory capital requirement established by
the regulator of any insurance underwriting
subsidiary of the holding company. For U.S.based insurance underwriting subsidiaries,
this amount generally would be 200 percent
of the subsidiary’s Authorized Control Level
as established by the appropriate state
regulator of the insurance company.
j. In section 33, revise paragraph (c)(2)
to read as follows:
Section 33. General Risk Weights
*
*
*
*
*
(c) * * *
(2) A bank holding company must assign
a risk weight of at least 100 percent to an
exposure to a depository institution or a
foreign bank that is includable in the
depository institution’s or foreign bank’s
regulatory capital and that is not subject to
deduction as a reciprocal holding pursuant to
12 CFR part 225, appendix A, section II.B.3.
*
*
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and under 12 CFR
part 225, appendix A, section III.C.3.
*
(2) A bank holding company is not
required to make the deductions from capital
for nonfinancial equity investments in 12
CFR part 225, appendix A, section II.B.5.
*
Traditional securitization * * *
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under 12 U.S.C. 24(Eleventh);
*
*
*
*
i. In section 21, revise paragraphs
(a)(1) and (2) and add a new paragraph
(c)(4) to read as follows:
*
*
*
*
k. In paragraph (k)(1) of section 33,
remove ‘‘A [BANK] may assign a zero
percent risk weight to cash owned and
held in all offices of the [BANK] or in
transit; to gold bullion held in the
[BANK]’s own vaults, or held in another
depository institution’s vaults on an
allocated basis, to the extent the gold
bullion assets are offset by gold bullion
liabilities;’’ and add in its place ‘‘A bank
holding company may assign a zero
percent risk weight to cash owned and
held in all offices of subsidiary
depository institutions or in transit; to
gold bullion held in either a subsidiary
depository institution’s own vaults, or
held in another depository institution’s
vaults on an allocated basis, to the
extent the gold bullion assets are offset
by gold bullion liabilities;’’
*
*
*
*
*
l. Revise paragraph (i)(1)(iv) and
revise paragraph (i)(4) of section 42 to
read as follows:
Section 42. Risk-Weighted Assets for
Securitization Exposures
*
*
Section 21. Modifications to Tier 1 and Tier
2 Capital
(a) * * *
(1) A bank holding company is not
required to make the deductions from capital
for CEIOs in 12 CFR part 225, appendix A,
section II.B.1.e.
(i) * * *
(1) * * *
(iv) The bank holding company is well
capitalized, as defined in the Federal
Reserve’s prompt corrective action regulation
at 12 CFR part 208, Subpart D. For purposes
of determining whether a bank holding
company is well capitalized for purposes of
this paragraph, the bank holding company’s
capital ratios must be calculated without
regard to the capital treatment for transfers of
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E:\FR\FM\29JYP2.SGM
*
29JYP2
*
*
*
44058
Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 / Proposed Rules
small-business obligations with recourse
specified in paragraph (i)(1) of this section.
*
*
*
*
*
(4) The risk-based capital ratios of the bank
holding company must be calculated without
regard to the capital treatment for transfers of
small-business obligations with recourse
specified in paragraph (i)(1) of this section as
provided in 12 CFR part 225, appendix A.
*
*
*
*
*
m. In section 52, revise paragraph
(b)(3)(i) to read as follows:
Section 52. Simple Risk-Weight Approach
(SRWA)
*
*
*
*
*
(b) * * *
(3) * * *
(i) Community development exposures. An
equity exposure that qualifies as a
community development investment under
12 U.S.C. 24(Eleventh), excluding equity
exposures to an unconsolidated small
business investment company and equity
exposures held through a consolidated small
business investment company described in
section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682).
*
*
*
*
*
n. In section 61, revise paragraph (c)
to read as follows:
Section 61. Basic Indicator Approach
*
*
*
*
*
(c) Annual gross income. A bank holding
company’s annual gross income equals its net
interest income plus its total noninterest
income minus its underwriting income from
insurance and reinsurance activities as
reported on the bank holding company’s Y–
9C Report.
*
*
*
*
*
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority and Issuance
For the reasons stated in the common
preamble, the Federal Deposit Insurance
Corporation amends part 325 of chapter
III of Title 12, Code of Federal
Regulations as follows:
PART 325—CAPITAL MAINTENANCE
1. The authority citation for part 325
continues to read as follows:
mstockstill on PROD1PC66 with PROPOSALS2
Authority: 12 U.S.C. 1815(a), 1815(b),
1816, 1818(a), 1818(b), 1818(t), 1819(Tenth),
1828(c), 1828(d), 1828(i), 1828(n), 1828(o),
1835, 3907, 3909, 4808; Pub. L. 102–233, 105
Stat. 1761, 1789, 1790 (12 U.S.C. 1831n,
note); Pub. L. 102–242, 105 Stat. 2236, 2355,
2386 (12 U.S.C. 1828 note).
2. New Appendix E to part 325 is
added as set forth at the end of the
common preamble.
3. Appendix E to part 325 is amended
as set forth below:
a. Remove ‘‘[agency]’’ and add ‘‘FDIC’’
in its place wherever it appears.
b. Remove ‘‘[BANK]’’ and add ‘‘bank’’
in its place wherever it appears, and
VerDate Aug<31>2005
18:35 Jul 28, 2008
Jkt 214001
remove ‘‘[Banks]’’ and add ‘‘Banks’’ in
its place wherever it appears.
c. Remove ‘‘[Appendix l to Part l]’’
and add ‘‘Appendix E to Part 325’’ in its
place wherever it appears.
d. Remove ‘‘[the general risk-based
capital rules]’’ and add ‘‘12 CFR part
325, appendix A’’ in its place wherever
it appears.
e. Remove ‘‘[the market risk rule]’’
and add ‘‘12 CFR part 325, appendix C’’
in its place wherever it appears.
f. Remove ‘‘[the advanced approaches
risk-based capital rules]’’ and add ‘‘12
CFR part 325, appendix D’’ in its place
wherever it appears.
g. In section 1, revise paragraph (e) to
read as follows:
Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
*
*
*
*
*
(e) Notice and response procedures. In
making a determination under paragraphs
(c)(3) or (d) of this section, the FDIC will
apply notice and response procedures in the
same manner as the notice and response
procedures in 12 CFR 325.6(c).
*
*
*
*
*
h. In section 2, revise the definitions
of gain-on-sale, pre-sold construction
loan, statutory multifamily mortgage,
and paragraph (7) of the definition of
traditional securitization to read as
follows:
Section 2. Definitions
*
*
*
*
*
Gain-on-sale means an increase in the
equity capital (as reported on Schedule RC of
the Consolidated Statement of Condition and
Income (Call Report)) of a bank that results
from a securitization (other than an increase
in equity capital that results from the bank’s
receipt of cash in connection with the
securitization). (See also securitization.)
*
*
*
*
*
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and under 12 CFR
part 325, appendix A, section II.C, and that
is not 90 days or more past due or on
nonaccrual.
*
*
*
*
*
Statutory multifamily mortgage means any
multifamily residential mortgage meeting the
requirements under section 618(b)(1) of the
RTCRRI Act and under 12 CFR part 325,
appendix A, section II.C.
*
*
*
*
*
Traditional securitization * * *
(7) The underlying exposures are not
owned by a firm an investment in which
qualifies as a community development
investment under 12 U.S.C. 24(Eleventh);
*
*
*
*
*
i. In section 21, revise paragraph (a)(1)
and (a)(2) to read as follows:
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Section 21. Modifications to Tier 1 and Tier
2 Capital
(a) * * *
(1) A bank is not required to make the
deductions from capital for CEIOs in 12 CFR
part 325, appendix A, section II.B.5.
(2) A bank is not required to make the
deductions from capital for nonfinancial
equity investments in 12 CFR part 325,
appendix A, section II.B.
*
*
*
*
*
j. In section 33, revise paragraphs
(c)(2) and (g)(3)(iv)(B) to read as follows:
Section 33. General Risk Weights
*
*
*
*
*
(c) * * *
(2) A bank must assign a risk weight of at
least 100 percent to an exposure to a
depository institution or a foreign bank that
is includable in the depository institution’s
or foreign bank’s regulatory capital and that
is not subject to deduction as a reciprocal
holding pursuant to 12 CFR part 325,
appendix A, section I.B.(4).
*
*
*
*
*
(g) * * *
(3) * * *
(iv) * * *
(B) A bank must base all estimates of a
property’s value on an appraisal or
evaluation of the property that satisfies 12
CFR part 323.
*
*
*
*
*
k. Revise paragraph (i)(1)(iv) and
paragraph (i)(4) of section 42 to read as
follows:
Section 42. Risk-Weighted Assets for
Securitization Exposures
*
*
*
*
*
(i) * * *
(1) * * *
(iv) The bank is well capitalized, as
defined in the FDIC’s prompt corrective
action regulation at 12 CFR part 325, subpart
B. For purposes of determining whether a
bank is well capitalized for purposes of this
paragraph, the bank’s capital ratios must be
calculated without regard to the capital
treatment for transfers of small-business
obligations with recourse specified in
paragraph (i)(1) of this section.
*
*
*
*
*
(4) The risk-based capital ratios of the bank
must be calculated without regard to the
capital treatment for transfers of smallbusiness obligations with recourse specified
in paragraph (i)(1) of this section as provided
in 12 CFR part 325, appendix A.
*
*
*
*
*
l. In section 52, revise paragraph
(b)(3)(i) to read as follows:
Section 52. Simple Risk-Weight Approach
(SRWA)
*
*
*
*
*
(b) * * *
(3) * * *
(i) Community development exposures. An
equity exposure that qualifies as a
community development investment under
12 U.S.C. 24(Eleventh), excluding equity
exposures to an unconsolidated small
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business investment company and equity
exposures held through a consolidated small
business investment company described in
section 302 of the Small Business Investment
Act of 1958 (15 U.S.C. 682).
*
*
*
*
*
m. In section 61, revise paragraph (c)
to read as follows:
Section 61. Basic Indicator Approach
*
*
*
*
*
(c) Annual gross income. A bank’s annual
gross income equals its net interest income
plus its total noninterest income minus its
underwriting income from insurance and
reinsurance activities as reported on the
bank’s Call Report.
*
*
*
*
*
n. In section 71, revise paragraph (b)
to read as follows:
Section 71. Disclosure Requirements
*
*
*
*
*
(b) A bank must comply with paragraph (c)
of section 71 of appendix H to the Federal
Reserve Board’s Regulation Y (12 CFR part
225, appendix H), including Tables 15.1–
15.10, unless it is a consolidated subsidiary
of a bank holding company or depository
institution that is subject to these
requirements.
*
*
*
*
*
o. In section 71, remove paragraph (c)
and Tables 15.1–15.10.
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
Authority and Issuance
For the reasons stated in the common
preamble, the Office of Thrift
Supervision amends Part 567 of chapter
V of Title 12, Code of Federal
Regulations as follows:
PART 567—CAPITAL
1. The authority citation for part 567
continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463,
1464, 1467a, 1828(note).
2. In § 567.0, revise paragraph (a),
redesignate paragraph (b) as paragraph
(c), add new paragraph (b), and amend
redesignated paragraph (c) by adding a
new heading and by revising paragraph
(c)(2)(ii) to read as follows:
mstockstill on PROD1PC66 with PROPOSALS2
§ 567.0
Scope.
(a) General. This part prescribes the
minimum regulatory capital
requirements for savings associations.
Subpart B of this part applies to all
savings associations, except as
described in paragraphs (b) and (c) of
this section.
(b) Savings associations using the
standardized approach rule. (1) A
savings association that uses Appendix
B of this part must utilize the
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18:35 Jul 28, 2008
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methodologies in that appendix to
calculate their risk based capital
requirement and make the required
disclosures described in that appendix.
(2) Subpart B of this part does not
apply to the computation of risk-based
capital requirements by a savings
association that uses Appendix B of this
part. However, these savings
associations:
(i) Must compute the components of
capital under § 567.5 subject to the
modifications in section 21 of Appendix
B of this part.
(ii) Must meet the leverage ratio
requirement described at §§ 567.2(a)(2)
and 567.8. Notwithstanding paragraph
(b)(2)(i) of this section, the savings
association must compute core (tier 1)
capital under section 567.5.
(iii) Must meet the tangible capital
requirement described at §§ 567.2(a)(3)
and 567.9.
(iv) Are subject to §§ 567.3 (individual
minimum capital requirement), 567.4
(capital directives); and 567.10
(consequences of failure to meet capital
requirements).
(v) Are subject to the reservations of
authority at § 567.11, which supplement
the reservations of authority at section
1 of Appendix B of this part.
(c) Savings associations using the
advanced approaches rule.
*
*
*
*
*
(2) * * *
(ii) Must meet the leverage ratio
requirement described at §§ 567.2(a)(2)
and 567.8. Notwithstanding paragraph
(c)(2)(i) of this section, the savings
association must compute core (tier 1)
capital under section 567.5.
*
*
*
*
*
2. Appendix B is added to part 567 as
set forth at the end of the common
preamble.
3. Amend Appendix B of part 567 as
follows:
a. Revise the heading of Appendix B
to read as follows:
Appendix B to Part 567—Risk-Based
Capital Requirements—Standardized
Framework
b. Remove [agency] and add ‘‘OTS’’ in
its place wherever it appears.
c. Remove ‘‘[BANK]’’ and add
‘‘savings association’’ in its place
wherever it appears, and remove
‘‘[Banks]’’ and add ‘‘Savings
Associations’’ in its place wherever it
appears.
d. Remove ‘‘[Appendix l to Part l]’’
and add ‘‘Appendix B to Part 567’’ in its
place wherever it appears.
e. Remove ‘‘[the general risk-based
capital rules]’’ and add ‘‘subpart B of
part 567’’ in its place wherever it
appears.
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Fmt 4701
Sfmt 4702
f. Remove ‘‘[the market risk rule]’’ and
add ‘‘any applicable market risk rule’’ in
its place wherever it appears.
g. Remove ‘‘[the advanced approaches
risk-based capital rules] and add
‘‘Appendix C to Part 567’’ in its place
wherever it appears.
h. In section 1, revise paragraph (e) to
read as follows:
Section 1. Purpose, Applicability, Election
Procedures, and Reservation of Authority
*
*
*
*
*
(e) Notice and response procedures. In
making a determination under paragraphs
(c)(3) or (d) of this section, the [agency] will
apply notice and response procedures in the
same manner as the notice and response
procedures in 12 CFR 567.3(d).
*
*
*
*
*
i. In section 2, revise the definitions
of gain-on-sale, pre-sold construction
loan, statutory multifamily loan, and
paragraph (7) of the definition of
traditional securitization to read as
follows:
Section 2. Definitions
*
*
*
*
*
Gain-on-sale means an increase in the
equity capital (as reported on Schedule SC of
the Thrift Financial Report) of a savings
association that results from a securitization
(other than an increase in equity capital that
results from the savings association’s receipt
of cash in connection with the
securitization). (See also securitization.)
*
*
*
*
*
Pre-sold construction loan means any oneto-four family residential pre-sold
construction loan for a residence meeting the
requirements under section 618(a)(1) or (2) of
the Resolution Trust Corporation
Refinancing, Restructuring, and Improvement
Act of 1991 (RTCRRI Act) and 12 CFR 567.1
(definition of ‘‘qualifying residential
construction loan’’), and that is not on
nonaccrual.
*
*
*
*
*
Statutory multifamily mortgage means any
multifamily residential mortgage that:
(1) Meets the requirements under section
618(b)(1) of the RTCRRI Act and under 12
CFR 567.1 (definition of ‘‘qualifying
multifamily mortgage loan’’) and 12 CFR
567.6(a)(1)(iii); and
(2) Is not on nonaccrual.
*
*
*
*
*
Traditional securitization * * *
(7) The underlying exposures are not
owned by a firm an investment in which is
designed primarily to promote community
welfare, including the welfare of low- and
moderate-income communities or families,
such as by providing services or jobs.
*
*
*
*
*
j. Revise paragraphs (a)(1) and (2) of
section 21 to read as follows:
Section 21. Modifications to Tier 1 and Tier
2 Capital
*
*
(a) * * *
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*
*
*
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(1) A savings association is not required to
make the deductions from capital for CEIOs
in 12 CFR 567.5(a)(2)(iii) and 567.12(e);
(2) A savings association is not required to
deduct equity securities from capital under
12 CFR 567.5(c)(2)(ii). However, it must
continue to deduct equity investments in real
estate under that section. See 12 CFR 567.1,
which defines equity investments, including
equity securities and equity investments in
real estate.
(iv) The savings association is well
capitalized, as defined in the OTS ’s prompt
corrective action regulation at 12 CFR part
565. * * *
*
*
Section 33. General Risk Weights
Section 52. Simple Risk-Weight Approach
(SRWA)
*
*
*
*
*
*
k. Revise paragraphs (c)(2) and
(g)(3)(iv)(B) of section 33 to read as
follows:
*
*
*
*
*
*
*
*
(g) * * *
(3) * * *
(iv) * * *
(B) A savings association must base all
estimates of a property’s value on an
appraisal or evaluation of the property that
satisfies 12 CFR part 564.
*
*
*
*
*
l. Revise the first sentence of
paragraph (i)(1)(iv) and paragraph (i)(4)
of section 42 to read as follows:
Section 42. Risk-Weighted Assets for
Securitization Exposures
*
*
*
*
*
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(i) * * *
(1) * * *
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*
*
*
*
(4) The risk-based capital ratios of the
savings association must be calculated
without regard to the capital treatment for
transfers of small-business obligations with
recourse specified in paragraph (i)(1) of this
section as provided in 12 CFR 567.6(b)(5)(v).
*
*
*
*
m. Revise paragraph (b)(3)(i) of
section 52 to read as follows:
(c) * * *
(2) A savings association must assign a risk
weight of at least 100 percent to an exposure
to a depository institution or a foreign bank
that is includable in the depository
institution’s or foreign bank’s regulatory
capital and that is not subject to deduction
as a reciprocal holding pursuant to 12 CFR
part 567.5(c)(2)(i).
*
*
*
*
*
*
(b) * * *
(3) * * *
(i) Community development equity
exposures. An equity exposure that is
designed primarily to promote community
welfare, including the welfare of low- and
moderate-income communities or families,
such as by providing services or jobs,
excluding equity exposures to an
unconsolidated small business investment
company and equity exposures held through
a consolidated small business investment
company described in section 302 of the
Small Business Investment Act of 1958 (15
U.S.C. 682).
*
*
*
*
*
n. Revise paragraph (c) in section 61
to read as follows:
Section 61. Basic Indicator Approach
*
*
*
*
*
(c) Annual gross income. Annual gross
income equals a savings association’s net
interest income (expense) before provision
for losses on interest-bearing assets, plus total
noninterest income, minus the portion of its
other fees and charges that represents income
derived from insurance and reinsurance
PO 00000
Frm 00080
Fmt 4701
Sfmt 4702
underwriting activities, minus (plus) its net
income (loss) from the sale of assets held for
sale and available-for-sale securities to
include only the profit or loss from the
disposition of available-for-sale securities
pursuant to FASB Statement No. 115, minus
(plus) its net income (loss) from the sale of
securities held-to-maturity, all as reported on
the savings association’s year-end Thrift
Financial Report.
*
*
*
*
*
o. In section 71, revise paragraph (b)
to read as follows:
Section 71. Disclosure Requirements
*
*
*
*
*
(b) A savings association must comply with
paragraph (c) of this section, unless it is a
consolidated subsidiary of a bank holding
company or depository institution that is
subject to these requirements.
*
*
*
*
*
Dated: July 2, 2008.
John C. Dugan,
Comptroller of the Currency.
By order of the Board of Governors of the
Federal Reserve System, July 10, 2008.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, this 25th day of
June 2008.
By order of the Board of Directors. Federal
Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.
Dated: July 2, 2008.
By the Office of Thrift Supervision.
John M. Reich,
Director.
[FR Doc. E8–16262 Filed 7–28–08; 8:45 am]
BILLING CODE 4810–33–P, 6210–01–P, 6714–01–P,
6720–01–P
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]]>Agencies
[Federal Register Volume 73, Number 146 (Tuesday, July 29, 2008)]
[Proposed Rules]
[Pages 43982-44060]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16262]
[[Page 43981]]
-----------------------------------------------------------------------
Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Federal Reserve System
12 CFR Parts 208 and 225
Federal Deposit Insurance Corporation
12 CFR Part 325
Department of the Treasury
Office of Thrift Supervision
12 CFR Part 567
Risk-Based Capital Guidelines; Capital Adequacy Guidelines:
Standardized Framework; Proposed Rule
Federal Register / Vol. 73, No. 146 / Tuesday, July 29, 2008 /
Proposed Rules
[[Page 43982]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID: OCC-2008-0006]
RIN 1557-AD07
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1318]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD29
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. 2008-002]
RIN 1550-AC19
Risk-Based Capital Guidelines; Capital Adequacy Guidelines:
Standardized Framework
AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of
Governors of the Federal Reserve System; Federal Deposit Insurance
Corporation; and Office of Thrift Supervision, Treasury.
ACTION: Joint notice of proposed rulemaking.
-----------------------------------------------------------------------
SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), Federal Deposit
Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS)
(collectively, the agencies) propose a new risk-based capital framework
(standardized framework) based on the standardized approach for credit
risk and the basic indicator approach for operational risk described in
the capital adequacy framework titled ``International Convergence of
Capital Measurement and Capital Standards: A Revised Framework'' (New
Accord) released by the Basel Committee on Banking Supervision. The
standardized framework generally would be available, on an optional
basis, to banks, bank holding companies, and savings associations
(banking organizations) that apply the general risk-based capital
rules.
DATES: Comments on this joint notice of proposed rulemaking must be
received by October 27, 2008.
ADDRESSES: Comments should be directed to:
OCC: Because paper mail in the Washington, DC area and at the OCC
is subject to delay, commenters are encouraged to submit comments by e-
mail, if possible. Please use the title ``Risk-Based Capital
Guidelines; Capital Adequacy Guidelines: Standardized Framework;
Proposed Rule and Notice'' to facilitate the organization and
distribution of the comments. You may submit comments by any of the
following methods:
Federal eRulemaking Portal--``Regulations.gov'': Go to
https://www.regulations.gov, under the ``More Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select OCC-2008-0006 to
submit or view public comments and to view supporting and related
materials for this notice of proposed rulemaking. The ``How to Use This
Site'' link on the Regulations.gov home page provides information on
using Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
E-mail: regs.comments@occ.treas.gov.
Mail: Office of the Comptroller of the Currency, 250 E
Street, SW., Mail Stop 1-5, Washington, DC 20219.
Fax: (202) 874-4448.
Hand Delivery/Courier: 250 E Street, SW., Attn: Public
Information Room, Mail Stop 1-5, Washington, DC 20219.
Instructions: You must include ``OCC'' as the agency name and
``Docket Number OCC-2008-0006'' in your comment. In general, OCC will
enter all comments received into the docket and publish them on the
Regulations.gov Web site without change, including any business or
personal information that you provide such as name and address
information, e-mail addresses, or phone numbers. Comments received,
including attachments and other supporting materials, are part of the
public record and subject to public disclosure. Do not enclose any
information in your comment or supporting materials that you consider
confidential or inappropriate for public disclosure.
You may review comments and other related materials that pertain to
this [insert type of rulemaking action] by any of the following
methods:
Viewing Comments Electronically: Go to https://
www.regulations.gov, under the ``More Search Options'' tab click next
to the ``Advanced Document Search'' option where indicated, select
``Comptroller of the Currency'' from the agency drop-down menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2008-0006''
to view public comments for this rulemaking action.
Viewing Comments Personally: You may personally inspect
and photocopy comments at the OCC's Public Information Room, 250 E
Street, SW., Washington, DC. For security reasons, the OCC requires
that visitors make an appointment to inspect comments. You may do so by
calling (202) 874-5043. Upon arrival, visitors will be required to
present valid government-issued photo identification and submit to
security screening in order to inspect and photocopy comments.
Docket: You may also view or request available background
documents and project summaries using the methods described above.
Board: You may submit comments, identified by Docket No. R-1318, by
any of the following methods:
Agency Web Site: https://www.federalreserve.gov. Follow the
instructions for submitting comments at https://www.federalreserve.gov/
generalinfo/foia/ProposedRegs.cfm.
Federal eRulemaking Portal: https://www.regulations.gov.
Follow the instructions for submitting comments.
E-mail: regs.comments@federalreserve.gov. Include docket
number in the subject line of the message.
FAX: (202) 452-3819 or (202) 452-3102.
Mail: Jennifer J. Johnson, Secretary, Board of Governors
of the Federal Reserve System, 20th Street and Constitution Avenue,
NW., Washington, DC 20551.
All public comments are available from the Board's Web site at
https://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm as
submitted, unless modified for technical reasons. Accordingly, your
comments will not be edited to remove any identifying or contact
information. Public comments may also be viewed electronically or in
paper form in Room MP-500 of the Board's Martin Building (20th and C
Street, NW.) between 9 a.m. and 5 p.m. on weekdays.
FDIC: You may submit by any of the following methods:
Federal eRulemaking Portal: https://www.regulations.gov
Follow the instructions for submitting comments.
[[Page 43983]]
Agency Web site: https://www.FDIC.gov/regulations/laws/
federal/propose.html.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
Hand Delivered/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street), on business days
between 7 a.m. and 5 p.m.
E-mail: comments@FDIC.gov.
Public Inspection: Comments may be inspected and
photocopied in the FDIC Public Information Center, Room E-1002, 3502
Fairfax Drive, Arlington, VA 22226, between 9 a.m. and 5 p.m. on
business days.
Instructions: Submissions received must include the Agency name and
title for this notice. Comments received will be posted without change
to https://www.FDIC.gov/regulations/laws/federal/propose.html, including
any personal information provided.
OTS: You may submit comments, identified by OTS-2008-0002, by any
of the following methods:
Federal eRulemaking Portal: ``Regulations.gov'': Go to
https://www.regulations.gov, under the ``more Search Options'' tab click
next to the ``Advanced Docket Search'' option where indicated, select
``Office of Thrift Supervision'' from the agency dropdown menu, then
click ``Submit.'' In the ``Docket ID'' column, select ``OTS-2008-0002''
to submit or view public comments and to view supporting and related
materials for this proposed rulemaking. The ``How to Use This Site''
link on the Regulations.gov home page provides information on using
Regulations.gov, including instructions for submitting or viewing
public comments, viewing other supporting and related materials, and
viewing the docket after the close of the comment period.
Mail: Regulation Comments, Chief Counsel's Office, Office
of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552,
Attention: OTS-2008-0002.
Facsimile: (202) 906-6518.
Hand Delivery/Courier: Guard's Desk, East Lobby Entrance,
1700 G Street, NW., from 9 a.m. to 4 p.m. on business days, Attention:
Regulation Comments, Chief Counsel's Office, Attention: OTS-2008-0002.
Instructions: All submissions received must include the
agency name and docket number for this rulemaking.
All comments received will be entered into the docket and posted on
Regulations.gov without change, including any personal information
provided. Comments, including attachments and other supporting
materials received are part of the public record and subject to public
disclosure. Do not enclose any information in your comment or
supporting materials that you consider confidential or inappropriate
for public disclosure.
Viewing Comments Electronically: Go to https://
www.regulations.gov, select ``Office of Thrift Supervision'' from the
agency drop-down menu, then click ``Submit.'' Select Docket ID ``OTS-
2008-0002'' to view public comments for this notice of proposed
rulemaking.
Viewing Comments On-Site: You may inspect comments at the
Public Reading Room, 1700 G Street, NW., by appointment. To make an
appointment for access, call (202) 906-5922, send an e-mail to
public.info@ots.treas.gov, or send a facsimile transmission to (202)
906-6518. (Prior notice identifying the materials you will be
requesting will assist us in serving you.) We schedule appointments on
business days between 10 a.m. and 4 p.m. In most cases, appointments
will be available the next business day following the date we receive a
request.
FOR FURTHER INFORMATION CONTACT:
OCC: Margot Schwadron, Senior Risk Expert, (202) 874-6022, Capital
Policy Division; Carl Kaminski, Attorney; or Ron Shimabukuro, Senior
Counsel, Legislative and Regulatory Activities Division, (202) 874-
5090; Office of the Comptroller of the Currency, 250 E Street, SW.,
Washington, DC 20219.
Board: Barbara Bouchard, Associate Director, (202) 452-3072; or
William Tiernay, Senior Supervisory Financial Analyst, (202) 872-7579,
Division of Banking Supervision and Regulation; or Mark E. Van Der
Weide, Assistant General Counsel, (202) 452-2263; or April Snyder,
Counsel, (202) 452-3099, Legal Division. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: Nancy Hunt, Senior Policy Analyst, (202) 898-6643; Ryan
Sheller, Capital Markets Specialist, (202) 898-6614; or Bobby R. Bean,
Chief, Policy Section, Capital Markets Branch, (202) 898-3575, Division
of Supervision and Consumer Protection; or Benjamin W. McDonough,
Senior Attorney, (202) 898-7411, or Michael B. Phillips, Counsel, (202)
898-3581, Supervision and Legislation Branch, Legal Division, Federal
Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC
20429.
OTS: Michael Solomon, Director, Capital Policy Division, (202) 906-
5654; or Teresa Scott, Senior Project Manager, Capital Policy Division,
(202) 906-6478, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Table of Contents
I. Background
II. Proposed Rule
A. Applicability of the Standardized Framework
B. Reservation of Authority
C. Principle of Conservatism
D. Merger and Acquisition Transition Provisions
E. Calculation of Tier 1 and Total Qualifying Capital
F. Calculation of Risk-Weighted Assets
1. Total Risk-Weighted Assets
2. Calculation of Risk-Weighted Assets for General Credit Risk
3. Calculation of Risk-Weighted Assets for Unsettled
Transactions, Securitization Exposures, and Equity Exposures
4. Calculation of Risk-Weighted Assets for Operational Risk
G. External and Inferred Ratings
1. Overview
2. Use of External Ratings
H. Risk-Weight Categories
1. Exposures to Sovereign Entities
2. Exposures to Certain Supranational Entities and Multilateral
Development Banks (MDBs)
3. Exposures to Depository Institutions, Foreign Banks, and
Credit Unions
4. Exposures to Public Sector Entities (PSEs)
5. Corporate Exposures
6. Regulatory Retail Exposures
7. Residential Mortgage Exposures
8. Pre-Sold Construction Loans and Statutory Multifamily
Mortgages
9. Past Due Loans
10. Other Assets
I.Off-Balance Sheet Items
J. OTC Derivative Contracts
1. Background
2. Treatment of OTC Derivative Contracts
3. Counterparty Credit Risk for Credit Derivatives
4. Counterparty Credit Risk for Equity Derivatives
5. Risk Weight for OTC Derivative Contracts
K. Credit Risk Mitigation (CRM)
1. Guarantees and Credit Derivatives
2. Collateralized Transactions
L. Unsettled Transactions
M. Risk-Weighted Assets for Securitization Exposures
1. Securitization Overview and Definitions
2. Operational Requirements
3. Hierarchy of Approaches
4. Ratings-Based Approach (RBA)
5. Exposures that Do Not Qualify for the RBA
6. CRM for Securitization Exposures
7. Risk-Weighted Assets for Early Amortization Provisions
8. Maximum Capital Requirement
N. Equity Exposures
1. Introduction and Exposure Measurement
2. Hedge Transactions
3. Measures of Hedge Effectiveness
4. Simple Risk-Weight Approach (SRWA)
5. Non-Significant Equity Exposures
6. Equity Exposures to Investment Funds
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7. Full Look-Through Approach
8. Simple Modified Look-Through Approach
9. Alternative Modified Look-Through Approach
10. Money Market Fund Approach
O. Operational Risk
1. Basic Indicator Approach (BIA)
2. Advanced Measurement Approach (AMA)
P. Supervisory Oversight and Internal Capital Adequacy
Assessment
Q. Market Discipline
1. Overview
2. General Requirements
3. Frequency/Timeliness
4. Location of Disclosures and Audit/Certification Requirements
5. Proprietary and Confidential Information
6. Summary of Specific Public Disclosure Requirements
III. Regulatory Analysis
A. Regulatory Flexibility Act Analysis
B. OCC Executive Order 12866 Determination
C. OTS Executive Order 12866 Determination
D. OCC Executive Order 13132 Determination
E. Paperwork Reduction Act
F. OCC Unfunded Mandates Reform Act of 1995 Determination
G. OTS Unfunded Mandates Reform Act of 1995 Determination
H. Solicitation of Comments on Use of Plain Language
I. Background
In 1989, the agencies implemented a risk-based capital framework
for U.S. banking organizations (general risk-based capital rules).\1\
The agencies based the framework on the ``International Convergence of
Capital Measurement and Capital Standards'' (Basel I), released by the
Basel Committee on Banking Supervision (Basel Committee) \2\ in 1988.
The general risk-based capital rules established a uniform risk-based
capital system that was more risk sensitive and addressed several
shortcomings in the capital regimes the agencies used prior to 1989.
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\1\ 12 CFR part 3, Appendix A (OCC); 12 CFR parts 208 and 225,
Appendix A (Board); 12 CFR part 325, Appendix A (FDIC); and 12 CFR
part 567, subpart B (OTS). The risk-based capital rules generally do
not apply to bank holding companies with less than $500 million in
assets. 71 FR 9897 (February 28, 2006).
\2\ The Basel Committee was established in 1974 by central banks
and governmental authorities with bank supervisory responsibilities.
Current member countries are Belgium, Canada, France, Germany,
Italy, Japan, Luxembourg, the Netherlands, Spain, Sweden,
Switzerland, the United Kingdom, and the United States.
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In June 2004, the Basel Committee introduced a new capital adequacy
framework, the New Accord,\3\ that is designed to promote improved risk
measurement and management processes and better align minimum risk-
based capital requirements with risk. The New Accord includes three
options for calculating risk-based capital requirements for credit risk
and three options for operational risk. For credit risk, the three
approaches are: standardized, foundation internal ratings-based, and
advanced internal ratings-based. For operational risk, the three
approaches are: basic indicator (BIA), standardized, and advanced
measurement (AMA). The advanced internal ratings-based approach and the
AMA together are referred to as the ``advanced approaches.''
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\3\ ``International Convergence of Capital Measurement and
Capital Standards, A Revised Framework, Comprehensive Version,'' the
Basel Committee on Banking Supervision, June 2006. The text is
available on the Bank for International Settlements Web site at
https://www.bis.org/publ/bcbs128.htm.
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On September 25, 2006, the agencies issued a notice of proposed
rulemaking to implement the advanced approaches in the United States
(advanced approaches NPR).\4\ Many of the commenters on the advanced
approaches NPR requested that the agencies harmonize certain provisions
of the agencies' proposal with the New Accord and offer the
standardized approach in the United States. A number of these
commenters supported making the standardized approach available for all
U.S. banking organizations.
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\4\ 71 FR 55830 (September 25, 2006).
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On December 7, 2007, the agencies issued a final rule implementing
the advanced approaches (advanced approaches final rule).\5\ The
advanced approaches final rule is mandatory for certain banking
organizations and voluntary for others. In general, the advanced
approaches final rule requires a banking organization that has
consolidated total assets of $250 billion or more, has consolidated on-
balance sheet foreign exposure of $10 billion or more, or is a
subsidiary or parent of an organization that uses the advanced
approaches (core banking organization) to implement the advanced
approaches. The implementation of the advanced approaches has created a
bifurcated regulatory capital framework in the United States: one set
of risk-based capital rules for banking organizations using the
advanced approaches (advanced approaches organizations), and another
set for banking organizations that do not use the advanced approaches
(general banking organizations).
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\5\ 72 FR 69288 (December 7, 2007).
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On December 26, 2006, the agencies issued a notice of proposed
rulemaking (Basel IA NPR), which proposed modifications to the general
risk-based capital rules for general banking organizations.\6\ One
objective of the Basel IA NPR was to enhance the risk sensitivity of
the risk-based capital rules without imposing undue regulatory burden.
Specifically, the agencies proposed to increase the number of risk-
weight categories, expand the use of external ratings for assigning
risk weights, broaden recognition of collateral and guarantors, use
loan-to-value ratios (LTV ratios) to risk weight most residential
mortgages, increase the credit conversion factor for various short-term
commitments, assess a risk-based capital requirement for early
amortizations in securitizations of revolving retail exposures, and
remove the 50 percent risk-weight limit for derivative transactions.
The Basel IA NPR also sought comment on the extent to which certain
advanced approaches organizations should be permitted to use approaches
other than the advanced approaches in the New Accord.
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\6\ 71 FR 77446 (December 26, 2006).
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Most commenters on the Basel IA NPR supported the agencies' goal to
make the general risk-based capital rules more risk sensitive without
adding undue regulatory burden. However, a number of the commenters
representing a broad range of U.S. banking organizations and trade
associations urged the agencies to implement the New Accord's
standardized approach for credit risk in the United States. These
commenters generally stated that the standardized approach is more risk
sensitive than the Basel IA NPR and would more appropriately address
the industry's concerns regarding domestic and international
competitiveness. Most of these commenters requested that the U.S.
implementation of the standardized approach closely follow the New
Accord. Certain commenters also requested that the agencies make some
or all of the other options for credit risk and operational risk in the
New Accord available in the United States. For example, some commenters
preferred implementation of the standardized approach without a
separate capital requirement for operational risk. Other commenters
supported including one or more of the approaches in the New Accord for
operational risk.
II. Proposed Rule
After considering the comments on both the Basel IA and the
advanced approaches NPRs, the agencies have decided not to finalize the
Basel IA NPR and to propose instead a new risk-based capital framework
that would implement the standardized approach for credit risk, the BIA
for operational
[[Page 43985]]
risk, and related disclosure requirements (collectively, this NPR or
this proposal). This NPR generally parallels the relevant approaches in
the New Accord. This NPR, however, diverges from the New Accord where
the U.S. markets have unique characteristics and risk profiles, notably
the proposal for risk weighting residential mortgage exposures. The
agencies have also sought to make this NPR consistent where relevant
with the advanced approaches final rule.
This NPR would not modify how a banking organization that uses the
standardized framework would calculate its leverage ratio
requirement.\7\ Banking organizations face risks other than credit and
operational risks that neither the New Accord nor this NPR addresses.
The leverage ratio is a straightforward measure of solvency that
supplements the risk-based capital requirements. Consequently, the
agencies continue to view the tier 1 leverage ratio and other
prudential safeguards such as Prompt Corrective Action as important
components of the regulatory capital regime.
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\7\ 12 CFR 3.6(b) and (c)(OCC); 12 CFR part 208, Appendix B and
12 CFR part 225, Appendix D (Board); 12 CFR 325.3 (FDIC); and 12 CFR
567.8 (OTS).
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Question 1a: The agencies seek comments on all aspects of this
proposal, including risk sensitivity, regulatory burden, and
competitive impact.
The agencies' general risk-based capital rules permit the use of
external ratings issued by a nationally recognized statistical rating
organization (NRSRO) to assign risk weights to recourse obligations,
direct credit substitutes, certain residual interests, and asset- and
mortgage-backed securities. The New Accord permits a banking
organization to use external ratings to determine risk weights for a
broad range of exposures, including sovereign, bank, corporate, and
securitization exposures. It also provides, within certain limitations,
for the use of both inferred ratings and issuer ratings. As discussed
in more detail later in this preamble, the agencies propose that
external, issuer, and inferred ratings be used to risk weight various
exposures. While the agencies believe that the use of ratings proposed
in this NPR can contribute to a more risk-sensitive framework, they are
aware of the limitations associated with using credit ratings for risk-
based capital purposes and, thus, are particularly interested in
comments on the use of such ratings for those purposes.
Numerous bank supervisory groups and committees, including the
Basel Committee on Banking Supervision, the Financial Stability Forum,
and the Senior Supervisors Group, have undertaken work to better
understand the causes for and possible responses to the recent market
events, discussing, among numerous other issues, the role of credit
ratings. In addition, in March, the President's Working Group on
Financial Markets (PWG) issued its report titled ``Policy Statement on
Financial Market Developments,'' providing an analysis of the
underlying factors contributing to the recent market stress and a set
of recommendations to address identified weaknesses. Among its
recommendations, the PWG encouraged regulators, including the Federal
banking agencies, to review the current use of credit ratings in the
regulation and supervision of financial institutions. In this regard,
the PWG policy statement noted that certain investors and asset
managers failed to obtain sufficient information or to conduct
comprehensive risk assessments, with some investors relying exclusively
on credit ratings for valuation purposes. More generally, the PWG
statement also noted market participants, including originators,
underwriters, asset managers, credit rating agencies, and investors,
failed to obtain sufficient information or to conduct comprehensive
risk assessments on complex instruments, including securitized credits
and their underlying asset pools.
The PWG policy statement also acknowledged the steps already taken
by credit rating agencies to improve the performance of credit ratings
and encouraged additional actions, potentially including the
publication of sufficient information about the assumptions underlying
their credit rating methodologies; changes to the credit rating process
to clearly differentiate ratings for structured products from ratings
for corporate and municipal securities; and ratings performance
measures for structured credit products and other asset-backed
securities readily available to the public in a manner that facilitates
comparisons across products and credit ratings.
Most directly relevant to this NPR, the agencies were encouraged to
reinforce steps taken by the credit rating agencies through revisions
to supervisory policy and regulation, including regulatory capital
requirements that use ratings. At a minimum, regulators were urged to
distinguish, as appropriate, between ratings of structured credit
products and ratings of corporate and municipal bonds in regulatory and
supervisory policies.
Question 1b: The agencies seek comment on the advantages and
disadvantages of the use of external credit ratings in risk-based
capital requirements for banking organizations and whether identified
weakness in the credit rating process suggests the need to change or
enhance any of the proposals in this NPR. The agencies also seek
comment on whether additional refinements to the proposals in the NPR
should be considered to address more broadly the prudent use of credit
ratings by banking organizations. For example, should there be
operational conditions for banking organizations to make use of credit
ratings in determining risk-based capital requirements, enhancements to
minimum capital requirements, or modifications to the supervisory
review process?
The agencies also note that efforts are underway by the BCBS to
review the treatment in the New Accord for certain off-balance sheet
conduits, resecuritizations, such as collateralized debt obligations
referencing asset-backed securities, and other securitization-related
risks. The agencies are fully committed to working with the BCBS in
this regard and also intend to review the agencies' current approach to
securitization transactions to assess whether modifications might be
needed. This review will take into account lessons learned from recent
market-related events and may result in additional proposals for
modification to the risk-based capital rules.
Question 1c: The agencies seek commenters' views on what changes to
the approaches set forth in this NPR, if any, should be considered as a
result of recent market events, particularly with respect to the
securitization framework described in this NPR.
A. Applicability of the Standardized Framework
Most commenters on the Basel IA NPR favored its opt-in approach,
whereby a banking organization could voluntarily decide whether or not
to use the proposed rules. They supported the flexibility of the opt-in
provision and the ability of a general banking organization to remain
under the general risk-based capital rules. Commenters observed that
many banking organizations choose to hold capital well in excess of
regulatory minimums and would not necessarily benefit from a more risk-
sensitive capital rule. For these commenters, limiting regulatory
burden was a higher priority than increasing the risk
[[Page 43986]]
sensitivity of their risk-based capital requirements.
The agencies acknowledge this concern and propose to make the
standardized framework optional for banking organizations that do not
use the advanced approaches final rule to calculate their risk-based
capital requirements.\8\ Under this NPR, a banking organization that
opts to use the standardized framework generally would have to notify
its primary Federal supervisor in writing of its intent to use the new
rules at least 60 days before the beginning of the calendar quarter in
which it first uses the standardized framework. This notice must
include a list of any affiliated depository institutions or bank
holding companies, if applicable, that seek supervisory exemption from
the use of the standardized framework. Before it notifies its primary
Federal supervisor, the banking organization should review its ability
to implement the proposed rule and evaluate the potential impact on its
regulatory capital.
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\8\ The agencies are not proposing in this NPR to make this
standardized framework available to banking organizations for which
the application of the advanced approaches final rule is mandatory,
unless such a banking organization is exempted in writing from the
advanced approaches final rule by its primary Federal supervisor.
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Under this proposal, a banking organization that opts to use this
standardized framework could return to the general risk-based capital
rules by notifying its primary Federal supervisor in writing at least
60 days before the beginning of the calendar quarter in which it
intends to opt out of the standardized framework. The banking
organization would have to include in its notice an explanation of its
rationale for ceasing to use the standardized framework and identify
the risk-based capital framework it intends to use. The primary Federal
supervisor would review this notice to ensure that the use of the
general risk-based capital rules would be appropriate for that banking
organization.\9\ The agencies expect that a banking organization would
not alternate between the general risk-based capital rules and this
standardized framework.
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\9\ The primary Federal supervisor may waive the 60-day notice
period for opting in to the standardized framework and for returning
to the general risk-based capital rules.
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Any general banking organization could generally continue to
calculate its risk-based capital requirements using the general risk-
based capital rules without notifying its primary Federal supervisor.
The primary Federal supervisor would, however, have the authority to
require a general banking organization to use a different risk-based
capital rule if that supervisor determines that a particular capital
rule is appropriate in light of the banking organization's asset size,
level of complexity, risk profile, or scope of operations.
Under section 1(b) of the proposed rule, if a bank holding company
opts in to the standardized framework, its subsidiary depository
institutions also would apply the standardized framework. Similarly, if
a depository institution opts in to the standardized framework, its
parent bank holding company (where applicable) and any subsidiary
depository institutions of the parent holding company generally would
be required to apply the standardized rules as well. Savings and loan
holding companies, however, are not subject to risk-based capital
rules. Accordingly, if a savings association opts in to the proposed
rule, the proposed rule would not apply to the savings and loan holding
company or to a subsidiary depository institution of that holding
company, unless the subsidiary depository institution is directly
controlled by the savings association.
The agencies believe that this approach serves as an important
safeguard against regulatory capital arbitrage among affiliated banking
organizations. The agencies recognize, however, that there may be
infrequent situations where the use of the standardized rules could
create undue burden at individual depository institutions within a
corporate family. Therefore, under section 1(c) of the proposed rule, a
banking organization that would otherwise be required to apply the
standardized rule because a related banking organization has elected to
apply it may instead use the general risk-based capital rules if its
primary Federal supervisor determines in writing that that application
of the standardized framework is not appropriate in light of the
banking organization's asset size, level of complexity, risk profile,
or scope of operations. When seeking such a determination, the banking
organization should provide a rationale for its request. The primary
Federal supervisor may consider potential capital arbitrage issues
within a corporate structure in making its determination.
Question 2: The agencies seek comment on the proposed applicability
of the standardized framework and in particular on the degree of
flexibility that should be provided to individual depository
institutions within a corporate family, keeping in mind regulatory
burden issues as well as ways to minimize the potential for regulatory
capital arbitrage.
In the advanced approaches final rule, the agencies require core
banking organizations to use only the most advanced approaches provided
in the New Accord. As proposed, the standardized framework generally
would be available only for banking organizations that are not core
banking organizations.
Question 3: The agencies seek comment on whether or to what extent
core banking organizations should be able to use the proposed
standardized framework.
B. Reservation of Authority
Under this NPR, a primary Federal supervisor could require a
banking organization to hold an amount of capital greater than would
otherwise be required if that supervisor determines that the risk-based
capital requirements under the standardized framework are not
commensurate with the banking organization's credit, market,
operational, or other risks. In addition, the agencies expect that
there may be instances when the standardized framework would prescribe
a risk-weighted asset amount for one or more exposures that was not
commensurate with the risks associated with the exposures. In such a
case, the banking organization's primary Federal supervisor would
retain the authority to require the banking organization to assign a
different risk-weighted asset amount for the exposures or to deduct the
amount of the exposures from regulatory capital. Similarly, this NPR
proposes to authorize a banking organization's primary Federal
supervisor to require the banking organization to assign a different
risk-weighted asset amount for operational risk if the supervisor were
to find that the risk-weighted asset amount for operational risk
produced by the banking organization under this NPR is not commensurate
with the operational risks of the banking organization.
C. Principle of Conservatism
The agencies believe that in some cases it may be reasonable to
allow a banking organization not to apply a provision of the proposed
rule if not doing so would yield a more conservative result. Under
section 1(f) of the proposed rule, a banking organization may choose
not to apply a provision of the rule to one or more exposures provided
that: (i) The banking organization can demonstrate on an ongoing basis
to the satisfaction of its primary Federal supervisor that not applying
the provision would, in all
[[Page 43987]]
circumstances, unambiguously generate a risk-based capital requirement
for each exposure greater than that which would otherwise be required
under the rule; (ii) the banking organization appropriately manages the
risk of those exposures; (iii) the banking organization provides
written notification to its primary Federal supervisor prior to
applying this principle to each exposure; and (iv) the exposures to
which the banking organization applies this principle are not, in the
aggregate, material to the banking organization.
The agencies emphasize that a conservative capital requirement for
a group of exposures does not reduce the need for appropriate risk
management of those exposures. Moreover, the principle of conservatism
applies to the determination of capital requirements for specific
exposures; it does not apply to the disclosure requirements in section
71 of the proposed rule.
D. Merger and Acquisition Transition Provisions
A banking organization that uses the standardized framework and
that merges with or acquires another banking organization operating
under different risk-based capital rules may not be able to quickly
integrate the acquired organization's exposures into its risk-based
capital system. Under this NPR, a banking organization that uses the
standardized framework and that merges with or acquires a banking
organization that uses the general risk-based capital rules could
continue to use the general risk-based capital rules to calculate the
risk-based capital requirements for the merged or acquired banking
organization's exposures for up to 12 months following the last day of
the calendar quarter during which the merger or acquisition is
consummated. The risk-weighted assets of the merged or acquired company
calculated under the general risk-based capital rules would be included
in the banking organization's total risk-weighted assets. Deductions
associated with the exposures of the merged or acquired company would
be deducted from the banking organization's tier 1 capital and tier 2
capital.
Similarly, where both banking organizations calculate their risk-
based capital requirements under the standardized framework, but the
merged or acquired banking organization uses different aspects of the
framework, the banking organization may continue to use the merged or
acquired banking organization's own systems to determine its
organization's risk-weighted assets for, and deductions from capital
associated with, the merged or acquired banking organization's
exposures for the same time period.
A banking organization that merges with or acquires an advanced
approaches banking organization may use the advanced approaches risk-
based capital rules to determine the risk-weighted asset amounts for,
and deductions from capital associated with, the merged or acquired
banking organization's exposures for up to 12 months after the calendar
quarter during which the merger or acquisition consummates. During the
period when the advanced approaches risk-based capital rules apply to
the merged or acquired company, any allowance for loan and lease losses
(ALLL) associated with the merged or acquired company's exposures must
be excluded from the banking organization's tier 2 capital. Any excess
eligible credit reserves associated with the merged or acquired banking
organization's exposures may be included in that banking organization's
tier 2 capital up to 0.6 percent of that banking organization's risk-
weighted assets. (Excess eligible credit reserves would be determined
according to section 13(a)(2) of the advanced approaches risk-based
capital rules.)
If a banking organization relies on these merger provisions, it
would be required to disclose publicly the amounts of risk-weighted
assets and total qualifying capital calculated under the applicable
risk-based capital rules for the acquiring banking organization and for
the merged or acquired banking organization.
E. Calculation of Tier 1 and Total Qualifying Capital
This NPR would maintain the minimum risk-based capital ratio
requirements of 4.0 percent tier 1 capital to total risk-weighted
assets and 8.0 percent total qualifying capital to total risk-weighted
assets. A banking organization's total qualifying capital is the sum of
its tier 1 (core) capital elements and tier 2 (supplemental) capital
elements, subject to various limits, restrictions, and deductions
(adjustments). The agencies are not restating the elements of tier 1
and tier 2 capital in the proposed rule. Those capital elements
generally would be unchanged from the general risk-based capital
rules.\10\ Deductions or other adjustments would also be unchanged,
except for those provisions discussed below.
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\10\ See 12 CFR part 3, Appendix A, section 2 (national banks);
12 CFR part 208, Appendix A, section II (state member banks); 12 CFR
part 225, Appendix A, section II (bank holding companies); 12 CFR
part 325, Appendix A, section I (state nonmember banks); and 12 CFR
567.5 (savings associations).
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Under this NPR, a banking organization would make certain other
adjustments to determine its tier 1 and total qualifying capital. Some
of these adjustments would be made only to tier 1 capital. Other
adjustments would be made 50 percent to tier 1 capital and 50 percent
to tier 2 capital. If the amount deductible from tier 2 capital exceeds
the banking organization's actual tier 2 capital, the banking
organization would have to deduct the shortfall amount from tier 1
capital. Consistent with the agencies' general risk-based capital
rules, a banking organization would have to have at least 50 percent of
its total qualifying capital in the form of tier 1 capital.
Under this NPR, a banking organization would deduct from tier 1
capital any after-tax gain-on-sale resulting from a securitization.
Gain-on-sale means an increase in a banking organization's equity
capital that results from a securitization, other than an increase in
equity capital that results from the banking organization's receipt of
cash in connection with the securitization. The agencies included this
deduction to offset accounting treatments that produce an increase in a
banking organization's equity capital and tier 1 capital at the
inception of a securitization, for example, a gain attributable to a
credit-enhancing interest-only strip receivable (CEIO) that results
from Financial Accounting Standard (FAS) 140 accounting treatment for
the sale of underlying exposures to a securitization special purpose
entity (SPE).\11\ The agencies expect that the amount of the required
deduction would diminish over time as the banking organization realizes
the increase in equity capital and, thus, tier 1 capital booked at the
inception of the securitization, through actual receipt of cash flows.
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\11\ See Statement of Financial Accounting Standards No. 140,
``Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities'' (September 2000).
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Under the general risk-based capital rules, a banking organization
must deduct CEIOs, whether purchased or retained, from tier 1 capital
to the extent that the CEIOs exceed 25 percent of the banking
organization's tier 1 capital. Under this NPR, a banking organization
would have to deduct CEIOs from tier 1 capital to the extent they
represent after-tax gain-on-sale, and would have to deduct any CEIOs
that do not constitute an after-tax gain-on-sale 50 percent from tier 1
capital and 50 percent from tier 2 capital.
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Under the FDIC, OCC, and Board general risk-based capital rules, a
banking organization must deduct from its tier 1 capital certain
percentages of the adjusted carrying value of its nonfinancial equity
investments. In contrast, OTS general risk-based capital rules require
the deduction of most investments in equity securities from total
capital.\12\ Under this NPR, however, a banking organization would not
deduct these investments. Instead, the banking organization's equity
exposures generally would be subject to the treatment provided in Part
V of this proposed rule.
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\12\ OTS general risk-based capital rules require savings
associations to deduct all ``equity investments'' from total
capital. 12 CFR 567.5(c)(2)(ii). ``Equity investments'' are defined
to include: (i) Investments in equity securities (other than
investments in subsidiaries, equity investments that are permissible
for national banks, indirect ownership interests in certain pools of
assets (for example, mutual funds), Federal Home Loan Bank stock and
Federal Reserve Bank stock); and (ii) investments in certain real
property. 12 CFR 567.1. The proposed treatment of investments in
equity securities is discussed above. Equity investments in real
estate would continue to be deducted to the same extent as under the
general risk-based capital rules.
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A banking organization also would have to deduct from total capital
the amount of certain unsettled transactions and certain securitization
exposures. These deductions are provided in section 21, section 38, and
Part IV of this proposed rule.
Consistent with the advanced approaches final rule, for bank
holding companies with consolidated insurance underwriting subsidiaries
that are functionally regulated (or subject to comparable supervision
and minimum regulatory capital requirements in their home
jurisdiction), the following treatment would apply. The assets and
liabilities of the subsidiary would be consolidated for purposes of
determining the bank holding company's risk-weighted assets. The bank
holding company, however, would deduct 50 percent from tier 1 capital
and 50 percent from tier 2 capital an amount equal to the insurance
underwriting subsidiary's minimum regulatory capital requirement as
determined by its functional (or equivalent) regulator. For U.S.
regulated insurance subsidiaries, this amount generally would be 200
percent of the subsidiary's Authorized Control Level as established by
the appropriate state insurance regulator. Under the general risk-based
capital rules, such subsidiaries typically are fully consolidated with
the bank holding company.
While the elements of tier 1 and tier 2 capital are the same across
the general risk-based capital rules, the advanced approaches final
rule, and this NPR, the deductions from those elements are different
for each of the three risk-based capital frameworks. As a result, each
framework has a distinct definition of tier 1, tier 2, and total
qualifying capital.
Securitization-related deductions create a significant difference
in the calculation of tier 1 and tier 2 capital across the three
frameworks. Under the general risk-based capital rules, only certain
CEIOs must be deducted from capital; all other high-risk exposures for
which dollar-for-dollar capital must be held may be ``grossed-up'' in
accordance with the regulatory reporting instructions, effectively
increasing the denominator of the risk-based capital ratio but not
affecting the numerator. In contrast, under the advanced approaches
final rule and this NPR, certain high risk securitization exposures
must be deducted directly from total capital. Other significant
differences in the definition of tier 1, tier 2, and total qualifying
capital across the three frameworks include the treatment of
nonfinancial equity investments for banks and bank holding companies,
certain equity investments for savings associations, certain unsettled
transactions, consolidated insurance underwriting subsidiaries of bank
holding companies, and the ALLL/eligible credit reserves.
The different definitions of tier 1, tier 2, and total capital
across the risk-based capital frameworks raise a number of issues. The
agencies clarified in the preamble to the advanced approaches rule that
a banking organization's tier 1 capital and tier 2 capital for all non-
regulatory-capital supervisory and regulatory purposes (for example,
lending limits and Regulation W quantitative limits) is the banking
organization's tier 1 capital and tier 2 capital as calculated under
the risk-based capital framework to which it is subject. The agencies
did not specifically state a position regarding the numerator of the
leverage ratio. One potential approach is for each banking organization
to use its applicable risk-based definition of tier 1 capital for
determining both the risk-based and leverage capital ratios. Another
potential approach is to define a numerator for the tier 1 leverage
ratio that would be the same for all banking organizations. This
approach could require banks to calculate one measure of tier 1 capital
for risk-based capital purposes and another measure of tier 1 capital
for leverage ratio purposes.\13\
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\13\ To the extent that the agencies decide to change the
numerator of the leverage ratio, they would propose such changes in
a separate rulemaking. As a related matter, the OTS advanced
approaches final rule incorrectly states that the leverage ratio is
calculated using the revised definition of tier 1 and tier 2
capital. This NPR would remove this provision until the agencies
conclusively resolve this matter.
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Question 4: Given the potential for three separate definitions of
tier 1 capital under the three frameworks, the agencies solicit comment
on all aspects of the tier 1 leverage ratio numerator, including issues
related to burden and competitive equity.
F. Calculation of Risk-Weighted Assets
(1) Total Risk-Weighted Assets
Under this NPR, a banking organization's total risk-weighted assets
would be the sum of its total risk-weighted assets for general credit
risk, unsettled transactions, securitization exposures, equity
exposures, and operational risk. Banking organizations that use the
market risk rule (MRR) would supplement their capital calculations with
those provisions.\14\
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\14\ 12 CFR part 3, Appendix B (national banks); 12 CFR part
208, Appendix E (state member banks); 12 CFR part 225, Appendix E
(bank holding companies); and 12 CFR part 325, Appendix C (state
nonmember banks). OTS intends to codify a market risk capital rule
for savings associations at 12 CFR part 567, Appendix D.
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(2) Calculation of Risk-Weighted Assets for General Credit Risk
For each of its general credit risk exposures (that is, credit
exposures that are not unsettled transactions subject to section 38 of
the proposed rule, securitization exposures, or equity exposures), a
banking organization must first determine the exposure amount and then
multiply that amount by the appropriate risk weight set forth in
section 33 of the proposed rule. General credit risk exposures include
exposures to sovereign entities; exposures to supranational entities
and multilateral development banks; exposures to public sector
entities; exposures to depository institutions, foreign banks, and
credit unions; corporate exposures; regulatory retail exposures;
residential mortgage exposures; pre-sold construction loans; statutory
multifamily mortgage exposures; and other assets.
Generally, the exposure amount for the on-balance sheet component
of an exposure is the banking organization's carrying value for the
exposure. If the exposure is classified as a security available for
sale, however, the exposure amount is the banking organization's
carrying value of the exposure adjusted for unrealized gains and
losses. The exposure amount for the off-balance sheet component of an
exposure is typically determined by multiplying the
[[Page 43989]]
notional amount of the off-balance sheet component by the appropriate
credit conversion factor (CCF) under section 34 of the proposed rule.
The exposure amount for over-the-counter (OTC) derivative contracts is
determined under section 35 of the proposed rule. Exposure amounts for
collateralized OTC derivative contracts, repo-style transactions, or
eligible margin loans may be determined under particular rules in
section 37 of the proposed rule.
(3) Calculation of Risk-Weighted Assets for Unsettled Transactions,
Securitization Exposures, and Equity Exposures
(a) Unsettled Transactions
Risk-weighted assets for specified unsettled and failed securities,
foreign exchange, and commodities transactions are calculated according
to paragraph (f) of section 38 of the proposed rule.\15\
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\15\ Certain transaction types are excluded from the scope of
section 38, as provided in paragraph (b) of section 38.
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(b) Securitization Exposures
Risk-weighted assets for securitization exposures are calculated
according to Part IV of the proposed rule. Generally, a banking
organization would calculate the risk-weighted asset amount of a
securitization exposure by multiplying the amount of the exposure as
determined in section 42 of the proposed rule by the appropriate risk
weight in section 43 of this NPR.
Part IV of the proposed rule provides a hierarchy of approaches for
calculating risk-weighted assets for securitization exposures. Among
the approaches included in Part IV is a ratings-based approach (RBA),
which calculates the risk-weighted asset amount of a securitization
exposure by multiplying the amount of the exposure by risk-weights that
correspond to the applicable external or applicable inferred rating of
the securitization. Part IV provides other treatments for specific
types of securitization exposures including deduction from capital for
certain exposures, and different risk-weighted asset computations for
certain securitizations exposures that do not qualify for the RBA and
for securitizations that have an early amortization provision.
(c) Equity Exposures
Risk-weighted assets for equity exposures are calculated according
to the rules in Part V of the proposed rule. Generally, risk-weighted
assets for equity exposures that are not exposures to investment funds
would be calculated according to the simple risk-weight approach (SRWA)
in section 52 of this proposed rule. Risk-weighted assets for equity
exposures to investment funds would, with certain exceptions, be
calculated according to one of three look-through approaches or, if the
investment fund qualifies, calculated according to the money market
fund approach. These approaches are described in section 53 of the
proposed rule.
(4) Calculation of Risk-Weighted Assets for Operational Risk
Risk-weighted assets for operational risk are calculated under the
BIA provided in section 61 of this proposed rule.
G. External and Inferred Ratings
(1) Overview
The agencies' general risk-based capital rules permit the use of
external ratings issued by a nationally recognized statistical rating
organization (NRSRO) to assign risk weights to recourse obligations,
direct credit substitutes, residual interests (other than a credit-
enhancing interest-only strip), and asset- and mortgage-backed
securities.\16\ Under the ratings-based approach in the general risk-
based capital rules, a banking organization must use the lowest NRSRO
external rating if multiple ratings exist. The approach also requires
one rating for a traded exposure and two ratings for a non-traded
exposure and allows the use of inferred ratings within a securitization
structure. When the agencies revised their general risk-based capital
rules to permit the use of external ratings issued by an NRSRO for
these exposures, the agencies acknowledged that these ratings
eventually could be used to determine the risk-based capital
requirements for other types of debt instruments, such as externally
rated corporate bonds.
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\16\ Some synthetic structures also may be subject to the
external rating approach. For example, certain credit-linked notes
issued from a synthetic securitization are risk weighted according
to the rating given to the notes. 66 FR 59614, 59622 (November 29,
2001).
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The New Accord would permit a banking organization to use external
ratings to determine risk weights for a broad range of exposures. It
also provides for the use of both inferred and, within certain
limitations, issuer ratings, but discourages the use of unsolicited
ratings. Generally consistent with the New Accord, and in response to
favorable comments on the Basel IA NPR's proposal to expand the use of
external ratings, the agencies propose that external, issuer, and
inferred ratings be used to risk weight various exposures.
This proposed use of ratings is a more risk-sensitive approach than
relying on membership in the Organization for Economic Cooperation and
Development (OECD) \17\ to differentiate the risk of exposures to
sovereign entities, depository institutions, foreign banks, and credit
unions. The proposed approach also would use a greater number of risk
weights than the general risk-based capital rules, which would further
improve the risk sensitivity of a banking organization's risk-based
capital requirements.
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\17\ The OECD-based group of countries comprises all full
members of the OECD, as well as countries that have concluded
special lending arrangements with the International Monetary Fund
(IMF) associated with the IMF's General Arrangements to Borrow. The
list of OECD countries is available on the OECD Web site at https://
www.oecd.org.
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Consistent with the agencies' general risk-based capital rules and
the advanced approaches final rule, the agencies propose to recognize
only credit ratings that are issued by an NRSRO. For the purposes of
this NPR, NRSRO means an entity registered with the U.S. Securities and
Exchange Commission (SEC) as an NRSRO under section 15E of the
Securities Exchange Act of 1934 (15 U.S.C. 78o-7).\18\
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\18\ See 17 CFR 240.17g-1. On September 29, 2006, the President
signed the Credit Rating Agency Reform Act of 2006 (``Reform Act'')
(Pub. L. 109-291) into law. The Reform Act requires a credit rating
agency that wants to represent itself as an NRSRO to register with
the SEC. The agencies may review their risk-based capital rules,
guidance and proposals from time to time to determine whether any
modification of the agencies' definition of an NRSRO is appropriate.
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(2) Use of External Ratings
Under this NPR, a banking organization would use the applicable
external rating of an exposure (for certain exposures that have
external ratings) to determine its risk weight. Additionally,
consistent with the New Accord, the banking organization would infer a
rating for certain exposures that do not have external ratings from the
issuer rating of the obligor or from the external rating of another
specific issue of the obligor. The agencies' proposal for the use of
external and inferred ratings, however, differs in some respects from
the New Accord, as described below.
(a) External Ratings
Under this NPR, an external rating means a credit rating that is
assigned by an NRSRO to an exposure, provided that the credit rating
fully reflects the entire amount of credit risk with regard to all
payments owed to the holder of the exposure. If, for example, a holder
is
[[Page 43990]]
owed principal and interest on an exposure, the credit rating must
fully reflect the credit risk associated with timely repayment of
principal and interest. If a holder is owed only principal on an
exposure, the credit rating must fully reflect only the credit risk
associated with timely repayment of principal. Furthermore, a credit
rating would qualify as an external rating only if it is published in
an accessible form and is or will be included in the transition
matrices made publicly available by the NRSRO that summarize the
historical performance of positions rated by the NRSRO. An external
rating may be either solicited or unsolicited by the obligor issuing
the rated exposure. This definition is consistent with the definition
of ``external rating'' in the advanced approaches final rule.
Under this NPR, a banking organization would determine the risk
weight for certain exposures with external ratings based on the
applicable external ratings of the exposures. If an exposure to a
sovereign or public sector entity (PSE), a corporate exposure, or a
securitization exposure has only one external rating, that rating is
the applicable external rating. If such an exposure has multiple
external ratings, the applicable external rating would be the lowest
external rating. This approach for de
