Alternatives to the Use of External Credit Ratings in the Regulations of the OCC, 73526-73534 [2011-30428]

Agencies

• Office of the Comptroller of the Currency
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 76, Number 229 (Tuesday, November 29, 2011)]
[Proposed Rules]
[Pages 73526-73534]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-30428]


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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

12 CFR Parts 1, 5, 16, 28, and 160

[Docket No. OCC-2011-0019]
RIN 1557-AD36


Alternatives to the Use of External Credit Ratings in the 
Regulations of the OCC

AGENCY: Office of the Comptroller of the Currency (OCC), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act (Dodd-Frank Act) contains two directives to Federal 
agencies including the OCC. First, section 939A directs all Federal 
agencies to review, no later than one year after enactment, any 
regulation that requires the use of an assessment of creditworthiness 
of a security or money market instrument and any references to, or 
requirements in, such regulations regarding credit ratings. Second, the 
agencies are required to remove any references to, or requirements of 
reliance on, credit ratings and substitute such standard of credit-
worthiness as each agency determines is appropriate. The statute 
further provides that the agencies shall seek to establish, to the 
extent feasible, uniform standards of creditworthiness, taking into 
account the entities the agencies regulate and the purposes for which 
those entities would rely on such standards.
    Through this notice of proposed rulemaking (NPRM), the OCC seeks 
comment on a proposal to revise its regulations pertaining to 
investment securities, securities offerings, and foreign bank capital 
equivalency deposits to replace references to credit ratings with 
alternative standards of creditworthiness.
    The OCC also is proposing to amend its regulations pertaining to 
financial subsidiaries of national banks to better reflect the language 
of the underlying statute, as amended by section 939(d) of the Dodd-
Frank Act.

DATES: Comments must be received by December 29, 2011.

ADDRESSES: Commenters are encouraged to use the title ``Alternatives to 
the Use of Credit Ratings in the Regulations of the OCC'' to facilitate 
the organization and review of comments. Because paper mail in the 
Washington, DC area and at the OCC is subject to delay, commenters are 
encouraged to submit comments by the Federal eRulemaking Portal or 
email, if possible. Please use the title ``Alternatives to the Use of 
Credit Ratings in the Regulations of the OCC'' to facilitate the 
organization and review of the comments. You may submit comments by any 
of the following methods:
     Federal eRulemaking Portal--``Regulations.gov'': Go to 
https://www.regulations.gov, under the ``More Search Options'' tab click 
next to the ``Advanced Docket Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0019'' 
to submit or view public comments and to view supporting and related 
materials for this proposed rule. The ``How to Use This Site'' link on 
the Regulations.gov home page provides information on using 
Regulations.gov, including instructions for submitting or viewing 
public comments, viewing other supporting and related materials, and 
viewing the docket after the close of the comment period.
     Email: regs.comments@occ.treas.gov.
     Mail: Office of the Comptroller of the Currency, 250 E 
Street SW., Mail Stop 2-3, Washington, DC 20219.
     Fax: (202) 874-5274.
     Hand Delivery/Courier: 250 E Street SW., Mail Stop 2-3, 
Washington, DC 20219.
    Instructions: You must include ``OCC'' as the agency name and 
``Docket Number OCC-2011-0019'' in your comment. In general, OCC will 
enter all comments received into the docket and publish them on the 
Regulations.gov Web site without change, including any business or 
personal information that you provide such as name and address 
information, email addresses, or phone numbers. Comments received, 
including attachments and other supporting materials, are part of the 
public record and subject to public disclosure. Do not enclose any 
information in your comment or supporting materials that you consider 
confidential or inappropriate for public disclosure.
    You may review comments and other related materials that pertain to 
this proposed rulemaking by any of the following methods:
     Viewing Comments Electronically: Go to https://www.regulations.gov, under the ``More Search Options'' tab click next 
to the ``Advanced Document Search'' option where indicated, select 
``Comptroller of the Currency'' from the agency drop-down menu, then 
click ``Submit.'' In the ``Docket ID'' column, select ``OCC-2011-0019'' 
to view public comments for this rulemaking action.
     Viewing Comments Personally: You may personally inspect 
and photocopy comments at the OCC, 250 E Street SW., Washington, DC. 
For security reasons, the OCC requires that visitors make an 
appointment to inspect comments. You may do so by calling (202) 874-
4700. Upon arrival, visitors will be required to present valid 
government-issued photo identification and submit to security screening 
in order to inspect and photocopy comments.
     Docket: You may also view or request available background 
documents and project summaries using the methods described above.

FOR FURTHER INFORMATION CONTACT: Kerri Corn, Director for Market Risk, 
Credit and Market Risk Division, (202) 874-4660; Carl Kaminski, Senior 
Attorney, or Kevin Korzeniewski, Attorney, Legislative and Regulatory 
Activities Division, (202) 874-5090; or Eugene H. Cantor, Counsel, 
Securities and Corporate Practices Division, (202) 874-5210, Office of 
the Comptroller of the Currency, 250 E Street SW., Washington, DC 
20219.

SUPPLEMENTARY INFORMATION: 

I. Background

    Section 939A of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act \1\ (the Dodd-Frank Act) contains two directives to 
Federal agencies including the OCC. First, section 939A directs all 
Federal agencies to review, no later than one year after enactment, any 
regulation that requires the use of an assessment of creditworthiness 
of a security or money market instrument and any references to or 
requirements in such regulations regarding credit ratings. Second, the

[[Page 73527]]

agencies are required to remove references to, or requirements of 
reliance on, credit ratings and substitute such standard of 
creditworthiness as each agency determines is appropriate. The statute 
further provides that the agencies shall seek to establish, to the 
extent feasible, uniform standards of creditworthiness, taking into 
account the entities the agencies regulate and the purposes for which 
those entities would rely on those standards.
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    \1\ Public Law 111-203, Section 939A, 124 Stat. 1376, 1887 (July 
21, 2010).
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    This NPRM describes the areas where the regulations of the OCC, 
other than those that establish regulatory capital requirements, 
currently reference credit ratings; sets forth the considerations 
underlying such reliance; and then requests comment on the alternatives 
we propose to replace credit ratings in those provisions. In connection 
with this NPRM, the OCC is simultaneously seeking comment on guidance 
to help explain the due diligence national banks and Federal savings 
associations should conduct in purchasing investment securities for 
their investment portfolios and to reiterate supervisory expectations 
for the securities the institution actually purchases. This proposed 
guidance is published elsewhere in this issue of the Federal Register.
    The regulations subject to this proposal generally require banks to 
determine whether a particular security or issuance qualifies, or does 
not qualify, for a specific treatment. For example, the OCC's 
investment securities regulations generally require a bank to determine 
whether or not a security is ``investment grade'' in order to determine 
whether purchasing the security is permissible. By contrast, some 
aspects of the OCC's risk-based capital regulations require a bank to 
place exposures (for example, securitization exposures) into one of 
several categories based on gradations of risk, which, in some cases 
under the current rules, may be determined by reference to nationally 
recognized statistical rating organizations (NRSROs) \2\ credit 
ratings. This type of granular risk measurement requires fundamentally 
different, more complex analyses than the analysis required to make the 
binary--or ``yes/no''--determinations necessary for the rules subject 
to this proposal. Separately, the OCC and the other Federal banking 
agencies issued a joint advance notice of proposed rulemaking on the 
agencies' use of credit ratings in risk-based capital frameworks,\3\ 
and we continue our efforts to explore the development of alternative 
standards appropriate for those frameworks.
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    \2\ A nationally recognized statistical rating organization 
(NRSRO) is an entity registered with the U.S. Securities and 
Exchange Commission (SEC) as an NRSRO under section 15E of the 
Securities Exchange Act of 1934. See, 15 U.S.C. 78o-7, as 
implemented by 17 CFR 240.17g-1.
    \3\ 75 FR 53823 (Aug. 25, 2010).
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A. Non-Capital Regulations That Reference Credit Ratings Regulations 
Applicable to National Banks and Federal Branches of Foreign Banks

    The OCC's regulations on permissible investment securities, 
securities offerings, and foreign bank capital equivalency deposits 
each reference or rely on credit ratings issued by NRSROs. These 
regulations are described below.

Investment Securities

    The OCC's investment securities regulations at 12 CFR part 1 use 
credit ratings as a factor for determining the credit quality, 
marketability, and appropriate concentration levels of investment 
securities purchased and held by national banks. Under the OCC rules, 
an investment security must not be ``predominantly speculative in 
nature.'' The OCC rules provide that an obligation is not 
``predominantly speculative in nature'' if it is rated investment grade 
or, if unrated, is the credit equivalent of investment grade. 
``Investment grade,'' in turn, is defined as a security rated in one of 
the four highest rating categories by two or more NRSROs (or one NRSRO 
if the security has been rated by only one NRSRO).
    Credit ratings also are used to determine marketability in the case 
of a security that is offered and sold under the Securities and 
Exchange Commission's (SEC) Rule 144A.\4\ Under part 1, a 144A security 
is deemed to be marketable if it is rated investment grade or the 
credit equivalent of investment grade. In addition, credit ratings are 
used to determine concentration limits on certain investment 
securities. For example, OCC rules limit holdings of so-called ``Type 
IV'' securities of any one obligor that are rated in the third highest 
investment grade rating categories to 25 percent of the bank's capital 
and surplus.\5\ There is no concentration limit for small business-
related securities that are rated in the highest or second highest 
investment grade categories.
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    \4\ Rule 144A provides a safe harbor from the registration 
requirements of the Securities Act of 1933 for certain private 
resales of restricted securities to qualified institutional buyers. 
The restricted securities that fall under this safe harbor are 
generally referred to as 144A securities.
    \5\ A Type IV investment security includes certain small 
business related-securities, commercial mortgage-related securities, 
or residential mortgage-related securities. See 12 CFR 1.2(m).
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Securities Offerings

    Securities issued by national banks are not covered by the 
registration provisions and SEC regulations governing other issuers' 
securities under the Securities Act of 1933. However, the OCC has 
adopted 12 CFR part 16 to require disclosures related to national bank-
issued securities. Part 16 includes references to ``investment grade'' 
ratings. For example, Sec.  16.6, which provides an optional 
abbreviated registration system for debt securities that meet certain 
criteria, requires that a security receive an investment grade credit 
rating to qualify for the abbreviated registration system.

International Banking Activities

    Under section 4(g) of the International Banking Act (IBA),\6\ each 
foreign bank with a Federal branch or agency must establish and 
maintain a capital equivalency deposit (CED) with a member bank located 
in the state where the Federal branch or agency is located. The IBA 
authorizes the OCC to prescribe regulations describing the types and 
amounts of assets that qualify for inclusion in the CED, ``as necessary 
or desirable for the maintenance of a sound financial condition, the 
protection of depositors, creditors, and the public interest.'' \7\ At 
12 CFR 28.15, OCC regulations set forth the types of assets eligible 
for inclusion in a CED. Among these assets are certificates of deposit 
that are payable in the United States and banker's acceptances, 
provided that, in either case, the issuer or the instrument is rated 
investment grade by an internationally recognized rating organization, 
and neither the issuer nor the instrument is rated lower than 
investment grade by any such rating organization that has rated the 
issuer or the instrument.
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    \6\ 12 U.S.C. 3102(g).
    \7\ 12 U.S.C. 3102(g)(4).
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Regulations Applicable to Federal Savings Associations

    Under Title III of the Dodd-Frank Act, on July 21, 2011, the 
rulemaking authority of the Office of Thrift Supervision (OTS) for 
Federal savings associations under the Home Owner's Loan Act 
transferred to the OCC.\8\ To facilitate the OCC's enforcement and 
administration of former OTS rules and to make appropriate changes to 
these rules to reflect OCC supervision of Federal savings associations, 
the OCC republished the OTS regulations, with

[[Page 73528]]

nomenclature and other technical changes, in the Code of Federal 
Regulations at Chapter I, parts 100 through 197 (Republished 
Regulations), effective on July 21, 2011.\9\
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    \8\ For a more detailed description of the allocation of 
jurisdiction over savings associations and savings and loan holding 
companies affected by the Dodd-Frank Act, see 76 FR 48950 (August 9, 
2011).
    \9\ To make it easier for Federal savings associations to use 
the republished rules, the OCC has preserved where possible the 
OTS's numbering system by republishing these regulations with OCC 
part numbers that correspond to the former OTS rules, specifically, 
by changing the ``5'' to a ``1''. For example, 12 CFR part 560 was 
republished as 12 CFR part 160.
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    The lending and investment regulations for Federal savings 
associations, now codified at 12 CFR part 160, use credit ratings as a 
factor for determining the credit quality, liquidity, and 
marketability. For example, under these rules, for a Federal savings 
association to purchase an investment security, the security must be 
``[r]ated in one of the four highest categories as to the portion of 
the security in which the association is investing by a nationally 
recognized investment rating service at its most recently published 
rating before the date of purchase by the association.'' \10\
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    \10\ 12 CFR 160.40(a)(2).
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    In addition, lending regulations for all Federal savings 
associations, now codified at 12 CFR part 160, subpart B, establish 
appropriate concentration levels of investment securities purchased and 
held by Federal savings associations. For example, Sec.  160.40 limits 
holdings of corporate debt securities of any one issuer that are rated 
in the third or fourth highest investment grade rating categories to 15 
percent of the association's capital and surplus. For securities that 
are rated in the highest or second highest investment grade categories, 
that limit is 25 percent of the savings association's capital and 
surplus.\11\
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    \11\ A Federal savings association may invest up to 10 percent 
of its capital and surplus in commercial paper rated in the highest 
category by at least two NRSROs, and corporate debt securities rated 
in one of the two highest categories by at least one NRSRO. This is 
in addition to being able to invest another 15 percent of its 
capital and surplus in these securities pursuant to its lending 
authority. 12 CFR 160.93(d)(5).
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    Credit ratings also are used to determine marketability in the case 
of a security that is offered and sold pursuant to the SEC's Rule 144A. 
As previously noted, a 144A security is generally deemed to be 
marketable if it is rated investment grade.

B. Advance Notices of Proposed Rulemaking

    On August 13, 2010, the OCC published an advance notice of proposed 
rulemaking (ANPR) that identified the references to credit ratings in 
its regulations at 12 CFR parts 1, 16, and 28 and requested comment on 
alternative creditworthiness standards.\12\ On October 14, 2010, the 
OTS published a similar ANPR describing the references to credit 
ratings in the non-capital regulations applicable to savings 
associations, including the OTS's investment securities 
regulations.\13\ Together, the ANPRs generally described, and requested 
comment on, four alternative frameworks for measuring creditworthiness 
to replace existing references to credit ratings.
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    \12\ 75 FR 49423 (Aug. 13, 2010).
    \13\ 75 FR 63107 (Oct. 14, 2010).
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    One alternative described in the ANPRs was the use of an approach 
currently contained in the existing investment securities regulations 
which permit a national bank or Federal savings association to purchase 
unrated securities. (An unrated security is one that does not have a 
credit rating issued by an NRSRO.) Under this approach, the national 
bank or Federal savings association would make the determination as to 
whether the security is the ``credit equivalent'' of investment grade 
by conducting and documenting its own credit assessment and analysis. 
This determination would be subject to examiner review, and national 
banks and Federal savings associations would continue to be expected to 
understand and manage the associated price, liquidity and other related 
risks associated with their investment securities activities.
    The ANPRs outlined a second alternative by redefining the 
``investment grade'' standard to focus on a broader set of criteria 
than the current creditworthiness standard. The current standard 
focuses primarily on the timely repayment of principal and interest and 
the risk of default and references credit ratings for that purpose. A 
broader standard could take into account criteria for marketability, 
liquidity, and price risk associated with market volatility, while 
removing references to credit ratings. National banks and Federal 
savings associations would be required to consider these broader 
standards in making determinations on whether securities are 
``investment grade.'' These determinations would be subject to examiner 
review.
    A third option in the ANPRs was to permit national banks and 
Federal savings associations to use internal loan classification 
systems to rate investment securities. This option borrows from both 
existing classification systems used by the Federal banking agencies to 
identify problem loans and the bank's or savings association's internal 
risk rating systems. The banking agencies classify loans on a scale 
reflecting decreasing credit quality. Generally, well-performing loans 
are rated ``pass.'' Troubled loans are rated ``special mention,'' 
``substandard,'' ``doubtful,'' or ``loss,'' depending on the quality of 
the credit. In their respective ANPRs, the OCC and the OTS suggested 
defining all investments classified ``special mention'' or worse as 
predominately speculative and thus not ``investment grade.''
    Finally, the OTS ANPR outlined a fourth alternative to using credit 
ratings that would permit savings associations to consider external 
data, including external data and credit analyses provided by third 
parties, to make a creditworthiness determination. Alternative ways to 
measure credit risk might be to derive ``implied ratings'' from the 
market price of traded instruments. The implied rating could be derived 
from the price of equities, debt instruments, or credit default swaps 
linked to the security. Investors typically require a higher return for 
an investment with a higher risk of default. For example, a yield 
spread (the difference between the yield on a corporate bond relative 
to a government bond with similar maturity) is often used as a measure 
of relative creditworthiness. A larger credit spread reflects a lower 
credit quality and higher perceived risk of the issuer's default.
    In addition to the proposed alternative frameworks for considering 
creditworthiness without reference to credit ratings, the agencies set 
forth criteria that appear to be most relevant to evaluating potential 
creditworthiness standards. The agencies requested comment on whether 
other considerations should be taken into account. Specifically, the 
ANPRs stated that any alternative creditworthiness standard should:
     Foster prudent risk management;
     Be transparent, replicable, and well defined;
     Allow different banking organizations to assign the same 
assessment of credit quality to the same or similar credit exposures;
     Allow for supervisory review;
     Differentiate among investments in the same asset class 
with different credit risk; and
     Provide for the timely and accurate measurement of 
negative and positive changes in investment quality, to the extent 
practicable.

C. Comments Received on the ANPRs

    Notwithstanding the requirements of section 939A of the Dodd-Frank 
Act, a majority of commenters on the ANPRs

[[Page 73529]]

said that the agencies should continue to use credit ratings. Most 
commenters argued that credit ratings are a valuable tool for national 
banks and Federal savings associations (herein, referred to 
collectively as ``banks'')--especially small banks--for measuring 
credit risk. Several commenters expressed doubt that any of the 
suggested alternatives for measuring creditworthiness would yield 
results that would be as useful and cost-effective as credit ratings. 
The commenters suggested that passage of the Dodd-Frank Act, 
specifically measures adding to the SEC's oversight authority over 
NRSROs, would improve the accuracy of credit ratings. A number of 
commenters stated that the agencies should interpret the statute in a 
manner that would permit the continued use of credit ratings or permit 
banks to consider credit ratings as one of several factors when 
measuring credit risk.
    Commenters on the ANPRs focused largely on two issues: Competitive 
equity and compliance burden. Community and regional bank commenters 
argued that the inability to use credit ratings in evaluating 
investments could disadvantage them when compared with larger 
institutions that have advanced analytical capabilities. Larger 
internationally active banks expressed concern that they will be 
disadvantaged when compared to their foreign counterparts who may 
continue to use external credit ratings. Commenters also stated that 
developing internal rating systems to replace the long-standing use of 
NRSRO credit ratings would involve cost considerations greater than 
those under the current regulation, without a corresponding benefit to 
risk management. While commenters noted that cost and burden would be a 
factor for all banks, it would likely be more pronounced for community 
and regional banks. These smaller institutions may not currently have 
in-house the systems and management capabilities to convert quickly to 
new standards. Commenters noted that if smaller financial institutions 
are unable to develop processes necessary to comply with the new 
standard, it would prevent them from purchasing many of the investment 
securities they are currently permitted to hold. Thus, commenters 
stated that a cost-effective, simple standardized approach to measuring 
credit risk would be particularly important for community and regional 
banks.
    Commenters generally agreed with and supported the factors and 
criteria set forth in the ANPRs as important for evaluating potential 
creditworthiness standards. Commenters suggested that, in establishing 
alternative creditworthiness measures, the agencies also should seek to 
avoid regulatory arbitrage, create parity with international standards, 
avoid oversimplified measures, dampen systemic risk, capture market 
complexities, identify appropriate time horizons, and allow for 
accurate and timely reassessments. Commenters further suggested that 
the agencies should consider transparency, replicability, assessment 
speed, ease of use, consistency across different regulated entities, 
and the existence of credit support.

II. Description of the Proposed Amendments to Non-Capital Regulations

    The OCC is proposing to amend the definition of ``investment 
grade'' to remove the current reference to credit ratings and to 
replace other references to credit ratings with alternative standards 
of creditworthiness for the purposes of its regulations at 12 CFR parts 
1, 16, 28, and 160.

Parts 1, 16, and 160

    This proposal generally removes references to credit ratings 
provided by NRSROs and instead generally requires national banks and 
Federal savings associations to make assessments of a security's 
creditworthiness, similar to the assessments currently required for the 
purchase of unrated securities.

National Bank Regulations

    Under the proposed amendments to parts 1 and 16, a security would 
be ``investment grade'' if the issuer of the security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. The ``adequate capacity to 
meet financial commitments'' standard would replace language in 
Sec. Sec.  1.2 and 16.2 which currently reference NRSRO credit ratings. 
To meet this new standard, national banks must be able to determine 
that the risk of default by the obligor is low and the full and timely 
repayment of principal and interest is expected.\14\
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    \14\ In the case of a structured finance transaction, principal 
and interest repayment is not necessarily solely reliant on the 
direct debt repaying capacity of the issuer or obligor. That is, the 
credit risk profile may be influenced more by the quality of the 
underlying collateral as well as the cash flow rules and the 
structure of the security itself than by the condition of the 
issuer.
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    When determining whether a particular issuer has an adequate 
capacity to meet financial commitments under a security for the 
projected life of the asset or exposure, the OCC expects national banks 
to consider a number of factors, to the extent appropriate. While 
external credit ratings and assessments remain valuable sources of 
information and provide national banks with a standardized credit risk 
indicator, banks must supplement the external ratings with due 
diligence processes and analyses that are appropriate for the bank's 
risk profile and for the size and complexity of the instrument. 
Therefore, it would be possible that a security rated in the top four 
rating categories by an NRSRO may not satisfy the proposed revised 
investment grade standard. Further information for national banks 
seeking to comply with the new regulations is being issued as proposed 
guidance at the same time as this NPRM.
    Additionally, 12 CFR 1.3(e)(2) of the current rules imposes a 
concentration limit on a national bank's purchases of certain small 
business-related securities for its own account. The provision limits a 
national bank's purchase of covered small business-related securities 
to 25 percent of the bank's capital and surplus unless the securities 
are rated in the highest two investment grade rating categories. The 
OCC is proposing to amend this provision to remove the limit since it 
is not required by statute. However, under the OCC's proposed 
amendment, national banks still may purchase only those securities that 
meet the statutory creditworthiness criteria set forth in the 
definition of small business-related securities in section 3(a)(53)(A) 
of the Securities Exchange Act of 1934.\15\ Currently, the statutory 
criteria include a requirement that the security be rated in one of the 
four highest investment grade rating categories by an NRSRO. However, 
the Dodd-Frank Act provides that this ratings-based requirement will be 
removed by July 21, 2012, and replaced with an alternative standard 
developed by the SEC.
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    \15\ 15 U.S.C. 78c(a)(53)(A).
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    Similarly, Sec. Sec.  1.2(m)(2) and (3) include references to NRSRO 
credit ratings and references the definition of ``mortgage-related 
security'' in section 3(a)(41) of the Securities Exchange Act of 
1934.\16\ This statutory definition includes a requirement that the 
security be rated in the top two investment grade categories by an 
NRSRO. Like the definition of small business-related security, the 
Dodd-Frank Act removes the reference to credit ratings in July 2012 and 
directs the SEC to develop an alternative creditworthiness standard. 
Consistent with the Dodd-Frank Act, the OCC is proposing to delete the 
explicit references to credit ratings in its

[[Page 73530]]

regulations at 12 CFR 1.2(m)(2) and (3). However, these provisions 
would continue to refer to the definition of mortgage-related security 
in the Securities Exchange Act of 1934.
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    \16\ 15 U.S.C. 78c(a)(41).
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Federal Savings Association Regulations

    Notably, under current law, savings associations generally are 
prohibited by statute from investing in corporate debt securities 
unless they are rated ``investment grade'' by an NRSRO.\17\ However, 
the Dodd-Frank Act provides that on July 21, 2012, this statutory 
requirement will be replaced by ``standards of creditworthiness 
established by the [FDIC].'' \18\ In this NPRM, the OCC is proposing to 
define the term ``investment grade,'' as it is used in Part 160, to 
refer to 12 U.S.C. 1831e. Therefore, it will continue to reference the 
current ratings-based requirement until such time as that requirement 
is replaced by the FDIC.
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    \17\ 12 U.S.C. 1831e(d)(1).
    \18\ Public Law 111-203, Section 939(a)(2) (July 21, 2010).
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    Additionally, in Sec.  160.40, the regulations applicable to 
Federal savings associations distinguish between commercial paper rated 
in the highest two rating categories, and in Sec.  160.93, the 
regulations distinguish between commercial paper rated in the highest 
rating category and corporate debt securities rated in the two highest 
rating categories. Section 160.40(a)(1)(ii) generally provides that 
Federal savings associations may invest in commercial paper only if it 
rated in the highest two investment grade categories or guaranteed by a 
company with such a rating. Section 160.93(d)(5)(i) provides a less 
restrictive lending limitation for commercial paper that is rated in 
the highest rating category, and Sec.  160.93(d)(5)(ii) provides a less 
restrictive lending limitation for corporate debt securities rated in 
the two highest rating categories. In this NPRM, the OCC is proposing 
to remove these references to credit ratings. Under the revised rules, 
Federal savings associations would be permitted to invest in commercial 
paper if it meets the standards set forth at 12 U.S.C. 1831e(d)(1), 
which currently limits all savings associations to purchasing corporate 
debt securities that are of investment grade, but will, after July 21, 
2012, include a new creditworthiness standard established by the FDIC. 
Additionally, the less restrictive lending limitations would apply to 
all commercial paper and corporate debt securities that meet the 
revised creditworthiness standards.
    Finally, at Sec.  160.42, Federal savings associations are subject 
to certain limitations with regard to purchases of state and local 
government obligations. Currently, Federal savings associations may 
hold state or municipal revenue bonds that have ratings in one of the 
four highest investment grade rating categories from one issuer up to a 
limit of 10 percent of total capital without prior OCC approval. Under 
the revised rules, this provision would apply to state or municipal 
revenue bonds if the issuer has an adequate capacity to meet financial 
commitments under the security for the projected life of the asset or 
exposure. An issuer has an adequate capacity to meet financial 
commitments if the risk of default by the obligor is low and the full 
and timely repayment of principal and interest is expected.

Safety and Soundness Regulations

    In addition to regulatory provisions that generally limit national 
banks and Federal savings associations to purchasing securities that 
are of investment grade, OCC regulations require that national banks 
and Federal savings associations conduct their investment activities in 
a manner that is consistent with safe and sound practices.\19\ 
Specifically, national banks and Federal savings associations must 
consider the interest rate, credit, liquidity, price and other risks 
presented by investments, and the investments must be appropriate for 
the particular bank.\20\ In addition to determining whether a security 
is of investment grade, national banks and Federal savings associations 
with substantial securities portfolios, in particular, must have and 
maintain robust risk management frameworks in place to ensure that an 
investment in a particular security appropriately fits within its goals 
and that the institution will remain in compliance with all relevant 
concentration limits.
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    \19\ 12 CFR 1.5; 12 CFR 160.1(b), 160.40(c).
    \20\ 12 CFR 1.5(a); 12 CFR 160.1(b), 160.40(c).
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Consistency With Other Federal Regulations

    Consistent with section 939A's directive that the Federal agencies 
seek to establish, to the extent feasible, uniform standards of 
creditworthiness, in developing this proposal, the OCC has considered 
the approaches in the two recent proposals issued by the SEC,\21\ as 
well as a recent proposal issued by the National Credit Union 
Administration (NCUA).\22\
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    \21\ See 76 FR 12896 (March 9, 2011); 76 FR 26550 (May 6, 2011).
    \22\ 76 FR 11164 (March 1, 2011).
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    On March 9, 2011, the SEC published a notice of proposed rulemaking 
to implement Section 939A with respect to its regulations governing 
investments made by mutual funds.\23\ The proposal includes replacing 
creditworthiness standards that reference credit ratings with standards 
that would reflect evaluating other criteria. The proposal would 
replace a requirement that a security purchased by a money-market 
mutual fund be rated in ``one of the two highest short-term rating 
categories'' with a standard that the security have minimal credit 
risk. The determination would be based on factors pertaining to credit 
quality and the issuer's ability to meet its short-term financial 
obligations. Under the SEC's proposed rule 2a-7, while the board of 
directors of a mutual fund must independently determine that an 
investment has minimal risk, they would be permitted to continue using 
credit ratings as one factor to make that determination.\24\
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    \23\ 76 FR 12896 (March 9, 2011).
    \24\ Specifically, the SEC proposal states:
    Nothing in the proposed rule would prohibit a money market fund 
from relying on policies and procedures it has adopted to comply 
with the current rule as long as the board concluded that the 
[credit] ratings specified in the policies and procedures establish 
similar standards to those proposed and are credible and reliable 
for that use.
    76 FR 12899 n.32. The SEC's March 9 proposal also notes that in 
addition to referencing credit ratings, the SEC rules already 
require a mutual fund board of directors to determine that a 
security meets the requisite investment standards based on factors 
``in addition to any ratings assigned.'' Thus, under the SEC's 
current rule a mutual fund may not purchase an investment based on 
the credit rating alone.
---------------------------------------------------------------------------

    On May 6, 2011, the SEC published a proposal to amend additional 
rules, including the Broker-Dealer Net Capital Rule, to remove 
references to credit ratings.\25\ The Net Capital Rule currently 
applies lower capital requirements to certain types of securities held 
by broker-dealers if the securities are rated in high rating categories 
by at least two NRSROs. Under the proposal, to receive a favorable 
treatment for commercial paper, nonconvertible debt, and preferred 
stock, a broker-dealer would be required to establish, maintain, and 
enforce written policies and procedures designed to assess the credit 
and liquidity risks applicable to a security, and based on this 
process, would have to determine that the investment has only a 
``minimal amount of credit risk.''
---------------------------------------------------------------------------

    \25\ 76 FR 26550 (May 6, 2011).
---------------------------------------------------------------------------

    Under the SEC's proposed amendments, a broker-dealer could consider 
various factors in assessing the credit risk for a security. These 
factors could include credit spreads, securities-related research, 
internal or external credit risk assessments (including credit

[[Page 73531]]

ratings), and default statistics. The SEC proposal's preamble states 
that the criteria are meant to capture securities that should generally 
qualify as investment grade under the current ratings-based standard 
``without placing undue reliance on third-party credit ratings.'' 
Similarly, the OCC's amendments would allow national banks and Federal 
savings associations to review multiple factors in evaluating the 
creditworthiness of a security.
    On March 1, 2011, the NCUA published a proposal to amend a number 
of its regulations to remove references to credit ratings and replace 
those references with narratives based on ratings descriptions 
published by Standard and Poor's and Fitch.\26\ For example, where NCUA 
regulations refer to an investment with an ``AA'' rating, the proposal 
would revise the reference to refer to a security that a credit union 
determines has a ``very strong capacity to meet financial 
commitments.'' Similarly, where NCUA regulations currently refer to an 
investment with an ``A'' rating, the proposal would revise the 
reference to refer to a security that a credit union determines has a 
``strong capacity to meet financial commitments,'' in line with the S&P 
definition; and likewise, where NCUA regulations currently refer to an 
investment with a ``BBB'' rating, the proposal would revise the 
reference to refer to a security that a credit union determines has an 
``adequate'' capacity to meet financial commitments. Under the NCUA 
proposal, a Federal credit union must reach these conclusions through 
its own analysis, rather than exclusively relying on credit ratings. 
However, part of that analysis may include the consideration of credit 
ratings.
---------------------------------------------------------------------------

    \26\ 76 FR 11164 (March 1, 2011).
---------------------------------------------------------------------------

    The NCUA proposal also provides that when a Federal credit union 
considers the creditworthiness of a security, the credit union must 
consider whether the security will continue to have the capacity to 
meet financial commitments, even under adverse economic conditions. The 
OCC is not currently proposing to include similar language in its 
investment securities regulations. However, the OCC invites comment on 
whether such a standard would be appropriate, and on how such a 
standard could be implemented.
    In the preamble to its proposal, the NCUA stated that it has and 
will continue to require Federal credit unions to conduct internal 
credit analyses that go beyond simple reliance on credit ratings, 
therefore, the NCUA does not believe that the proposed approach would 
result in significant changes for most Federal credit unions. 
Similarly, the OCC's proposed amendments would not change the OCC's 
continuing expectation that national banks and Federal savings 
associations consider and evaluate multiple factors when evaluating the 
creditworthiness of a security, and that they supplement the use of 
external ratings with due diligence processes and analyses that are 
appropriate for the bank's risk profile and for the size and complexity 
of the instrument.

Part 28--Foreign Banking Institutions

    The OCC's capital equivalency deposit regulation at 12 CFR 28.15 
currently allows for the use of certificates of deposit or bankers' 
acceptances as part of the deposit, if its issuer is rated investment 
grade by an internationally recognized rating organization. The OCC 
proposes to remove the requirement referencing credit ratings provided 
by ratings organizations. Instead, the issuer of the certificate of 
deposit or banker's acceptance must have ``an adequate capacity to meet 
financial commitments for the projected life of the asset or 
exposure.''

Part 5--Financial Subsidiaries

    Finally, the OCC is proposing to make a technical change to 12 CFR 
5.39, which pertains to financial subsidiaries of national banks. 
Currently, this regulation contains language that appeared in Section 
5136A of title LXII of the Revised Statutes (12 U.S.C. 24a), as added 
by the Gramm-Leach-Bliley Act.\27\ Prior to its amendment by the Dodd-
Frank Act, section 5136A permitted a national bank, directly or 
indirectly, to control a financial subsidiary or hold an interest in a 
financial subsidiary only if the bank was one of the largest 100 
insured depository institutions and has at least one issue of 
outstanding debt rated in one of the top three investment grade 
categories by an NRSRO. The Dodd-Frank Act amended section 5136A to 
remove the reference to investment grade ratings.\28\
---------------------------------------------------------------------------

    \27\ Public Law 106-102, Section 121, 113 Stat. 1338, 1373-81 
(Nov. 12, 1999).
    \28\ Public Law 111-203 at Section 939(d), 124 Stat. at 1886.
---------------------------------------------------------------------------

    The OCC is proposing to revise this provision to conform with the 
revised statutory language. The new language would provide that a 
national bank may, directly or indirectly, control a financial 
subsidiary or hold an interest in a financial subsidiary only if the 
bank is one of the 100 largest insured banks and the bank has not fewer 
than one issue of outstanding debt that meets such applicable standard 
or criteria established by the Treasury Department and the Federal 
Reserve Board pursuant to Section 5136A of title LXII of the Revised 
Statutes (12 U.S.C. 24a).

III. Implementation Guidance

    Together with this NPRM, the OCC is publishing proposed updates and 
revisions to its guidance for national bank and Federal savings 
association investment activities. This guidance reflects the OCC's 
expectations for national banks and Federal savings associations as 
they review their systems and consider any changes necessary to comply 
with the revisions proposed in this NPRM. The guidance describes 
factors institutions should consider with respect to certain types of 
investment securities to assess creditworthiness and continue 
conducting their activities in a safe and sound manner. Commenters are 
strongly encouraged to review and provide comment on the guidance in 
conjunction with their review of and comment on this NPRM.
    As noted above, OCC regulations require that national banks and 
Federal savings associations conduct their investment activities in a 
manner that is consistent with safe and sound practices.\29\ Neither 
this NPRM, nor the proposed guidance, would change this requirement. 
The OCC expects national banks and Federal savings associations to 
continue to follow safe and sound practices in their investment 
activities.
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    \29\ 12 CFR 1.5; 12 CFR 160.1(b), 160.40(c).
---------------------------------------------------------------------------

IV. Request for Comment

    The OCC seeks comment on all aspects of this NPRM and the revised 
proposed revision to the term ``investment grade'' as it is referenced 
in the OCC's regulations pertaining to investment securities, 
securities offerings, and foreign bank capital equivalency deposits. 
Commenters are also strongly encouraged to provide comments on the 
proposed guidance the OCC released in connection with this NPRM, which 
describes how national banks and Federal savings associations could 
implement the new standards. In addition, the OCC seeks comment on the 
specific questions set forth below.
    1. Does the proposed revision to the definition of investment grade 
satisfy the OCC's stated goals of applying a standard that:
     Fosters prudent risk management;
     Is transparent, replicable, and well defined;

[[Page 73532]]

     Allows different banks or savings associations to assign 
the same or similar assessment of credit quality to the same or similar 
credit exposures;
     Allows for supervisory review;
     Differentiates among investments in the same asset class 
with different credit risk; and
     Provides for the timely and accurate measurement of 
negative and positive changes in investment quality, to the extent 
practicable?
    2. Commenters on the ANPRs suggested a number of additional 
objectives to consider in developing creditworthiness standards, 
including avoidance of regulatory arbitrage; avoidance of 
oversimplified measures; dampening systemic risk; capturing market 
complexities; identifying appropriate time horizons; and, allowing for 
accurate and timely reassessments. Does the OCC's proposed revision to 
the definition of ``investment grade'' satisfy these objectives? What 
changes could the OCC make to the proposed investment grade definition 
to better address these objectives?
    3. The OCC recognizes that any measure of creditworthiness likely 
will involve tradeoffs between more refined differentiation of 
creditworthiness and greater implementation burden. Does the proposed 
revised definition strike an appropriate balance between measurement of 
credit risk and implementation burden in considering alternative 
measures of creditworthiness? Are there other alternatives permissible 
under Dodd-Frank Section 939A that strike a more appropriate balance?
    4. The OCC notes that the proposed ``investment grade'' standard 
for national bank investment securities activities is generally 
consistent with proposals published by the SEC and the NCUA (although 
the OCC's proposed standard does not include the NCUA's provision 
specifically referencing the consideration of adverse economic 
circumstances). The OCC requests comment on whether establishing 
consistent standards is appropriate in light of the different types of 
entities subject to OCC, SEC, and NCUA jurisdiction.
    5. This proposal would apply separate creditworthiness standards 
for national bank and Federal savings association investments in 
corporate debt securities. The OCC requests comment on how best to 
align these standards consistent with section 939A's direction that 
Federal agencies shall seek to establish, to the extent feasible, 
uniform standards of creditworthiness.

V. Regulatory Analyses

A. Paperwork Reduction Act

    This notice of proposed rulemaking amends several regulations for 
which the OCC currently has approved collections of information under 
the Paperwork Reduction Act (44 U.S.C. 3501-3520) (OMB Control Nos. 
1557-0014; 1557-0190; 1557-0120; 1557-0205). The amendments in this 
proposal do not introduce any new collections of information into the 
rules, nor do they amend the rules in a way that substantively modifies 
the collections of information that OMB has previously approved. 
Therefore, no additional OMB PRA approval is required at this time.

B. Regulatory Flexibility Act Analysis

    Pursuant to section 605(b) of the Regulatory Flexibility Act,\30\ 
(RFA), the regulatory flexibility analysis otherwise required under 
section 604 of the RFA is not required if an agency certifies that the 
rule will not have a significant economic impact on a substantial 
number of small entities (defined for purposes of the RFA to include 
banks with assets less than or equal to $175 million) and publishes its 
certification and a short, explanatory statement in the Federal 
Register along with its rule.
---------------------------------------------------------------------------

    \30\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    This proposal would affect all 578 small national banks and all 288 
small federally chartered savings associations.\31\ However, because 
banks have long been expected to maintain a risk management process to 
ensure that credit risk is effectively identified, measured, monitored, 
and controlled, most if not all of the institutions affected by the 
proposed rule already engage in appropriate risk management activity. 
Although the proposed rule will affect a substantial number of small 
banks and federally chartered savings associations, it will not have a 
significant effect on a substantial number of those institutions. 
Therefore, the OCC certifies that the proposed rule would not have a 
significant impact on a substantial number of small entities.
---------------------------------------------------------------------------

    \31\ All totals are as of June 30, 2011.
---------------------------------------------------------------------------

C. Unfunded Mandates Reform Act

    Section 202 of the Unfunded Mandates Reform Act of 1995, Public Law 
104-4 (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 has determined that its proposed rule would not result in 
expenditures by state, local, and Tribal governments, or by the private 
sector, of $100 million or more. Accordingly, the OCC has not prepared 
a budgetary impact statement or specifically addressed the regulatory 
alternatives considered.

List of Subjects

12 CFR Part 1

    Banks, Banking, National banks, Reporting and recordkeeping 
requirements, Securities.

12 CFR Part 16

    National banks, Reporting and recordkeeping requirements, 
Securities.

12 CFR Part 28

    Foreign banking, National banks, Reporting and recordkeeping 
requirements.

12 CFR Part 160

    Banks, Banking, Consumer protection, Investments, manufactured 
homes, Mortgages, Reporting and recordkeeping requirements, Savings 
associations, Securities, Surety bonds.

Department of the Treasury

Office of the Comptroller of the Currency

12 CFR Chapter I

Authority and Issuance

    For the reasons stated in the preamble, the Office of the 
Comptroller of the Currency proposes to amend parts 1, 16, 28, and 160 
of chapter I of Title 12, Code of Federal Regulations as follows:

PART 1--INVESTMENT SECURITIES

    1. The authority citation for part 1 continues to read as follows:

    Authority: 12 U.S.C. 1, et seq., 12 U.S.C. 24 (Seventh), and 12 
U.S.C. 93a.

    2. In part 1, in Sec.  1.2, revise paragraphs (d) through (f), and 
(h), and (m) through (n), as follows:


Sec.  1.2  Definitions.

* * * * *
    (d) Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments

[[Page 73533]]

if the risk of default by the obligor is low and the full and timely 
repayment of principal and interest is expected.
    (e) Investment security means a marketable debt obligation that is 
investment grade and not predominately speculative in nature.
    (f) Marketable means that the security:
    (1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a 
et seq.;
    (2) Is a municipal revenue bond exempt from registration under the 
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
    (3) Is offered and sold pursuant to Securities and Exchange 
Commission Rule 144A, 17 CFR 230.144A, and investment grade; or
    (4) Can be sold with reasonable promptness at a price that 
corresponds reasonably to its fair value.
* * * * *
    (h) [reserved]
* * * * *
    (m) Type IV security means:
    (1) A small business-related security as defined in section 
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C. 
78c(a)(53)(A), that is fully secured by interests in a pool of loans to 
numerous obligors.
    (2) A commercial mortgage-related security that is offered or sold 
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a commercial mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(a)(41), that represents ownership of a 
promissory note or certificate of interest or participation that is 
directly secured by a first lien on one or more parcels of real estate 
upon which one or more commercial structures are located and that is 
fully secured by interests in a pool of loans to numerous obligors.
    (3) A residential mortgage-related security that is offered and 
sold pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C. 
77d(5), that is investment grade, or a residential mortgage-related 
security as described in section 3(a)(41) of the Securities Exchange 
Act of 1934, 15 U.S.C. 78c(a)(41)) that does not otherwise qualify as a 
Type I security.
    (n) Type V security means a security that is:
    (1) Investment grade;
    (2) Marketable;
    (3) Not a Type IV security; and
    (4) Fully secured by interests in a pool of loans to numerous 
obligors and in which a national bank could invest directly.
    3. In Sec.  1.3, revise paragraphs (e) and (h) as follows:


Sec.  1.3  Limitations on dealing in, underwriting, and purchase and 
sale of securities.

* * * * *
    (e) Type IV securities. A national bank may purchase and sell Type 
IV securities for its own account. The amount of the Type IV securities 
that a bank may purchase and sell is not limited to a specified 
percentage of the bank's capital and surplus.
* * * * *
    (h) Pooled investments--(1) General. A national bank may purchase 
and sell for its own account investment company shares provided that:
    (i) The portfolio of the investment company consists exclusively of 
assets that the national bank may purchase and sell for its own 
account; and
    (ii) The bank's holdings of investment company shares do not exceed 
the limitations in section 1.4(e).
    (2) Other issuers. The OCC may determine that a national bank may 
invest in an entity that is exempt from registration as an investment 
company under section 3(c)(1) of the Investment Company Act of 1940, 
provided that the portfolio of the entity consists exclusively of 
assets that a national bank may purchase and sell for its own account.
    (3) Investments made under this paragraph (h) must comply with 
section 1.5 of this part, conform with applicable published OCC 
precedent, and must be:
    (i) Marketable and investment grade, or
    (ii) Satisfy the requirements of Sec.  1.3(i).
* * * * *

PART 5--RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES

    4. The authority citation for part 5 continues to read as follows:

    Authority: 12 U.S.C. 1, et seq., 12 U.S.C. 93a, 215a-2, 215a-3, 
481, and section 5136A of the Revised Statutes (12 U.S.C. 24a).

    5. In Sec.  5.39, revise paragraphs (g)(3) through (5) and (j)(2) 
to read as follows:


Sec.  5.39  Financial subsidiaries.

* * * * *
    (g) * * *
    (3) The national bank is one of the 100 largest insured banks, 
determined on the basis of the bank's consolidated total assets at the 
end of the calendar year; and
    (4) The bank has not fewer than one issue of outstanding debt that 
meets such applicable standard or criteria established by the Treasury 
Department and the Federal Reserve Board pursuant to Section 5136A of 
title LXII of the Revised Statutes (12 U.S.C. 24a).
    (5) Paragraph (g)(3) does not apply if the financial subsidiary is 
engaged solely in activities in an agency capacity.
* * * * *
    (j) * * *
    (2) Eligible debt requirement. A national bank that does not 
continue to meet the qualification requirements set forth in paragraphs 
(g)(3) and (g)(4) of this section, applicable where the bank's 
financial subsidiary is engaged in activities other than solely in an 
agency capacity, may not directly or through a subsidiary, purchase or 
acquire any additional equity capital of any such financial subsidiary 
until the bank meets the requirement in paragraph (g)(3) and (g)(4) of 
this section. For purposes of this paragraph (j)(2), the term ``equity 
capital'' includes, in addition to any equity investment, any debt 
instrument issued by the financial subsidiary if the instrument 
qualifies as capital of the subsidiary under federal or state law, 
regulation, or interpretation applicable to the subsidiary.
* * * * *

PART 16--SECURITIES OFFERING DISCLOSURE RULES

    6. The authority citation for part 16 continues to read as follows:

    Authority: 12 U.S.C. 1, et seq., 12 U.S.C. 93a.
    7. In Sec.  16.2, revise paragraph (g) as follows:


Sec.  16.2  Definitions.

* * * * *
    (g) Investment grade means the issuer of a security has an adequate 
capacity to meet financial commitments under the security for the 
projected life of the asset or exposure. An issuer has an adequate 
capacity to meet financial commitments if the risk of default by the 
obligor is low and the full and timely repayment of principal and 
interest is expected.

* * * * *
    8. In Sec.  16.6, revise paragraph (a)(4) as follows:


Sec.  16.6  Sales of nonconvertible debt.

    (a) * * *
    (4) The debt is investment grade.
* * * * *

PART 28--INTERNATIONAL BANKING ACTIVITIES

    9. The authority citation for part 28 continues to read as follows:

    Authority: 12 U.S.C. 1 et seq., 24 (Seventh), 93a, 161, 602, 
1818, 3101 et seq., and 3901 et seq.

    10. In Sec.  28.15, revise paragraph (a)(1)(iii) as follows:

[[Page 73534]]

Sec.  28.15  Capital equivalency deposits.

    (a) * * * (1) * * *
    (iii) Certificates of deposit, payable in the United States, and 
banker's acceptances, provided that, in either case, the issuer has an 
adequate capacity to meet financial commitments for the projected life 
of the asset or exposure. An issuer has an adequate capacity to meet 
financial commitments if the risk of default by the obligor is low and 
the full and timely repayment of principal and interest is expected
* * * * *

PART 160--LENDING AND INVESTMENT

    11. The authority citation for part 160 continues to read as 
follows:

    Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1701j-3, 
1828, 3803, 3806, 5412(b)(2)(B); 42 U.S.C. 4106.

    12. In Sec.  160.3, add the following definition in alphabetical 
order:


Sec.  160.3  Definitions.

* * * * *
    Investment grade means a security that meets the creditworthiness 
standards described in 12 U.S.C. 1831e.
* * * * *
    13. In Sec.  160.40, revise paragraphs (a)(1)(i) and (a)(2)(ii) as 
follows:


Sec.  160.40  Commercial paper and corporate debt securities.

    (a) * * * (1) * * *
    (i) Investment grade as of the date of purchase; or
    (ii) Guaranteed by a company having outstanding paper that meets 
the standard set forth in paragraph (a)(1)(i) of this section.
    (2) * * *
    (i) * * *
    (ii) Investment grade.
* * * * *
    14. In Sec.  160.42, revise paragraphs (a) and (d) to read as 
follows:


Sec.  160.42  State and local government obligations.

    (a) Pursuant to HOLA section 5(c)(1)(H), a Federal savings 
association may invest in obligations issued by any state, territory, 
possession, or political subdivision thereof (``governmental entity''), 
subject to appropriate underwriting and the following conditions:

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Aggregate limitation                                       Per-issuer limitation
--------------------------------------------------------------------------------------------------------------------------------------------------------
(1) General obligations..........  None......................................................  None.
(2) Other obligations of a         None......................................................  10% of the institution's total capital.
 governmental entity (e.g.,
 revenue bonds) if the issuer has
 an adequate capacity to meet
 financial commitments under the
 security for the projected life
 of the asset or exposure. An
 issuer has an adequate capacity
 to meet financial commitments if
 the risk of default by the
 obligor is low and the full and
 timely repayment of principal
 and interest is expected.
(3) Obligations of a governmental  As approved by the OCC....................................  10% of the institution's total capital.
 entity that do not qualify under
 any other paragraph but are
 approved by the OCC.
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