Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Regulatory Capital; Impact of Modifications to Generally Accepted Accounting Principles; Consolidation of Asset-Backed Commercial Paper Programs; and Other Related Issues, 4636-4654 [2010-825]

Download as PDF 4636 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations DEPARTMENT OF THE TREASURY Office of the Comptroller of the Currency 12 CFR Part 3 [Docket ID: OCC–2009–0020] RIN 1557–AD26 FEDERAL RESERVE SYSTEM 12 CFR Parts 208 and 225 [Regulations H and Y; Docket No. R–1368] FEDERAL DEPOSIT INSURANCE CORPORATION 12 CFR Part 325 RIN 3064–AD48 DEPARTMENT OF THE TREASURY Office of Thrift Supervision 12 CFR Part 567 [No. OTS–2010–0002] RIN 1550–AC36 Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital Maintenance: Regulatory Capital; Impact of Modifications to Generally Accepted Accounting Principles; Consolidation of Asset-Backed Commercial Paper Programs; and Other Related Issues jlentini on DSKJ8SOYB1PROD with RULES2 AGENCIES: Office of the Comptroller of the Currency, Department of the Treasury; Board of Governors of the Federal Reserve System; Federal Deposit Insurance Corporation; and Office of Thrift Supervision, Department of the Treasury. ACTION: Final rule. 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 the Office of Thrift Supervision (OTS) (collectively, the agencies) are amending their general risk-based and advanced risk-based capital adequacy frameworks by adopting a final rule that eliminates the exclusion of certain consolidated asset-backed commercial paper programs from risk-weighted assets; provides for an optional two-quarter implementation delay followed by an optional two-quarter partial implementation of the effect on riskweighted assets that will result from changes to U.S. generally accepted accounting principles; provides for an VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 optional two-quarter delay, followed by an optional two-quarter phase-in, of the application of the agencies’ regulatory limit on the inclusion of the allowance for loan and lease losses (ALLL) in tier 2 capital for the portion of the ALLL associated with the assets a banking organization consolidates as a result of changes to U.S. generally accepted accounting principles; and provides a reservation of authority to permit the agencies to require a banking organization to treat entities that are not consolidated under accounting standards as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the structure. The delay and subsequent phase-in periods of the implementation will apply only to the agencies’ riskbased capital requirements, not the leverage ratio requirement. DATES: This rule is effective March 29, 2010. Banking organizations may elect to comply with this final rule as of the beginning of their first annual reporting period that begins after November 15, 2009. FOR FURTHER INFORMATION CONTACT: OCC: Paul Podgorski, Risk Expert, Capital Policy Division, (202) 874–5070, or Carl Kaminski, Senior Attorney, (202) 874–5090, or Hugh Carney, Attorney, Legislative and Regulatory Activities Division, (202) 874–5090, Office of the Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219. Board: Barbara J. Bouchard, Associate Director, (202) 452–3072, or Anna Lee Hewko, Manager, Supervisory Policy and Guidance, (202) 530–6260, Division of Banking Supervision and Regulation; or April C. Snyder, Counsel, (202) 452– 3099, or Benjamin W. McDonough, Counsel, (202) 452–2036, Legal Division. For the hearing impaired only, Telecommunication Device for the Deaf (TDD), (202) 263–4869. FDIC: James Weinberger, Senior Policy Analyst (Capital Markets), (202) 898–7034, Christine Bouvier, Senior Policy Analyst (Bank Accounting), (202) 898–7289, Division of Supervision and Consumer Protection; or Mark Handzlik, Senior Attorney, (202) 898–3990, or Michael Phillips, Counsel, (202) 898– 3581, Supervision Branch, Legal Division. OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906–6478, Capital Risk, Christine Smith, Senior Policy Analyst, (202) 906–5740, Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906–6639, Legislation and Regulation Division, Office of Thrift Supervision, 1700 G Street, NW., Washington, DC 20552. SUPPLEMENTARY INFORMATION: PO 00000 Frm 00002 Fmt 4701 Sfmt 4700 I. Background A. Changes to U.S. Accounting Standards and the Effect on Regulatory Capital On June 12, 2009, the Financial Accounting Standard Board (FASB) issued Statement of Financial Accounting Standards No. 166, Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140 (FAS 166), and Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167). Among other things, FAS 166 and FAS 167 modified the accounting treatment under U.S. generally accepted accounting principles (GAAP) of certain structured finance transactions involving a special purpose entity.1 FAS 166 and FAS 167 are effective as of the beginning of a banking organization’s 2 first annual reporting period that begins after November 15, 2009 (implementation date), including interim periods therein, and for interim and annual periods thereafter.3 The agencies’ risk-based measures for banking organizations (the general riskbased capital rules4 and the advanced approaches rules,5 collectively the riskbased capital rules) establish capital requirements intended to reflect the risks associated with on-balance sheet exposures as well as off-balance sheet exposures, such as guarantees, commitments, and derivative transactions. The agencies use GAAP as the initial basis for determining whether an exposure is treated as on- or offbalance sheet for risk-based capital 1 The accounting treatment of these transactions and structures was previously governed by the FASB’s Statement of Financial Accounting Standards No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (2000) (FAS 140) and FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (2003) (FIN 46(R)). References herein to FASB Statements of Financial Accounting Standards and Interpretations are to the FASB’s ‘‘pre-Codification standards’’ documents and do not reflect modifications that have been made by the FASB as the related text is incorporated in the FASB Accounting Standards Codification that FASB announced on July 1, 2009. 2 Unless otherwise indicated, the term ‘‘banking organization’’ includes banks, savings associations, and bank holding companies (BHCs). The terms ‘‘bank holding company’’ and ‘‘BHC’’ refer only to bank holding companies regulated by the Board. 3 See relevant provisions in FAS 166, paragraphs 5–7, and FAS 167, paragraphs 7–10. 4 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 BHCs with $500 million or less in consolidated assets. 5 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix F; and 12 CFR part 225, appendix G (Board); 12 CFR part 325, appendix D (FDIC); 12 CFR 567, Appendix C (OTS). E:\FR\FM\28JAR2.SGM 28JAR2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations purposes. Additionally, the agencies’ leverage measure (leverage rule) 6 uses consolidated on-balance sheet assets as the basis for setting minimum capital requirements that are intended to limit the degree to which a banking organization can leverage its equity capital base. FAS 166 and FAS 167, among other things, establish new standards for reporting companies’ transfers of assets to special purpose entities, known as variable interest entities (VIEs) under GAAP, and for consolidating VIEs. Under FAS 167, banking organizations may be required to consolidate assets, liabilities, and equity in certain VIEs that were not consolidated under the standards that FAS 166 and FAS 167 replaced. Most banking organizations will be required to implement the new consolidation standards as of January 1, 2010.7 The agencies’ risk-based capital and leverage rules (collectively, the capital rules) generally would require a banking organization to include assets held by newly consolidated VIEs in its leverage and risk-based capital ratios determined under those rules. At the same time, a consolidating banking organization may need to establish an ALLL 8 to cover estimated credit losses on the assets consolidated under FAS 167. As a consequence, absent a change in the capital rules and all other factors remaining constant, both the leverage and risk-based capital ratios of banking organizations that must consolidate due to FAS 167 VIEs that they did not previously consolidate are likely to fall by varying amounts. jlentini on DSKJ8SOYB1PROD with RULES2 B. Notice of Proposed Rulemaking On September 15, 2009, the agencies published a notice of proposed rulemaking (NPR) that solicited 6 12 CFR part 3 (OCC);12 CFR part 208, appendix B and 12 CFR part 225 appendix D (Board); 12 CFR 325.3 (FDIC); 12 CFR 567.8 (OTS). 7 While most banking organizations affected by FAS 166 and FAS 167 will implement the new standards on January 1, 2010, some banking organizations use annual reporting periods other than the calendar year and will implement the new standards at the beginning of their first annual reporting period that starts after November 15, 2009. 8 Under GAAP, an ALLL should be recognized when events have occurred indicating that it is probable that an asset has been impaired or that a liability has been incurred as of the balance sheet date and the amount of the loss can be reasonably estimated. Furthermore, under the risk-based capital rules, the ALLL is a component of tier 2 capital and, therefore, included in the numerator of the total risk-based capital ratio. However, the amount of the ALLL that may be included in tier 2 capital is limited to 1.25 percent of gross riskweighted assets under the risk-based capital rules. 12 CFR part 3, appendix A § 2(b)(1) (OCC); 12 CFR part 208, appendix A § II.A.2.a and 12 CFR part 225, appendix A § II.A.2.a (Board); 12 CFR part 325, appendix A § I.A.2.i. (FDIC); 12 CFR 567.5 (OTS). VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 information and views from the public on the effect the accounting changes mandated by FAS 166 and FAS 167 would have on regulatory capital, the appropriateness of adjusting the riskbased capital treatment of some classes of assets that would be consolidated by banking organizations as a result of their implementation of FAS 167, and the utility of a phase-in of the regulatory capital effects of the accounting changes, among other issues.9 In addition, the NPR proposed modifying the agencies’ risk-based capital rules by eliminating provisions that permit a banking organization to exclude assets of consolidated assetbacked commercial paper (ABCP) programs from risk-weighted assets (ABCP exclusion) and instead assess a risk-based capital requirement against any contractual exposures of the banking organization to such ABCP programs.10 The NPR also proposed eliminating an associated provision in the general risk-based capital rules (incorporated by reference in the advanced approaches) that excludes from tier 1 capital the minority interest in a consolidated ABCP program not included in a banking organization’s risk-weighted assets.11 In addition, the NPR proposed a new reservation of authority for the agencies’ risk-based capital rules to permit a banking organization’s primary Federal supervisor to treat entities that are not consolidated under GAAP as if they were consolidated for risk-based capital purposes, commensurate with the risk relationship of the banking organization to the entity. Collectively, the agencies received approximately 41 comment letters from banking organizations, banking industry associations, mortgage companies, investment and asset management firms, and individuals. Commenters generally agreed with the agencies’ preliminary identification of VIEs that are likely to be consolidated by banking organizations as a result of FAS 167. Most notably, these included VIEs 9 74 FR 47138 (September 15, 2009). CFR part 3, appendix A, § 3(a)(5) and 12 CFR part 3, appendix C § 42(l) (OCC); 12 CFR part 208, appendix A, § III.B.6.b and appendix F § 42(l); and 12 CFR part 225, appendix A, § III.B.6.b and appendix G § 42(l) (Board); 12 CFR part 325, appendix A, § II.B.6.b and 12 CFR part 325, appendix D, § 42(l) (FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567, appendix C, § 42(l) (OTS). 11 12 CFR part 3, appendix A, § 2(a)(3)(ii) (OCC); 12 CFR parts 208 and 225, appendix A, § II A.1.c (Board); 12 CFR part 325, appendix A, § I.A.1.(d) (FDIC); 12 CFR 567.5(a)(iii)(OTS). See 12 CFR part 3, appendix C § 11(a) (OCC); 12 CFR part 208, appendix F, § 11(a) and 12 CFR part 225, appendix G, § 11(a) (Board) ; 12 CFR part 325, appendix D, § 11(a) (FDIC); 12 CFR part 567, appendix C, § 11(a) (OTS). 10 12 PO 00000 Frm 00003 Fmt 4701 Sfmt 4700 4637 associated with (1) ABCP programs; (2) revolving securitizations structured as master trusts, including credit card and home equity line of credit (HELOC) securitizations; (3) certain mortgage loan securitizations not guaranteed by the U.S. government or a U.S. governmentsponsored agency; and (4) certain term loan securitizations in which a banking organization retains a residual interest and servicing rights, including some student loan and automobile loan securitizations.12 A number of commenters asserted that the implementation of FAS 166 and FAS 167 without changes to the agencies’ risk-based capital and leverage rules would increase regulatory capital requirements for banking organizations, as would the proposed elimination of the ABCP exclusion. They argued this would have a negative and procyclical impact on financial markets and the economy, particularly as banking organizations recover from the recent financial crises and recession, by increasing the cost of and ultimately curtailing lending. Most commenters also argued that there would be negative competitive equity effects from increased regulatory capital requirements that would disadvantage U.S. banking organizations relative to foreign and domestic competitors not subject to similarly high capital requirements. A few commenters asserted that competitive equity concerns were most severe with respect to foreign banking competitors. Some commenters also expressed concern that higher capital requirements would provide incentives for banking organizations to conduct more activity in less stringently regulated foreign jurisdictions. Many commenters also argued that such implementation would inappropriately align regulatory capital requirements with GAAP’s controlbased approach to consolidation, in contrast to the credit-risk focus of the agencies’ risk-based capital rules. Commenters overwhelmingly supported a delay and/or phase-in of the regulatory capital requirements associated with the implementation of FAS 167 for a period 12 Many commenters also expressed concern regarding the possibility that VIEs used for asset management, money market, and private equity investments where the fund manager earns more than a non-significant performance fee could be subject to consolidation under FAS 167, and urged the agencies to implement alternative regulatory capital treatments for such funds. On December 4, 2009, FASB proposed that the application of FAS 167 to such entities be deferred for an undetermined period of time. As a result, both riskbased and leverage capital requirements related to these assets would remain unchanged for the duration of the deferral. The agencies are taking no action with respect to these assets at this time. E:\FR\FM\28JAR2.SGM 28JAR2 4638 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations of up to three years. A number of commenters asserted that the proposed elimination of the exclusion of consolidated ABCP program assets from risk-weighted assets would lead to an inappropriate capital requirement for ABCP programs with certain structural features. II. Final Rule jlentini on DSKJ8SOYB1PROD with RULES2 A. Transition Mechanism for Risk-Based Capital Requirements Associated With the Implementation of FAS 166 and FAS 167 In the final rule, the agencies are instituting a transition mechanism consisting of: (1) An optional twoquarter delay, through the end of the second quarter after the implementation date of FAS 166 and FAS 167 for a banking organization, of recognition of the effect on risk-weighted assets and ALLL includable in tier 2 capital that results from a banking organization’s implementation of FAS 167 and (2) an optional phase-in, for a banking organization that has opted for the delay, of those effects over the next two quarters.13 A banking organization that chooses to implement this transition mechanism must apply it to all relevant VIEs. The effect of the transition mechanism on a banking organization’s risk-based capital ratios would be reflected in the regulatory capital information the organization reports in its regulatory reports 14 for the four calendar quarter-end regulatory report dates following the banking organization’s implementation date. In the NPR, the agencies requested comment on any significant costs or burdens, or other relevant considerations that the agencies should consider with respect to phasing-in the impact on capital requirements relating to banking organizations’ implementation of FAS 167. The agencies also requested specific and detailed rationales, evidence, and data in support of commenters’ positions and requested comment on one potential four-quarter phase-in method. Almost every commenter asserted that a four-quarter phase-in of any additional capital requirements resulting from banking organizations’ implementation of FAS 167 would be insufficient. The 13 For example, if a banking organization has a calendar year reporting period, the optional twoquarter delay period ends June 30, 2010, and the optional phase-in period ends December 31, 2010. 14 For banks, Schedule RC–R of the Consolidated Reports of Condition and Income (Call Report); for savings associations, Schedule CCR of the Thrift Financial Report (TFR); and for bank holding companies, Schedule HC–R of the Consolidated Financial Statements for Bank Holding Companies (FR Y–9C). VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 majority of commenters requested at least a three-year phase-in period. The commenters offered three primary rationales for a longer phase-in period: (1) Any shorter phase-in would unfairly penalize banking organizations given their already established businesses, practices, and programs conceived in good faith to comply with the current capital standards; (2) banking organizations need a longer period to phase out structures designed for current regulatory capital treatment and/or adopt the more risk-sensitive capital treatment of the advanced approaches rules; and (3) corporate financing and capital planning covers more than a four-quarter horizon. In addition, some commenters asserted that the cost of raising new capital in the current economic environment is high. Several commenters requested, in addition to the increased phase-in time, a six-month delay on the effect of implementation of FAS 167 on capital requirements, during which the agencies would further study the effects of FAS 166 and FAS 167 implementation, including the appropriate regulatory capital treatment for VIEs consolidated as a result of FAS 167 implementation. A few commenters indicated that there should be no phasein or that any phase-in should be as short as possible, on the grounds that any phase-in would delay needed changes. The agencies have long maintained that a banking organization should hold capital commensurate with the level and nature of the risks to which it is exposed. As described below, the agencies believe that the effects of FAS 166 and FAS 167 on banking organizations’ risk-based capital ratios will result in regulatory capital requirements that better reflect, in many cases, banking organizations’ exposure to credit risk. As a result, the agencies do not believe it is appropriate for banking organizations to delay recognizing VIEs consolidated under FAS 167 and the risks associated with them in their risk-based capital ratios for several years, as some commenters proposed. However, as discussed below, in order to avoid abrupt adjustments that could undermine or complicate government actions to support the provision of credit to U.S. households and businesses in the current economic environment, the agencies are providing banking organizations with an optional two-quarter implementation delay followed by an optional two-quarter partial implementation of the effect of FAS 167 on risk-weighted assets and ALLL includable in tier 2 capital. PO 00000 Frm 00004 Fmt 4701 Sfmt 4700 Many commenters asserted that banking organizations’ implementation of FAS 166 and FAS 167 without a change to the regulatory capital rules would decrease the volume and increase the cost of lending to consumers and businesses. Commenters did not, however, provide adequate empirical analyses and projections of this impact. The agencies note that both the supply of and demand for credit has decreased over recent quarters due to many factors, including household, business, and financial sector deleveraging. As described in the NPR, affected banking organizations’ risk-based and leverage capital ratios likely will decrease with their implementation of FAS 166 and FAS 167. However, based on public disclosures by some banking organizations and supervisory information, including the Supervisory Capital Assessment Program (SCAP),15 risk-based and leverage capital ratios at the largest banking organizations (the banking organizations most affected by FAS 166 and FAS 167) will remain substantially in excess of regulatory minimums. The agencies thus believe that, based on available information, these banking organizations will not encounter an immediate or near-term need to decrease lending or raise substantial amounts of new capital for risk-based capital purposes related to the incremental effects of this final rule. In addition, smaller banking organizations, including community banking organizations, generally did not raise concerns about an adverse impact on smaller banking organizations from the implementation of FAS 166 and FAS 167. Although the agencies believe that a banking organization’s implementation of FAS 166 and FAS 167 will result in regulatory capital requirements that more appropriately reflect risks to which the banking organization is exposed, the agencies also recognize that government initiatives may affect the securitization market in the near term. Several government programs supporting the securitization market, including the Commercial Paper Funding Facility and the noncommercial mortgage-backed securities 15 The SCAP was a supervisory exercise conducted in the first half of 2009 to determine if the 19 largest banking organizations (the banking organizations most affected by FAS 166 and FAS 167 due to the volume of their securitization activities) held regulatory capital sufficient to absorb losses under a specified adverse scenario. The exercise included consideration of estimates of the impact of FAS 166 and FAS 167 on banking organizations’ balance sheets and resulting riskbased capital requirements. Further information about SCAP results is available at http:// www.federalreserve.gov/bankinforeg/scap.htm. E:\FR\FM\28JAR2.SGM 28JAR2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations jlentini on DSKJ8SOYB1PROD with RULES2 portion of the Term Asset-Backed Securities Loan Facility, are scheduled to terminate in the first quarter of 2010. Moreover, the Congress and financial regulators, including the agencies, are considering a number of legislative and regulatory changes that would affect securitization activities. Because the agencies cannot fully assess the combined impact of these potential changes on the securitization market, and because securitization remains an important source of funding for banking organizations, the agencies are providing in the final rule an optional transition mechanism that permits a banking organization to phase in the impact of FAS 167 on its risk-weighted assets and ALLL includable in tier 2 capital. The transition mechanism consists of an optional two-quarter delay in implementation followed by an optional two-quarter partial implementation of the effect of FAS 167 on risk-weighted assets and ALLL includable in tier 2 capital.16 The timing of the transition reflects the termination dates of the government programs supporting the securitization market and the potential for uncertainty regarding securitization reform initiatives to extend through 2010. The delay and partial implementation periods also provide time for financial market participants and the agencies to observe the effects of these changes on bank lending, financial markets and the overall economy. The transition mechanism is optional because it requires a banking organization to maintain two sets of records for the duration of the delay and partial implementation periods—to account for affected VIEs for financial reporting under GAAP and separately to track the implementation-date contractual exposures to these VIEs and the ALLLs attributable to their assets for regulatory capital reporting—a dual recordkeeping requirement that banking organizations have expressed concerns about in the past. A banking organization generally would adopt the transition mechanism as of the date it implements FAS 166 and FAS 167, which is the starting date of its first annual reporting period beginning after November 15, 2009. 16 One commenter expressed concern about a statutory provision in the Home Owner’s Lending Act (HOLA), uniquely applicable to savings associations, which limits the amount of consumer loans to 35 percent of the amount of a savings association’s total assets. OTS notes that any provision under HOLA would be treated consistent with the transition mechanism. VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 1. Transition for Risk-Weighted Assets For the banking organization’s first two quarters after the date it implements FAS 166 and FAS 167 (exclusion period), including for the two calendar quarter-end regulatory report dates within the exclusion period, the banking organization may choose to exclude from risk-weighted assets those assets held by VIEs that the banking organization must consolidate as a result of implementing FAS 167, provided that (1) the VIE existed prior to the banking organization’s implementation date and (2) the banking organization did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date. A banking organization that applies this exclusion to any VIE must apply the exclusion to all VIEs that qualify for the exclusion. During the exclusion period, the banking organization may also exclude from risk-weighted assets those assets held by VIEs that are consolidated ABCP programs (ABCP program VIEs), provided that the banking organization is the sponsor of the ABCP program and the banking organization consolidated the ABCP program VIE onto its balance sheet under GAAP and excluded the VIE’s assets from its risk-weighted assets prior to the implementation date. A banking organization that applies this exclusion to any ABCP program VIE must apply the exclusion to all ABCP program VIEs that qualify for the exclusion. A banking organization electing to exclude assets of any VIE pursuant to the transition mechanism described above may not, however, exclude from risk-weighted assets the assets of a VIE to which the banking organization has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold (implicit support). During the exclusion period, the banking organization would include in risk-weighted assets an amount equal to the risk-weighted assets it would have been required to calculate for its contractual exposures to these VIEs on the implementation date, including direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans, under the riskbased capital rules prior to its implementation of FAS 166 and FAS 167. The agencies expect a banking organization would calculate riskweighted assets using a methodology similar to the methodology used to calculate the risk weights of exposures PO 00000 Frm 00005 Fmt 4701 Sfmt 4700 4639 to ABCP programs pursuant to the ABCP exclusion. The amount of risk-weighted assets associated with assets held by VIEs subject to exclusion as described above as of the implementation date of FAS 166 and FAS 167 is the exclusion amount. For the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, a banking organization that has adopted the optional transition mechanism for the first two quarters may exclude from risk-weighted assets 50 percent of the exclusion amount. However, the banking organization may not include in risk-weighted assets an amount less than the aggregate risk-weighted assets it held based on its contractual exposures to these VIEs as of the implementation date, had the VIEs not been consolidated. This floor on riskweighted assets ensures that, notwithstanding these transition provisions, a banking organization always calculates risk-weighted assets in a manner that at a minimum reflects its contractual risk exposure to its consolidated VIEs as of the implementation date. 2. Transition for Allowance for Loan and Lease Losses During the exclusion period, including for the two calendar quarterend regulatory report dates within the exclusion period, a banking organization that adopts the transition mechanism for risk-weighted assets described in section II.A.1. above by excluding assets of consolidated VIEs from risk-weighted assets may also include without limit in tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excluded pursuant to the transition mechanism for risk-weighted assets (inclusion amount). That is, the ALLL included in tier 2 capital pursuant to this transition mechanism during the exclusion period would not be subject to (1) the 1.25 percent of risk-weighted assets limit (1.25 percent limit) on the ALLL in tier 2 capital contained in the agencies’ general risk-based capital rules; 17 or (2) the limits in section 13 of the agencies’ advanced approaches rules on including ALLL in tier 2 capital.18 17 See footnote 8. CFR part 3, appendix C § 13(a)(2) and (b) (OCC); 12 CFR part 208, appendix F § 13(a)(2) and (b); and 12 CFR part 225, appendix G § 13(a)(2) and (b) (Board); 12 CFR part 325, appendix D, § 13(a)(2) and (b) (FDIC); 12 CFR part 567, appendix C, § 13(a)(2) and (b) (OTS). 18 12 E:\FR\FM\28JAR2.SGM 28JAR2 4640 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations During the phase-in period, including for the two calendar quarter-end regulatory report dates within the phase-in period, a banking organization that has adopted the transition mechanism for risk-weighted assets during the phase-in period may include in tier 2 capital without limit 50 percent of the inclusion amount. The banking organization’s ALLL in excess of 50 percent of the inclusion amount may be included in tier 2 capital subject to the 1.25 percent limit. As with the transition for risk-weighted assets, a banking organization may not adopt the transition mechanism for the ALLL for VIEs that it must consolidate after implementing FAS 167 to which it has provided implicit support. Therefore, a banking organization must count toward the 1.25 percent limit all ALLL it includes in tier 2 capital that is associated with assets of a VIE to which it has provided implicit support. B. Regulatory Capital Requirements Associated With the Implementation of FAS 166 and FAS 167 jlentini on DSKJ8SOYB1PROD with RULES2 1. Risk-Based Capital Rules The agencies have concluded that it is appropriate to provide an optional delay of and then phase in the effect of banking organizations’ implementation of FAS 166 and FAS 167 on riskweighted assets and the ALLL included in tier 2 capital as described above. However, after careful consideration and analyses of commenters’ arguments and supporting information, as well as banking organizations’ financial disclosures, and supervisory data and analyses, the agencies have concluded that there is insufficient justification to warrant a permanent modification of the risk-based capital rules in response to banking organizations’ implementation of FAS 166 and FAS 167. a. Risk-Weighted Assets As the agencies noted in the NPR, the qualitative analysis required under FAS 167, as well as enhanced requirements for recognizing transfers of financial assets under FAS 166, converge in many respects with the agencies’ assessment of a banking organization’s ongoing credit risk exposure to the VIEs that are required to be consolidated under FAS 167. Experience from the recent financial crisis demonstrates that credit risk exposure of sponsoring banking organizations to such structures (and to the assets of these structures) has in fact been greater than the agencies previously estimated, and more associated with non-contractual risks, including reputational risk, than the agencies had previously anticipated. In VerDate Nov<24>2008 18:36 Jan 27, 2010 Jkt 220001 the NPR, the agencies noted situations in which banking organizations provided implicit support to some securitization structures, revolving structures in particular, to reduce the likelihood that senior securities of the structures would experience credit ratings downgrades.19 These examples were intended to demonstrate that riskbased capital requirements based solely on a banking organization’s contractual exposure may underestimate the true exposure of a sponsoring banking organization to the credit risk of securitization structures and other VIEs.20 In the NPR, the agencies sought specific views from commenters, with supporting data and other documentation, regarding the types of VIEs and other special purpose entities that are more or less likely to elicit implicit support. The agencies also sought comment on any types of consolidated VIEs that might merit a different risk-based capital treatment than that which will result from the implementation of FAS 166 and FAS 167 without any change to regulatory capital requirements, together with a detailed explanation and supporting empirical analysis of why the features and characteristics of these structure types merit an alternative treatment, how the risks to the consolidating banking organization of the structures should be measured, and what an appropriate alternative capital treatment would be. Many commenters identified reputational and operational risks as most likely to induce a banking organization to provide implicit support to a VIE. Some commenters noted that certain banking organizations did not follow their peers in providing implicit support during the recent crisis despite reputational risks. However, commenters generally argued that the risk-based capital rules should be modified to mitigate the effect of FAS 166 and FAS 167 on risk-based capital requirements, taking into account risks borne by third-party investors in VIEs; a substantial number of commenters 19 Typical structures of this type include securitizations that are backed by credit card or HELOC receivables, single- and multi-seller ABCP conduits, and structured investment vehicles. 20 Some commenters expressed concern that the accounting changes coupled with the agencies’ proposal would result in duplicative capital requirements and excessive regulatory capital being held on a system-wide basis. The agencies recognize that there will be some overlap in regulatory capital held by sponsoring and investing banking organizations in relation to the same assets. However, the agencies believe this overlap results in a fair reflection of the risks to which sponsoring and investing banking organizations are exposed on an individual basis. PO 00000 Frm 00006 Fmt 4701 Sfmt 4700 asserted that risk-based capital requirements should be limited to a banking organization’s contractual exposure to VIEs consolidated under FAS 167. Other commenters suggested that the agencies consider using a sliding-scale to risk weight assets subject to consolidation under FAS 167 based on the likelihood of the VIE holding the assets receiving implicit support, as demonstrated by historical experience. Some commenters suggested an implicit support trigger approach that would require higher capital requirements based on a decrease in a VIE’s excess spread (that is, the amount of income the VIE receives from assets in excess of that it pays to holders of its obligations), deterioration in VIE asset quality, downward changes in the credit ratings of the VIE’s obligations, or other adverse credit events. Many commenters recommended an approach to risk weighting assets held by consolidated VIEs that would consider each structure independently, calculate a banking organization’s ‘‘net exposure’’ to the structure by subtracting third-party investor interests in the structure from the structure’s total assets, and then consider the appropriate risk weight to be applied to the resulting net exposure based on the risk characteristics of the structure. Some commenters similarly suggested the agencies adjust risk weights for securitized assets case-by-case on the basis of credit risk mitigation instruments supporting the assets, or include in regulatory capital some subordinated debt instruments issued by consolidated VIEs. Others argued that the agencies should separate regulatory capital reporting from GAAP when establishing regulatory capital requirements for banking organizations’ exposures to VIEs and look to the way banking organizations manage VIE exposures internally to determine treatment as ‘‘on’’- or- ‘‘off’’ balance sheet for regulatory capital purposes. Some commenters suggested that the size and risk profile of a banking organization should determine capital requirements for consolidated assets. Other commenters suggested the agencies develop risk weights for consolidated VIEs based on the agencies’ guidance on synthetic securitizations. With regard to specific types of structures, many commenters asserted that certain multiseller ABCP conduits (as discussed further below) and non-revolving, amortizing asset securitizations with certain features, such as term residential mortgage-backed securities structures, should receive more favorable capital E:\FR\FM\28JAR2.SGM 28JAR2 jlentini on DSKJ8SOYB1PROD with RULES2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations treatment based on their low historical loss levels to sponsoring banking organizations or low likelihood of implicit support. Some commenters also requested the agencies provide capital relief for consolidated residential and commercial mortgage-backed securities structures in order to aid the real estate market. Although commenters provided some empirical data in support of their arguments for favorable treatment of ABCP conduits (as discussed below), they provided much less data in support of other proposed alternative risk-based capital treatments. Commenters provided some examples of structural features (such as tax consequences) that may effectively minimize the possibility that a sponsoring banking organization will provide implicit support to certain structures. They did not, however, provide an explicit set of criteria, supported by broad-based empirical evidence, that the agencies could use to identify structures with minimal likelihood of implicit support, particularly during times of financial market stress, nor did they identify alternative risk-based capital treatments that would appropriately identify and measure risk and allay the agencies’ concerns regarding regulatory capital arbitrage (that is, the structuring of transactions to obtain lower regulatory capital requirements without a commensurate reduction in risk). Commenters also did not empirically demonstrate the degree of competitive harm relative to foreign banks and other competitors that banking organizations would likely suffer as a result of the regulatory capital effects of their implementation of FAS 166 and FAS 167. The agencies therefore are not implementing modifications to the riskbased capital rules to provide an alternative risk-based capital treatment for assets that will be newly consolidated on a banking organization’s balance sheet following implementation of FAS 166 and FAS 167. The agencies believe that the optional interim relief provided by this final rule, through the delay and phasein of the effects of FAS 167 upon riskbased capital requirements as described above, will give a banking organization that elects the option adequate time to adjust its risk profiles to address competitive concerns and to plan to develop structural features needed for future transactions with due consideration to its regulatory capital profiles. VerDate Nov<24>2008 18:36 Jan 27, 2010 Jkt 220001 b. Qualifying Total Capital In the NPR, the agencies sought comment on whether securitized loans subject to consolidation on banking organizations’ balance sheets under FAS 167 would be subject to the same ALLL provisioning process, including applicable loss rates, as similar loans that are not securitized. The agencies asked for comment on how banking organizations would reflect the benefits of risk sharing in cases where investors in VIEs holding such loans absorb realized credit losses, and for a quantification of such benefits and any other effects of loss sharing, wherever possible. The agencies also asked whether they should consider policy alternatives with regard to the ALLL provisioning process, including the limit on ALLL that may be included in tier 2 capital. Commenters indicated that the ALLL provisioning process and amounts for loans held in VIEs consolidated under FAS 167 would be the same as for loans not held in VIEs. Commenters asserted that the addition to ALLL that would result from this consolidation would be significantly greater than the actual losses contractually borne by the consolidating banking organization and would distort the relationship of the ALLL to the contractual risk of the consolidating banking organization to the assets held in the affected VIEs. Commenters further noted that, because additions to ALLL are deducted from retained earnings, the additions have the effect of reducing tier 1 capital. Many commenters also noted that a higher ALLL would result in higher deferred tax assets (DTAs) 21 and significantly affect banking organizations’ regulatory capital ratios due to the capital rules’ limits on including DTAs and the ALLL in regulatory capital.22 Many commenters requested that the agencies relax or eliminate the restrictions on including DTAs in tier 1 capital and the ALLL in tier 2 capital to mitigate the effects of 21 Under GAAP, a DTA arises as a result of the recognition of an expense, in this case a loss provision, for financial reporting purposes in advance of its recognition as a deduction for income tax reporting purposes. 22 The agencies’ risk-based capital rules limit the amount of DTAs dependent upon future taxable income that may be included in tier 1 capital to the lesser of two measures: (a) The amount of such DTAs that a banking organization could reasonably expect to realize within one year; or (b) ten percent of tier 1 capital that exists before the deduction of any disallowed servicing assets, any disallowed purchased credit card relationships, any disallowed credit-enhancing interest-only strips, and any disallowed deferred tax assets. See 12 CFR part 3, Appendix A, § 2(c)(1)(iii) (OCC); 12 CFR parts 208 and 225, Appendix A § II.B.4 (Board); 12 CFR 325.5(g) (FDIC); and 12 CFR 567.12(h) (OTS). PO 00000 Frm 00007 Fmt 4701 Sfmt 4700 4641 consolidation due to the implementation of FAS 167 on regulatory capital. Specifically, some commenters recommended that the current limit (1.25 percent of riskweighted assets) on the inclusion of the ALLL in tier 2 capital be increased, or that the entire ALLL related to the assets supporting VIEs’ contractual obligations to third parties be included in tier 2 capital. Other commenters recommended that all ALLL related to losses contractually borne by third parties be eligible for inclusion in tier 1 capital. Commenters also noted that DTA balances will increase along with the ALLL, and recommended that either the current limit on DTAs in regulatory capital be removed or that all DTAs arising from ALLL related to the contractual loss absorption responsibilities of third parties to consolidated VIEs be included in tier 1 capital. Under FAS 167, banking organizations have several financial reporting methods for recognizing the initial and ongoing consolidation of VIEs. One method is the fair value option, under which the assets of the VIE are recorded at fair value upon consolidation and no associated ALLL is recognized. Another method is to record newly consolidated assets at carrying value, which requires the establishment of an ALLL at a level appropriate to cover estimated credit losses.23 Commenters suggested that by not relaxing the limit on the amount of ALLL that may be included in tier 2 capital, the agencies may encourage banking organizations to elect the fair value option for initial consolidation and/or ongoing accounting of affected consolidated VIEs. The agencies have considered the concerns raised by commenters with respect to ALLL provisioning and DTAs created as a result of a banking organization’s implementation of FAS 167. The agencies recognize the effects on tier 1 and tier 2 capital of the increased ALLL provisioning that will result from the consolidation of VIEs, and note the concern of some commenters that, in some cases, the provisioning may be disproportionate to the contractual risks borne by a banking organization with respect to the consolidated assets. However, as described above, a regulatory focus on contractual exposures may understate a banking organization’s exposure to loss 23 If a banking organization makes use of a practicability exception to record the assets at fair value as of the date FAS 166 and FAS 167 are first implemented, no associated ALLL is recognized on that date, but an associated ALLL will be recognized in future periods. E:\FR\FM\28JAR2.SGM 28JAR2 4642 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations with regard to a VIE’s assets that the banking organization must consolidate under FAS 167. Moreover, the agencies have determined that the current limits on ALLL are appropriate given the policy benefits of maintaining consistency among international capital standards absent compelling policy justifications for deviating from such standards. The limit of 1.25 percent of risk-weighted assets on the amount of the ALLL that a banking organization may include in tier 2 capital is a standard included in the first capital accord of the Basel Committee on Banking Supervision (Basel Accord).24 The agencies also note that the current limit on DTAs that a banking organization may include in tier 1 capital is currently being considered as part of an international review of the components of regulatory capital, including deductions from capital. Moreover, commenters generally did not quantify the effect of FAS 167 on banking organizations’ ALLLs and DTAs, and the agencies believe that it may be difficult to identify on an ongoing basis the ALLLs and DTAs associated only with assets newly subject to consolidation under FAS 167. For the above reasons, the agencies have decided not to modify current limits on the inclusion of the ALLL in tier 2 capital and of DTAs in tier 1 capital. However, as described in section II.A.2., this final rule provides substantial transitional relief from the agencies’ limits on including ALLL in tier 2 capital to a banking organization implementing FAS 167 that elects to adopt the transition mechanism for riskweighted assets described in section II.A.1 above. The agencies believe that this relief, along with the transitional relief for risk-weighted assets included in the final rule, will aid banking organizations with capital planning as they implement FAS 166 and FAS 167 and adjust their business practices accordingly. jlentini on DSKJ8SOYB1PROD with RULES2 2. Leverage Requirement Under the leverage rule, tier 1 capital is assessed against a measure of a banking organization’s total on-balance sheet assets, net of ALLL and certain other exposures (leverage ratio).25 Therefore, previously unconsolidated assets that now must be recognized on a banking organization’s balance sheet as a result of its implementation of FAS 24 Basel Committee on Banking Supervision, International Convergence of Capital Measurement and Capital Standards (1988), paragraph 21. 25 See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B § II.b and 12 CFR part 225, appendix D, § II.b (Board); 12 CFR 325.2(m) (FDIC); 12 CFR 567.5(b)(4) (OTS). VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 167 will increase the denominator of the banking organization’s leverage ratio. The agencies have maintained the leverage rule as a balance-sheet assessment to supplement the risk-based capital rules and limit the degree to which a banking organization can leverage its equity capital base.26 By design, the leverage rule does not recognize the risk profile of on-balance sheet exposures, including any risk transference associated with those exposures. Some commenters suggested, based on the same risk transference arguments referred to above with respect to the risk-based capital rules, that the agencies exclude the assets of VIEs consolidated by banking organizations under FAS 167 from the leverage ratio. Other commenters urged that the agencies apply any phase-in of capital requirements associated with the implementation of FAS 167 to the leverage rule as well as the risk-based capital rules. Having considered commenters’ views, the anticipated impact of the implementation of FAS 166 and FAS 167 on banking organizations’ leverage ratios, and the history and purpose of the leverage rule, the agencies have concluded that a delay or phase-in of the effect of consolidation under FAS 167 on the leverage rule is not appropriate or justified. The agencies believe the maintenance of the leverage rule as a balance-sheet assessment separate from the assessment of relative risk is a particularly important feature of prudential regulation and did not find evidence that the impact of FAS 166 and FAS 167 on banking organizations’ leverage ratios justifies any alteration of the leverage rule. C. Asset-Backed Commercial Paper Programs In the NPR, the agencies proposed to eliminate the ABCP exclusion, which permits a banking organization to exclude from risk-weighted assets the assets of an ABCP program that the banking organization is required to consolidate under GAAP and for which the banking organization acts as sponsor. Under the current risk-based capital rules, a banking organization that elects the ABCP exclusion must instead assess risk-based capital requirements only on its contractual exposures to the program. As proposed in the NPR, as with all other consolidated VIEs, a banking 26 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B, § I.a. and 12 CFR part 225, appendix D, § I.a (Board); 12 CFR 325.3 (FDIC); 12 CFR 567.5 (OTS). PO 00000 Frm 00008 Fmt 4701 Sfmt 4700 organization would be required to include the assets of a consolidated ABCP program in risk-weighted assets. The agencies also proposed to eliminate the associated provision in the general risk-based capital rules (incorporated by reference in the advanced approaches) that excludes from tier 1 capital the minority interest in a consolidated ABCP program not included in a banking organization’s risk-weighted assets. Commenters generally opposed the proposal to eliminate the ABCP exclusion, particularly with respect to customer-focused, multi-seller ABCP programs (customer conduits). These commenters argued that such ABCP programs have a history of low loss rates (including during the recent financial crisis) and are important sources of funding for many businesses. These commenters also suggested that if the agencies eliminate the ABCP exclusion, the increased capital requirement associated with ABCP programs would increase the cost of funding and decrease credit availability for businesses that have used customer conduits to fund their operations, and therefore would adversely affect the economy and financial markets. Commenters also argued that the proposed elimination of the ABCP exclusion would raise significant competitive equity concerns for domestic banking organizations relative to foreign banks and domestic entities not subject to banking regulation. Some commenters additionally argued that the elimination of the ABCP exclusion would decrease incentives for banking organizations to transfer risk and might encourage banking organizations to invest in riskier, higher yield assets than those typically associated with consumer conduits. One commenter suggested that elimination of the ABCP exclusion was appropriate where liquidity facilities act as credit enhancement or where affiliates of the conduit sponsor are the largest holder of the ABCP obligations. Additionally, in response to the agencies’ proposal, a number of commenters suggested that the agencies allow early adoption of the advanced approaches rules’ Internal Assessment Approach (IAA) methodology 27 for risk weighting these assets, or delay 27 See 12 CFR part 3, appendix C, (OCC) § 44; 12 CFR part 208, appendix F, § 44; and 12 CFR part 225, appendix G, § 44 (Board); 12 CFR part 325, appendix D, § 44 (FDIC); 12 CFR 567, Appendix C, § 44 (OTS). Qualifying banking organizations using the IAA may calculate risk-weighted asset amounts for securitization exposures (as defined in the advanced approaches rule) to qualifying ABCP programs by using an internal credit assessment process mapped to equivalent external ratings. E:\FR\FM\28JAR2.SGM 28JAR2 jlentini on DSKJ8SOYB1PROD with RULES2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations eliminating the ABCP exclusion until banking organizations could operate fully under the advanced approaches rules. Other commenters urged the agencies not to implement the proposal to eliminate the ABCP exclusion at all, particularly for customer conduits. The agencies have weighed the concerns raised by commenters, as described above, related to the proposal to eliminate the ABCP exclusion from the risk-based capital rules, against the agencies’ own concerns regarding the possibility of sponsors providing implicit support to ABCP programs and regulatory capital arbitrage, among others. The agencies acknowledge that customer conduits appear to present a lower risk of loss to the sponsoring banking organization relative to other ABCP programs. However, recent events have raised serious questions about the original rationale for allowing the exclusion of consolidated ABCP programs from risk-weighted assets. As the agencies noted in the NPR, the 2004 implementation of the ABCP exclusion was based on the agencies’ belief that sponsoring banking organizations’ risk exposure to these entities was limited to their contractual exposure. However, as a result of some banking organizations having provided implicit support to a number of ABCP programs they sponsored during the recent financial turmoil, the agencies have observed that the premise of a contractual limit on risk was incorrect for some ABCP programs. In addition, and notwithstanding commenters’ assertions to the contrary, the agencies believe that the type of customer conduit advocated by commenters to be considered for preferential exclusion from riskweighted assets cannot be distinguished from other ABCP programs to a degree of certainty that would effectively mitigate the risk of regulatory capital arbitrage. Furthermore, commenters did not describe the features and characteristics of customer conduits that would effectively mitigate the risk of a banking organization providing implicit support to sponsored structures under the broadest range of circumstances. The agencies are sensitive to competitive concerns and recognize that some ABCP programs include generally high credit-quality assets. However, given the absence of a workable alternative proposal that satisfactorily addresses the agencies’ concerns about regulatory capital arbitrage and implicit support, the agencies have decided to eliminate as proposed the ABCP exclusion, subject to the delay and phase-in described above. With respect to the recommendation that the agencies allow early adoption of VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 the IAA, the agencies note that the IAA is applicable exclusively to a banking organization’s exposures to off-balance sheet ABCP programs and not to a program’s underlying assets when reported on balance sheet. Moreover, the IAA, like the ABCP exclusion, focuses on a banking organization’s contractual exposures to an ABCP conduit. The IAA does not capture implicit support and thus an extension of the IAA to consolidated ABCP programs would not sufficiently reflect the risk to a sponsoring banking organization of such programs. D. Reservation of Authority The NPR proposed a new reservation of authority for the risk-based capital rules specifying that a banking organization’s primary Federal supervisor would have the authority to require the banking organization to treat an off-balance sheet VIE (or similar entity) as if it were consolidated onto the banking organization’s balance sheet. The banking organization would have to hold capital against the entity’s exposures for risk-based capital purposes if the primary Federal supervisor determined that the banking organization’s exposure or other relationship to the entity was not commensurate with the actual risk relationship of the banking organization to the entity. The agencies received little comment with respect to the proposed reservation of authority. The few comments received regarding the proposed reservation of authority suggested that it be used in conjunction with recognition of contractual risk transfer. One commenter opposed the reservation of authority as proposed and requested that the agencies specify standards for the exercise of the authority. The agencies asked in the NPR if there are any features and characteristics of transactions not subject to consolidation on banking organizations’ balance sheets under GAAP as modified by FAS 166 and FAS 167 that should be recognized as on-balance sheet exposures for regulatory capital purposes to more appropriately reflect risk. Commenters generally stated that they were not aware of any such transactions. Many commenters also asserted that such transactions were unlikely. As stated in the NPR, the agencies believe the reservation of authority is essential to address instances when a banking organization structures a financial transaction with a VIE to avoid consolidation under FAS 167, and the resulting capital treatment is not commensurate with all risks of the PO 00000 Frm 00009 Fmt 4701 Sfmt 4700 4643 banking organization to the VIE, including non-contractual risks. The agencies have therefore decided to incorporate the reservation of authority in their risk-based capital rules as proposed in the NPR. E. Other Related Matters 1. Department of the Treasury’s Home Affordable Mortgage Program In the NPR, the agencies solicited comment on whether banking organizations that service securitized residential mortgages, participate in the United States Department of the Treasury’s Home Affordable Mortgage Program (HAMP), and receive certain incentive payments in connection with the program, would be required under FAS 167 to consolidate VIEs holding such mortgages solely due to loan modifications under HAMP. The agencies also asked if such consolidation were required, whether such assets should be included in regulatory capital requirements and what alternative capital treatment may be appropriate. Commenters generally did not think that incentive payments under HAMP would independently trigger consolidation under FAS 167. Most also argued that if such consolidation were to occur as a result of actions related to or required by HAMP participation, regulatory capital treatment should be modified with respect to the relevant consolidated mortgage loan assets. The agencies agree with commenters’ assessment that it is unlikely that incentive payments under HAMP independently would cause servicers participating in HAMP to consolidate VIEs holding mortgage loans modified under HAMP. The agencies therefore do not see a basis for any modification of their capital requirements in relation to incentive payments made pursuant to HAMP. 2. Denial of Extension of Comment Period A few commenters requested that the agencies extend the NPR comment period. As noted above, the agencies received approximately 41 comments following the publication of the NPR, which indicates that commenters had adequate time to express their views. Furthermore, the possible regulatory capital implications of FAS 166 and FAS 167 were publicly known for months prior to the NPR and several commenters expressed viewpoints on these matters to the agencies well before the publication of the NPR. The agencies therefore have concluded that the 30-day comment period provided E:\FR\FM\28JAR2.SGM 28JAR2 4644 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations adequate time for commenters to provide views to the agencies and deny requests to extend the NPR comment period. VI. Regulatory Analysis Riegle Community Development and Regulatory Improvement Act Section 302 of Riegle Community Development and Regulatory Improvement Act 28 (RCDRIA) generally requires that regulations prescribed by Federal banking agencies which impose additional reporting, disclosures or other new requirements on insured depository institutions take effect on the first day of a calendar quarter unless an agency finds good cause that the regulations should become effective sooner and publishes its finding with the rule. The effective date of this rule is March 29, 2010.29 The agencies believe that it is important to make this final rule effective before banking organizations generally must calculate their regulatory risk-based capital ratios at the end of the first quarter of 2010. This will allow banking organizations to implement the rule prior to calculating their first quarter 2010 risk-based capital ratios and mitigate possible negative impacts on securitization and financial markets as described in section II.A above. The RCDRIA also provides that an entity that is subject to such a regulation may elect to comply with the regulation before its effective date.30 Accordingly, banking organizations may elect to comply with this final rule before the effective date (as of the beginning of their first annual reporting period that begins after November 15, 2009). Regulatory Flexibility Act jlentini on DSKJ8SOYB1PROD with RULES2 In accordance with Section 3(a) of the Regulatory Flexibility Act (RFA),31 the agencies are publishing a final regulatory flexibility analysis for amendments to their capital rules. Under regulations issued by the Small Business Administration,32 a small entity includes a commercial bank, BHC, or savings association with assets of $175 million or less (a small banking organization). As of September 30, 2009, there were approximately 2,484 small BHCs, 379 small savings associations, 722 small national banks, 419 small State member banks, and 2,818 small 28 12 U.S.C. 4802. final rule is a ‘‘major rule’’ under the Congressional Review Act and therefore may not take effect until at least 60 days after publication in the Federal Register. See 5 U.S.C. 801. 30 12 U.S.C. 4802(b)(2). 31 5 U.S.C. 601 et seq. 32 See 13 CFR 121.201. 29 This VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 State nonmember banks. As a general matter, the Board’s general risk-based capital rules apply only to a BHC that has consolidated assets of $500 million or more. Therefore, the proposed changes to the Board’s general riskbased capital rules for BHCs will not affect small BHCs. The agencies have determined that the final rule will not have a significant impact on a substantial number of small banking organizations. Small banking organizations do not sponsor ABCP programs and very few will be required to consolidate VIEs as a result of implementing FAS 167. The agencies expect that few small banking organizations will elect to implement the transition mechanism set forth in the final rule and they will not be affected by the removal of the ABCP exclusion. Therefore, the agencies certify that the final rule will not have a significant economic impact on a substantial number of small banking organizations. 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.’’ Regulatory actions that satisfy one or more of these criteria are referred to as ‘‘economically significant regulatory actions.’’ The OCC and OTS have determined that this rulemaking is an economically significant regulatory action for purposes of Executive Order 12866. However, because the rule addresses changes to accounting standards that will become effective for national banks and savings associations as of the beginning of their first annual reporting period that begins after November 15, 2009, the issuance of this rule is subject to the procedures set forth in Section 6(a)(3)(D) of Executive Order 12866. Paperwork Reduction Act In accordance with the requirements of the Paperwork Reduction Act of 1995,33 the agencies have reviewed the final rule. The Board reviewed the final rule under the authority delegated to the Board by the Office of Management and Budget. The Board, the FDIC, and the OCC note that instructions related to ABCP conduits in Schedule RC–R of the Consolidated Reports of Condition and Income 34 and Schedule HC–R of the Consolidated Financial Statements for Bank Holding Companies 35 will require revision.36 The Board, the FDIC, and the OCC also note that the instructions for other items in Schedules RC–R and HC– R will require revisions related to the delay and phase-in options included in the final rule. If these revisions are determined to be significant, the revisions would be incorporated into a proposal that the agencies would publish with a request for comment in accordance with the requirements of the PRA. OCC/OTS Unfunded Mandates Reform Act of 1995 Determination Executive Order 12866 Executive Order 12866 requires Federal agencies to prepare a regulatory impact analysis for agency actions that are found to be ‘‘significant regulatory 33 44 U.S.C. 3506. Nos. 7100–0036, 1557–0081, and 3064– 0052; FFIEC 031 and 041. 35 OMB No. 7100–0128; FR Y–9C. 36 OTS notes that the Thrift Financial Report (TFR) does not need any revisions, given that it does not currently ask for specific information like the call report. OTS does not anticipate the need to revise the TFR, but if the need arises OTS would request comment in accordance with the requirements of the PRA. 34 OMB PO 00000 Frm 00010 Fmt 4701 Sfmt 4700 The Unfunded Mandates Reform Act of 1995 37 (UMRA) requires that an agency prepare a budgetary impact statement before promulgating a rule that includes a 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. If a budgetary impact statement is required, section 205 of the UMRA also requires an agency to identify and consider a reasonable number of regulatory alternatives before promulgating a rule. The OCC and the OTS each have determined that its proposed rule will not result in expenditures by State, local, and Tribal governments, in the aggregate, or by the private sector, of $100 million or more in any one year. Accordingly, neither the OCC nor the OTS has prepared a budgetary impact statement or specifically addressed the regulatory alternatives considered. Use of Plain Language Section 722 of the Gramm-LeachBliley Act 38 requires the Federal banking agencies to use plain language in all proposed and final rules published after January 1, 2000. The agencies invited comment on how to make the proposed rule easier to understand. The agencies received no comment on plain language. 37 See Public Law 104–4. Law 106–102. 38 Public E:\FR\FM\28JAR2.SGM 28JAR2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations Nevertheless, the agencies have endeavored to present this final rule, and all their capital rules, in a manner that is as brief, comprehensible, and straightforward as possible, in light of the nature and complexity of the subject matter. List of Subjects 12 CFR Part 3 Administrative practice and procedure, Banks, Banking, 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. Appendix A to Part 3—Risk-Based Capital Guidelines 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, Risk, Savings associations. 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 is amending 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: ■ Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note, 1835, 3907, and 3909. 2. Section 3.4 is amended by adding paragraph (c) to read as follows: jlentini on DSKJ8SOYB1PROD with RULES2 ■ § 3.4 Reservation of authority. * * * * * (c) The OCC may find that the capital treatment for an exposure not subject to consolidation on the bank’s balance sheet does not appropriately reflect the VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 risks imposed on the bank. Accordingly, the OCC may require the bank to treat the exposure as if it were consolidated onto the bank’s balance sheet for the purpose of determining compliance with the bank’s minimum risk-based capital requirements set forth in Appendix A or Appendix C to this Part. The OCC will look to the substance of and risk associated with the transaction as well as other relevant factors the OCC deems appropriate in determining whether to require such treatment and in determining the bank’s compliance with minimum risk-based capital requirements. ■ 3. In appendix A to Part 3: ■ a. In section 2, remove and reserve paragraph (a)(3)(ii); ■ b. In section 3, remove and reserve paragraph (a)(5) and revise paragraph (a)(6); and ■ c. Revise section 5. The revisions read as set forth below. * * * * * Section 3. * * * * * * * * (a) * * * (6) Other variable interest entities subject to consolidation. If a bank is required to consolidate the assets of a variable interest entity under generally accepted accounting principles, the bank must assess a risk-based capital charge based on the appropriate risk weight of the consolidated assets in accordance with sections 3(a) and 4 of this appendix A. Any direct credit substitutes and recourse obligations (including residual interests), and loans that a bank may provide to such a variable interest entity are not subject to a capital charge under section 4 of this appendix A. Section 5. Optional transition provisions related to the implementation of consolidation requirements under FAS 167. (a) This section 5 provides optional transition provisions for a national bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of riskweighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of this section 5, assets held by a VIE, PO 00000 Frm 00011 Fmt 4701 Sfmt 4700 4645 provided that the following conditions are met: (A) The VIE existed prior to the implementation date; (B) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date; (C) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167; and (D) The bank excludes all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 5; and (ii) Subject to the limitations of paragraph (d) of this section 5, assets held by a VIE that is a consolidated asset-backed commercial paper (ABCP) program, provided that the following conditions are met: (A) The bank is the sponsor of the ABCP program; (B) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets; and (C) The bank chooses to exclude all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 5. (2) Risk-weighted assets during exclusion period. During the exclusion period, including the two calendar quarter-end regulatory report dates within the exclusion period, a bank adopting the optional provisions of this paragraph (b) of this section 5 must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 5 on the implementation date and include this calculated amount in its risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to paragraph (b)(1) of this section may include in Tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 5 (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 2(b)(1) of this Appendix A. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of riskweighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets during the third and fourth quarters. A bank that excludes assets of consolidated VIEs from riskweighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates E:\FR\FM\28JAR2.SGM 28JAR2 4646 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations within those quarters, exclude from riskweighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section. (3) Inclusion of ALLL in Tier 2 capital during the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in section 2(b)(1) of this Appendix A. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 5, assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. * * * * * 4. In Appendix C to part 3, amend the Table of Contents by adding a new Part IX and Section 81 as follows: ■ Appendix C to Part 3—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches Part I—General Provisions Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 5. Further amend appendix C to Part 3 as follows: ■ a. In section 1, redesignate paragraph (c)(3) as paragraph (c)(4), and add a new paragraph (c)(3); and ■ b. Remove section 42(l) and redesignate section 42(m) as section 42(l). The addition reads as set forth below. ■ jlentini on DSKJ8SOYB1PROD with RULES2 Appendix C to Part 3—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches Section 1. * * * (c) * * * (3) Regulatory capital treatment of unconsolidated entities. If the OCC determines that the capital treatment for a bank’s exposure or other relationship to an entity not consolidated on the bank’s balance sheet is not commensurate with the actual risk relationship of the bank to the entity, for risk-based capital purposes, it may require the bank to treat the entity as if it were consolidated onto the bank’s balance sheet and require the bank to hold capital against the entity’s exposures. The OCC will look to the substance of and risk associated with the transaction as well as other relevant factors the OCC deems appropriate in determining whether to require such treatment and in determining the bank’s compliance with VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 minimum risk-based capital requirements. In making a determination under this paragraph, the OCC will apply notice and response procedures in the same manner and to the same extent as the notice and response procedures in 12 CFR 3.12. 6. Further amend Appendix C to part 3 by adding a new part IX and section 81 to read as follows: ■ Appendix C to Part 3—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 (a) Scope, applicability, and purpose. This section 81 provides optional transition provisions for a bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under GAAP. These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of riskweighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE, provided that the following conditions are met: (A) The VIE existed prior to the implementation date; (B) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date; (C) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167; and (D) The bank chooses to exclude all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 81; and (ii) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE that is a consolidated asset-backed commercial paper (ABCP) program, provided that the following conditions are met: (A) The bank is the sponsor of the ABCP program; (B) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets; and (C) The bank excludes all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 81. PO 00000 Frm 00012 Fmt 4701 Sfmt 4700 (2) Risk-weighted assets during exclusion period. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank adopting the optional provisions in paragraph (b) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 81 on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to paragraph (b)(1) of this section 81 may include in Tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 81 (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 13(a)(2) and (b) of this Appendix C. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of riskweighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section 81. (3) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in section 13(a)(2) and (b) of this Appendix. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 81, assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. E:\FR\FM\28JAR2.SGM 28JAR2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations 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 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) 7. The authority citation for part 208 continues to read as follows: ■ 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),1833(j), 1828(o)1831, 1831o, 1831p–1, 1831r–1, 1831w, 1831x 1835a, 1882, 2901–2907, 3105, 3310, 3331–3351, and 3905–3909; 15 U.S.C. 78b, 78I(b), 78l(i),780–4(c)(5), 78q, 78q–1, and 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and 4128. 8. In appendix A to part 208: A. Amend section I by adding a new paragraph immediately prior to the last undesignated paragraph; ■ B. Amend paragraph c. of section II.A.1 by removing the last sentence; ■ C. Remove paragraph b. of section III.B.6 and redesignate paragraph c. of section III.B.6 as paragraph b.; ■ D. Add new section IV.C after attachment 1. The additions and revisions read as follows: ■ ■ Appendix A to Part 208—Capital Adequacy Guidelines for State Member Banks: Risk-Based Measure jlentini on DSKJ8SOYB1PROD with RULES2 I. * * * The Federal Reserve may determine that the regulatory capital treatment for a bank’s exposure or other relationship to an entity not consolidated on the bank’s balance sheet is not commensurate with the actual risk relationship of the bank to the entity. In making this determination, the Federal Reserve may require the bank to treat the entity as if it were consolidated onto the balance sheet of the bank for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly, all as specified by the Federal Reserve. * * * * * IV. Minimum Supervisory Ratios and Standards * * * VerDate Nov<24>2008 * * 17:46 Jan 27, 2010 Jkt 220001 C. Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 This section IV.C. provides optional transition provisions for a bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). 1. Exclusion Period a. Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: i. Subject to the limitations in section IV.C.3, assets held by a VIE, provided that the following conditions are met: (1) The VIE existed prior to the implementation date, (2) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (3) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (4) The bank excludes all assets held by VIEs described in paragraphs C.1.a.i.(1) through (3) of this section IV.C.1.a.i; and ii. Subject to the limitations in section IV.C.3, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: (1) The bank is the sponsor of the ABCP program, (2) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets, and (3) The bank chooses to exclude all assets held by ABCP program VIEs described in paragraphs (1) and (2) of this section IV.C.1.a.ii. b. Risk-weighted assets during exclusion period. During the exclusion period, including for the two-calendar quarter-end regulatory report dates within the exclusion period, a bank adopting the optional provisions in section IV.C.1.a must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in section IV.C.1.a on the implementation date and include this calculated amount in its riskweighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. c. Inclusion of allowance for loan and lease losses in tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end PO 00000 Frm 00013 Fmt 4701 Sfmt 4700 4647 regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to section IV.C.1.a may include in tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to section IV.C.1.a (inclusion amount). The amount of ALLL includable in tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section II.A.2.a. of this Appendix. 2. Phase-In Period a. Exclusion amount. For purposes of this section IV.C., exclusion amount is defined as the amount of risk-weighted assets excluded in section IV.C.1.a. as of the implementation date. b. Risk-weighted assets for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.1.a. may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to section IV.C.1.b. c. Inclusion of ALLL in tier 2 capital for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.2.b. may, for the phase-in period, include in tier 2 capital 50 percent of the inclusion amount it included in tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in tier 2 capital in section II.A.2.a. of this Appendix. 3. Implicit recourse limitation. Notwithstanding any other provision in this section IV.C., assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. 9. In appendix F to part 208: A. In section 1(c), redesignate paragraph (3) as paragraph (4), and add a new paragraph (3); ■ B. Remove section 42(l) and redesignate section 42(m) as section 42(l); ■ C. Add a new part IX and section 81 at the end of appendix F. The additions read as follows: ■ ■ Appendix F to Part 208—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches * * * * * * * * 1. * * * (c) * * * * * (3) Regulatory capital treatment of unconsolidated entities. The Federal Reserve may determine that the regulatory capital treatment for a bank’s exposure or other E:\FR\FM\28JAR2.SGM 28JAR2 4648 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations relationship to an entity not consolidated on the bank’s balance sheet is not commensurate with the actual risk relationship of the bank to the entity. In making this determination, the Federal Reserve may require the bank to treat the entity as if it were consolidated onto the balance sheet of the bank for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly, all as specified by the Federal Reserve. * * * * * jlentini on DSKJ8SOYB1PROD with RULES2 Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of, Consolidation Requirements Under FAS 167 (a) Scope, applicability, and purpose. This section 81 provides optional transition provisions for a State member bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under GAAP. These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE, provided that the following conditions are met: (A) The VIE existed prior to the implementation date, (B) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (C) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (D) The bank excludes all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 81; and (ii) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE that is a consolidated asset-backed commercial paper (ABCP) program, provided that the following conditions are met: (A) The bank is the sponsor of the ABCP program, (B) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets, and (C) The bank chooses to exclude all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 81. (2) Risk-weighted assets during exclusion period. During the exclusion period, including for the two calendar quarter-end VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 regulatory report dates within the exclusion period, a bank adopting the optional provisions in paragraph (b) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 81 on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to paragraph (b)(1) of this section 81 may include in Tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 81 (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 13(a)(2) and (b) of this Appendix. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of risk-weighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section 81. (3) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in section 13(a)(2) and (b) of this Appendix. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 81, assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. PART 225—BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL (REGULATION Y) 10. The authority citation for part 225 continues to read as follows: ■ PO 00000 Frm 00014 Fmt 4701 Sfmt 4700 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. 1681s, 1681w, 6801 and 6805. 11. In appendix A to part 225, A. Amend section I by adding a paragraph immediately prior to the last undesignated paragraph; ■ B. Amend paragraph iii. of section II.A.1.c by removing the last sentence; ■ C. Remove paragraph b. of section III.B.6 and redesignate paragraph c. of section III.B.6 as paragraph b.; ■ D. Add new section IV.C. The additions and revisions read as follows: ■ ■ Appendix A to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Risk-Based Measure I. * * * The Federal Reserve may determine that the regulatory capital treatment for a banking organization’s exposure or other relationship to an entity not consolidated on the banking organization’s balance sheet is not commensurate with the actual risk relationship of the banking organization to the entity. In making this determination, the Federal Reserve may require the banking organization to treat the entity as if it were consolidated onto the balance sheet of the banking organization for risk-based capital purposes and calculate the appropriate riskbased capital ratios accordingly, all as specified by the Federal Reserve. * * * * * IV. * * * C. Optional Transition Provisions Related to the Implementation of Consolidation Requirements under FAS 167 This section IV.C. provides optional transition provisions for a banking organization that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a banking organization’s implementation of FAS 167 (implementation date). 1. Exclusion Period a. Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a banking organization may exclude from risk-weighted assets: i. Subject to the limitations in section IV.C.3, assets held by a VIE, provided that the following conditions are met: (1) The VIE existed prior to the implementation date, (2) The banking organization did not consolidate the VIE on its balance sheet for E:\FR\FM\28JAR2.SGM 28JAR2 jlentini on DSKJ8SOYB1PROD with RULES2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations calendar quarter-end regulatory report dates prior to the implementation date, (3) The banking organization must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (4) The banking organization excludes all assets held by VIEs described in paragraphs C.1.a.i. (1) through (3) of this section IV.C.1.a.i; and ii. Subject to the limitations in section IV.C.3, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: (1) The banking organization is the sponsor of the ABCP program, (2) Prior to the implementation date, the banking organization consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the banking organization’s risk-weighted assets, and (3) The banking organization chooses to exclude all assets held by ABCP program VIEs described in paragraphs (1) and (2) of this section IV.C.1.a.ii. b. Risk-weighted assets during exclusion period. During the exclusion period, including the two calendar quarter-end regulatory report dates during the exclusion period, a banking organization adopting the optional provisions in section IV.C.1.a must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in section IV.C.1.a on the implementation date and include this calculated amount in its risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. c. Inclusion of allowance for loan and lease losses in tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a banking organization that excludes VIE assets from risk-weighted assets pursuant to section IV.C.1.a may include in tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to section IV.C.1.a (inclusion amount). The amount of ALLL includable in tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section II.A.2.a of this Appendix. 2. Phase-In Period a. Exclusion amount. For purposes of this section IV.C., exclusion amount is defined as the amount of risk-weighted assets excluded in section IV.C.1.a as of the implementation date. b. Risk-weighted assets for the third and fourth quarters. A banking organization that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.1.a. may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from riskweighted assets 50 percent of the exclusion amount, provided that the banking organization may not include in riskweighted assets pursuant to this paragraph an VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 amount less than the aggregate risk-weighted assets calculated pursuant to section IV.C.1.b. c. Inclusion of ALLL in tier 2 capital for the third and fourth quarters. A banking organization that excludes assets of consolidated VIEs from risk-weighted assets pursuant to section IV.C.2.b. may, for the phase-in period, include in tier 2 capital 50 percent of the inclusion amount it included in tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in tier 2 capital in section II.A.2.a. of this Appendix. 3. Implicit recourse limitation. Notwithstanding any other provision in this section IV.C., assets held by a VIE to which the banking organization has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from riskweighted assets. 12. In appendix G to part 225, A. In section 1(c), redesignate paragraph (3) as paragraph (4), and add a new paragraph (3); ■ B. Remove section 42(l) and redesignating section 42(m) as section 42(l); ■ C. Add a new part IX and section 81 at the end of appendix G. The added text will read as follows: ■ ■ Appendix G to Part 225—Capital Adequacy Guidelines for Bank Holding Companies: Internal-Ratings-Based and Advanced Measurement Approaches * * * * * * * * 1. * * * (c) * * * * * (3) Regulatory capital treatment of unconsolidated entities. The Federal Reserve may determine that the regulatory capital treatment for a bank holding company’s exposure or other relationship to an entity not consolidated on the bank holding company’s balance sheet is not commensurate with the actual risk relationship of the bank holding company to the entity. In making this determination, the Federal Reserve may require the bank holding company to treat the entity as if it were consolidated onto the balance sheet of the bank holding company for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly, all as specified by the Federal Reserve. * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of, Consolidation Requirements Under FAS 167 (a) Scope, applicability, and purpose. This section 81 provides optional transition provisions for a bank holding company that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest PO 00000 Frm 00015 Fmt 4701 Sfmt 4700 4649 entities (VIEs) as defined under GAAP. These transition provisions apply through the end of the fourth quarter following the date of a bank holding company’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank holding company may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE, provided that the following conditions are met: (A) The VIE existed prior to the implementation date, (B) The bank holding company did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (C) The bank holding company must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (D) The bank holding company excludes all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 81; and (ii) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: (A) The bank holding company is the sponsor of the ABCP program, (B) Prior to the implementation date, the bank holding company consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank holding company’s risk-weighted assets, and (C) The bank holding company chooses to exclude all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 81. (2) Risk-weighted assets during exclusion period. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank holding company adopting the optional provisions in paragraph (b) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 81 on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank holding company that excludes VIE assets from riskweighted assets pursuant to paragraph (b)(1) of this section 81 may include in Tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 81 E:\FR\FM\28JAR2.SGM 28JAR2 4650 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 13(a)(2) and (b) of this Appendix. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of risk-weighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets for the third and fourth quarters. A bank holding company that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the bank holding company may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section 81. (3) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A bank holding company that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in section 13(a)(2) and (b) of this Appendix. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 81, assets held by a VIE to which the bank holding company has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. Federal Deposit Insurance Corporation 12 CFR Chapter III Authority for 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 the Federal Regulations as follows: ■ PART 325—CAPITAL MAINTENANCE 13. The authority citation for part 325 continues to read as follows: jlentini on DSKJ8SOYB1PROD with RULES2 ■ Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b), 1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n), 1828(o), 1831o, 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, as amended by Pub. L. 103–325, 108 Stat. 2160, 2233 (12 U.S.C. 1828 note); Pub. L. 102–242, 105 Stat. 2236, 2386, as amended by Pub. L. 102–550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note). 14. In Appendix A to part 325, revise section I.A.1.iii.(d) to read as follows: ■ VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 Appendix A to Part 325—Statement of Policy on Risk Based Capital * * * * * I. * * * A. * * * 1. * * * iii. * * * (d) Minority interests in small business investment companies, investment funds that hold nonfinancial equity investments (as defined in section II.B.(6)(ii) of this appendix A), and subsidiaries that are engaged in nonfinancial activities are not included in the bank’s Tier 1 or total capital base if the bank’s interest in the company or fund is held under one of the legal authorities listed in section II.B.(6)(ii) of this appendix A. 15. Further amend Appendix A to part 325 in section II.A. by adding new paragraphs 4. and 5. as follows: ■ Appendix A to Part 325—Statement of Policy on Risk Based Capital * * * * * II. * * * A. * * * 4. The Director of the Division of Supervision and Consumer Protection (DSC) may, on a case-by-case basis, determine that the regulatory capital treatment for an exposure or other relationship to an entity that is not subject to consolidation on the balance sheet is not commensurate with the risk of the exposure and the relationship of the bank to the entity. In making this determination, the Director of DSC may require the bank to treat the entity as if it were consolidated on the balance sheet of the bank for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly. 5. Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 Section II.A.5 of this appendix provides optional transition provisions for a State nonmember bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). i. Exclusion period. (a) Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: (1) Subject to the limitations in paragraph iii. of this section II.A.5, assets held by a VIE, provided that the following conditions are met: PO 00000 Frm 00016 Fmt 4701 Sfmt 4700 (i) The VIE existed prior to the implementation date, (ii) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (iii) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (iv) The bank excludes all assets held by VIEs described in paragraphs i.(a)(1)(i) through (iii) of this section II.A.5; and (2) Subject to the limitations in paragraph iii. of this section II.A.5, assets held by a VIE that is a consolidated asset-backed commercial paper (ABCP) program, provided that the following conditions are met: (i) The bank is the sponsor of the ABCP program, (ii) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets, and (iii) The bank chooses to exclude all assets held by ABCP program VIEs described in paragraphs i.(a)(2)(i) and (ii) of this section II.A.5. (b) Risk-weighted assets during exclusion period. During the exclusion period, including the two calendar quarter-end regulatory report dates within the exclusion period, a bank adopting the optional provisions of this paragraph i. of this section II.A.5 must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph i.(a) of this section II.A.5 on the implementation date and include this calculated amount in its riskweighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (c) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to paragraph i.(a) of this section II.A.5 may include in Tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph i.(a) of this section II.A.5 (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in paragraph i. of section I.A.2. ii. Phase-in period. (a) Exclusion amount. For purposes of this paragraph ii. of this section II.A.5, exclusion amount is defined as the amount of riskweighted assets excluded in paragraph i.(a) of this section II.A.5 as of the implementation date. (b) Risk-weighted assets for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph i.(a) of this section II.A.5 may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates E:\FR\FM\28JAR2.SGM 28JAR2 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations within those quarters, exclude from riskweighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph i.(b) of this section II.A.5. (c) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph ii.(b) of this section II.A.5 may, for the phasein period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in paragraph i. of section I.A.2. iii. Implicit recourse limitation. Notwithstanding any other provision in this section II.A.5, assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. 16. Further amend Appendix A to part 325 by removing section II.B.6.b. and redesignating section II.B.6.c. as section II.B.6.b. ■ 17. In Appendix D to part 325, amend the Table of Contents by adding a new Part IX and Section 81 as follows: ■ Appendix D to Part 325—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches Part I—General Provisions * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 18. Further amend Appendix D to part 325 in section 1(c) by redesignating paragraph (3) as paragraph (4) and adding new paragraph (3) as follows: ■ Appendix D to Part 325—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches jlentini on DSKJ8SOYB1PROD with RULES2 Part I. * * * Section 1. * * * (c) * * * (3) The FDIC may, on a case-by-case basis, determine that the regulatory capital treatment for an exposure or other relationship to an entity that is not subject to consolidation on the balance sheet is not commensurate with the risk of the exposure and the relationship of the bank to the entity. In making this determination, the FDIC may require the bank to treat the entity as if it were consolidated on the balance sheet of the bank for risk-based capital purposes and calculate the appropriate risk-based capital ratios accordingly. * * * VerDate Nov<24>2008 * * 17:46 Jan 27, 2010 Jkt 220001 19. Further amend Appendix D to part 325 by removing section 42(l) and redesignating section 42(m) as section 42(l). ■ 20. Further amend Appendix D to part 325 by adding a new part IX and section 81 to read as follows: ■ Appendix D to Part 325—Capital Adequacy Guidelines for Banks: Internal-Ratings-Based and Advanced Measurement Approaches * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 (a) Scope, applicability, and purpose. This section 81 provides optional transition provisions for a State nonmember bank that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under GAAP. These transition provisions apply through the end of the fourth quarter following the date of a bank’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a bank may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE, provided that the following conditions are met: (A) The VIE existed prior to the implementation date, (B) The bank did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (C) The bank must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (D) The bank excludes all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 81; and (ii) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: (A) The bank is the sponsor of the ABCP program, (B) Prior to the implementation date, the bank consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the bank’s risk-weighted assets, and (C) The bank chooses to exclude all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 81. (2) Risk-weighted assets during exclusion period. During the exclusion period, PO 00000 Frm 00017 Fmt 4701 Sfmt 4700 4651 including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank adopting the optional provisions in paragraph (b) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 81 on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in Tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a bank that excludes VIE assets from risk-weighted assets pursuant to paragraph (b)(1) of this section 81 may include in Tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 81 (inclusion amount). The amount of ALLL includable in Tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 13(a)(2) and (b) of this Appendix. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of risk-weighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from risk-weighted assets 50 percent of the exclusion amount, provided that the bank may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section 81. (3) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A bank that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in Tier 2 capital 50 percent of the inclusion amount it included in Tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in Tier 2 capital in section 13(a)(2) and (b) of this Appendix. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 81, assets held by a VIE to which the bank has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. Department of the Treasury Office of Thrift Supervision 12 CFR Chapter V For reasons set forth in the common preamble, the Office of Thrift ■ E:\FR\FM\28JAR2.SGM 28JAR2 4652 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations Supervision amends part 567 of Chapter V of title 12 of the Code of Federal Regulations as follows: PART 567—CAPITAL 21. The authority citation for part 567 continues to read as follows: ■ Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828 (note). 22. Section 567.0 is amended by adding paragraph (c) to read as follows: ■ § 567.0 Scope. jlentini on DSKJ8SOYB1PROD with RULES2 * * * * * (c) Optional transition provisions related to the implementation of consolidation requirements under FAS 167—(1) Scope, applicability, and purpose. The section provides optional transition provisions for a savings association that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (referred to in this section as FAS 167), to consolidate certain variable interest entities (VIEs) as defined under United States generally accepted accounting principles (GAAP). These transition provisions apply through the end of the fourth quarter following the date of a savings association’s implementation of FAS 167 (implementation date). (2) Exclusion period—(i) Exclusion of risk-weighted assets for first and second quarters. For the first two quarters, after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a savings association may exclude from riskweighted assets: (A) Subject to the limitations in paragraph (c)(4) of this section, assets held by a VIE, provided that the following conditions are met: (1) The VIE existed prior to the implementation date; (2) The savings association did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date; (3) The savings association must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167; and (4) The savings association excludes all assets held by VIEs described in paragraphs (c)(2)(i)(A)(1) through (3) of this section. (B) Subject to the limitations in paragraph (c)(4) of this section, assets held by a VIE that is a consolidated asset-backed commercial paper (ABCP) VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 program, provided that the following conditions are met: (1) The savings association is the sponsor of the ABCP program, (2) Prior to the implementation date, the savings association consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the savings association’s risk-weighted assets; and (3) The savings association chooses to exclude all assets held by ABCP program VIEs described in paragraphs (c)(2)(i)(B)(i) and (ii) of this section. (ii) Risk-weighted assets during exclusion period. During the exclusion period, including the two calendar quarter-end regulatory report dates within the exclusion period, a savings association adopting the optional provisions of paragraph (c)(2) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (c)(2)(i) on the implementation date and include this calculated amount in its risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (iii) Inclusion of Allowance for Loan and Lease Losses (ALLL) in tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a savings association that excludes VIE assets from risk-weighted assets pursuant to paragraph (c)(2)(i) of this section may include in tier 2 capital the full amount of the allowance for loan and lease losses (ALLL) calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (c)(2)(i) of this section (inclusion amount). The amount of ALLL includable in tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth at § 567.5(b)(4). (3) Phase-in period—(i) Exclusion amount. For purposes of this paragraph, exclusion amount is defined as the amount of risk-weighted assets excluded in paragraph (c)(2)(i) of this section as of the implementation date. (ii) Risk-weighted assets for the third and fourth quarters. A savings association that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2)(i) of this section may, for the third and fourth quarters, after the implementation date (phase-in period), including for the two calendar quarterend regulatory report dates within those quarters exclude from risk-weighted assets 50 percent of the exclusion PO 00000 Frm 00018 Fmt 4701 Sfmt 4700 amount, provided that the savings association may not include in riskweighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2)(ii) of this section. (iii) Inclusion of ALLL in Tier 2 capital for the third and fourth quarters. A savings association that excludes assets of consolidated VIEs from riskweighted assets pursuant to paragraph (c)(3)(ii) of this section may, for the phase-in period, include in tier 2 capital 50 percent of the inclusion amount it included in tier 2 capital during the exclusion period, notwithstanding the limit on including ALLL in tier 2 capital in § 567.5(b)(4). (4) Implicit recourse limitation. Notwithstanding any other provision in § 567.0(c), assets held by a VIE to which a savings association has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. ■ 23. Section 567.5 (a)(1)(iii) is revised to read as follows: § 567.5 Components of capital. * * * * * (a) * * * (1) * * * (iii) Minority interests in the equity accounts of the subsidiaries that are fully consolidated. * * * * * ■ 24. Section 567.6 is amended by revising paragraph (a)(3) to read as follows: § 567.6 Risk-based capital credit riskweight categories. * * * * * (a) * * * (3) If a savings association has multiple overlapping exposures (such as a program-wide credit enhancement and a liquidity facility) to an ABCP program that is not consolidated for risk-based capital purposes, the savings association is not required to hold duplicative riskbased capital under this part against the overlapping position. Instead, the savings association should apply to the overlapping position the applicable riskbased capital treatment that results in the highest capital charge. * * * * * ■ 25. Section 567.11 is amended by redesignating paragraph (c)(3) as paragraph (c)(4), and adding new paragraphs (c)(3) and (d) to read as follows: § 567.11 * E:\FR\FM\28JAR2.SGM * Reservation of authority. * 28JAR2 * * Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations (c) * * * (3) OTS may find that the capital treatment for an exposure to a transaction not subject to consolidation on the savings association’s balance sheet does not appropriately reflect the risks imposed on the savings association. Accordingly, OTS may require the savings association to treat the transaction as if it were consolidated on the savings association’s balance sheet. OTS will look to the substance of and risk associated with the transaction as well as other relevant factors in determining whether to require such treatment and in calculating risk based capital as OTS deems appropriate. * * * * * (d) In making a determination under this paragraph (c) of this section, the OTS will notify the savings association of the determination and solicit a response from the savings association. After review of the response by the savings association, the OTS shall issue a final supervisory decision regarding the determination made under paragraph (c) of this section. ■ 26. In Appendix C to part 567, amend the Table of Contents by adding a new Part IX and Section 81 as follows: Appendix C to Part 567—Risk-Based Capital Requirements—InternalRatings-Based and Advanced Measurement Approaches * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 27. Further amend Appendix C to part 567 by redesignating paragraph (c)(3) as paragraph (c)(4) and adding a new paragraph (c)(3) to Part 1, Section 1 as follows: ■ Appendix C to Part 567—Risk-Based Capital Requirements—InternalRatings-Based and Advanced Measurement Approaches jlentini on DSKJ8SOYB1PROD with RULES2 * * * * * (c) * * * (3) Regulatory capital treatment of unconsolidated entities. OTS may find that the capital treatment for an exposure to a transaction not subject to consolidation on the savings association’s balance sheet does not appropriately reflect the risks imposed on the savings association. Accordingly, OTS may require the savings association to treat the transaction as if it were consolidated on the savings association’s balance sheet. OTS will look to the substance of and risk associated with the transaction as well as other relevant factors in determining whether to require such treatment and in calculating risk-based capital as OTS deems appropriate. * * * VerDate Nov<24>2008 * * 17:46 Jan 27, 2010 Jkt 220001 28. Further amend appendix C to part 567 by removing section 42(l) and redesignating section 42(m) as section 42(l). ■ 29. Further amend Appendix C to part 567 by adding a new part IX and section 81 to read as follows: ■ Appendix C to Part 567—Risk-Based Capital Requirements: Internal-RatingsBased and Advanced Measurement Approaches * * * * * Part IX—Transition Provisions Section 81—Optional Transition Provisions Related to the Implementation of Consolidation Requirements Under FAS 167 (a) Scope, applicability, and purpose. This section 81 provides optional transition provisions for a savings association that is required for financial and regulatory reporting purposes, as a result of its implementation of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain variable interest entities (VIEs) as defined under GAAP. These transition provisions apply through the end of the fourth quarter following the date of a savings association’s implementation of FAS 167 (implementation date). (b) Exclusion period. (1) Exclusion of risk-weighted assets for the first and second quarters. For the first two quarters after the implementation date (exclusion period), including for the two calendar quarter-end regulatory report dates within those quarters, a savings association may exclude from risk-weighted assets: (i) Subject to the limitations in paragraph (d) of section 81, assets held by a VIE, provided that the following conditions are met: (A) The VIE existed prior to the implementation date, (B) The savings association did not consolidate the VIE on its balance sheet for calendar quarter-end regulatory report dates prior to the implementation date, (C) The savings association must consolidate the VIE on its balance sheet beginning as of the implementation date as a result of its implementation of FAS 167, and (D) The savings association excludes all assets held by VIEs described in paragraphs (b)(1)(i)(A) through (C) of this section 81; and (ii) Subject to the limitations in paragraph (d) of this section 81, assets held by a VIE that is a consolidated ABCP program, provided that the following conditions are met: (A) The savings association is the sponsor of the ABCP program, (B) Prior to the implementation date, the savings association consolidated the VIE onto its balance sheet under GAAP and excluded the VIE’s assets from the savings association’s risk-weighted assets, and (C) The savings association chooses to exclude all assets held by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section 81. PO 00000 Frm 00019 Fmt 4701 Sfmt 4700 4653 (2) Risk-weighted assets during exclusion period. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a savings association adopting the optional provisions in paragraph (b) of this section must calculate risk-weighted assets for its contractual exposures to the VIEs referenced in paragraph (b)(1) of this section 81 on the implementation date and include this calculated amount in risk-weighted assets. Such contractual exposures may include direct-credit substitutes, recourse obligations, residual interests, liquidity facilities, and loans. (3) Inclusion of ALLL in tier 2 capital for the first and second quarters. During the exclusion period, including for the two calendar quarter-end regulatory report dates within the exclusion period, a savings association that excludes VIE assets from risk-weighted assets pursuant to paragraph (b)(1) of this section 81 may include in tier 2 capital the full amount of the ALLL calculated as of the implementation date that is attributable to the assets it excludes pursuant to paragraph (b)(1) of this section 81 (inclusion amount). The amount of ALLL includable in tier 2 capital in accordance with this paragraph shall not be subject to the limitations set forth in section 13(A)(2) and 13(b) of this Appendix. (c) Phase-in period. (1) Exclusion amount. For purposes of this paragraph (c), exclusion amount is defined as the amount of risk-weighted assets excluded in paragraph (b)(1) of this section as of the implementation date. (2) Risk-weighted assets for the third and fourth quarters. A savings association that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (b)(1) of this section may, for the third and fourth quarters after the implementation date (phase-in period), including for the two calendar quarter-end regulatory report dates within those quarters, exclude from riskweighted assets 50 percent of the exclusion amount, provided that the savings association may not include in risk-weighted assets pursuant to this paragraph an amount less than the aggregate risk-weighted assets calculated pursuant to paragraph (b)(2) of this section 81. (3) Inclusion of ALLL in tier 2 capital for the third and fourth quarters. A savings association that excludes assets of consolidated VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this section may, for the phase-in period, include in tier 2 capital 50 percent of the inclusion amount it included in tier 2 capital, during the exclusion period, notwithstanding the limit on including ALLL in tier 2 capital in section 13(a)(2) and 13(b) of this Appendix. (d) Implicit recourse limitation. Notwithstanding any other provision in this section 81, assets held by a VIE to which the savings association has provided recourse through credit enhancement beyond any contractual obligation to support assets it has sold may not be excluded from risk-weighted assets. E:\FR\FM\28JAR2.SGM 28JAR2 4654 Federal Register / Vol. 75, No. 18 / Thursday, January 28, 2010 / Rules and Regulations Dated: January 7, 2010. John C. Dugan, Comptroller of Currency. jlentini on DSKJ8SOYB1PROD with RULES2 By Order of the Board of Governors of the Federal Reserve System. Jennifer J. Johnson, Secretary of the Board. Dated at Washington, DC, at this 17th day of December 2009. VerDate Nov<24>2008 17:46 Jan 27, 2010 Jkt 220001 By order of the Board of Directors. Robert E. Feldman, Executive Secretary. Federal Deposit Insurance Corporation. Dated: December 18, 2009. PO 00000 Frm 00020 Fmt 4701 Sfmt 9990 By the Office of Thrift Supervision. John E. Bowman, Acting Director. [FR Doc. 2010–825 Filed 1–27–10; 8:45 am] BILLING CODE 6720–01–P; 6210–01–P; 6714–01–P; 6720–01–P E:\FR\FM\28JAR2.SGM 28JAR2

Agencies

[Federal Register Volume 75, Number 18 (Thursday, January 28, 2010)]
[Rules and Regulations]
[Pages 4636-4654]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-825]



[[Page 4635]]

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Part II

Department of the Treasury



Office of the Comptroller of the Currency



12 CFR Part 3



Office of Thrift Supervision

12 CFR Part 567



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Federal Reserve System

12 CFR Parts 208 and 225



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Federal Deposit Insurance Corporation

12 CFR Part 325



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Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital 
Maintenance: Regulatory Capital; Impact of Modifications to Generally 
Accepted Accounting Principles; Consolidation of Asset-Backed 
Commercial Paper Programs; and Other Related Issues; Final Rule

Federal Register / Vol. 75 , No. 18 / Thursday, January 28, 2010 / 
Rules and Regulations

[[Page 4636]]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Part 3

[Docket ID: OCC-2009-0020]
RIN 1557-AD26

FEDERAL RESERVE SYSTEM

12 CFR Parts 208 and 225

[Regulations H and Y; Docket No. R-1368]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 325

RIN 3064-AD48

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

12 CFR Part 567

[No. OTS-2010-0002]
RIN 1550-AC36


Risk-Based Capital Guidelines; Capital Adequacy Guidelines; 
Capital Maintenance: Regulatory Capital; Impact of Modifications to 
Generally Accepted Accounting Principles; Consolidation of Asset-Backed 
Commercial Paper Programs; and Other Related Issues

AGENCIES: Office of the Comptroller of the Currency, Department of the 
Treasury; Board of Governors of the Federal Reserve System; Federal 
Deposit Insurance Corporation; and Office of Thrift Supervision, 
Department of the Treasury.

ACTION: Final rule.

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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 the Office of Thrift Supervision 
(OTS) (collectively, the agencies) are amending their general risk-
based and advanced risk-based capital adequacy frameworks by adopting a 
final rule that eliminates the exclusion of certain consolidated asset-
backed commercial paper programs from risk-weighted assets; provides 
for an optional two-quarter implementation delay followed by an 
optional two-quarter partial implementation of the effect on risk-
weighted assets that will result from changes to U.S. generally 
accepted accounting principles; provides for an optional two-quarter 
delay, followed by an optional two-quarter phase-in, of the application 
of the agencies' regulatory limit on the inclusion of the allowance for 
loan and lease losses (ALLL) in tier 2 capital for the portion of the 
ALLL associated with the assets a banking organization consolidates as 
a result of changes to U.S. generally accepted accounting principles; 
and provides a reservation of authority to permit the agencies to 
require a banking organization to treat entities that are not 
consolidated under accounting standards as if they were consolidated 
for risk-based capital purposes, commensurate with the risk 
relationship of the banking organization to the structure. The delay 
and subsequent phase-in periods of the implementation will apply only 
to the agencies' risk-based capital requirements, not the leverage 
ratio requirement.

DATES: This rule is effective March 29, 2010. Banking organizations may 
elect to comply with this final rule as of the beginning of their first 
annual reporting period that begins after November 15, 2009.

FOR FURTHER INFORMATION CONTACT: OCC: Paul Podgorski, Risk Expert, 
Capital Policy Division, (202) 874-5070, or Carl Kaminski, Senior 
Attorney, (202) 874-5090, or Hugh Carney, Attorney, Legislative and 
Regulatory Activities Division, (202) 874-5090, Office of the 
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
    Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or 
Anna Lee Hewko, Manager, Supervisory Policy and Guidance, (202) 530-
6260, Division of Banking Supervision and Regulation; or April C. 
Snyder, Counsel, (202) 452-3099, or Benjamin W. McDonough, Counsel, 
(202) 452-2036, Legal Division. For the hearing impaired only, 
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
    FDIC: James Weinberger, Senior Policy Analyst (Capital Markets), 
(202) 898-7034, Christine Bouvier, Senior Policy Analyst (Bank 
Accounting), (202) 898-7289, Division of Supervision and Consumer 
Protection; or Mark Handzlik, Senior Attorney, (202) 898-3990, or 
Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, Legal 
Division.
    OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478, 
Capital Risk, Christine Smith, Senior Policy Analyst, (202) 906-5740, 
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639, 
Legislation and Regulation Division, Office of Thrift Supervision, 1700 
G Street, NW., Washington, DC 20552.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Changes to U.S. Accounting Standards and the Effect on Regulatory 
Capital

    On June 12, 2009, the Financial Accounting Standard Board (FASB) 
issued Statement of Financial Accounting Standards No. 166, Accounting 
for Transfers of Financial Assets, an Amendment of FASB Statement No. 
140 (FAS 166), and Statement of Financial Accounting Standards No. 167, 
Amendments to FASB Interpretation No. 46(R) (FAS 167). Among other 
things, FAS 166 and FAS 167 modified the accounting treatment under 
U.S. generally accepted accounting principles (GAAP) of certain 
structured finance transactions involving a special purpose entity.\1\ 
FAS 166 and FAS 167 are effective as of the beginning of a banking 
organization's \2\ first annual reporting period that begins after 
November 15, 2009 (implementation date), including interim periods 
therein, and for interim and annual periods thereafter.\3\
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    \1\ The accounting treatment of these transactions and 
structures was previously governed by the FASB's Statement of 
Financial Accounting Standards No. 140, Accounting for Transfers and 
Servicing of Financial Assets and Extinguishments of Liabilities 
(2000) (FAS 140) and FASB Interpretation No. 46(R), Consolidation of 
Variable Interest Entities (2003) (FIN 46(R)). References herein to 
FASB Statements of Financial Accounting Standards and 
Interpretations are to the FASB's ``pre-Codification standards'' 
documents and do not reflect modifications that have been made by 
the FASB as the related text is incorporated in the FASB Accounting 
Standards Codification that FASB announced on July 1, 2009.
    \2\ Unless otherwise indicated, the term ``banking 
organization'' includes banks, savings associations, and bank 
holding companies (BHCs). The terms ``bank holding company'' and 
``BHC'' refer only to bank holding companies regulated by the Board.
    \3\ See relevant provisions in FAS 166, paragraphs 5-7, and FAS 
167, paragraphs 7-10.
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    The agencies' risk-based measures for banking organizations (the 
general risk-based capital rules\4\ and the advanced approaches 
rules,\5\ collectively the risk-based capital rules) establish capital 
requirements intended to reflect the risks associated with on-balance 
sheet exposures as well as off-balance sheet exposures, such as 
guarantees, commitments, and derivative transactions. The agencies use 
GAAP as the initial basis for determining whether an exposure is 
treated as on- or off-balance sheet for risk-based capital

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purposes. Additionally, the agencies' leverage measure (leverage rule) 
\6\ uses consolidated on-balance sheet assets as the basis for setting 
minimum capital requirements that are intended to limit the degree to 
which a banking organization can leverage its equity capital base.
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    \4\ 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 BHCs with $500 million or less in consolidated assets.
    \5\ 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix 
F; and 12 CFR part 225, appendix G (Board); 12 CFR part 325, 
appendix D (FDIC); 12 CFR 567, Appendix C (OTS).
    \6\ 12 CFR part 3 (OCC);12 CFR part 208, appendix B and 12 CFR 
part 225 appendix D (Board); 12 CFR 325.3 (FDIC); 12 CFR 567.8 
(OTS).
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    FAS 166 and FAS 167, among other things, establish new standards 
for reporting companies' transfers of assets to special purpose 
entities, known as variable interest entities (VIEs) under GAAP, and 
for consolidating VIEs. Under FAS 167, banking organizations may be 
required to consolidate assets, liabilities, and equity in certain VIEs 
that were not consolidated under the standards that FAS 166 and FAS 167 
replaced. Most banking organizations will be required to implement the 
new consolidation standards as of January 1, 2010.\7\ The agencies' 
risk-based capital and leverage rules (collectively, the capital rules) 
generally would require a banking organization to include assets held 
by newly consolidated VIEs in its leverage and risk-based capital 
ratios determined under those rules. At the same time, a consolidating 
banking organization may need to establish an ALLL \8\ to cover 
estimated credit losses on the assets consolidated under FAS 167. As a 
consequence, absent a change in the capital rules and all other factors 
remaining constant, both the leverage and risk-based capital ratios of 
banking organizations that must consolidate due to FAS 167 VIEs that 
they did not previously consolidate are likely to fall by varying 
amounts.
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    \7\ While most banking organizations affected by FAS 166 and FAS 
167 will implement the new standards on January 1, 2010, some 
banking organizations use annual reporting periods other than the 
calendar year and will implement the new standards at the beginning 
of their first annual reporting period that starts after November 
15, 2009.
    \8\ Under GAAP, an ALLL should be recognized when events have 
occurred indicating that it is probable that an asset has been 
impaired or that a liability has been incurred as of the balance 
sheet date and the amount of the loss can be reasonably estimated. 
Furthermore, under the risk-based capital rules, the ALLL is a 
component of tier 2 capital and, therefore, included in the 
numerator of the total risk-based capital ratio. However, the amount 
of the ALLL that may be included in tier 2 capital is limited to 
1.25 percent of gross risk-weighted assets under the risk-based 
capital rules. 12 CFR part 3, appendix A Sec.  2(b)(1) (OCC); 12 CFR 
part 208, appendix A Sec.  II.A.2.a and 12 CFR part 225, appendix A 
Sec.  II.A.2.a (Board); 12 CFR part 325, appendix A Sec.  I.A.2.i. 
(FDIC); 12 CFR 567.5 (OTS).
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B. Notice of Proposed Rulemaking

    On September 15, 2009, the agencies published a notice of proposed 
rulemaking (NPR) that solicited information and views from the public 
on the effect the accounting changes mandated by FAS 166 and FAS 167 
would have on regulatory capital, the appropriateness of adjusting the 
risk-based capital treatment of some classes of assets that would be 
consolidated by banking organizations as a result of their 
implementation of FAS 167, and the utility of a phase-in of the 
regulatory capital effects of the accounting changes, among other 
issues.\9\
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    \9\ 74 FR 47138 (September 15, 2009).
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    In addition, the NPR proposed modifying the agencies' risk-based 
capital rules by eliminating provisions that permit a banking 
organization to exclude assets of consolidated asset-backed commercial 
paper (ABCP) programs from risk-weighted assets (ABCP exclusion) and 
instead assess a risk-based capital requirement against any contractual 
exposures of the banking organization to such ABCP programs.\10\ The 
NPR also proposed eliminating an associated provision in the general 
risk-based capital rules (incorporated by reference in the advanced 
approaches) that excludes from tier 1 capital the minority interest in 
a consolidated ABCP program not included in a banking organization's 
risk-weighted assets.\11\ In addition, the NPR proposed a new 
reservation of authority for the agencies' risk-based capital rules to 
permit a banking organization's primary Federal supervisor to treat 
entities that are not consolidated under GAAP as if they were 
consolidated for risk-based capital purposes, commensurate with the 
risk relationship of the banking organization to the entity.
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    \10\ 12 CFR part 3, appendix A, Sec.  3(a)(5) and 12 CFR part 3, 
appendix C Sec.  42(l) (OCC); 12 CFR part 208, appendix A, Sec.  
III.B.6.b and appendix F Sec.  42(l); and 12 CFR part 225, appendix 
A, Sec.  III.B.6.b and appendix G Sec.  42(l) (Board); 12 CFR part 
325, appendix A, Sec.  II.B.6.b and 12 CFR part 325, appendix D, 
Sec.  42(l) (FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567, 
appendix C, Sec.  42(l) (OTS).
    \11\ 12 CFR part 3, appendix A, Sec.  2(a)(3)(ii) (OCC); 12 CFR 
parts 208 and 225, appendix A, Sec.  II A.1.c (Board); 12 CFR part 
325, appendix A, Sec.  I.A.1.(d) (FDIC); 12 CFR 567.5(a)(iii)(OTS). 
See 12 CFR part 3, appendix C Sec.  11(a) (OCC); 12 CFR part 208, 
appendix F, Sec.  11(a) and 12 CFR part 225, appendix G, Sec.  11(a) 
(Board) ; 12 CFR part 325, appendix D, Sec.  11(a) (FDIC); 12 CFR 
part 567, appendix C, Sec.  11(a) (OTS).
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    Collectively, the agencies received approximately 41 comment 
letters from banking organizations, banking industry associations, 
mortgage companies, investment and asset management firms, and 
individuals. Commenters generally agreed with the agencies' preliminary 
identification of VIEs that are likely to be consolidated by banking 
organizations as a result of FAS 167. Most notably, these included VIEs 
associated with (1) ABCP programs; (2) revolving securitizations 
structured as master trusts, including credit card and home equity line 
of credit (HELOC) securitizations; (3) certain mortgage loan 
securitizations not guaranteed by the U.S. government or a U.S. 
government-sponsored agency; and (4) certain term loan securitizations 
in which a banking organization retains a residual interest and 
servicing rights, including some student loan and automobile loan 
securitizations.\12\
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    \12\ Many commenters also expressed concern regarding the 
possibility that VIEs used for asset management, money market, and 
private equity investments where the fund manager earns more than a 
non-significant performance fee could be subject to consolidation 
under FAS 167, and urged the agencies to implement alternative 
regulatory capital treatments for such funds. On December 4, 2009, 
FASB proposed that the application of FAS 167 to such entities be 
deferred for an undetermined period of time. As a result, both risk-
based and leverage capital requirements related to these assets 
would remain unchanged for the duration of the deferral. The 
agencies are taking no action with respect to these assets at this 
time.
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    A number of commenters asserted that the implementation of FAS 166 
and FAS 167 without changes to the agencies' risk-based capital and 
leverage rules would increase regulatory capital requirements for 
banking organizations, as would the proposed elimination of the ABCP 
exclusion. They argued this would have a negative and procyclical 
impact on financial markets and the economy, particularly as banking 
organizations recover from the recent financial crises and recession, 
by increasing the cost of and ultimately curtailing lending. Most 
commenters also argued that there would be negative competitive equity 
effects from increased regulatory capital requirements that would 
disadvantage U.S. banking organizations relative to foreign and 
domestic competitors not subject to similarly high capital 
requirements. A few commenters asserted that competitive equity 
concerns were most severe with respect to foreign banking competitors. 
Some commenters also expressed concern that higher capital requirements 
would provide incentives for banking organizations to conduct more 
activity in less stringently regulated foreign jurisdictions.
    Many commenters also argued that such implementation would 
inappropriately align regulatory capital requirements with GAAP's 
control-based approach to consolidation, in contrast to the credit-risk 
focus of the agencies' risk-based capital rules. Commenters 
overwhelmingly supported a delay and/or phase-in of the regulatory 
capital requirements associated with the implementation of FAS 167 for 
a period

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of up to three years. A number of commenters asserted that the proposed 
elimination of the exclusion of consolidated ABCP program assets from 
risk-weighted assets would lead to an inappropriate capital requirement 
for ABCP programs with certain structural features.

II. Final Rule

A. Transition Mechanism for Risk-Based Capital Requirements Associated 
With the Implementation of FAS 166 and FAS 167

    In the final rule, the agencies are instituting a transition 
mechanism consisting of: (1) An optional two-quarter delay, through the 
end of the second quarter after the implementation date of FAS 166 and 
FAS 167 for a banking organization, of recognition of the effect on 
risk-weighted assets and ALLL includable in tier 2 capital that results 
from a banking organization's implementation of FAS 167 and (2) an 
optional phase-in, for a banking organization that has opted for the 
delay, of those effects over the next two quarters.\13\ A banking 
organization that chooses to implement this transition mechanism must 
apply it to all relevant VIEs. The effect of the transition mechanism 
on a banking organization's risk-based capital ratios would be 
reflected in the regulatory capital information the organization 
reports in its regulatory reports \14\ for the four calendar quarter-
end regulatory report dates following the banking organization's 
implementation date.
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    \13\ For example, if a banking organization has a calendar year 
reporting period, the optional two-quarter delay period ends June 
30, 2010, and the optional phase-in period ends December 31, 2010.
    \14\ For banks, Schedule RC-R of the Consolidated Reports of 
Condition and Income (Call Report); for savings associations, 
Schedule CCR of the Thrift Financial Report (TFR); and for bank 
holding companies, Schedule HC-R of the Consolidated Financial 
Statements for Bank Holding Companies (FR Y-9C).
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    In the NPR, the agencies requested comment on any significant costs 
or burdens, or other relevant considerations that the agencies should 
consider with respect to phasing-in the impact on capital requirements 
relating to banking organizations' implementation of FAS 167. The 
agencies also requested specific and detailed rationales, evidence, and 
data in support of commenters' positions and requested comment on one 
potential four-quarter phase-in method.
    Almost every commenter asserted that a four-quarter phase-in of any 
additional capital requirements resulting from banking organizations' 
implementation of FAS 167 would be insufficient. The majority of 
commenters requested at least a three-year phase-in period. The 
commenters offered three primary rationales for a longer phase-in 
period: (1) Any shorter phase-in would unfairly penalize banking 
organizations given their already established businesses, practices, 
and programs conceived in good faith to comply with the current capital 
standards; (2) banking organizations need a longer period to phase out 
structures designed for current regulatory capital treatment and/or 
adopt the more risk-sensitive capital treatment of the advanced 
approaches rules; and (3) corporate financing and capital planning 
covers more than a four-quarter horizon. In addition, some commenters 
asserted that the cost of raising new capital in the current economic 
environment is high. Several commenters requested, in addition to the 
increased phase-in time, a six-month delay on the effect of 
implementation of FAS 167 on capital requirements, during which the 
agencies would further study the effects of FAS 166 and FAS 167 
implementation, including the appropriate regulatory capital treatment 
for VIEs consolidated as a result of FAS 167 implementation. A few 
commenters indicated that there should be no phase-in or that any 
phase-in should be as short as possible, on the grounds that any phase-
in would delay needed changes.
    The agencies have long maintained that a banking organization 
should hold capital commensurate with the level and nature of the risks 
to which it is exposed. As described below, the agencies believe that 
the effects of FAS 166 and FAS 167 on banking organizations' risk-based 
capital ratios will result in regulatory capital requirements that 
better reflect, in many cases, banking organizations' exposure to 
credit risk. As a result, the agencies do not believe it is appropriate 
for banking organizations to delay recognizing VIEs consolidated under 
FAS 167 and the risks associated with them in their risk-based capital 
ratios for several years, as some commenters proposed. However, as 
discussed below, in order to avoid abrupt adjustments that could 
undermine or complicate government actions to support the provision of 
credit to U.S. households and businesses in the current economic 
environment, the agencies are providing banking organizations with an 
optional two-quarter implementation delay followed by an optional two-
quarter partial implementation of the effect of FAS 167 on risk-
weighted assets and ALLL includable in tier 2 capital.
    Many commenters asserted that banking organizations' implementation 
of FAS 166 and FAS 167 without a change to the regulatory capital rules 
would decrease the volume and increase the cost of lending to consumers 
and businesses. Commenters did not, however, provide adequate empirical 
analyses and projections of this impact. The agencies note that both 
the supply of and demand for credit has decreased over recent quarters 
due to many factors, including household, business, and financial 
sector deleveraging. As described in the NPR, affected banking 
organizations' risk-based and leverage capital ratios likely will 
decrease with their implementation of FAS 166 and FAS 167. However, 
based on public disclosures by some banking organizations and 
supervisory information, including the Supervisory Capital Assessment 
Program (SCAP),\15\ risk-based and leverage capital ratios at the 
largest banking organizations (the banking organizations most affected 
by FAS 166 and FAS 167) will remain substantially in excess of 
regulatory minimums. The agencies thus believe that, based on available 
information, these banking organizations will not encounter an 
immediate or near-term need to decrease lending or raise substantial 
amounts of new capital for risk-based capital purposes related to the 
incremental effects of this final rule. In addition, smaller banking 
organizations, including community banking organizations, generally did 
not raise concerns about an adverse impact on smaller banking 
organizations from the implementation of FAS 166 and FAS 167.
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    \15\ The SCAP was a supervisory exercise conducted in the first 
half of 2009 to determine if the 19 largest banking organizations 
(the banking organizations most affected by FAS 166 and FAS 167 due 
to the volume of their securitization activities) held regulatory 
capital sufficient to absorb losses under a specified adverse 
scenario. The exercise included consideration of estimates of the 
impact of FAS 166 and FAS 167 on banking organizations' balance 
sheets and resulting risk-based capital requirements. Further 
information about SCAP results is available at http://www.federalreserve.gov/bankinforeg/scap.htm.
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    Although the agencies believe that a banking organization's 
implementation of FAS 166 and FAS 167 will result in regulatory capital 
requirements that more appropriately reflect risks to which the banking 
organization is exposed, the agencies also recognize that government 
initiatives may affect the securitization market in the near term. 
Several government programs supporting the securitization market, 
including the Commercial Paper Funding Facility and the non-commercial 
mortgage-backed securities

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portion of the Term Asset-Backed Securities Loan Facility, are 
scheduled to terminate in the first quarter of 2010. Moreover, the 
Congress and financial regulators, including the agencies, are 
considering a number of legislative and regulatory changes that would 
affect securitization activities. Because the agencies cannot fully 
assess the combined impact of these potential changes on the 
securitization market, and because securitization remains an important 
source of funding for banking organizations, the agencies are providing 
in the final rule an optional transition mechanism that permits a 
banking organization to phase in the impact of FAS 167 on its risk-
weighted assets and ALLL includable in tier 2 capital.
    The transition mechanism consists of an optional two-quarter delay 
in implementation followed by an optional two-quarter partial 
implementation of the effect of FAS 167 on risk-weighted assets and 
ALLL includable in tier 2 capital.\16\ The timing of the transition 
reflects the termination dates of the government programs supporting 
the securitization market and the potential for uncertainty regarding 
securitization reform initiatives to extend through 2010. The delay and 
partial implementation periods also provide time for financial market 
participants and the agencies to observe the effects of these changes 
on bank lending, financial markets and the overall economy. The 
transition mechanism is optional because it requires a banking 
organization to maintain two sets of records for the duration of the 
delay and partial implementation periods--to account for affected VIEs 
for financial reporting under GAAP and separately to track the 
implementation-date contractual exposures to these VIEs and the ALLLs 
attributable to their assets for regulatory capital reporting--a dual 
recordkeeping requirement that banking organizations have expressed 
concerns about in the past.
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    \16\ One commenter expressed concern about a statutory provision 
in the Home Owner's Lending Act (HOLA), uniquely applicable to 
savings associations, which limits the amount of consumer loans to 
35 percent of the amount of a savings association's total assets. 
OTS notes that any provision under HOLA would be treated consistent 
with the transition mechanism.
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    A banking organization generally would adopt the transition 
mechanism as of the date it implements FAS 166 and FAS 167, which is 
the starting date of its first annual reporting period beginning after 
November 15, 2009.
1. Transition for Risk-Weighted Assets
    For the banking organization's first two quarters after the date it 
implements FAS 166 and FAS 167 (exclusion period), including for the 
two calendar quarter-end regulatory report dates within the exclusion 
period, the banking organization may choose to exclude from risk-
weighted assets those assets held by VIEs that the banking organization 
must consolidate as a result of implementing FAS 167, provided that (1) 
the VIE existed prior to the banking organization's implementation date 
and (2) the banking organization did not consolidate the VIE on its 
balance sheet for calendar quarter-end regulatory report dates prior to 
the implementation date. A banking organization that applies this 
exclusion to any VIE must apply the exclusion to all VIEs that qualify 
for the exclusion.
    During the exclusion period, the banking organization may also 
exclude from risk-weighted assets those assets held by VIEs that are 
consolidated ABCP programs (ABCP program VIEs), provided that the 
banking organization is the sponsor of the ABCP program and the banking 
organization consolidated the ABCP program VIE onto its balance sheet 
under GAAP and excluded the VIE's assets from its risk-weighted assets 
prior to the implementation date. A banking organization that applies 
this exclusion to any ABCP program VIE must apply the exclusion to all 
ABCP program VIEs that qualify for the exclusion.
    A banking organization electing to exclude assets of any VIE 
pursuant to the transition mechanism described above may not, however, 
exclude from risk-weighted assets the assets of a VIE to which the 
banking organization has provided recourse through credit enhancement 
beyond any contractual obligation to support assets it has sold 
(implicit support).
    During the exclusion period, the banking organization would include 
in risk-weighted assets an amount equal to the risk-weighted assets it 
would have been required to calculate for its contractual exposures to 
these VIEs on the implementation date, including direct-credit 
substitutes, recourse obligations, residual interests, liquidity 
facilities, and loans, under the risk-based capital rules prior to its 
implementation of FAS 166 and FAS 167. The agencies expect a banking 
organization would calculate risk-weighted assets using a methodology 
similar to the methodology used to calculate the risk weights of 
exposures to ABCP programs pursuant to the ABCP exclusion.
    The amount of risk-weighted assets associated with assets held by 
VIEs subject to exclusion as described above as of the implementation 
date of FAS 166 and FAS 167 is the exclusion amount. For the third and 
fourth quarters after the implementation date (phase-in period), 
including for the two calendar quarter-end regulatory report dates 
within those quarters, a banking organization that has adopted the 
optional transition mechanism for the first two quarters may exclude 
from risk-weighted assets 50 percent of the exclusion amount. However, 
the banking organization may not include in risk-weighted assets an 
amount less than the aggregate risk-weighted assets it held based on 
its contractual exposures to these VIEs as of the implementation date, 
had the VIEs not been consolidated. This floor on risk-weighted assets 
ensures that, notwithstanding these transition provisions, a banking 
organization always calculates risk-weighted assets in a manner that at 
a minimum reflects its contractual risk exposure to its consolidated 
VIEs as of the implementation date.
2. Transition for Allowance for Loan and Lease Losses
    During the exclusion period, including for the two calendar 
quarter-end regulatory report dates within the exclusion period, a 
banking organization that adopts the transition mechanism for risk-
weighted assets described in section II.A.1. above by excluding assets 
of consolidated VIEs from risk-weighted assets may also include without 
limit in tier 2 capital the full amount of the ALLL calculated as of 
the implementation date that is attributable to the assets it excluded 
pursuant to the transition mechanism for risk-weighted assets 
(inclusion amount). That is, the ALLL included in tier 2 capital 
pursuant to this transition mechanism during the exclusion period would 
not be subject to (1) the 1.25 percent of risk-weighted assets limit 
(1.25 percent limit) on the ALLL in tier 2 capital contained in the 
agencies' general risk-based capital rules; \17\ or (2) the limits in 
section 13 of the agencies' advanced approaches rules on including ALLL 
in tier 2 capital.\18\
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    \17\ See footnote 8.
    \18\ 12 CFR part 3, appendix C Sec.  13(a)(2) and (b) (OCC); 12 
CFR part 208, appendix F Sec.  13(a)(2) and (b); and 12 CFR part 
225, appendix G Sec.  13(a)(2) and (b) (Board); 12 CFR part 325, 
appendix D, Sec.  13(a)(2) and (b) (FDIC); 12 CFR part 567, appendix 
C, Sec.  13(a)(2) and (b) (OTS).

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[[Page 4640]]

    During the phase-in period, including for the two calendar quarter-
end regulatory report dates within the phase-in period, a banking 
organization that has adopted the transition mechanism for risk-
weighted assets during the phase-in period may include in tier 2 
capital without limit 50 percent of the inclusion amount. The banking 
organization's ALLL in excess of 50 percent of the inclusion amount may 
be included in tier 2 capital subject to the 1.25 percent limit. As 
with the transition for risk-weighted assets, a banking organization 
may not adopt the transition mechanism for the ALLL for VIEs that it 
must consolidate after implementing FAS 167 to which it has provided 
implicit support. Therefore, a banking organization must count toward 
the 1.25 percent limit all ALLL it includes in tier 2 capital that is 
associated with assets of a VIE to which it has provided implicit 
support.

B. Regulatory Capital Requirements Associated With the Implementation 
of FAS 166 and FAS 167

1. Risk-Based Capital Rules
    The agencies have concluded that it is appropriate to provide an 
optional delay of and then phase in the effect of banking 
organizations' implementation of FAS 166 and FAS 167 on risk-weighted 
assets and the ALLL included in tier 2 capital as described above. 
However, after careful consideration and analyses of commenters' 
arguments and supporting information, as well as banking organizations' 
financial disclosures, and supervisory data and analyses, the agencies 
have concluded that there is insufficient justification to warrant a 
permanent modification of the risk-based capital rules in response to 
banking organizations' implementation of FAS 166 and FAS 167.
a. Risk-Weighted Assets
    As the agencies noted in the NPR, the qualitative analysis required 
under FAS 167, as well as enhanced requirements for recognizing 
transfers of financial assets under FAS 166, converge in many respects 
with the agencies' assessment of a banking organization's ongoing 
credit risk exposure to the VIEs that are required to be consolidated 
under FAS 167. Experience from the recent financial crisis demonstrates 
that credit risk exposure of sponsoring banking organizations to such 
structures (and to the assets of these structures) has in fact been 
greater than the agencies previously estimated, and more associated 
with non-contractual risks, including reputational risk, than the 
agencies had previously anticipated. In the NPR, the agencies noted 
situations in which banking organizations provided implicit support to 
some securitization structures, revolving structures in particular, to 
reduce the likelihood that senior securities of the structures would 
experience credit ratings downgrades.\19\ These examples were intended 
to demonstrate that risk-based capital requirements based solely on a 
banking organization's contractual exposure may underestimate the true 
exposure of a sponsoring banking organization to the credit risk of 
securitization structures and other VIEs.\20\
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    \19\ Typical structures of this type include securitizations 
that are backed by credit card or HELOC receivables, single- and 
multi-seller ABCP conduits, and structured investment vehicles.
    \20\ Some commenters expressed concern that the accounting 
changes coupled with the agencies' proposal would result in 
duplicative capital requirements and excessive regulatory capital 
being held on a system-wide basis. The agencies recognize that there 
will be some overlap in regulatory capital held by sponsoring and 
investing banking organizations in relation to the same assets. 
However, the agencies believe this overlap results in a fair 
reflection of the risks to which sponsoring and investing banking 
organizations are exposed on an individual basis.
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    In the NPR, the agencies sought specific views from commenters, 
with supporting data and other documentation, regarding the types of 
VIEs and other special purpose entities that are more or less likely to 
elicit implicit support. The agencies also sought comment on any types 
of consolidated VIEs that might merit a different risk-based capital 
treatment than that which will result from the implementation of FAS 
166 and FAS 167 without any change to regulatory capital requirements, 
together with a detailed explanation and supporting empirical analysis 
of why the features and characteristics of these structure types merit 
an alternative treatment, how the risks to the consolidating banking 
organization of the structures should be measured, and what an 
appropriate alternative capital treatment would be.
    Many commenters identified reputational and operational risks as 
most likely to induce a banking organization to provide implicit 
support to a VIE. Some commenters noted that certain banking 
organizations did not follow their peers in providing implicit support 
during the recent crisis despite reputational risks. However, 
commenters generally argued that the risk-based capital rules should be 
modified to mitigate the effect of FAS 166 and FAS 167 on risk-based 
capital requirements, taking into account risks borne by third-party 
investors in VIEs; a substantial number of commenters asserted that 
risk-based capital requirements should be limited to a banking 
organization's contractual exposure to VIEs consolidated under FAS 167. 
Other commenters suggested that the agencies consider using a sliding-
scale to risk weight assets subject to consolidation under FAS 167 
based on the likelihood of the VIE holding the assets receiving 
implicit support, as demonstrated by historical experience. Some 
commenters suggested an implicit support trigger approach that would 
require higher capital requirements based on a decrease in a VIE's 
excess spread (that is, the amount of income the VIE receives from 
assets in excess of that it pays to holders of its obligations), 
deterioration in VIE asset quality, downward changes in the credit 
ratings of the VIE's obligations, or other adverse credit events.
    Many commenters recommended an approach to risk weighting assets 
held by consolidated VIEs that would consider each structure 
independently, calculate a banking organization's ``net exposure'' to 
the structure by subtracting third-party investor interests in the 
structure from the structure's total assets, and then consider the 
appropriate risk weight to be applied to the resulting net exposure 
based on the risk characteristics of the structure. Some commenters 
similarly suggested the agencies adjust risk weights for securitized 
assets case-by-case on the basis of credit risk mitigation instruments 
supporting the assets, or include in regulatory capital some 
subordinated debt instruments issued by consolidated VIEs. Others 
argued that the agencies should separate regulatory capital reporting 
from GAAP when establishing regulatory capital requirements for banking 
organizations' exposures to VIEs and look to the way banking 
organizations manage VIE exposures internally to determine treatment as 
``on''- or- ``off'' balance sheet for regulatory capital purposes. Some 
commenters suggested that the size and risk profile of a banking 
organization should determine capital requirements for consolidated 
assets. Other commenters suggested the agencies develop risk weights 
for consolidated VIEs based on the agencies' guidance on synthetic 
securitizations. With regard to specific types of structures, many 
commenters asserted that certain multi-seller ABCP conduits (as 
discussed further below) and non-revolving, amortizing asset 
securitizations with certain features, such as term residential 
mortgage-backed securities structures, should receive more favorable 
capital

[[Page 4641]]

treatment based on their low historical loss levels to sponsoring 
banking organizations or low likelihood of implicit support. Some 
commenters also requested the agencies provide capital relief for 
consolidated residential and commercial mortgage-backed securities 
structures in order to aid the real estate market.
    Although commenters provided some empirical data in support of 
their arguments for favorable treatment of ABCP conduits (as discussed 
below), they provided much less data in support of other proposed 
alternative risk-based capital treatments. Commenters provided some 
examples of structural features (such as tax consequences) that may 
effectively minimize the possibility that a sponsoring banking 
organization will provide implicit support to certain structures. They 
did not, however, provide an explicit set of criteria, supported by 
broad-based empirical evidence, that the agencies could use to identify 
structures with minimal likelihood of implicit support, particularly 
during times of financial market stress, nor did they identify 
alternative risk-based capital treatments that would appropriately 
identify and measure risk and allay the agencies' concerns regarding 
regulatory capital arbitrage (that is, the structuring of transactions 
to obtain lower regulatory capital requirements without a commensurate 
reduction in risk). Commenters also did not empirically demonstrate the 
degree of competitive harm relative to foreign banks and other 
competitors that banking organizations would likely suffer as a result 
of the regulatory capital effects of their implementation of FAS 166 
and FAS 167.
    The agencies therefore are not implementing modifications to the 
risk-based capital rules to provide an alternative risk-based capital 
treatment for assets that will be newly consolidated on a banking 
organization's balance sheet following implementation of FAS 166 and 
FAS 167. The agencies believe that the optional interim relief provided 
by this final rule, through the delay and phase-in of the effects of 
FAS 167 upon risk-based capital requirements as described above, will 
give a banking organization that elects the option adequate time to 
adjust its risk profiles to address competitive concerns and to plan to 
develop structural features needed for future transactions with due 
consideration to its regulatory capital profiles.
b. Qualifying Total Capital
    In the NPR, the agencies sought comment on whether securitized 
loans subject to consolidation on banking organizations' balance sheets 
under FAS 167 would be subject to the same ALLL provisioning process, 
including applicable loss rates, as similar loans that are not 
securitized. The agencies asked for comment on how banking 
organizations would reflect the benefits of risk sharing in cases where 
investors in VIEs holding such loans absorb realized credit losses, and 
for a quantification of such benefits and any other effects of loss 
sharing, wherever possible. The agencies also asked whether they should 
consider policy alternatives with regard to the ALLL provisioning 
process, including the limit on ALLL that may be included in tier 2 
capital.
    Commenters indicated that the ALLL provisioning process and amounts 
for loans held in VIEs consolidated under FAS 167 would be the same as 
for loans not held in VIEs. Commenters asserted that the addition to 
ALLL that would result from this consolidation would be significantly 
greater than the actual losses contractually borne by the consolidating 
banking organization and would distort the relationship of the ALLL to 
the contractual risk of the consolidating banking organization to the 
assets held in the affected VIEs. Commenters further noted that, 
because additions to ALLL are deducted from retained earnings, the 
additions have the effect of reducing tier 1 capital.
    Many commenters also noted that a higher ALLL would result in 
higher deferred tax assets (DTAs) \21\ and significantly affect banking 
organizations' regulatory capital ratios due to the capital rules' 
limits on including DTAs and the ALLL in regulatory capital.\22\ Many 
commenters requested that the agencies relax or eliminate the 
restrictions on including DTAs in tier 1 capital and the ALLL in tier 2 
capital to mitigate the effects of consolidation due to the 
implementation of FAS 167 on regulatory capital. Specifically, some 
commenters recommended that the current limit (1.25 percent of risk-
weighted assets) on the inclusion of the ALLL in tier 2 capital be 
increased, or that the entire ALLL related to the assets supporting 
VIEs' contractual obligations to third parties be included in tier 2 
capital. Other commenters recommended that all ALLL related to losses 
contractually borne by third parties be eligible for inclusion in tier 
1 capital. Commenters also noted that DTA balances will increase along 
with the ALLL, and recommended that either the current limit on DTAs in 
regulatory capital be removed or that all DTAs arising from ALLL 
related to the contractual loss absorption responsibilities of third 
parties to consolidated VIEs be included in tier 1 capital.
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    \21\ Under GAAP, a DTA arises as a result of the recognition of 
an expense, in this case a loss provision, for financial reporting 
purposes in advance of its recognition as a deduction for income tax 
reporting purposes.
    \22\ The agencies' risk-based capital rules limit the amount of 
DTAs dependent upon future taxable income that may be included in 
tier 1 capital to the lesser of two measures: (a) The amount of such 
DTAs that a banking organization could reasonably expect to realize 
within one year; or (b) ten percent of tier 1 capital that exists 
before the deduction of any disallowed servicing assets, any 
disallowed purchased credit card relationships, any disallowed 
credit-enhancing interest-only strips, and any disallowed deferred 
tax assets. See 12 CFR part 3, Appendix A, Sec.  2(c)(1)(iii) (OCC); 
12 CFR parts 208 and 225, Appendix A Sec.  II.B.4 (Board); 12 CFR 
325.5(g) (FDIC); and 12 CFR 567.12(h) (OTS).
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    Under FAS 167, banking organizations have several financial 
reporting methods for recognizing the initial and ongoing consolidation 
of VIEs. One method is the fair value option, under which the assets of 
the VIE are recorded at fair value upon consolidation and no associated 
ALLL is recognized. Another method is to record newly consolidated 
assets at carrying value, which requires the establishment of an ALLL 
at a level appropriate to cover estimated credit losses.\23\ Commenters 
suggested that by not relaxing the limit on the amount of ALLL that may 
be included in tier 2 capital, the agencies may encourage banking 
organizations to elect the fair value option for initial consolidation 
and/or ongoing accounting of affected consolidated VIEs.
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    \23\ If a banking organization makes use of a practicability 
exception to record the assets at fair value as of the date FAS 166 
and FAS 167 are first implemented, no associated ALLL is recognized 
on that date, but an associated ALLL will be recognized in future 
periods.
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    The agencies have considered the concerns raised by commenters with 
respect to ALLL provisioning and DTAs created as a result of a banking 
organization's implementation of FAS 167. The agencies recognize the 
effects on tier 1 and tier 2 capital of the increased ALLL provisioning 
that will result from the consolidation of VIEs, and note the concern 
of some commenters that, in some cases, the provisioning may be 
disproportionate to the contractual risks borne by a banking 
organization with respect to the consolidated assets. However, as 
described above, a regulatory focus on contractual exposures may 
understate a banking organization's exposure to loss

[[Page 4642]]

with regard to a VIE's assets that the banking organization must 
consolidate under FAS 167. Moreover, the agencies have determined that 
the current limits on ALLL are appropriate given the policy benefits of 
maintaining consistency among international capital standards absent 
compelling policy justifications for deviating from such standards. The 
limit of 1.25 percent of risk-weighted assets on the amount of the ALLL 
that a banking organization may include in tier 2 capital is a standard 
included in the first capital accord of the Basel Committee on Banking 
Supervision (Basel Accord).\24\ The agencies also note that the current 
limit on DTAs that a banking organization may include in tier 1 capital 
is currently being considered as part of an international review of the 
components of regulatory capital, including deductions from capital. 
Moreover, commenters generally did not quantify the effect of FAS 167 
on banking organizations' ALLLs and DTAs, and the agencies believe that 
it may be difficult to identify on an ongoing basis the ALLLs and DTAs 
associated only with assets newly subject to consolidation under FAS 
167.
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    \24\ Basel Committee on Banking Supervision, International 
Convergence of Capital Measurement and Capital Standards (1988), 
paragraph 21.
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    For the above reasons, the agencies have decided not to modify 
current limits on the inclusion of the ALLL in tier 2 capital and of 
DTAs in tier 1 capital. However, as described in section II.A.2., this 
final rule provides substantial transitional relief from the agencies' 
limits on including ALLL in tier 2 capital to a banking organization 
implementing FAS 167 that elects to adopt the transition mechanism for 
risk-weighted assets described in section II.A.1 above. The agencies 
believe that this relief, along with the transitional relief for risk-
weighted assets included in the final rule, will aid banking 
organizations with capital planning as they implement FAS 166 and FAS 
167 and adjust their business practices accordingly.
2. Leverage Requirement
    Under the leverage rule, tier 1 capital is assessed against a 
measure of a banking organization's total on-balance sheet assets, net 
of ALLL and certain other exposures (leverage ratio).\25\ Therefore, 
previously unconsolidated assets that now must be recognized on a 
banking organization's balance sheet as a result of its implementation 
of FAS 167 will increase the denominator of the banking organization's 
leverage ratio. The agencies have maintained the leverage rule as a 
balance-sheet assessment to supplement the risk-based capital rules and 
limit the degree to which a banking organization can leverage its 
equity capital base.\26\ By design, the leverage rule does not 
recognize the risk profile of on-balance sheet exposures, including any 
risk transference associated with those exposures.
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    \25\ See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B Sec.  
II.b and 12 CFR part 225, appendix D, Sec.  II.b (Board); 12 CFR 
325.2(m) (FDIC); 12 CFR 567.5(b)(4) (OTS).
    \26\ 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B, 
Sec.  I.a. and 12 CFR part 225, appendix D, Sec.  I.a (Board); 12 
CFR 325.3 (FDIC); 12 CFR 567.5 (OTS).
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    Some commenters suggested, based on the same risk transference 
arguments referred to above with respect to the risk-based capital 
rules, that the agencies exclude the assets of VIEs consolidated by 
banking organizations under FAS 167 from the leverage ratio. Other 
commenters urged that the agencies apply any phase-in of capital 
requirements associated with the implementation of FAS 167 to the 
leverage rule as well as the risk-based capital rules.
    Having considered commenters' views, the anticipated impact of the 
implementation of FAS 166 and FAS 167 on banking organizations' 
leverage ratios, and the history and purpose of the leverage rule, the 
agencies have concluded that a delay or phase-in of the effect of 
consolidation under FAS 167 on the leverage rule is not appropriate or 
justified. The agencies believe the maintenance of the leverage rule as 
a balance-sheet assessment separate from the assessment of relative 
risk is a particularly important feature of prudential regulation and 
did not find evidence that the impact of FAS 166 and FAS 167 on banking 
organizations' leverage ratios justifies any alteration of the leverage 
rule.

C. Asset-Backed Commercial Paper Programs

    In the NPR, the agencies proposed to eliminate the ABCP exclusion, 
which permits a banking organization to exclude from risk-weighted 
assets the assets of an ABCP program that the banking organization is 
required to consolidate under GAAP and for which the banking 
organization acts as sponsor. Under the current risk-based capital 
rules, a banking organization that elects the ABCP exclusion must 
instead assess risk-based capital requirements only on its contractual 
exposures to the program. As proposed in the NPR, as with all other 
consolidated VIEs, a banking organization would be required to include 
the assets of a consolidated ABCP program in risk-weighted assets. The 
agencies also proposed to eliminate the associated provision in the 
general risk-based capital rules (incorporated by reference in the 
advanced approaches) that excludes from tier 1 capital the minority 
interest in a consolidated ABCP program not included in a banking 
organization's risk-weighted assets.
    Commenters generally opposed the proposal to eliminate the ABCP 
exclusion, particularly with respect to customer-focused, multi-seller 
ABCP programs (customer conduits). These commenters argued that such 
ABCP programs have a history of low loss rates (including during the 
recent financial crisis) and are important sources of funding for many 
businesses. These commenters also suggested that if the agencies 
eliminate the ABCP exclusion, the increased capital requirement 
associated with ABCP programs would increase the cost of funding and 
decrease credit availability for businesses that have used customer 
conduits to fund their operations, and therefore would adversely affect 
the economy and financial markets. Commenters also argued that the 
proposed elimination of the ABCP exclusion would raise significant 
competitive equity concerns for domestic banking organizations relative 
to foreign banks and domestic entities not subject to banking 
regulation. Some commenters additionally argued that the elimination of 
the ABCP exclusion would decrease incentives for banking organizations 
to transfer risk and might encourage banking organizations to invest in 
riskier, higher yield assets than those typically associated with 
consumer conduits. One commenter suggested that elimination of the ABCP 
exclusion was appropriate where liquidity facilities act as credit 
enhancement or where affiliates of the conduit sponsor are the largest 
holder of the ABCP obligations.
    Additionally, in response to the agencies' proposal, a number of 
commenters suggested that the agencies allow early adoption of the 
advanced approaches rules' Internal Assessment Approach (IAA) 
methodology \27\ for risk weighting these assets, or delay

[[Page 4643]]

eliminating the ABCP exclusion until banking organizations could 
operate fully under the advanced approaches rules. Other commenters 
urged the agencies not to implement the proposal to eliminate the ABCP 
exclusion at all, particularly for customer conduits.
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    \27\ See 12 CFR part 3, appendix C, (OCC) Sec.  44; 12 CFR part 
208, appendix F, Sec.  44; and 12 CFR part 225, appendix G, Sec.  44 
(Board); 12 CFR part 325, appendix D, Sec.  44 (FDIC); 12 CFR 567, 
Appendix C, Sec.  44 (OTS). Qualifying banking organizations using 
the IAA may calculate risk-weighted asset amounts for securitization 
exposures (as defined in the advanced approaches rule) to qualifying 
ABCP programs by using an internal credit assessment process mapped 
to equivalent external ratings.
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    The agencies have weighed the concerns raised by commenters, as 
described above, related to the proposal to eliminate the ABCP 
exclusion from the risk-based capital rules, against the agencies' own 
concerns regarding the possibility of sponsors providing implicit 
support to ABCP programs and regulatory capital arbitrage, among 
others. The agencies acknowledge that customer conduits appear to 
present a lower risk of loss to the sponsoring banking organization 
relative to other ABCP programs. However, recent events have raised 
serious questions about the original rationale for allowing the 
exclusion of consolidated ABCP programs from risk-weighted assets. As 
the agencies noted in the NPR, the 2004 implementation of the ABCP 
exclusion was based on the agencies' belief that sponsoring banking 
organizations' risk exposure to these entities was limited to their 
contractual exposure. However, as a result of some banking 
organizations having provided implicit support to a number of ABCP 
programs they sponsored during the recent financial turmoil, the 
agencies have observed that the premise of a contractual limit on risk 
was incorrect for some ABCP programs. In addition, and notwithstanding 
commenters' assertions to the contrary, the agencies believe that the 
type of customer conduit advocated by commenters to be considered for 
preferential exclusion from risk-weighted assets cannot be 
distinguished from other ABCP programs to a degree of certainty that 
would effectively mitigate the risk of regulatory capital arbitrage. 
Furthermore, commenters did not describe the features and 
characteristics of customer conduits that would effectively mitigate 
the risk of a banking organization providing implicit support to 
sponsored structures under the broadest range of circumstances. The 
agencies are sensitive to competitive concerns and recognize that some 
ABCP programs include generally high credit-quality assets. However, 
given the absence of a workable alternative proposal that 
satisfactorily addresses the agencies' concerns about regulatory 
capital arbitrage and implicit support, the agencies have decided to 
eliminate as proposed the ABCP exclusion, subject to the delay and 
phase-in described above.
    With respect to the recommendation that the agencies allow early 
adoption of the IAA, the agencies note that the IAA is applicable 
exclusively to a banking organization's exposures to off-balance sheet 
ABCP programs and not to a program's underlying assets when reported on 
balance sheet. Moreover, the IAA, like the ABCP exclusion, focuses on a 
banking organization's contractual exposures to an ABCP conduit. The 
IAA does not capture implicit support and thus an extension of the IAA 
to consolidated ABCP programs would not sufficiently reflect the risk 
to a sponsoring banking organization of such programs.

D. Reservation of Authority

    The NPR proposed a new reservation of authority for the risk-based 
capital rules specifying that a banking organization's primary Federal 
supervisor would have the authority to require the banking organization 
to treat an off-balance sheet VIE (or similar entity) as if it were 
consolidated onto the banking organization's balance sheet. The banking 
organization would have to hold capital against the entity's exposures 
for risk-based capital purposes if the primary Federal supervisor 
determined that the banking organization's exposure or other 
relationship to the entity was not commensurate with the actual risk 
relationship of the banking organization to the entity.
    The agencies received little comment with respect to the proposed 
reservation of authority. The few comments received regarding the 
proposed reservation of authority suggested that it be used in 
conjunction with recognition of contractual risk transfer. One 
commenter opposed the reservation of authority as proposed and 
requested that the agencies specify standards for the exercise of the 
authority. The agencies asked in the NPR if there are any features and 
characteristics of transactions not subject to consolidation on banking 
organizations' balance sheets under GAAP as modified by FAS 166 and FAS 
167 that should be recognized as on-balance sheet exposures for 
regulatory capital purposes to more appropriately reflect risk. 
Commenters generally stated that they were not aware of any such 
transactions. Many commenters also asserted that such transactions were 
unlikely.
    As stated in the NPR, the agencies believe the reservation of 
authority is essential to address instances when a banking organization 
structures a financial transaction with a VIE to avoid consolidation 
under FAS 167, and the resulting capital treatment is not commensurate 
with all risks of the banking organization to the VIE, including non-
contractual risks. The agencies have therefore decided to incorporate 
the reservation of authority in their risk-based capital rules as 
proposed in the NPR.

E. Other Related Matters

1. Department of the Treasury's Home Affordable Mortgage Program
    In the NPR, the agencies solicited comment on whether banking 
organizations that service securitized residential mortgages, 
participate in the United States Department of the Treasury's Home 
Affordable Mortgage Program (HAMP), and receive certain incentive 
payments in connection with the program, would be required under FAS 
167 to consolidate VIEs holding such mortgages solely due to loan 
modifications under HAMP. The agencies also asked if such consolidation 
were required, whether such assets should be included in regulatory 
capital requirements and what alternative capital treatment may be 
appropriate.
    Commenters generally did not think that incentive payments under 
HAMP would independently trigger consolidation under FAS 167. Most also 
argued that if such consolidation were to occur as a result of actions 
related to or required by HAMP participation, regulatory capital 
treatment should be modified with respect to the relevant consolidated 
mortgage loan assets.
    The agencies agree with commenters' assessment that it is unlikely 
that incentive payments under HAMP independently would cause servicers 
participating in HAMP to consolidate VIEs holding mortgage loans 
modified under HAMP. The agencies therefore do not see a basis for any 
modification of their capital requirements in relation to incentive 
payments made pursuant to HAMP.
2. Denial of Extension of Comment Period
    A few commenters requested that the agencies extend the NPR comment 
period. As noted above, the agencies received approximately 41 comme