[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2011 Edition]
[From the U.S. Government Printing Office]
[[Page i]]
Title 12
Parts 1 to 199
Revised as of January 1, 2011
Banks and Banking
________________________
Containing a codification of documents of general
applicability and future effect
As of January 1, 2011
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
A Special Edition of the Federal Register
[[Page ii]]
U.S. GOVERNMENT OFFICIAL EDITION NOTICE
Legal Status and Use of Seals and Logos
The seal of the National Archives and Records Administration
(NARA) authenticates the Code of Federal Regulations (CFR) as
the official codification of Federal regulations established
under the Federal Register Act. Under the provisions of 44
U.S.C. 1507, the contents of the CFR, a special edition of the
Federal Register, shall be judicially noticed. The CFR is
prima facie evidence of the original documents published in
the Federal Register (44 U.S.C. 1510).
It is prohibited to use NARA's official seal and the stylized Code
of Federal Regulations logo on any republication of this
material without the express, written permission of the
Archivist of the United States or the Archivist's designee.
Any person using NARA's official seals and logos in a manner
inconsistent with the provisions of 36 CFR part 1200 is
subject to the penalties specified in 18 U.S.C. 506, 701, and
1017.
Use of ISBN Prefix
This is the Official U.S. Government edition of this publication
and is herein identified to certify its authenticity. Use of
the 0-16 ISBN prefix is for U.S. Government Printing Office
Official Editions only. The Superintendent of Documents of the
U.S. Government Printing Office requests that any reprinted
edition clearly be labeled as a copy of the authentic work
with a new ISBN.
U . S . G O V E R N M E N T P R I N T I N G O F F I C E
------------------------------------------------------------------
U.S. Superintendent of Documents Washington, DC
20402-0001
http://bookstore.gpo.gov
Phone: toll-free (866) 512-1800; DC area (202) 512-1800
[[Page iii]]
Table of Contents
Page
Explanation................................................. v
Title 12:
Chapter I--Comptroller of the Currency, Department
of the Treasury 3
Finding Aids:
Table of CFR Titles and Chapters........................ 497
Alphabetical List of Agencies Appearing in the CFR...... 517
List of CFR Sections Affected........................... 527
[[Page iv]]
----------------------------
Cite this Code: CFR
To cite the regulations in
this volume use title,
part and section number.
Thus, 12 CFR 1.1 refers to
title 12, part 1, section
1.
----------------------------
[[Page v]]
EXPLANATION
The Code of Federal Regulations is a codification of the general and
permanent rules published in the Federal Register by the Executive
departments and agencies of the Federal Government. The Code is divided
into 50 titles which represent broad areas subject to Federal
regulation. Each title is divided into chapters which usually bear the
name of the issuing agency. Each chapter is further subdivided into
parts covering specific regulatory areas.
Each volume of the Code is revised at least once each calendar year
and issued on a quarterly basis approximately as follows:
Title 1 through Title 16.................................as of January 1
Title 17 through Title 27..................................as of April 1
Title 28 through Title 41...................................as of July 1
Title 42 through Title 50................................as of October 1
The appropriate revision date is printed on the cover of each
volume.
LEGAL STATUS
The contents of the Federal Register are required to be judicially
noticed (44 U.S.C. 1507). The Code of Federal Regulations is prima facie
evidence of the text of the original documents (44 U.S.C. 1510).
HOW TO USE THE CODE OF FEDERAL REGULATIONS
The Code of Federal Regulations is kept up to date by the individual
issues of the Federal Register. These two publications must be used
together to determine the latest version of any given rule.
To determine whether a Code volume has been amended since its
revision date (in this case, January 1, 2011), consult the ``List of CFR
Sections Affected (LSA),'' which is issued monthly, and the ``Cumulative
List of Parts Affected,'' which appears in the Reader Aids section of
the daily Federal Register. These two lists will identify the Federal
Register page number of the latest amendment of any given rule.
EFFECTIVE AND EXPIRATION DATES
Each volume of the Code contains amendments published in the Federal
Register since the last revision of that volume of the Code. Source
citations for the regulations are referred to by volume number and page
number of the Federal Register and date of publication. Publication
dates and effective dates are usually not the same and care must be
exercised by the user in determining the actual effective date. In
instances where the effective date is beyond the cut-off date for the
Code a note has been inserted to reflect the future effective date. In
those instances where a regulation published in the Federal Register
states a date certain for expiration, an appropriate note will be
inserted following the text.
OMB CONTROL NUMBERS
The Paperwork Reduction Act of 1980 (Pub. L. 96-511) requires
Federal agencies to display an OMB control number with their information
collection request.
[[Page vi]]
Many agencies have begun publishing numerous OMB control numbers as
amendments to existing regulations in the CFR. These OMB numbers are
placed as close as possible to the applicable recordkeeping or reporting
requirements.
OBSOLETE PROVISIONS
Provisions that become obsolete before the revision date stated on
the cover of each volume are not carried. Code users may find the text
of provisions in effect on a given date in the past by using the
appropriate numerical list of sections affected. For the period before
January 1, 2001, consult either the List of CFR Sections Affected, 1949-
1963, 1964-1972, 1973-1985, or 1986-2000, published in eleven separate
volumes. For the period beginning January 1, 2001, a ``List of CFR
Sections Affected'' is published at the end of each CFR volume.
``[RESERVED]'' TERMINOLOGY
The term ``[Reserved]'' is used as a place holder within the Code of
Federal Regulations. An agency may add regulatory information at a
``[Reserved]'' location at any time. Occasionally ``[Reserved]'' is used
editorially to indicate that a portion of the CFR was left vacant and
not accidentally dropped due to a printing or computer error.
INCORPORATION BY REFERENCE
What is incorporation by reference? Incorporation by reference was
established by statute and allows Federal agencies to meet the
requirement to publish regulations in the Federal Register by referring
to materials already published elsewhere. For an incorporation to be
valid, the Director of the Federal Register must approve it. The legal
effect of incorporation by reference is that the material is treated as
if it were published in full in the Federal Register (5 U.S.C. 552(a)).
This material, like any other properly issued regulation, has the force
of law.
What is a proper incorporation by reference? The Director of the
Federal Register will approve an incorporation by reference only when
the requirements of 1 CFR part 51 are met. Some of the elements on which
approval is based are:
(a) The incorporation will substantially reduce the volume of
material published in the Federal Register.
(b) The matter incorporated is in fact available to the extent
necessary to afford fairness and uniformity in the administrative
process.
(c) The incorporating document is drafted and submitted for
publication in accordance with 1 CFR part 51.
What if the material incorporated by reference cannot be found? If
you have any problem locating or obtaining a copy of material listed as
an approved incorporation by reference, please contact the agency that
issued the regulation containing that incorporation. If, after
contacting the agency, you find the material is not available, please
notify the Director of the Federal Register, National Archives and
Records Administration, 8601 Adelphi Road, College Park, MD 20740-6001,
or call 202-741-6010.
CFR INDEXES AND TABULAR GUIDES
A subject index to the Code of Federal Regulations is contained in a
separate volume, revised annually as of January 1, entitled CFR Index
and Finding Aids. This volume contains the Parallel Table of Authorities
and Rules. A list of CFR titles, chapters, subchapters, and parts and an
alphabetical list of agencies publishing in the CFR are also included in
this volume.
An index to the text of ``Title 3--The President'' is carried within
that volume.
[[Page vii]]
The Federal Register Index is issued monthly in cumulative form.
This index is based on a consolidation of the ``Contents'' entries in
the daily Federal Register.
A List of CFR Sections Affected (LSA) is published monthly, keyed to
the revision dates of the 50 CFR titles.
REPUBLICATION OF MATERIAL
There are no restrictions on the republication of material appearing
in the Code of Federal Regulations.
INQUIRIES
For a legal interpretation or explanation of any regulation in this
volume, contact the issuing agency. The issuing agency's name appears at
the top of odd-numbered pages.
For inquiries concerning CFR reference assistance, call 202-741-6000
or write to the Director, Office of the Federal Register, National
Archives and Records Administration, 8601 Adelphi Road, College Park, MD
20740-6001 or e-mail [email protected].
SALES
The Government Printing Office (GPO) processes all sales and
distribution of the CFR. For payment by credit card, call toll-free,
866-512-1800, or DC area, 202-512-1800, M-F 8 a.m. to 4 p.m. e.s.t. or
fax your order to 202-512-2104, 24 hours a day. For payment by check,
write to: US Government Printing Office - New Orders, P.O. Box 979050,
St. Louis, MO 63197-9000.
ELECTRONIC SERVICES
The full text of the Code of Federal Regulations, the LSA (List of
CFR Sections Affected), The United States Government Manual, the Federal
Register, Public Laws, Public Papers of the Presidents of the United
States, Compilation of Presidential Documents and the Privacy Act
Compilation are available in electronic format via www.ofr.gov. For more
information, contact the GPO Customer Contact Center, U.S. Government
Printing Office. Phone 202-512-1800, or 866-512-1800 (toll-free). E-
mail, [email protected].
The Office of the Federal Register also offers a free service on the
National Archives and Records Administration's (NARA) World Wide Web
site for public law numbers, Federal Register finding aids, and related
information. Connect to NARA's web site at www.archives.gov/federal-
register.
Raymond A. Mosley,
Director,
Office of the Federal Register.
January 1, 2011.
[[Page ix]]
THIS TITLE
Title 12--Banks and Banking is composed of seven volumes. The parts
in these volumes are arranged in the following order: Parts 1-199, 200-
219, 220-299, 300-499, 500-599, part 600-899, and 900-end. The first
volume containing parts 1-199 is comprised of chapter I--Comptroller of
the Currency, Department of the Treasury. The second and third volumes
containing parts 200-299 are comprised of chapter II--Federal Reserve
System. The fourth volume containing parts 300-499 is comprised of
chapter III--Federal Deposit Insurance Corporation and chapter IV--
Export-Import Bank of the United States. The fifth volume containing
parts 500-599 is comprised of chapter V--Office of Thrift Supervision,
Department of the Treasury. The sixth volume containing parts 600-899 is
comprised of chapter VI--Farm Credit Administration, chapter VII--
National Credit Union Administration, chapter VIII--Federal Financing
Bank. The seventh volume containing part 900-end is comprised of chapter
IX--Federal Housing Finance Board, chapter XI--Federal Financial
Institutions Examination Council, chapter XIV--Farm Credit System
Insurance Corporation, chapter XV--Department of the Treasury, chapter
XVII--Office of Federal Housing Enterprise Oversight, Department of
Housing and Urban Development and chapter XVIII--Community Development
Financial Institutions Fund, Department of the Treasury. The contents of
these volumes represent all of the current regulations codified under
this title of the CFR as of January 1, 2011.
For this volume, Jonn V. Lilyea was Chief Editor. The Code of
Federal Regulations publication program is under the direction of
Michael L. White, assisted by Ann Worley.
[[Page 1]]
TITLE 12--BANKS AND BANKING
(This book contains parts 1 to 199)
--------------------------------------------------------------------
Part
chapter i--Comptroller of the Currency, Department of the
Treasury.................................................. 1
[[Page 3]]
CHAPTER I--COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE TREASURY
--------------------------------------------------------------------
Part Page
1 Investment securities....................... 5
2 Sales of credit life insurance.............. 12
3 Minimum capital ratios; issuance of
directives.............................. 13
4 Organization and functions, availability and
release of information, contracting
outreach program, post-employment
restrictions for senior examiners....... 101
5 Rules, policies, and procedures for
corporate activities.................... 123
6 Prompt corrective action.................... 178
7 Bank activities and operations.............. 185
8 Assessment of fees.......................... 208
9 Fiduciary activities of national banks...... 213
10 Municipal securities dealers................ 223
11 Securities Exchange Act disclosure rules.... 224
12 Recordkeeping and confirmation requirements
for securities transactions............. 225
13 Government securities sales practices....... 233
14 Consumer protection in sales of insurance... 236
15 [Reserved]
16 Securities offering disclosure rules........ 240
18 Disclosure of financial and other
information by national banks........... 246
19 Rules of practice and procedure............. 248
21 Minimum security devices and procedures,
reports of suspicious activities, and
Bank Secrecy Act Compliance Program..... 290
22 Loans in areas having special flood hazards. 295
23 Leasing..................................... 299
24 Community and economic development entities,
community development projects, and
other public welfare investments........ 302
25 Community Reinvestment Act and Interstate
Deposit Production regulations.......... 312
26 Management official interlocks.............. 335
[[Page 4]]
27 Fair housing home loan data system.......... 339
28 International banking activities............ 350
29 [Reserved]
30 Safety and soundness standards.............. 364
31 Extensions of credit to insiders and
transactions with affiliates............ 378
32 Lending limits.............................. 382
33 [Reserved]
34 Real estate lending and appraisals.......... 394
35 Disclosure and reporting of CRA-related
agreements.............................. 415
36 [Reserved]
37 Debt cancellation contracts and debt
suspension agreements................... 428
38-39 [Reserved]
40 Privacy of consumer financial information... 433
41 Fair Credit Reporting....................... 461
42-199 [Reserved]
[[Page 5]]
PART 1_INVESTMENT SECURITIES--Table of Contents
Sec.
1.1 Authority, purpose, scope, and reservation of authority.
1.2 Definitions.
1.3 Limitations on dealing in, underwriting, and purchase and sale of
securities.
1.4 Calculation of limits.
1.5 Safe and sound banking practices; credit information required.
1.6 Convertible securities.
1.7 Securities held in satisfaction of debts previously contracted;
holding period; disposal; accounting treatment; non-
speculative purpose.
1.8 Nonconforming investments.
Interpretations
1.100 Indirect general obligations.
1.110 Taxing powers of a State or political subdivision.
1.120 Prerefunded or escrowed bonds and obligations secured by Type I
securities.
1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
Authority: 12 U.S.C. 1 et seq., 24 (Seventh), and 93a.
Source: 61 FR 63982, Dec. 2, 1996, unless otherwise noted.
Sec. 1.1 Authority, purpose, scope, and reservation of authority.
(a) Authority. This part is issued pursuant to 12 U.S.C. 1 et seq.,
12 U.S.C. 24 (Seventh), and 12 U.S.C. 93a.
(b) Purpose This part prescribes standards under which national
banks may purchase, sell, deal in, underwrite, and hold securities,
consistent with the authority contained in 12 U.S.C. 24 (Seventh) and
safe and sound banking practices.
(c) Scope.The standards set forth in this part apply to national
banks and Federal branches of foreign banks.Further, pursuant to 12
U.S.C. 335, State banks that are members of the Federal Reserve System
are subject to the same limitations and conditions that apply to
national banks in connection with purchasing, selling, dealing in, and
underwriting securities and stock. In addition to activities authorized
under this part, foreign branches of national banks are authorized to
conduct international activities and invest in securities pursuant to 12
CFR part 211.
(d) Reservation of authority. The OCC may determine, on a case-by-
case basis, that a national bank may acquire an investment security
other than an investment security of a type set forth in this part,
provided the OCC determines that the bank's investment is consistent
with 12 U.S.C. section 24 (Seventh) and with safe and sound banking
practices. The OCC will consider all relevant factors, including the
risk characteristics of the particular investment in comparison with the
risk characteristics of investments that the OCC has previously
authorized, and the bank's ability effectively to manage such risks. The
OCC may impose limits or conditions in connection with approval of an
investment security under this subsection. Investment securities that
the OCC determines are permissible in accordance with this paragraph
constitute eligible investments for purposes of 12 U.S.C. 24.
[61 FR 63982, Dec. 2, 1996, as amended at 73 FR 22235, Apr. 24, 2008]
Sec. 1.2 Definitions.
(a) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's
risk-based capital standards set forth in appendix A to 12 CFR part 3
(or comparable capital guidelines of the appropriate Federal banking
agency) as reported in the bank's Consolidated Report of Condition and
Income filed under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of
a state member bank); plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital described in paragraph (a)(1) of this section, as
reported in the bank's Consolidated Report of Condition and Income filed
under 12 U.S.C. 161 (or under 12 U.S.C. 1817 in the case of a state
member bank).
(b) General obligation of a State or political subdivision means:
(1) An obligation supported by the full faith and credit of an
obligor possessing general powers of taxation, including property
taxation; or
(2) An obligation payable from a special fund or by an obligor not
possessing general powers of taxation,
[[Page 6]]
when an obligor possessing general powers of taxation, including
property taxation, has unconditionally promised to make payments into
the fund or otherwise provide funds to cover all required payments on
the obligation.
(c) Investment company means an investment company, including a
mutual fund, registered under section 8 of the Investment Company Act of
1940, 15 U.S.C. 80a-8.
(d) Investment grade means a security that is rated in one of the
four highest rating categories by:
(1) Two or more NRSROs; or
(2) One NRSRO if the security has been rated by only one NRSRO.
(e) Investment security means a marketable debt obligation that is
not predominantly speculative in nature. A security is not predominantly
speculative in nature if it is rated investment grade. When a security
is not rated, the security must be the credit equivalent of a security
rated investment grade.
(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 rated investment grade or is
the credit equivalent of investment grade; or
(4) Can be sold with reasonable promptness at a price that
corresponds reasonably to its fair value.
(g) Municipal bonds means obligations of a State or political
subdivision other than general obligations, and includes limited
obligation bonds, revenue bonds, and obligations that satisfy the
requirements of section 142(b)(1) of the Internal Revenue Code of 1986
issued by or on behalf of any State or political subdivision of a State,
including any municipal corporate instrumentality of 1 or more States,
or any public agency or authority of any State or political subdivision
of a State.
(h) NRSRO means a nationally recognized statistical rating
organization.
(i) Political subdivision means a county, city, town, or other
municipal corporation, a public authority, and generally any publicly-
owned entity that is an instrumentality of a State or of a municipal
corporation.
(j) Type I security means:
(1) Obligations of the United States;
(2) Obligations issued, insured, or guaranteed by a department or an
agency of the United States Government, if the obligation, insurance, or
guarantee commits the full faith and credit of the United States for the
repayment of the obligation;
(3) Obligations issued by a department or agency of the United
States, or an agency or political subdivision of a State of the United
States, that represent an interest in a loan or a pool of loans made to
third parties, if the full faith and credit of the United States has
been validly pledged for the full and timely payment of interest on, and
principal of, the loans in the event of non-payment by the third party
obligor(s);
(4) General obligations of a State of the United States or any
political subdivision thereof; and municipal bonds if the national bank
is well capitalized as defined in 12 CFR 6.4(b)(1);
(5) Obligations authorized under 12 U.S.C. 24 (Seventh) as
permissible for a national bank to deal in, underwrite, purchase, and
sell for the bank's own account, including qualified Canadian government
obligations; and
(6) Other securities the OCC determines to be eligible as Type I
securities under 12 U.S.C. 24 (Seventh).
(k) Type II security means an investment security that represents:
(1) Obligations issued by a State, or a political subdivision or
agency of a State, for housing, university, or dormitory purposes that
would not satisfy the definition of Type I securities pursuant to
paragraph (j) of Sec. 1.2;
(2) Obligations of international and multilateral development banks
and organizations listed in 12 U.S.C. 24 (Seventh);
(3) Other obligations listed in 12 U.S.C. 24 (Seventh) as
permissible for a bank to deal in, underwrite, purchase, and sell for
the bank's own account, subject to a limitation per obligor of 10
percent of the bank's capital and surplus; and
(4) Other securities the OCC determines to be eligible as Type II
securities under 12 U.S.C. 24 (Seventh).
[[Page 7]]
(l) Type III security means an investment security that does not
qualify as a Type I, II, IV, or V security. Examples of Type III
securities include corporate bonds and municipal bonds that do not
satisfy the definition of Type I securities pursuant to paragraph (j) of
Sec. 1.2 or the definition of Type II securities pursuant to paragraph
(k) of Sec. 1.2.
(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 rated investment grade or is the credit
equivalent thereof, 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 rated investment grade or is the credit equivalent
thereof, 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 is rated investment grade in one of the two highest
investment grade rating categories, and 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 rated investment grade or is the credit equivalent
thereof, 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 is rated investment grade in one of the two highest
investment grade rating categories, and that does not otherwise qualify
as a Type I security.
(n) Type V security means a security that is:
(1) Rated 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.
[61 FR 63982, Dec. 2, 1996, as amended at 66 FR 34791, July 2, 2001]
Sec. 1.3 Limitations on dealing in, underwriting, and purchase and sale of
securities.
(a) Type I securities. A national bank may deal in, underwrite,
purchase, and sell Type I securities for its own account. The amount of
Type I securities that the bank may deal in, underwrite, purchase, and
sell is not limited to a specified percentage of the bank's capital and
surplus.
(b) Type II securities. A national bank may deal in, underwrite,
purchase, and sell Type II securities for its own account, provided the
aggregate par value of Type II securities issued by any one obligor held
by the bank does not exceed 10 percent of the bank's capital and
surplus. In applying this limitation, a national bank shall take account
of Type II securities that the bank is legally committed to purchase or
to sell in addition to the bank's existing holdings.
(c) Type III securities. A national bank may purchase and sell Type
III securities for its own account, provided the aggregate par value of
Type III securities issued by any one obligor held by the bank does not
exceed 10 percent of the bank's capital and surplus. In applying this
limitation, a national bank shall take account of Type III securities
that the bank is legally committed to purchase or to sell in addition to
the bank's existing holdings.
(d) Type II and III securities; other investment securities
limitations. A national bank may not hold Type II and III securities
issued by any one obligor with an aggregate par value exceeding 10
percent of the bank's capital and surplus. However, if the proceeds of
each issue are to be used to acquire and lease real estate and related
facilities to economically and legally separate industrial tenants, and
if each issue is payable solely from and secured by a first lien on the
revenues to be derived from rentals paid by the lessee under net
noncancellable leases, the bank may apply the 10 percent investment
limitation separately to each issue of a single obligor.
[[Page 8]]
(e) Type IV securities--(1) General. A national bank may purchase
and sell Type IV securities for its own account. Except as described in
paragraph (e)(2) of this section, 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.
(2) Limitation on small business-related securities rated in the
third and fourth highest rating categories by an NRSRO. A national bank
may hold small business-related securities, as defined in section
3(a)(53)(A) of the Securities Exchange Act of 1934, 15 U.S.C.
78c(a)(53)(A), of any one issuer with an aggregate par value not
exceeding 25 percent of the bank's capital and surplus if those
securities are rated investment grade in the third or fourth highest
investment grade rating categories. In applying this limitation, a
national bank shall take account of securities that the bank is legally
committed to purchase or to sell in addition to the bank's existing
holdings. No percentage of capital and surplus limit applies to small
business related securities rated investment grade in the highest two
investment grade rating categories.
(f) Type V securities. A national bank may purchase and sell Type V
securities for its own account provided that the aggregate par value of
Type V securities issued by any one issuer held by the bank does not
exceed 25 percent of the bank's capital and surplus. In applying this
limitation, a national bank shall take account of Type V securities that
the bank is legally committed to purchase or to sell in addition to the
bank's existing holdings.
(g) Securitization. A national bank may securitize and sell assets
that it holds, as a part of its banking business. The amount of
securitized loans and obligations that a bank may 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 Sec. 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 Sec.
1.5 of this part, conform with applicable published OCC precedent, and
must be:
(i) Marketable and rated investment grade or the credit equivalent
of a security rated investment grade, or
(ii) Satisfy the requirements of Sec. 1.3(i).
(i) Securities held based on estimates of obligor's performance. (1)
Notwithstanding Sec. Sec. 1.2(d) and (e), a national bank may treat a
debt security as an investment security for purposes of this part if the
security is marketable and the bank concludes, on the basis of estimates
that the bank reasonably believes are reliable, that the obligor will be
able to satisfy its obligations under that security.
(2) The aggregate par value of securities treated as investment
securities under paragraph (i)(1) of this section may not exceed 5
percent of the bank's capital and surplus.
[61 FR 63982, Dec. 2, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 73
FR 22235, Apr. 24, 2008]
Sec. 1.4 Calculation of limits.
(a) Calculation date. For purposes of determining compliance with 12
U.S.C. 24 (Seventh) and this part, a bank shall determine its investment
limitations as of the most recent of the following dates:
(1) The last day of the preceding calendar quarter; or
(2) The date on which there is a change in the bank's capital
category for purposes of 12 U.S.C. 1831o and 12 CFR 6.3.
(b) Effective date. (1) A bank's investment limit calculated in
accordance with paragraph (a)(1) of this section
[[Page 9]]
will be effective on the earlier of the following dates:
(i) The date on which the bank's Consolidated Report of Condition
and Income (Call Report) is submitted; or
(ii) The date on which the bank's Consolidated Report of Condition
and Income is required to be submitted.
(2) A bank's investment limit calculated in accordance with
paragraph (a)(2) of this section will be effective on the date that the
limit is to be calculated.
(c) Authority of OCC to require more frequent calculations. If the
OCC determines for safety and soundness reasons that a bank should
calculate its investment limits more frequently than required by
paragraph (a) of this section, the OCC may provide written notice to the
bank directing the bank to calculate its investment limitations at a
more frequent interval. The bank shall thereafter calculate its
investment limits at that interval until further notice.
(d) Calculation of Type III and Type V securities holdings--(1)
General. In calculating the amount of its investment in Type III or Type
V securities issued by any one obligor, a bank shall aggregate:
(i) Obligations issued by obligors that are related directly or
indirectly through common control; and
(ii) Securities that are credit enhanced by the same entity.
(2) Aggregation by type. The aggregation requirement in paragraph
(d)(1) of this section applies separately to the Type III and Type V
securities held by a bank.
(e) Limit on investment company holdings--(1) General. In
calculating the amount of its investment in investment company shares
under this part, a bank shall use reasonable efforts to calculate and
combine its pro rata share of a particular security in the portfolio of
each investment company with the bank's direct holdings of that
security. The bank's direct holdings of the particular security and the
bank's pro rata interest in the same security in the investment
company's portfolio may not, in the aggregate, exceed the investment
limitation that would apply to that security.
(2) Alternate limit for diversified investment companies. A national
bank may elect not to combine its pro rata interest in a particular
security in an investment company with the bank's direct holdings of
that security if:
(i) The investment company's holdings of the securities of any one
issuer do not exceed 5 percent of its total portfolio; and
(ii) The bank's total holdings of the investment company's shares do
not exceed the most stringent investment limitation that would apply to
any of the securities in the company's portfolio if those securities
were purchased directly by the bank.
Sec. 1.5 Safe and sound banking practices; credit information required.
(a) A national bank shall adhere to safe and sound banking practices
and the specific requirements of this part in conducting the activities
described in Sec. 1.3. The bank shall consider, as appropriate, the
interest rate, credit, liquidity, price, foreign exchange, transaction,
compliance, strategic, and reputation risks presented by a proposed
activity, and the particular activities undertaken by the bank must be
appropriate for that bank.
(b) In conducting these activities, the bank shall determine that
there is adequate evidence that an obligor possesses resources
sufficient to provide for all required payments on its obligations, or,
in the case of securities deemed to be investment securities on the
basis of reliable estimates of an obligor's performance, that the bank
reasonably believes that the obligor will be able to satisfy the
obligation.
(c) Each bank shall maintain records available for examination
purposes adequate to demonstrate that it meets the requirements of this
part. The bank may store the information in any manner that can be
readily retrieved and reproduced in a readable form.
Sec. 1.6 Convertible securities.
A national bank may not purchase securities convertible into stock
at the option of the issuer.
[[Page 10]]
Sec. 1.7 Securities held in satisfaction of debts previously contracted;
holding period; disposal; accounting treatment; non-speculative purpose.
(a) Securities held in satisfaction of debts previously contracted.
The restrictions and limitations of this part, other than those set
forth in paragraphs (b),(c), and (d) of this section, do not apply to
securities acquired:
(1) Through foreclosure on collateral;
(2) In good faith by way of compromise of a doubtful claim; or
(3) To avoid loss in connection with a debt previously contracted.
(b) Holding period. A national bank holding securities pursuant to
paragraph (a) of this section may do so for a period not to exceed five
years from the date that ownership of the securities was originally
transferred to the bank. The OCC may extend the holding period for up to
an additional five years if a bank provides a clearly convincing
demonstration as to why an additional holding period is needed.
(c) Accounting treatment. A bank shall account for securities held
pursuant to paragraph (a) of this section in accordance with Generally
Accepted Accounting Principles.
(d) Non-speculative purpose. A bank may not hold securities pursuant
to paragraph (a) of this section for speculative purposes.
Sec. 1.8 Nonconforming investments.
(a) A national bank's investment in securities that no longer
conform to this part but conformed when made will not be deemed in
violation but instead will be treated as nonconforming if the reason why
the investment no longer conforms to this part is because:
(1) The bank's capital declines;
(2) Issuers, obligors, or credit-enhancers merge;
(3) Issuers become related directly or indirectly through common
control;
(4) The investment securities rules change;
(5) The security no longer qualifies as an investment security; or
(6) Other events identified by the OCC occur.
(b) A bank shall exercise reasonable efforts to bring an investment
that is nonconforming as a result of events described in paragraph (a)
of this section into conformity with this part unless to do so would be
inconsistent with safe and sound banking practices.
Interpretations
Sec. 1.100 Indirect general obligations.
(a) Obligation issued by an obligor not possessing general powers of
taxation. Pursuant to Sec. 1.2(b), an obligation issued by an obligor
not possessing general powers of taxation qualifies as a general
obligation of a State or political subdivision for the purposes of 12
U.S.C. 24 (Seventh), if a party possessing general powers of taxation
unconditionally promises to make sufficient funds available for all
required payments in connection with the obligation.
(b) Indirect commitment of full faith and credit. The indirect
commitment of the full faith and credit of a State or political
subdivision (that possesses general powers of taxation) in support of an
obligation may be demonstrated by any of the following methods, alone or
in combination, when the State or political subdivision pledges its full
faith and credit in support of the obligation.
(1) Lease/rental agreement. The lease agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise to pay rentals that,
together with any other available funds, are sufficient for the timely
payment of interest on, and principal of, the obligation. These lease/
rental agreement may, for instance, provide support for obligations
financing the acquisition or operation of public projects in the areas
of education, medical care, transportation, recreation, public
buildings, and facilities.
(2) Service/purchase agreement. The agreement must be valid and
binding on the State or the political subdivision, and the State or
political subdivision must unconditionally promise in the agreement to
make payments for services or resources provided through or by the
issuer of the obligation. These payments, together with any other
available funds, must be sufficient for the timely payment of interest
on, and principal of, the obligation.
[[Page 11]]
An agreement to purchase municipal sewer, water, waste disposal, or
electric services may, for instance, provide support for obligations
financing the construction or acquisition of facilities supplying those
services.
(3) Refillable debt service reserve fund. The reserve fund must at
least equal the amount necessary to meet the annual payment of interest
on, and principal of, the obligation as required by applicable law. The
maintenance of a refillable reserve fund may be provided, for instance,
by statutory direction for an appropriation, or by statutory automatic
apportionment and payment from the State funds of amounts necessary to
restore the fund to the required level.
(4) Other grants or support. A statutory provision or agreement must
unconditionally commit the State or the political subdivision to provide
funds which, together with other available funds, are sufficient for the
timely payment of interest on, and principal of, the obligation. Those
funds may, for instance, be supplied in the form of annual grants or may
be advanced whenever the other available revenues are not sufficient for
the payment of principal and interest.
Sec. 1.110 Taxing powers of a State or political subdivision.
(a) An obligation is considered supported by the full faith and
credit of a State or political subdivision possessing general powers of
taxation when the promise or other commitment of the State or the
political subdivision will produce funds, which (together with any other
funds available for the purpose) will be sufficient to provide for all
required payments on the obligation. In order to evaluate whether a
commitment of a State or political subdivision is likely to generate
sufficient funds, a bank shall consider the impact of any possible
limitations regarding the State's or political subdivision's taxing
powers, as well as the availability of funds in view of the projected
revenues and expenditures. Quantitative restrictions on the general
powers of taxation of the State or political subdivision do not
necessarily mean that an obligation is not supported by the full faith
and credit of the State or political subdivision. In such case, the bank
shall determine the eligibility of obligations by reviewing, on a case-
by-case basis, whether tax revenues available under the limited taxing
powers are sufficient for the full and timely payment of interest on,
and principal of, the obligation. The bank shall use current and
reasonable financial projections in calculating the availability of the
revenues. An obligation expressly or implicitly dependent upon voter or
legislative authorization of appropriations may be considered supported
by the full faith and credit of a State or political subdivision if the
bank determines, on the basis of past actions by the voters or
legislative body in similar situations involving similar types of
projects, that it is reasonably probable that the obligor will obtain
all necessary appropriations.
(b) An obligation supported exclusively by excise taxes or license
fees is not a general obligation for the purposes of 12 U.S.C. 24
(Seventh). Nevertheless, an obligation that is primarily payable from a
fund consisting of excise taxes or other pledged revenues qualifies as a
``general obligation,'' if, in the event of a deficiency of those
revenues, the obligation is also supported by the general revenues of a
State or a political subdivision possessing general powers of taxation.
Sec. 1.120 Prerefunded or escrowed bonds and obligations secured by Type I
securities.
(a) An obligation qualifies as a Type I security if it is secured by
an escrow fund consisting of obligations of the United States or general
obligations of a State or a political subdivision, and the escrowed
obligations produce interest earnings sufficient for the full and timely
payment of interest on, and principal of, the obligation.
(b) If the interest earnings from the escrowed Type I securities
alone are not sufficient to guarantee the full repayment of an
obligation, a promise of a State or a political subdivision possessing
general powers of taxation to maintain a reserve fund for the timely
payment of interest on, and principal of, the obligation may further
support a guarantee of the full repayment of an obligation.
[[Page 12]]
(c) An obligation issued to refund an indirect general obligation
may be supported in a number of ways that, in combination, are
sufficient at all times to support the obligation with the full faith
and credit of the United States or a State or a political subdivision
possessing general powers of taxation. During the period following its
issuance, the proceeds of the refunding obligation may be invested in
U.S. obligations or municipal general obligations that will produce
sufficient interest income for payment of principal and interest. Upon
the retirement of the outstanding indirect general obligation bonds, the
same indirect commitment, such as a lease agreement or a reserve fund,
that supported the prior issue, may support the refunding obligation.
Sec. 1.130 Type II securities; guidelines for obligations issued for
university and housing purposes.
(a) Investment quality. An obligation issued for housing,
university, or dormitory purposes is a Type II security only if it:
(1) Qualifies as an investment security, as defined in Sec. 1.2(e);
and
(2) Is issued for the appropriate purpose and by a qualifying
issuer.
(b) Obligation issued for university purposes. (1) An obligation
issued by a State or political subdivision or agency of a State or
political subdivision for the purpose of financing the construction or
improvement of facilities at or used by a university or a degree-
granting college-level institution, or financing loans for studies at
such institutions, qualifies as a Type II security. Facilities financed
in this manner may include student buildings, classrooms, university
utility buildings, cafeterias, stadiums, and university parking lots.
(2) An obligation that finances the construction or improvement of
facilities used by a hospital may be eligible as a Type II security, if
the hospital is a department or a division of a university, or otherwise
provides a nexus with university purposes, such as an affiliation
agreement between the university and the hospital, faculty positions of
the hospital staff, and training of medical students, interns,
residents, and nurses (e.g., a ``teaching hospital'').
(c) Obligation issued for housing purposes. An obligation issued for
housing purposes may qualify as a Type II security if the security
otherwise meets the criteria for a Type II security.
PART 2_SALES OF CREDIT LIFE INSURANCE--Table of Contents
Sec.
2.1 Authority, purpose, and scope.
2.2 Definitions.
2.3 Distribution of credit life insurance income.
2.4 Bonus and incentive plans.
2.5 Bank compensation.
Authority: 12 U.S.C. 24 (Seventh), 93a, and 1818(n).
Source: 61 FR 51781, Oct. 4, 1996, unless otherwise noted.
Sec. 2.1 Authority, purpose, and scope.
(a) Authority. A national bank may provide credit life insurance to
loan customers pursuant to 12 U.S.C. 24 (Seventh).
(b) Purpose. The purpose of this part is to set forth the principles
and standards that apply to a national bank's provision of credit life
insurance and the limitations that apply to the receipt of income from
those sales by certain individuals and entities associated with the
bank.
(c) Scope. This part applies to the provision of credit life
insurance by any national bank employee, officer, director, or principal
shareholder, and certain entities in which such persons own an interest
of more than ten percent.
Sec. 2.2 Definitions.
(a) Bank means a national banking association.
(b) Credit life insurance means credit life, health, and accident
insurance, sometimes referred to as credit life and disability
insurance, and mortgage life and disability insurance.
(c) Owning an interest includes:
(1) Ownership through a spouse or minor child;
(2) Ownership through a broker, nominee, or other agent; or
(3) Ownership through any corporation, partnership, association,
joint
[[Page 13]]
venture, or proprietorship, that is controlled by the director, officer,
employee, or principal shareholder of the bank.
(d) Officer, director, employee, or principal shareholder includes
the spouse and minor children of an officer, director, employee, or
principal shareholder.
(e) Principal shareholder means any shareholder who directly or
indirectly owns or controls an interest of more than ten percent of the
bank's outstanding voting securities.
[61 FR 51781, Oct. 4, 1996, as amended at 73 FR 22235, Apr. 24, 2008]
Sec. 2.3 Distribution of credit life insurance income.
(a) Distribution of credit life insurance income by a national bank
must be consistent with the requirements and principles of this section.
(b) It is an unsafe and unsound practice for any director, officer,
employee, or principal shareholder of a national bank (including any
entity in which this person owns an interest of more than ten percent),
who is involved in the sale of credit life insurance to loan customers
of the national bank, to take advantage of that business opportunity for
personal profit. Recommendations to customers to buy insurance should be
based on the benefits of the policy, not the commissions received from
the sale.
(c) Except as provided in Sec. Sec. 2.4 and 2.5(b), and paragraph
(d) of this section, a director, officer, employee, or principal
shareholder of a national bank, or an entity in which such person owns
an interest of more than ten percent, may not retain commissions or
other income from the sale of credit life insurance in connection with
any loan made by that bank, and income from credit life insurance sales
to loan customers must be credited to the income accounts of the bank.
(d) The requirements of paragraph (c) of this section do not apply
to a director, officer, employee, or principal shareholder if:
(1) The person is employed by a third party that has contracted with
the bank on an arm's-length basis to sell financial products on bank
premises; and
(2) The person is not involved in the bank's credit decision
process.
Sec. 2.4 Bonus and incentive plans.
A bank employee or officer may participate in a bonus or incentive
plan based on the sale of credit life insurance if payments to the
employee or officer in any one year do not exceed the greater of:
(a) Five percent of the recipient's annual salary; or
(b) Five percent of the average salary of all loan officers
participating in the plan.
Sec. 2.5 Bank compensation.
(a) Nothing contained in this part prohibits a bank employee,
officer, director, or principal shareholder who holds an insurance
agent's license from agreeing to compensate the bank for the use of its
premises, employees, or good will. However, the employee, officer,
director, or principal shareholder shall turn over to the bank as
compensation all income received from the sale of the credit life
insurance to the bank's loan customers.
(b) Income derived from credit life insurance sales to loan
customers may be credited to an affiliate operating under the Bank
Holding Company Act of 1956, 12 U.S.C. 1841 et seq., or to a trust for
the benefit of all shareholders, provided that the bank receives
reasonable compensation in recognition of the role played by its
personnel, premises, and good will in credit life insurance sales.
Reasonable compensation generally means an amount equivalent to at least
20 percent of the affiliate's net income attributable to the bank's
credit life insurance sales.
PART 3_MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES--Table of Contents
Subpart A_Authority and Definitions
Sec.
3.1 Authority.
3.2 Definitions.
3.3 Transitional rules.
3.4 Reservation of authority.
Subpart B_Minimum Capital Ratios
3.5 Applicability.
3.6 Minimum capital ratios.
3.7 Plan to achieve minimum capital ratios.
[[Page 14]]
3.8 Reservation of authority.
Subpart C_Establishment of Minimum Capital Ratios for an Individual Bank
3.9 Purpose and scope.
3.10 Applicability.
3.11 Standards for determination of appropriate individual minimum
capital ratios.
3.12 Procedures.
3.13 Relation to other actions.
Subpart D_Enforcement
3.14 Remedies.
Subpart E_Issuance of a Directive
3.15 Purpose and scope.
3.16 Notice of intent to issue a directive.
3.17 Response to notice.
3.18 Decision.
3.19 Issuance of a directive.
3.20 Change in circumstances.
3.21 Relation to other administrative actions.
Interpretations
3.100 Capital and surplus.
Appendix A to Part 3--Risk-Based Capital Guidelines
Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment
Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n note,
1835, 3907, and 3909.
Source: 50 FR 10216, Mar. 14, 1985, unless otherwise noted.
Subpart A_Authority and Definitions
Sec. 3.1 Authority.
This part is issued under the authority of 12 U.S.C. 1 et seq., 93a,
161, 1818, 3907 and 3909.
[59 FR 64563, Dec. 15, 1994]
Sec. 3.2 Definitions.
For the purposes of this part:
(a) Adjusted total assets means the average total assets figure
required to be computed for and stated in a bank's most recent quarterly
Consolidated Report of Condition and Income (Call Report) minus end-of-
quarter intangible assets, deferred tax assets, and credit-enhancing
interest-only strips, that are deducted from Tier 1 capital, and minus
nonfinancial equity investments for which a Tier 1 capital deduction is
required pursuant to section 2(c)(5) of appendix A of this part 3. The
OCC reserves the right to require a bank to compute and maintain its
capital ratios on the basis of actual, rather than average, total assets
when necessary to carry out the purposes of this part.
(b) Bank means a national banking association.
(c) Tier 1 capital means Tier 1 capital as determined according to
section 2 of appendix A of this part, including the deductions described
therein.
(d) Tier 2 capital means Tier 2 capital as determined according to
section 2 of appendix A of this part, including the limitations
described therein.
(e) Total capital means Total capital as determined according to
section 1(25) and section 2 of appendix A of this part, including the
deductions described therein.
[55 FR 38800, Sept. 21, 1990, as amended at 60 FR 7907, Feb. 10, 1995;
67 FR 3795, Jan. 25, 2002; 73 FR 22236, Apr. 24, 2008]
Sec. 3.3 Transitional rules.
Intangible assets, other than mortgage servicing rights, purchased
prior to April 15, 1985, and accounted for in accordance with the
instruction of the OCC, need not be deducted from Tier 1 capital until
December 31, 1992. However, when combined with other qualifying
intangible assets, these intangibles may not exceed 25 percent of Tier 1
capital. After December 31, 1992, only those intangible assets that meet
the criteria contained in section 2(c)(2) of appendix A will not be
deducted from Tier 1 capital.
[55 FR 38800, Sept. 21, 1990]
Sec. 3.4 Reservation of authority.
(a) Deductions from capital. Notwithstanding the definitions of Tier
1 capital and Tier 2 capital in Sec. 3.2 (c) and (d), the OCC may find
that a newly developed or modified capital instrument constitutes Tier 1
capital or Tier 2 capital, and may permit one or more banks to include
all or a portion of funds obtained through such capital instruments as
Tier 1 or Tier 2 capital, permanently or on a temporary basis, for
[[Page 15]]
the purposes of compliance with this part or for other purposes.
Similarly, the OCC may find that a particular intangible asset, deferred
tax asset or credit-enhancing interest-only strip need not be deducted
from Tier 1 or Tier 2 capital. Conversely, the OCC may find that a
particular intangible asset, deferred tax asset, credit-enhancing
interest-only strip or other Tier 1 or Tier 2 capital component has
characteristics or terms that diminish its contribution to a bank's
ability to absorb losses, and may require the deduction from Tier 1 or
Tier 2 capital of all of the component or of a greater portion of the
component than is otherwise required.
(b) Risk weight categories. Notwithstanding the risk categories in
sections 3 and 4 of appendix A to this part, the OCC will look to the
substance of the transaction and may find that the assigned risk weight
for any asset or the credit equivalent amount or credit conversion
factor for any off-balance sheet item does not appropriately reflect the
risks imposed on a bank and may require another risk weight, credit
equivalent amount, or credit conversion factor that the OCC deems
appropriate. Similarly, if no risk weight, credit equivalent amount, or
credit conversion factor is specifically assigned, the OCC may assign
any risk weight, credit equivalent amount, or credit conversion factor
that the OCC deems appropriate. In making its determination, the OCC
considers risks associated with the asset or off-balance sheet item as
well as other relevant factors.
(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 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.
[55 FR 38800, Sept. 21, 1990, as amended at 66 FR 59630, Nov. 29, 2001;
75 FR 4645, Jan. 28, 2010]
Subpart B_Minimum Capital Ratios
Sec. 3.5 Applicability.
This subpart is applicable to all banks unless the Office
determines, pursuant to the procedures set forth in subpart C, that
different minimum capital ratios are appropriate for an individual bank
based upon its particular circumstances, or unless different minimum
capital ratios have been established or are established for an
individual bank in a written agreement or a temporary or final order
pursuant to 12 U.S.C. 1818 (b) or (c), or as a condition for approval of
an application.
Sec. 3.6 Minimum capital ratios.
(a) Risk-based capital ratio. All national banks must have and
maintain the minimum risk-based capital ratio as set forth in appendix A
(and, for certain banks, in appendix B).
(b) Total assets leverage ratio. All national banks must have and
maintain Tier 1 capital in an amount equal to at least 3.0 percent of
adjusted total assets.
(c) Additional leverage ratio requirement. An institution operating
at or near the level in paragraph (b) of this section should have well-
diversified risks, including no undue interest rate risk exposure;
excellent control systems; good earnings; high asset quality; high
liquidity; and well managed on-and off-balance sheet activities; and in
general be considered a strong banking organization, rated composite 1
under the Uniform Financial Institutions Rating System (CAMELS) rating
system of banks. For all but the most highly-rated banks meeting the
conditions set forth in this paragraph (c), the minimum Tier 1 leverage
ratio is 4
[[Page 16]]
percent. In all cases, banking institutions should hold capital
commensurate with the level and nature of all risks.
[55 FR 38800, Sept. 21, 1990, as amended at 61 FR 47367, Sept. 6, 1996;
64 FR 10199, Mar. 2, 1999]
Sec. 3.7 Plan to achieve minimum capital ratios.
Effective December 31, 1990, any bank having capital ratios less
than the minimums required under Sec. 3.6 (a) and (b) shall, within 60
days, submit to the OCC a plan describing the means and schedule by
which the bank shall achieve the applicable minimum capital ratios. The
plan may be considered acceptable unless the bank is notified to the
contrary by the OCC. A bank in compliance with an acceptable plan to
achieve the applicable minimum capital ratios will not be deemed to be
in violation of Sec. 3.6.
[55 FR 38800, Sept. 21, 1990]
Sec. 3.8 Reservation of authority.
When, in the opinion of the Office the circumstances so require, a
bank may be authorized to have less than the minimum capital ratios in
Sec. 3.6 during a time period specified by the Office.
Subpart C_Establishment of Minimum Capital Ratios for an Individual Bank
Sec. 3.9 Purpose and scope.
The rules and procedures specified in this subpart are applicable to
a proceeding to establish required minimum capital ratios that would
otherwise be applicable to a bank under Sec. 3.6. The OCC is authorized
under 12 U.S.C. 3907 (a)(2) to establish such minimum capital
requirements for a bank as the OCC, in its discretion, deems appropriate
in light of the particular circumstances at that bank. Proceedings under
this subpart also may be initiated to require a bank having capital
ratios above those set forth in Sec. 3.6, or other legal authority to
continue to maintain those higher ratios.
[55 FR 38800, Sept. 21, 1990]
Sec. 3.10 Applicability.
The OCC may require higher minimum capital ratios for an individual
bank in view of its circumstances. For example, higher capital ratios
may be appropriate for:
(a) A newly chartered bank;
(b) A bank receiving special supervisory attention;
(c) A bank that has, or is expected to have, losses resulting in
capital inadequacy;
(d) A bank with significant exposure due to the risks from
concentrations of credit, certain risks arising from nontraditional
activities, or management's overall inability to monitor and control
financial and operating risks presented by concentrations of credit and
nontraditional activities;
(e) A bank with significant exposure to declines in the economic
value of its capital due to changes in interest rates;
(f) A bank with significant exposure due to fiduciary or operational
risk;
(g) A bank exposed to a high degree of asset depreciation, or a low
level of liquid assets in relation to short term liabilities;
(h) A bank exposed to a high volume or, or particularly severe,
problem loans;
(i) A bank that is growing rapidly, either internally or through
acquisitions; or
(j) A bank that may be adversely affected by the activities or
condition of its holding company, affiliate(s), or other persons or
institutions including chain banking organizations, with which it has
significant business relationships.
[60 FR 39493, Aug. 2, 1995]
Sec. 3.11 Standards for determination of appropriate individual minimum
capital ratios.
The appropriate minimum capital ratios for an individual bank cannot
be determined solely through the application of a rigid mathematical
formula or wholly objective criteria. The decision is necessarily based
in part on subjective judgment grounded in agency expertise. The factors
to be considered in the determination will vary in each case and may
include, for example:
[[Page 17]]
(a) The conditions or circumstances leading to the Office's
determination that higher minimum capital ratios are appropriate or
necessary for the bank;
(b) The exigency of those circumstances or potential problems;
(c) The overall condition, management strength, and future prospects
of the bank and, if applicable, its holding company and/or affiliate(s);
(d) The bank's liquidity, capital, risk asset and other ratios
compared to the ratios of its peer group; and
(e) The views of the bank's directors and senior management.
Sec. 3.12 Procedures.
(a) Notice. When the OCC determines that minimum capital ratios
above those set forth in Sec. 3.6 or other legal authority are
necessary or appropriate for a particular bank, the OCC will notify the
bank in writing of the proposed minimum capital ratios and the date by
which they should be reached (if applicable) and will provide an
explanation of why the ratios proposed are considered necessary or
appropriate for the bank.
(b) Response. (1) The bank may respond to any or all of the items in
the notice. The response should include any matters which the bank would
have the Office consider in deciding whether individual minimum capital
ratios should be established for the bank, what those capital ratios
should be, and, if applicable, when they should be achieved. The
response must be in writing and delivered to the designated OCC official
within 30 days after the date on which the bank received the notice. The
Office may shorten the time period when, in the opinion of the Office,
the condition of the bank so requires, provided that the bank is
informed promptly of the new time period, or with the consent of the
bank. In its discretion, the Office may extend the time period for good
cause.
(2) Failure to respond within 30 days or such other time period as
may be specified by the Office shall constitute a waiver of any
objections to the proposed minimum capital ratios or the deadline for
their achievement.
(c) Decision. After the close of the bank's response period, the
Office will decide, based on a review of the bank's response and other
information concerning the bank, whether individual minimum capital
ratios should be established for the bank and, if so, the ratios and the
date the requirements will become effective. The bank will be notified
of the decision in writing. The notice will include an explanation of
the decision, except for a decision not to establish individual minimum
capital requirements for the bank.
(d) Submission of plan. The decision may require the bank to develop
and submit to the Office, within a time period specified, an acceptable
plan to reach the minimum capital ratios established for the bank by the
date required.
(e) Change in circumstances. If, after the Office's decision in
paragraph (c) of this section, there is a change in the circumstances
affecting the bank's capital adequacy or its ability to reach the
required minimum capital ratios by the specified date, either the bank
or the Office may propose to the other a change in the minimum capital
ratios for the bank, the date when the minimums must be achieved, or the
bank's plan (if applicable). The Office may decline to consider
proposals that are not based on a significant change in circumstances or
are repetitive or frivolous. Pending a decision on reconsideration, the
Office's original decision and any plan required under that decision
shall continue in full force and effect.
[50 FR 10216, Mar. 14, 1985, as amended at 55 FR 38800, Sept. 21, 1990]
Sec. 3.13 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the
required minimum capital ratios for a bank may be established or revised
through a written agreement or cease and desist proceedings under 12
U.S.C. 1818 (b) or (c) (12 CFR 19.0 through 19.21), or as a condition
for approval of an application.
Subpart D_Enforcement
Sec. 3.14 Remedies.
A bank that does not have or maintain the minimum capital ratios
applicable to it, whether required in subpart
[[Page 18]]
B of this part, in a decision pursuant to subpart C of this part, in a
written agreement or temporary or final order under 12 U.S.C. 1818 (b)
or (c), or in a condition for approval of an application, or a bank that
has failed to submit or comply with an acceptable plan to attain those
ratios, will be subject to such administrative action or sanctions as
the OCC considers appropriate. These sanctions may include the issuance
of a Directive pursuant to subpart E of this part or other enforcement
action, assessment of civil money penalties, and/or the denial,
conditioning, or revocation of applications. A national bank's failure
to achieve or maintain minimum capital ratios in Sec. 3.6 (a) or (b)
may also be the basis for an action by the Federal Deposit Insurance
Corporation to terminate federal deposit insurance. See 12 CFR 325.4.
[55 FR 38801, Sept. 21, 1990]
Subpart E_Issuance of a Directive
Sec. 3.15 Purpose and scope.
This subpart is applicable to proceedings by the Office to issue a
directive under 12 U.S.C. 3907(b)(2). A directive is an order issued to
a bank that does not have or maintain capital at or above the minimum
ratios set forth in Sec. 3.6, or established for the bank under subpart
C, by a written agreement under 12 U.S.C. 1818(b), or as a condition for
approval of an application. A directive may order the bank to:
(a) Achieve the minimum capital ratios applicable to it by a
specified date;
(b) Adhere to a previously submitted plan to achieve the applicable
capital ratios;
(c) Submit and adhere to a plan acceptable to the Office describing
the means and time schedule by which the bank shall achieve the
applicable capital ratios;
(d) Take other action, such as reduction of assets or the rate of
growth of assets, or restrictions on the payment of dividends, to
achieve the applicable capital ratios; or
(e) A combination of any of these or similar actions.
A directive issued under this rule, including a plan submitted under
a directive, is enforceable in the same manner and to the same extent as
an effective and outstanding cease and desist order which has become
final as defined in 12 U.S.C. 1818(k). Violation of a directive may
result in assessment of civil money penalties in accordance with 12
U.S.C. 3909(d).
Sec. 3.16 Notice of intent to issue a directive.
The Office will notify a bank in writing of its intention to issue a
directive. The notice will state:
(a) Reasons for issuance of the directive; and
(b) The proposed contents of the directive.
Sec. 3.17 Response to notice.
(a) A bank may respond to the notice by stating why a directive
should not be issued and/or by proposing alternative contents for the
directive. The response should include any matters which the bank would
have the Office consider in deciding whether to issue a directive and/or
what the contents of the directive should be. The response may include a
plan for achieving the minimum capital ratios applicable to the bank.
The response must be in writing and delivered to the designated OCC
official within 30 days after the date on which the bank received the
notice. The Office may shorten the 30-day time period:
(1) When, in the opinion of the Office, the condition of the bank so
requires, provided that the bank shall be informed promptly of the new
time period;
(2) With the consent of the bank; or
(3) When the bank already has advised the Office that it cannot or
will not achieve its applicable minimum capital ratios. In its
discretion, the Office may extend the time period for good cause.
(b) Failure to respond within 30 days or such other time period as
may be specified by the Office shall constitute a waiver of any
objections to the proposed directive.
Sec. 3.18 Decision.
After the closing date of the bank's response period, or receipt of
the bank's response, if earlier, the Office will consider the bank's
response, and
[[Page 19]]
may seek additional information or clarification of the response.
Thereafter, the Office will determine whether or not to issue a
directive, and if one is to be issued, whether it should be as
originally proposed or in modified form.
Sec. 3.19 Issuance of a directive.
(a) A directive will be served by delivery to the bank. It will
include or be accompanied by a statement of reasons for its issuance.
(b) A directive is effective immediately upon its receipt by the
bank, or upon such later date as may be specified therein, and shall
remain effective and enforceable until it is stayed, modified, or
terminated by the Office.
Sec. 3.20 Change in circumstances.
Upon a change in circumstances, a bank may request the Office to
reconsider the terms of its directive or may propose changes in the plan
to achieve the bank's applicable minimum capital ratios. The Office also
may take such action on its own motion. The Office may decline to
consider requests or proposals that are not based on a significant
change in circumstances or are repetitive or frivolous. Pending a
decision on reconsideration, the directive and plan shall continue in
full force and effect.
Sec. 3.21 Relation to other administrative actions.
A directive may be issued in addition to, or in lieu of, any other
action authorized by law, including cease and desist proceedings, civil
money penalties, or the conditioning or denial of applications. The
Office also may, in its discretion, take any action authorized by law,
in lieu of a directive, in response to a bank's failure to achieve or
maintain the applicable minimum capital ratios.
Interpretations
Sec. 3.100 Capital and surplus.
For purposes of determining statutory limits that are based on the
amount of bank's capital and/or surplus, the provisions of this section
are to be used, rather than the definitions of capital contained in
Sec. 3.2.
(a) Capital. The term capital as used in provisions of law relating
to the capital of national banking associations shall include the amount
of common stock outstanding and unimpaired plus the amount of perpetual
preferred stock outstanding and unimpaired.
(b) Capital Stock. The term capital stock as used in provisions of
law relating to the capital stock of national banking associations,
other than 12 U.S.C. 101, 177 and 178, shall have the same meaning as
the term capital set forth in paragraph (a) of this section.
(c) Surplus. The term surplus as used in provisions of law relating
to the surplus of national banking associations means the sum of
paragraphs (c) (1), (2), (3) and (4) of this section:
(1) Capital surplus; undivided profits; reserves for contingencies
and other capital reserves (excluding accrued dividends on perpetual and
limited life preferred stock); net worth certificates issued pursuant to
12 U.S.C. 1823(i); minority interests in consolidated subsidiaries; and
allowances for loan and lease losses; minus intangible assets;
(2) Mortgage servicing assets;
(3) Mandatory convertible debt to the extent of 20% of the sum of
paragraphs (a) and (c) (1) and (2) of this section;
(4) Other mandatory convertible debt, limited life preferred stock
and subordinated notes and debentures to the extent set forth in
paragraph (f)(2) of this section.
(d) Unimpaired Surplus Fund. The term unimpaired surplus fund as
used in provisions of law relating to the unimpaired surplus fund of
national banking associations shall have the same meaning as the term
surplus set forth in paragraph (c) of this section.
(e) Definitions. (1) Allowance for loan and lease losses means the
balance of the valuation reserve on December 31, 1968, plus additions to
the reserve charged to operations since that date, less losses charged
against the allowance net of recoveries.
(2) Capital surplus means the total of those accounts reflecting:
(i) Amounts paid in in excess of the par or stated value of capital
stock;
(ii) Amounts contributed to the bank other than for capital stock;
[[Page 20]]
(iii) amounts transferred from undivided profits pursuant to 12
U.S.C. 60; and
(iv) Other amounts transferred from undivided profits.
(3) Intangible assets means those purchased assets that are to be
reported as intangible assets in accordance with the Instructions--
Consolidated Reports of Condition and Income (Call Report).
(4) Limited Life preferred stock means preferred stock which has a
maturity or which may be redeemed at the option of the holder.
(5) Mandatory convertible debt means subordinated debt instruments
which unqualifiedly require the issuer to exchange either common or
perpetual preferred stock for such instruments by a date at or before
the maturity of the instrument. The maturity of these instruments must
be 12 years or less. In addition, the instrument must meet the
requirements of paragraphs (f)(1)(i) through (v) of this section for
subordinated notes and debentures or other requirements published by the
OCC.
(6) Minority interest in consolidated subsidiaries means the portion
of equity capital accounts of all consolidated subsidiaries of the bank
that is allocated to minority shareholders of such subsidiaries.
(7) Mortgage servicing assets means the bank-owned rights to service
for a fee mortgage loans that are owned by others.
(8) Perpetual preferred stock means preferred stock that does not
have a stated maturity date and cannot be redeemed at the option of the
holder.
(f) Requirements and restrictions: Limited life preferred stock,
mandatory convertible debt, and other subordinated debt--(1)
Requirements. Issues of limited life preferred stock and subordinated
notes and debentures (except mandatory convertible debt) shall have
original weighted average maturities of at least five years to be
included in the definition of surplus. In addition, a subordinated note
or debenture must also:
(i) Be subordinated to the claims of depositors;
(ii) State on the instrument that it is not a deposit and is not
insured by the FDIC;
(iii) Be unsecured;
(iv) Be ineligible as collateral for a loan by the issuing bank;
(v) Provide that once any scheduled payments of principal begin, all
scheduled payments shall be made at least annually and the amount repaid
in each year shall be no less than in the prior year; and
(vi) Provide that no prepayment (including payment pursuant to an
acceleration clause or redemption prior to maturity) shall be made
without prior OCC approval unless the bank remains an eligible bank, as
defined in 12 CFR 5.3(g), after the prepayment.
(2) Restrictions. The total amount of mandatory convertible debt not
included in paragraph (c)(3) of this section, limited life preferred
stock, and subordinated notes and debentures considered as surplus is
limited to 50 percent of the sum of paragraphs (a) and (c) (1), (2) and
(3) of this section.
(3) Reservation of authority. The OCC expressly reserves the
authority to waive the requirements and restrictions set forth in
paragraphs (f) (1) and (2) of this section, in order to allow the
inclusion of other limited life preferred stock, mandatory convertible
notes and subordinated notes and debentures in the capital base of any
national bank for capital adequacy purposes or for purposes of
determining statutory limits. The OCC further expressly reserves the
authority to impose more stringent conditions than those set forth in
paragraphs (f) (1) and (2) of this section to exclude any component of
Tier 1 or Tier 2 capital, in whole or in part, as part of a national
bank's capital and surplus for any purpose.
(g) Transitional rules. (1) Equity commitment notes approved by the
OCC as capital and issued prior to April 15, 1985, may continue to be
included in paragraph (c)(3) of this section. All other instruments
approved by the OCC as capital and issued prior to April 15, 1985, are
to be included in paragraph (c)(4) of this section.
(2) Intangible assets (other than mortgage servicing assets)
purchased prior to April 15, 1985, and accounted for in accordance with
OCC instructions, may continue to be included as
[[Page 21]]
surplus up to 25% of the sum of paragraphs (a) and (c)(1) of this
section.
(Approved by the Office of Management and Budget under control number
1557-0166)
[50 FR 10216, Mar. 14, 1985, as amended at 55 FR 38801, Sept. 21, 1990;
60 FR 39229, Aug. 1, 1995; 61 FR 60363, Nov. 27, 1996; 63 FR 42674, Aug.
10, 1998]
Sec. Appendix A to Part 3--Risk-Based Capital Guidelines
Section 1. Purpose, Applicability of Guidelines, and Definitions.
(a) Purpose. (1) An important function of the Office of the
Comptroller of the Currency (OCC) is to evaluate the adequacy of capital
maintained by each national bank. Such an evaluation involves the
consideration of numerous factors, including the riskiness of a bank's
assets and off-balance sheet items. This appendix A implements the OCC's
risk-based capital guidelines. The risk-based capital ratio derived from
those guidelines is more systematically sensitive to the credit risk
associated with various bank activities than is a capital ratio based
strictly on a bank's total balance sheet assets. A bank's risk-based
capital ratio is obtained by dividing its capital base (as defined in
section 2 of this appendix A) by its risk-weighted assets (as calculated
pursuant to section 3 of this appendix A). These guidelines were created
within the framework established by the report issued by the Committee
on Banking Regulations and Supervisory Practices in July 1988. The OCC
believes that the risk-based capital ratio is a useful tool in
evaluating the capital adequacy of all national banks, not just those
that are active in the international banking system.
(2) The purpose of this appendix A is to explain precisely (i) how a
national bank's risk-based capital ratio is determined and (ii) how
these risk-based capital guidelines are applied to national banks. The
OCC will review these guidelines periodically for possible adjustments
commensurate with its experience with the risk-based capital ratio and
with changes in the economy, financial markets and domestic and
international banking practices.
(b) Applicability. (1) The risk-based capital ratio derived from
these guidelines is an important factor in the OCC's evaluation of a
bank's capital adequacy. However, since this measure addresses only
credit risk, the 8% minimum ratio should not be viewed as the level to
be targeted, but rather as a floor. The final supervisory judgment on a
bank's capital adequacy is based on an individualized assessment of
numerous factors, including those listed in 12 CFR 3.10. With respect to
the consideration of these factors, the OCC will give particular
attention to any bank with significant exposure to declines in the
economic value of its capital due to changes in interest rates. As a
result, it may differ from the conclusion drawn from an isolated
comparison of a bank's risk-based capital ration to the 8% minimum
specified in these guidelines. In addition to the standards established
by these risk-based capital guidelines, all national banks must maintain
a minimum capital-to-total assets ratio in accordance with the
provisions of 12 CFR part 3.
(2) Effective December 31, 1990, these risk-based capital guidelines
will apply to all national banks. In the interim, banks must maintain
minimum capital-to-total assets ratios as required by 12 CFR part 3, and
should begin preparing for the implementation of these risk-based
capital guidelines. In this regard, each national bank that does not
currently meet the final minimum ratio established in section 4(b)(1) of
this appendix A should begin planning for achieving that standard.
(3) These risk-based capital guidelines will not be applied to
federal branches and agencies of foreign banks.
(c) Definitions. For purposes of this appendix A, the following
definitions apply:
(1) Adjusted carrying value means, for purposes of section 2(c)(5)
of this appendix A, the aggregate value that investments are carried on
the balance sheet of the bank reduced by any unrealized gains on the
investments that are reflected in such carrying value but excluded from
the bank's Tier 1 capital and reduced by any associated deferred tax
liabilities. For example, for investments held as available-for-sale
(AFS), the adjusted carrying value of the investments would be the
aggregate carrying value of the investments (as reflected on the
consolidated balance sheet of the bank) less any unrealized gains on
those investments that are included in other comprehensive income and
that are not reflected in Tier 1 capital, and less any associated
deferred tax liabilities. Unrealized losses on AFS nonfinancial equity
investments must be deducted from Tier 1 capital in accordance with
section 1(c)(10) of this appendix A. The treatment of small business
investment companies that are consolidated for accounting purposes under
generally accepted accounting principles is discussed in section
2(c)(5)(ii) of this appendix A. For investments in a nonfinancial
company that is consolidated for accounting purposes, the bank's
adjusted carrying value of the investment is determined under the equity
method of accounting (net of any intangibles associated with the
investment that are deducted from the bank's Tier 1 capital in
accordance with section 2(c)(2) of this appendix A). Even though the
assets of the nonfinancial company are consolidated for accounting
purposes, these assets (as well as the credit equivalent
[[Page 22]]
amounts of the company's off-balance sheet items) are excluded from the
bank's risk-weighted assets.
(2) Allowances for loan and lease losses means the balance of the
valuation reserve on December 31, 1968, plus additions to the reserve
charged to operations since that date, less losses charged against the
allowance net of recoveries.
(3) Asset-backed commercial paper program means a program that
primarily issues externally rated commercial paper backed by assets or
other exposures held in a bankruptcy-remote, special-purpose entity.
(4) Asset-backed commercial paper sponsor means a bank that:
(i) Establishes an asset-backed commercial paper program;
(ii) Approves the sellers permitted to participate in an asset-
backed commercial paper program;
(iii) Approves the asset pools to be purchased by an asset-backed
commercial paper program; or
(iv) Administers the asset-backed commercial paper program by
monitoring the assets, arranging for debt placement, compiling monthly
reports, or ensuring compliance with the program documents and with the
program's credit and investment policy.
(5) Associated company means any corporation, partnership, business
trust, joint venture, association or similar organization in which a
national bank directly or indirectly holds a 20 to 50 percent ownership
interest.
(6) Banking and finance subsidiary means any subsidiary of a
national bank that engages in banking- and finance-related activities.
(7) Cash items in the process of collection means checks or drafts
in the process of collection that are drawn on another depository
institution, including a central bank, and that are payable immediately
upon presentation in the country in which the reporting bank's office
that is clearing or collecting the check or draft is located; U.S.
Government checks that are drawn on the United States Treasury or any
other U.S. Government or Government-sponsored agency and that are
payable immediately upon presentation; broker's security drafts and
commodity or bill-of-lading drafts payable immediately upon presentation
in the United States or the country in which the reporting bank's office
that is handling the drafts is located; and unposted debits.
(8) Central government means the national governing authority of a
country; it includes the departments, ministries and agencies of the
central government and the central bank. The U.S. Central Bank includes
the 12 Federal Reserve Banks. The definition of central government does
not include the following: State, provincial, or local governments;
commercial enterprises owned by the central government, which are
entities engaged in activities involving trade, commerce, or profit that
are generally conducted or performed in the private sector of the United
States economy; and non-central government entities whose obligations
are guaranteed by the central government.
(9) Commitment means any arrangement that obligates a national bank
to: (i) Purchase loans or securities; or (ii) extend credit in the form
of loans or leases, participations in loans or leases, overdraft
facilities, revolving credit facilities, home equity lines of credit,
liquidity facilities, or similar transactions.
(10) Common stockholders' equity means common stock, common stock
surplus, undivided profits, capital reserves, and adjustments for the
cumulative effect of foreign currency translation, less net unrealized
holding losses on available-for-sale equity securities with readily
determinable fair values.
(11) Conditional guarantee means a contingent obligation of the
United States Government or its agencies, or the central government of
an OECD country, the validity of which to the beneficiary is dependent
upon some affirmative action--e.g., servicing requirements--on the part
of the beneficiary of the guarantee or a third party.
(12) Deferred tax assets means the tax consequences attributable to
tax carryforwards and deductible temporary differences. Tax
carryforwards are deductions or credits that cannot be used for tax
purposes during the current period, but can be carried forward to reduce
taxable income or taxes payable in a future period or periods. Temporary
differences are financial events or transactions that are recognized in
one period for financial statement purposes, but are recognized in
another period or periods for income tax purposes. Deductible temporary
differences are temporary differences that result in a reduction of
taxable income in a future period or periods.
(13) Derivative contract means generally a financial contract whose
value is derived from the values of one or more underlying assets,
reference rates or indexes of asset values. Derivative contracts include
interest rate, foreign exchange rate, equity, precious metals and
commodity contracts, or any other instrument that poses similar credit
risks.
(14) Depository institution means a financial institution that
engages in the business of banking; that is recognized as a bank by the
bank supervisory or monetary authorities of the country of its
incorporation and the country of its principal banking operations; that
receives deposits to a substantial extent in the regular course of
business; and that has the power to accept demand deposits. In the U.S.,
this definition encompasses all federally insured offices of commercial
banks, mutual and stock savings banks, savings or
[[Page 23]]
building and loan associations (stock and mutual), cooperative banks,
credit unions, and international banking facilities of domestic
depository institution. Bank holding companies are excluded from this
definition. For the purposes of assigning risk weights, the
differentiation between OECD depository institutions and non-OECD
depository institutions is based on the country of incorporation. Claims
on branches and agencies of foreign banks located in the United States
are to be categorized on the basis of the parent bank's country of
incorporation.
(15) Equity investment means, for purposes of section 1(c)(19) and
section 2(c)(5) of this appendix A, any equity instrument including
warrants and call options that give the holder the right to purchase an
equity instrument, any equity feature of a debt instrument (such as a
warrant or call option), and any debt instrument that is convertible
into equity. An investment in any other instrument, including
subordinated debt or other types of debt instruments, may be treated as
an equity investment if the OCC determines that the instrument is the
functional equivalent of equity or exposes the bank to essentially the
same risks as an equity instrument.
(16) Exchange rate contracts include: Cross-currency interest rate
swaps; forward foreign exchange rate contracts; currency options
purchased; and any similar instrument that, in the opinion of the OCC,
gives rise to similar risks.
(17) Goodwill is an intangible asset that represents the excess of
the cost of an acquired entity over the net of the amounts assigned to
assets acquired and liabilities assumed.
(18) Intangible assets include mortgage and non-mortgage servicing
assets (but exclude any interest only (IO) strips receivable related to
these mortgage and nonmortgage servicing assets), purchased credit card
relationships, goodwill, favorable leaseholds, and core deposit value.
(19) Interest rate contracts include: Single currency interest rate
swaps; basis swaps; forward rate agreements; interest rate options
purchased; forward forward deposits accepted; and any similar instrument
that, in the opinion of the OCC, gives rise to similar risks, including
when-issued securities.
(20) Liquidity facility means a legally binding commitment to
provide liquidity to various types of transactions, structures or
programs. A liquidity facility that supports asset-backed commercial
paper, in any amount, by lending to, or purchasing assets from any
structure, program, or conduit constitutes an asset-backed commercial
paper liquidity facility.
(21) Multifamily residential property means any residential property
consisting of five or more dwelling units including apartment buildings,
condominiums, cooperatives, and other similar structures primarily for
residential use, but not including hospitals, nursing homes, or other
similar facilities.
(22) Nationally recognized statistical rating organization (NRSRO)
means an entity recognized by the Division of Market Regulation of the
Securities and Exchange Commission (or any successor Division)
(Commission or SEC) as a nationally recognized statistical rating
organization for various purposes, including the Commission's uniform
net capital requirements for brokers and dealers.
(23) Nonfinancial equity investment means any equity investment held
by a bank in a nonfinancial company through a small business investment
company (SBIC) under section 302(b) of the Small Business Investment Act
of 1958 (15 U.S.C. 682(b)) or under the portfolio investment provisions
of Regulation K (12 CFR 211.8(c)(3)). An equity investment made under
section 302(b) of the Small Business Investment Act of 1958 in a SBIC
that is not consolidated with the bank is treated as a nonfinancial
equity investment in the manner provided in section 2(c)(5)(ii)(C) of
this appendix A. A nonfinancial company is an entity that engages in any
activity that has not been determined to be permissible for a bank to
conduct directly or to be financial in nature or incidental to financial
activities under section 4(k) of the Bank Holding Company Act (12 U.S.C.
1843(k)).
(24) The OECD-based group of countries comprises all full members of
the Organization for Economic Cooperation and Development (OECD)
regardless of entry date, as well as countries that have concluded
special lending arrangements with the International Monetary Fund (IMF)
associated with the IMF's General Arrangements to Borrow, \1\ but
excludes any country that has rescheduled its external sovereign debt
within the previous five years. These countries are hereinafter referred
to as OECD countries. A rescheduling of external sovereign debt
generally would include any renegotiation of terms arising from a
country's inability or unwillingness to meet its external debt service
obligations, but generally would not include renegotiations of debt in
the normal course of business, such as a renegotiation to allow the
borrower to take advantage of a
[[Page 24]]
decline in interest rates or other change in market conditions.
---------------------------------------------------------------------------
\1\ As of November 1995, the OECD included the following countries:
Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany,
Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Mexico, the
Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland,
Turkey, the United Kingdom, and the United States; and Saudi Arabia had
concluded special lending arrangements with the IMF associated with the
IMF's General Arrangements to Borrow.
---------------------------------------------------------------------------
(25) Original maturity means, with respect to a commitment, the
earliest possible date after a commitment is made on which the
commitment is scheduled to expire (i.e., it will reach its stated
maturity and cease to be binding on either party), provided that either:
(i) The commitment is not subject to extension or renewal and will
actually expire on its stated expiration date; or
(ii) If the commitment is subject to extension or renewal beyond its
stated expiration date, the stated expiration date will be deemed the
original maturity only if the extension or renewal must be based upon
terms and conditions independently negotiated in good faith with the
customer at the time of the extension or renewal and upon a new, bona
fide credit analysis utilizing current information on financial
condition and trends.
(26) Preferred stock includes the following instruments: (i)
Convertible preferred stock, which means preferred stock that is
mandatorily convertible into either common or perpetual preferred stock;
(ii) Intermediate-term preferred stock, which means preferred stock with
an original maturity of at least five years, but less than 20 years;
(iii) Long-term preferred stock, which means preferred stock with an
original maturity of 20 years or more; and (iv) Perpetual preferred
stock, which means preferred stock without a fixed maturity date that
cannot be redeemed at the option of the holder, and that has no other
provisions that will require future redemption of the issue. For
purposes of these instruments, preferred stock that can be redeemed at
the option of the holder is deemed to have an original maturity of the
earliest possible date on which it may be so redeemed.
(27) Public-sector entities include states, local authorities and
governmental subdivisions below the central government level in an OECD
country. In the United States, this definition encompasses a state,
county, city, town, or other municipal corporation, a public authority,
and generally any publicly-owned entity that is an instrumentality of a
state or municipal corporation. This definition does not include
commercial companies owned by the public sector. \1a\
---------------------------------------------------------------------------
\1a\ See Definition (5), Central government, for further explanation
of commercial companies owned by the public sector.
---------------------------------------------------------------------------
(28) Reciprocal holdings of bank capital instruments means cross-
holdings or other formal or informal arrangements in which two or more
banking organizations swap, exchange, or otherwise agree to hold each
other's capital instruments. This definition does not include holdings
of capital instruments issued by other banking organizations that were
taken in satisfaction of debts previously contracted, provided that the
reporting national bank has not held such instruments for more than five
years or a longer period approved by the OCC.
(29) Replacement cost means, with respect to interest rate and
exchange rate contracts, the loss that would be incurred in the event of
a counterparty default, as measured by the net cost of replacing the
contract at the current market value. If default would result in a
theoretical profit, the replacement value is considered to be zero. The
mark-to-market process should incorporate changes in both interest rates
and counterparty credit quality.
(30) Residential properties means houses, condominiums, cooperative
units, and manufactured homes. This definition does not include boats or
motor homes, even if used as a primary residence.
(31) Risk-weighted assets means the sum of total risk-weighted
balance sheet assets and the total of risk-weighted off-balance sheet
credit equivalent amounts. Risk-weighted balance sheet and off-balance
sheet assets are calculated in accordance with section 3 of this
appendix A.
(32) State means any one of the several states of the United States
of America, the District of Columbia, Puerto Rico, and the territories
and possessions of the United States.
(33) Subsidiary means any corporation, partnership, business trust,
joint venture, association or similar organization in which a national
bank directly or indirectly holds more than a 50% ownership interest.
This definition does not include ownership interests that were taken in
satisfaction of debts previously contracted, provided that the reporting
bank has not held the interest for more than five years or a longer
period approved by the OCC.
(34) Total capital means the sum of a national bank's core (Tier 1)
and qualifying supplementary (Tier 2) capital elements.
(35) Unconditionally cancelable means, with respect to a commitment-
type lending arrangement, that the bank may, at any time, with or
without cause, refuse to advance funds or extend credit under the
facility. In the case of home equity lines of credit, the bank is deemed
able to unconditionally cancel the commitment if it can, at its option,
prohibit additional extensions of credit, reduce the line, and terminate
the commitment to the full extent permitted by relevant Federal law.
(36) United States Government or its agencies means an
instrumentality of the U.S. Government whose debt obligations are fully
and explicitly guaranteed as to the timely payment of principal and
interest by the full faith and credit of the United States Government.
[[Page 25]]
(37) United States Government-sponsored agency means an agency
originally established or chartered to serve public purposes specified
by the United States Congress, but whose obligations are not explicitly
guaranteed by the full faith and credit of the United States Government.
(38) Walkaway clause means a provision in a bilateral netting
contract that permits a nondefaulting counterparty to make a lower
payment than it would make otherwise under the bilateral netting
contract, or no payment at all, to a defaulter or the estate of a
defaulter, even if the defaulter or the estate of the defaulter is a net
creditor under the bilateral netting contract.
Section 2. Components of Capital.
A national bank's qualifying capital base consists of two types of
capital--core (Tier 1) and supplementary (Tier 2).
(a) Tier 1 Capital. The following elements comprise a national
bank's Tier 1 capital:
(1) Common stockholders' equity;
(2) Noncumulative perpetual preferred stock and related surplus; and
\2\
---------------------------------------------------------------------------
\2\ Preferred stock issues where the dividend is reset periodically
based upon current market conditions and the bank's current credit
rating, including but not limited to, auction rate, money market or
remarketable preferred stock, are assigned to Tier 2 capital, regardless
of whether the dividends are cumulative or noncumulative.
---------------------------------------------------------------------------
(3) Minority interests in the equity accounts of consolidated
subsidiaries, except that the following are not included in Tier 1
capital or total capital:
(i) Minority interests in a small business investment company or
investment fund that holds nonfinancial equity investments and minority
interests in a subsidiary that is engaged in a nonfinancial activities
and is held under one of the legal authorities listed in section
1(c)(23) of this appendix A.
(ii) [Reserved]
(b) Tier 2 Capital. The following elements comprise a national
bank's Tier 2 capital:
(1) Allowance for loan and lease losses, up to a maximum of 1.25% of
risk-weighted assets, \3\ subject to the transition rules in section
4(a)(2) of this appendix A;
---------------------------------------------------------------------------
\3\ The amount of the allowance for loan and lease losses that may
be included in capital is based on a percentage of risk-weighted assets.
The gross sum of risk-weighted assets used in this calculation includes
all risk-weighted assets, with the exception of the assets required to
be deducted under section 3 in establishing risk-weighted assets (i.e.,
the assets required to be deducted from capital under section 2(c)) of
this appendix. A banking organization may deduct reserves for loan and
lease losses in excess of the amount permitted to be included as
capital, as well as allocated transfer risk reserves and reserves held
against other real estate owned, from the gross sum of risk-weighted
assets in computing the denominator of the risk-based capital ratio.
---------------------------------------------------------------------------
(2) Cumulative perpetual preferred stock, long-term preferred stock,
convertible preferred stock, and any related surplus, without limit, if
the issuing national bank has the option to defer payment of dividends
on these instruments. For long-term preferred stock, the amount that is
eligible to be included as Tier 2 capital is reduced by 20% of the
original amount of the instrument (net of redemptions) at the beginning
of each of the last five years of the life of the instrument;
(3) Hybrid capital instruments, without limit. Hybrid capital
instruments are those instruments that combine certain characteristics
of debt and equity, such as perpetual debt. To be included as Tier 2
capital, these instruments must meet the following criteria: \4\
---------------------------------------------------------------------------
\4\ Mandatory convertible debt instruments that meet the
requirements of 12 CFR 3.100(e)(5), or that have been previously
approved as capital by the OCC, are treated as qualifying hybrid capital
instruments.
---------------------------------------------------------------------------
(i) The instrument must be unsecured, subordinated to the claims of
depositors and general creditors, and fully paid-up;
(ii) The instrument must not be redeemable at the option of the
holder prior to maturity, except with the prior approval of the OCC;
(iii) The instrument must be available to participate in losses
while the issuer is operating as a going concern (in this regard, the
instrument must automatically convert to common stock or perpetual
preferred stock, if the sum of the retained earnings and capital surplus
accounts of the issuer shows a negative balance); and
(iv) The instrument must provide the option for the issuer to defer
principal and interest payments, if
(A) The issuer does not report a net profit for the most recent
combined four quarters, and
(B) The issuer eliminates cash dividends on its common and preferred
stock.
(4) Term subordinated debt instruments, and intermediate-term
preferred stock and related surplus are included in Tier 2 capital, but
only to a maximum of 50% of Tier 1 capital as calculated after
deductions pursuant to section 2(c) of this appendix. To be considered
capital, term subordinated debt instruments shall meet the requirements
of Sec. 3.100(f)(1). However, pursuant to 12 CFR 5.47, the OCC may, in
some cases, require that the subordinated debt be approved by the OCC
before the subordinated debt may qualify as Tier 2 capital or may
require prior approval
[[Page 26]]
for any prepayment (including payment pursuant to an acceleration clause
or redemption prior to maturity) of the subordinated debt. Also, at the
beginning of each of the last five years for the life of either type of
instrument, the amount that is eligible to be included as Tier 2 capital
is reduced by 20% of the original amount of that instrument (net of
redemptions).
(5) Up to 45 percent of the pretax net unrealized holding gains
(that is, the excess, if any, of the fair value over historical cost) on
available-for-sale equity securities with readily determinable fair
values. \5\ Unrealized gains (losses) on other types of assets, such as
bank premises and available-for-sale debt securities, are not included
in Tier 2 capital, but the OCC may take these unrealized gains (losses)
into account as additional factors when assessing a bank's overall
capital adequacy.
---------------------------------------------------------------------------
\5\ The OCC reserves the authority to exclude all or a portion of
unrealized gains from Tier 2 capital if the OCC determines that the
equity securities are not prudently valued.
---------------------------------------------------------------------------
(c) Deductions from Capital. The following items are deducted from
the appropriate portion of a national bank's capital base when
calculating its risk-based capital ratio:
(1) Deductions from Tier 1 Capital. The following items are deducted
from Tier 1 capital before the Tier 2 portion of the calculation is
made:
(i) Goodwill;
(ii) Other intangible assets, except as provided in section 2(c)(2)
of this appendix A;
(iii) Deferred tax assets, except as provided in section 2(c)(3) and
(2)(c)(6) of this appendix A, that are dependent upon future taxable
income, which exceed the lesser of either:
(A) The amount of deferred tax assets that the bank could reasonably
expect to realize within one year of the quarter-end Call Report, based
on its estimate of future taxable income for that year; or
(B) 10% of Tier 1 capital, net of goodwill and all intangible assets
other than purchased credit card relationships, mortgage servicing
assets and non-mortgage servicing assets; and
(iv) Credit-enhancing interest-only strips (as defined in section
4(a)(2) of this appendix A), as provided in section 2(c)(4).
(v) Nonfinancial equity investments as provided by section 2(c)(5)
of this appendix A.
(2) Qualifying intangible assets. Subject to the following
conditions, mortgage servicing assets, nonmortgage servicing assets \6\
and purchased credit card relationships need not be deducted from Tier 1
capital:
---------------------------------------------------------------------------
\6\ Intangible assets are defined to exclude IO strips receivable
related to these mortgage and non-mortgage servicing assets. See section
1(c)(18) of this appendix A. Consequently, IO strips receivable related
to mortgage and non-mortgage servicing assets are not required to be
deducted under section 2(c)(2) of this appendix A. However, credit-
enhancing interest-only strips as defined in section 4(a)(2) are
deducted from Tier 1 capital in accordance with section 2(c)(4) of this
appendix A. Any non credit-enhancing IO strips receivable are subject to
a 100% risk weight under section 3(a)(4) of this appendix A.
---------------------------------------------------------------------------
(i) The total of all intangible assets that are included in Tier 1
capital is limited to 100 percent of Tier 1 capital, of which no more
than 25 percent of Tier 1 capital can consist of purchased credit card
relationships and non-mortgage servicing assets in the aggregate.
Calculation of these limitations must be based on Tier 1 capital net of
goodwill and all other identifiable intangibles, other than purchased
credit card relationships, mortgage servicing assets and non-mortgage
servicing assets.
(ii) Banks must value each intangible asset included in Tier 1
capital at least quarterly at the lesser of:
(A) 90 percent of the fair value of each intangible asset,
determined in accordance with section 2(c)(2)(iii) of this appendix A;
or
(B) 100 percent of the remaining unamortized book value.
(iii) The quarterly determination of the current fair value of the
intangible asset must include adjustments for any significant changes in
original valuation assumptions, including changes in prepayment
estimates.
(3) Deferred tax assets--(i) Net unrealized gains and losses on
available-for-sale securities. Net unrealized gains and losses on
available-for-sale securities. Before calculating the amount of deferred
tax assets subject to the limit in section 2(c)(1)(iii) of this appendix
A, a bank may eliminate the deferred tax effects of any net unrealized
holding gains and losses on available-for-sale debt securities. Banks
report these net unrealized holding gains and losses in their Call
Reports as a separate component of equity capital, but exclude them from
the definition of common stockholders' equity for regulatory capital
purposes. A bank that adopts a policy to deduct these amounts must apply
that approach consistently in all future calculations of the amount of
disallowed deferred tax assets under section 2(c)(1)(iii) of this
appendix A.
(ii) Consolidated groups. The amount of deferred tax assets that a
bank can realize from taxes paid in prior carryback years and from
reversals of existing taxable temporary differences generally would not
be deducted from capital. However, for a bank that is a member of a
consolidated group (for tax purposes), the amount of carryback potential
a bank may consider in calculating the limit
[[Page 27]]
on deferred tax assets under section 2(c)(1)(iii) of this appendix A,
may not exceed the amount that the bank could reasonably expect to have
refunded by its parent holding company.
(iii) Estimated future taxable income. Estimated future taxable
income does not include net operating loss carryforwards to be used
during that year or the amount of existing temporary differences
expected to reverse within the year. A bank may use future taxable
income projections for their closest fiscal year, provided it adjusts
the projections for any significant changes that occur or that it
expects to occur. Such projections must include the estimated effect of
tax planning strategies that the bank expects to implement to realize
net operating losses or tax credit carryforwards that will otherwise
expire during the year.
(4) Credit-enhancing interest-only strips. Credit-enhancing
interest-only strips, whether purchased or retained, that exceed 25% of
Tier 1 capital must be deducted from Tier 1 capital. Purchased and
retained credit-enhancing interest-only strips, on a non-tax adjusted
basis, are included in the total amount that is used for purposes of
determining whether a bank exceeds its Tier 1 capital.
(i) The 25% limitation on credit-enhancing interest-only strips will
be based on Tier 1 capital net of goodwill and all identifiable
intangibles, other than purchased credit card relationships, mortgage
servicing assets and non-mortgage servicing assets.
(ii) Banks must value each credit-enhancing interest-only strip
included in Tier 1 capital at least quarterly. The quarterly
determination of the current fair value of the credit-enhancing
interest-only strip must include adjustments for any significant changes
in original valuation assumptions, including changes in prepayment
estimates.
(5) Nonfinancial equity investments--(i) General. (A) A bank must
deduct from its Tier 1 capital the appropriate percentage, as determined
in accordance with Table A, of the adjusted carrying value of all
nonfinancial equity investments held by the bank and its subsidiaries.
Table A--Deduction for Nonfinancial Equity Investments
------------------------------------------------------------------------
Aggregate adjusted carrying value of all
nonfinancial equity investments held Deduction from Tier 1 Capital
directly or indirectly by banks (as a (as a percentage of the
percentage of the Tier 1 capital of the adjusted carrying value of
bank) \1\ the investment)
------------------------------------------------------------------------
Less than 15 percent..................... 8.0 percent.
Greater than or equal to 15 percent but 12.0 percent.
less than 25 percent.
Greater than or equal to 25 percent...... 25.0 percent.
------------------------------------------------------------------------
\1\ For purposes of calculating the adjusted carrying value of
nonfinancial equity investments as a percentage of Tier 1 capital,
Tier 1 capital is defined as the sum of the Tier 1 capital elements
net of goodwill and net of all identifiable intangible assets other
than mortgage servicing assets, nonmortgage servicing assets and
purchased credit card relationships, but prior to the deduction for
disallowed mortgage servicing assets, disallowed nonmortgage servicing
assets, disallowed purchased credit card relationships, disallowed
credit-enhancing interest only strips (both purchased and retained),
disallowed deferred tax assets, and nonfinancial equity investments.
(B) Deductions for nonfinancial equity investments must be applied
on a marginal basis to the portions of the adjusted carrying value of
nonfinancial equity investments that fall within the specified ranges of
the bank's Tier 1 capital. For example, if the adjusted carrying value
of all nonfinancial equity investments held by a bank equals 20 percent
of the Tier 1 capital of the bank, then the amount of the deduction
would be 8 percent of the adjusted carrying value of all investments up
to 15 percent of the bank's Tier 1 capital, and 12 percent of the
adjusted carrying value of all investments equal to, or in excess of, 15
percent of the bank's Tier 1 capital.
(C) The total adjusted carrying value of any nonfinancial equity
investment that is subject to deduction under section 2(c)(5) of this
appendix A is excluded from the bank's weighted risk assets for purposes
of computing the denominator of the bank's risk-based capital ratio. For
example, if 8 percent of the adjusted carrying value of a nonfinancial
equity investment is deducted from Tier 1 capital, the entire adjusted
carrying value of the investment will be excluded from risk-weighted
assets in calculating the denominator of the risk-based capital ratio.
(D) Banks engaged in equity investment activities, including those
banks with a high concentration in nonfinancial equity investments
(e.g., in excess of 50 percent of Tier 1 capital), will be monitored and
may be subject to heightened supervision, as appropriate, by the OCC to
ensure that such banks maintain capital levels that are appropriate in
light of their equity investment activities, and the OCC may impose a
higher capital charge in any case where the circumstances, such as the
level of risk of the particular investment or portfolio of investments,
the risk management systems of the bank, or other information, indicate
that a higher minimum capital requirement is appropriate.
(ii) Small business investment company investments. (A)
Notwithstanding section
[[Page 28]]
2(c)(5)(i) of this appendix A, no deduction is required for nonfinancial
equity investments that are made by a bank or its subsidiary through a
SBIC that is consolidated with the bank, or in a SBIC that is not
consolidated with the bank, to the extent that such investments, in the
aggregate, do not exceed 15 percent of the Tier 1 capital of the bank.
Except as provided in paragraph (c)(5)(ii)(B) of this section, any
nonfinancial equity investment that is held through or in a SBIC and not
deducted from Tier 1 capital will be assigned to the 100 percent risk-
weight category and included in the bank's consolidated risk-weighted
assets.
(B) If a bank has an investment in a SBIC that is consolidated for
accounting purposes but the SBIC is not wholly owned by the bank, the
adjusted carrying value of the bank's nonfinancial equity investments
held through the SBIC is equal to the bank's proportionate share of the
SBIC's adjusted carrying value of its equity investments in nonfinancial
companies. The remainder of the SBIC's adjusted carrying value (i.e.,
the minority interest holders' proportionate share) is excluded from the
risk-weighted assets of the bank.
(C) If a bank has an investment in a SBIC that is not consolidated
for accounting purposes and has current information that identifies the
percentage of the SBIC's assets that are equity investments in
nonfinancial companies, the bank may reduce the adjusted carrying value
of its investment in the SBIC proportionately to reflect the percentage
of the adjusted carrying value of the SBIC's assets that are not equity
investments in nonfinancial companies. The amount by which the adjusted
carrying value of the bank's investment in the SBIC is reduced under
this paragraph will be risk weighted at 100 percent and included in the
bank's risk-weighted assets.
(D) To the extent the adjusted carrying value of all nonfinancial
equity investments that the bank holds through a consolidated SBIC or in
a nonconsolidated SBIC equals or exceeds, in the aggregate, 15 percent
of the Tier 1 capital of the bank, the appropriate percentage of such
amounts, as set forth in Table A, must be deducted from the bank's Tier
1 capital. In addition, the aggregate adjusted carrying value of all
nonfinancial equity investments held through a consolidated SBIC and in
a nonconsolidated SBIC (including any nonfinancial equity investments
for which no deduction is required) must be included in determining, for
purposes of Table A the total amount of nonfinancial equity investments
held by the bank in relation to its Tier 1 capital.
(iii) Nonfinancial equity investments excluded. (A) Notwithstanding
section 2(c)(5)(i) and (ii) of this appendix A, no deduction from Tier 1
capital is required for the following:
(1) Nonfinancial equity investments (or portion of such investments)
made by the bank prior to March 13, 2000, and continuously held by the
bank since March 13, 2000.
(2) Nonfinancial equity investments made on or after March 13, 2000,
pursuant to a legally binding written commitment that was entered into
by the bank prior to March 13, 2000, and that required the bank to make
the investment, if the bank has continuously held the investment since
the date the investment was acquired.
(3) Nonfinancial equity investments received by the bank through a
stock split or stock dividend on a nonfinancial equity investment made
prior to March 13, 2000, provided that the bank provides no
consideration for the shares or interests received, and the transaction
does not materially increase the bank's proportional interest in the
nonfinancial company.
(4) Nonfinancial equity investments received by the bank through the
exercise on or after March 13, 2000, of an option, warrant, or other
agreement that provides the bank with the right, but not the obligation,
to acquire equity or make an investment in a nonfinancial company, if
the option, warrant, or other agreement was acquired by the bank prior
to March 13, 2000, and the bank provides no consideration for the
nonfinancial equity investments.
(B) Any excluded nonfinancial equity investments described in
section 2(c)(5)(iii)(A) of this appendix A must be included in
determining the total amount of nonfinancial equity investments held by
the bank in relation to its Tier 1 capital for purposes of Table A. In
addition, any excluded nonfinancial equity investments will be risk
weighted at 100 percent and included in the bank's risk-weighted assets.
(6) Netting of Deferred Tax Liability. (i) Banks may elect to deduct
the following assets from Tier 1 capital on a basis that is net of any
associated deferred tax liability:
(A) Goodwill;
(B) Intangible assets acquired due to a nontaxable purchase business
combination, except banks may not elect to deduct from Tier 1 capital on
a basis that is net of any associated deferred tax liability, regardless
of the method by which they were acquired:
(1) Purchased credit card relationships; and
(2) Servicing assets that are includable in Tier 1 capital;
(C) Disallowed servicing assets;
(D) Disallowed credit-enhancing interest-only strips; and
(E) Nonfinancial equity investments, as defined in section 1(c)(1)
of this appendix A.
(ii) Deferred tax liabilities netted in this manner cannot also be
netted against deferred tax assets when determining the
[[Page 29]]
amount of deferred tax assets that are dependent upon future taxable
income as calculated under section 2(c)(1)(iii) of this appendix A.
(7) Deductions from total capital. The following assets are deducted
from total capital:
(i) Investments, both equity and debt, in unconsolidated banking and
finance subsidiaries that are deemed to be capital of the subsidiary;\7\
and
---------------------------------------------------------------------------
\7\ The OCC may require deduction of investments in other
subsidiaries and associated companies, on a case-by-case basis.
---------------------------------------------------------------------------
(ii) Reciprocal holdings of bank capital instruments.
Section 3. Risk Categories/Weights for On-Balance Sheet Assets and Off-
Balance Sheet Items
The denominator of the risk-based capital ratio, i.e., a national
bank's risk-weighted assets, \8\ is derived by assigning that bank's
assets and off-balance sheet items to one of the four risk categories
detailed in section 3(a) of this appendix A. Each category has a
specific risk weight. Before an off-balance sheet item is assigned a
risk weight, it is converted to an on-balance sheet credit equivalent
amount in accordance with section 3(b) of this appendix A. The risk
weight assigned to a particular asset or on-balance sheet credit
equivalent amount determines the percentage of that asset/credit
equivalent that is included in the denominator of the bank's risk-based
capital ratio. Any asset deducted from a bank's capital in computing the
numerator of the risk-based capital ratio is not included as part of the
bank's risk-weighted assets.
---------------------------------------------------------------------------
\8\ The OCC reserves the right to require a bank to compute its
risk-based capital ratio on the basis of average, rather than period-
end, risk-weighted assets when necessary to carry out the purposes of
these guidelines.
---------------------------------------------------------------------------
Some of the assets on a bank's balance sheet may represent an
indirect holding of a pool of assets, e.g., mutual funds, that
encompasses more than one risk weight within the pool. In those
situations, the bank may assign the asset to the risk category
applicable to the highest risk-weighted asset that pool is permitted to
hold pursuant to its stated investment objectives in the fund's
prospectus. Alternatively, the bank may assign the asset on a pro rata
basis to different risk categories according to the investment limits in
the fund's prospectus. In either case, the minimum risk weight that may
be assigned to such a pool is 20%. If a bank assigns the asset on a pro
rata basis, and the sum of the investment limits in the fund's
prospectus exceeds 100%, the bank must assign the highest pro rata
amounts of its total investment to the higher risk category. If, in
order to maintain a necessary degree of liquidity, the fund is permitted
to hold an insignificant amount of its assets in short-term, highly-
liquid securities of superior credit quality (that do not qualify for a
preferential risk weight), such securities generally will not be taken
into account in determining the risk category into which the bank's
holding in the overall pool should be assigned. The prudent use of
hedging instruments by a fund to reduce the risk of its assets will not
increase the risk weighting of the investment in that fund above the 20%
category. However, if a fund engages in any activities that are deemed
to be speculative in nature or has any other characteristics that are
inconsistent with the preferential risk weighting assigned to the fund's
assets, the bank's investment in the fund will be assigned to the 100%
risk category. More detail on the treatment of mortgage-backed
securities is provided in section 3(a)(3)(vi) of this appendix A.
(a) On-Balance Sheet Assets. The following are the risk categories/
weights for on-balance sheet assets.
(1) Zero percent risk weight. (i) Cash, including domestic and
foreign currency owned and held in all offices of a national bank or in
transit. Any foreign currency held by a national bank should be
converted into U.S. dollar equivalents.
(ii) Deposit reserves and other balances at Federal Reserve Banks.
(iii) Securities issued by, and other direct claims on, the United
States Government or its agencies, or the central government of an OECD
country.
(iv) That portion of assets directly and unconditionally guaranteed
by the United States Government or its agencies, or the central
government of an OECD country. \9\
---------------------------------------------------------------------------
\9\ For the treatment of privately-issued mortgage-backed securities
where the underlying pool is comprised solely of mortgage-related
securities issued by GNMA, see infra note 10.
---------------------------------------------------------------------------
(v) That portion of local currency claims on, or unconditionally
guaranteed by, central governments of non-OECD countries, to the extent
the bank has liabilities in that currency. Any amount of such claims
that exceeds the amount of the bank's liabilities in that currency is
assigned to the 100% risk category of section 3(a)(4) of this appendix.
(vi) Gold bullion held in the bank's own vaults or in another bank's
vaults on an allocated basis, to the extent it is backed by gold bullion
liabilities.
(vii) The book value of paid-in Federal Reserve Bank stock.
[[Page 30]]
(viii) That portion of assets and off-balance sheet transactions
\9a\ collateralized by cash or securities issued or directly and
unconditionally guaranteed by the United States Government or its
agencies, or the central government of an OECD country, provided that:
\9b\
---------------------------------------------------------------------------
\9a\ See footnote 22 in section 3(b)(5)(iii) of this appendix A
(collateral held against derivative contracts).
\9b\ Assets and off-balance sheet transactions collateralized by
securities issued or guaranteed by the United States Government or its
agencies, or the central government of an OECD country include, but are
not limited to, securities lending transactions, repurchase agreements,
collateralized letters of credit, such as reinsurance letters of credit,
and other similar financial guarantees. Swaps, forwards, futures, and
options transactions are also eligible, if they meet the collateral
requirements. However, the OCC may at its discretion require that
certain collateralized transactions be risk weighted at 20 percent if
they involve more than a minimal risk.
---------------------------------------------------------------------------
(A) The bank maintains control over the collateral:
(1) If the collateral consists of cash, the cash must be held on
deposit by the bank or by a third-party for the account of the bank;
(2) If the collateral consists of OECD government securities, then
the OECD government securities must be held by the bank or by a third-
party acting on behalf of the bank;
(B) The bank maintains a daily positive margin of collateral fully
taking into account any change in the market value of the collateral
held as security;
(C) Where the bank is acting as a customer's agent in a transaction
involving the loan or sale of securities that is collateralized by cash
or OECD government securities delivered to the bank, any obligation by
the bank to indemnify the customer is limited to no more than the
difference between the market value of the securities lent and the
market value of the collateral received, and any reinvestment risk
associated with the collateral is borne by the customer; and
(D) The transaction involves no more than minimal risk.
(ix) Asset-backed commercial paper (ABCP) that is:
(A) Purchased by the bank on or after September 19, 2008, from a
Securities and Exchange Commission (SEC)-registered open-end investment
company that holds itself out as a money market mutual fund under SEC
Rule 2a-7 (17 CFR 270.2a-7); and
(B) Pledged by the bank to a Federal Reserve Bank to secure
financing from the ABCP lending facility (AMLF) established by the
Federal Reserve Board on September 19, 2008.
(2) 20 percent risk weight. (i) All claims on depository
institutions incorporated in an OECD country, and all assets backed by
the full faith and credit of depository institutions incorporated in an
OECD country. This includes the credit equivalent amount of
participations in commitments and standby letters of credit sold to
other depository institutions incorporated in an OECD country, but only
if the originating bank remains liable to the customer or beneficiary
for the full amount of the commitment or standby letter of credit. Also
included in this category are the credit equivalent amounts of risk
participations in bankers' acceptances conveyed to other depository
institutions incorporated in an OECD country. However, bank-issued
securities that qualify as capital of the issuing bank are not included
in this risk category, but are assigned to the 100% risk category of
section 3(a)(4) of this appendix A.
(ii) Claims on, or guaranteed by depository institutions, other than
the central bank, incorporated in a non-OECD country, with a residual
maturity of one year or less.
(iii) Cash items in the process of collection.
(iv) That portion of assets collateralized by cash or by securities
issued or directly and unconditionally guaranteed by the United States
Government or its agencies, or the central government of an OECD
country, that does not qualify for the zero percent risk-weight
category.
(v) That portion of assets conditionally guaranteed by the United
States Government or its agencies, or the central government of an OECD
country.
(vi) Securities issued by, or other direct claims on, United States
Government-sponsored agencies.
(vii) That portion of assets guaranteed by United States Government-
sponsored agencies. \10\
---------------------------------------------------------------------------
\10\ Privately issued mortgage-backed securities, e.g., CMOs and
REMICs, where the underlying pool is comprised solely of mortgage-
related securities issued by GNMA, FNMA and FHLMC, will be treated as an
indirect holding of the underlying assets and assigned to the 20% risk
category of this section 3(a)(2). If the underlying pool is comprised of
assets which attract different risk weights, e.g., FNMA securities and
conventional mortgages, the bank should generally assign the security to
the highest risk category appropriate for any asset in the pool.
However, on a case-by-case basis, the OCC may allow the bank to assign
the security proportionately to the various risk categories based on the
proportion in which the risk categories are represented by the
composition cash flows of the underlying pool of assets. Before the OCC
will consider a request to proportionately risk-weight such a security,
the bank must have current information for the reporting date that
details the composition and cash flows of the underlying pool of assets.
Furthermore, before a mortgage-related security will receive a risk
weight lower than 100%, it must meet the criteria set forth in section
3(a)(3)(vi) of this appendix A.
---------------------------------------------------------------------------
[[Page 31]]
(viii) That portion of assets collateralized by the current market
value of securities issued or guaranteed by United States Government-
sponsored agencies.
(ix) Claims representing general obligations of any public-sector
entity in an OECD country, and that portion of any claims guaranteed by
any such public-sector entity. In the U.S., these obligations must meet
the requirements of 12 CFR 1.2(b).
(x) Claims on, or guaranteed by, official multilateral lending
institutions or regional development institutions in which the United
States Government is a shareholder or contributing member. \11\
---------------------------------------------------------------------------
\11\ These institutions include, but are not limited to, the
International Bank for Reconstruction and Development (World Bank), the
Inter-American Development Bank, the Asian Development Bank, the African
Development Bank, the European Investments Bank, the International
Monetary Fund and the Bank for International Settlements.
---------------------------------------------------------------------------
(xi) That portion of assets collateralized by the current market
value of securities issued by official multilateral lending institutions
or regional development institutions in which the United States
Government is a shareholder or contributing member.
(xii) That portion of local currency claims conditionally guaranteed
by central governments of non-OECD countries, to the extent the bank has
local currency liabilities in that country. Any amount of such claims
that exceeds the amount of the bank's local currency liabilities is
assigned to the 100% risk category of section 3(a)(4) of this appendix.
(xiii) Claims on, or guaranteed by, a securities firm incorporated
in an OECD country, that satisfies the following conditions:
(A) If the securities firm is incorporated in the United States,
then the firm must be a broker-dealer that is registered with the SEC
and must be in compliance with the SEC's net capital regulation (17 CFR
240.15c3(1)).
(B) If the securities firm is incorporated in any other OECD
country, then the bank must be able to demonstrate that the firm is
subject to consolidated supervision and regulation, including its
subsidiaries, comparable to that imposed on depository institutions in
OECD countries; such regulation must include risk-based capital
standards comparable to those applied to depository institutions under
the Basel Capital Accord. \11a\
---------------------------------------------------------------------------
\11a\ See Accord on International Convergence of Capital Measurement
and Capital Standards as adopted by the Basle Committee on Banking
Regulations and Supervisory Practices (renamed as the Basel Committee on
Banking Supervision), dated July 1988 (amended 1998).
---------------------------------------------------------------------------
(C) The securities firm, whether incorporated in the United States
or another OECD country, must also have a long-term credit rating in
accordance with section 3(a)(2)(xiii)(C)(1) of this appendix A; a parent
company guarantee in accordance with section 3(a)(2)(xiii)(C)(2) of this
appendix A; or a collateralized claim in accordance with section
3(a)(2)(xiii)(C)(3) of this appendix A. Claims representing capital of a
securities firm must be risk weighted at 100 percent in accordance with
section 3(a)(4) of this appendix A.
(1) Credit rating. The securities firm must have either a long-term
issuer credit rating or a credit rating on at least one issue of long-
term unsecured debt, from a NRSRO that is in one of the three highest
investment-grade categories used by the NRSRO. If the securities firm
has a credit rating from more than one NRSRO, the lowest credit rating
must be used to determine the credit rating under this paragraph.
(2) Parent company guarantee. The claim on, or guaranteed by, the
securities firm must be guaranteed by the firm's parent company, and the
parent company must have either a long-term issuer credit rating or a
credit rating on at least one issue of long-term unsecured debt, from a
NRSRO that is in one of the three highest investment-grade categories
used by the NRSRO.
(3) Collateralized claim. The claim on the securities firm must be
collateralized subject to all of the following requirements:
(i) The claim must arise from a reverse repurchase/repurchase
agreement or securities lending/borrowing contract executed using
standard industry documentation.
(ii) The collateral must consist of debt or equity securities that
are liquid and readily marketable.
(iii) The claim and collateral must be marked-to-market daily.
(iv) The claim must be subject to daily margin maintenance
requirements under standard industry documentation.
(v) The contract from which the claim arises can be liquidated,
terminated, or accelerated immediately in bankruptcy or similar
proceedings, and the security or collateral agreement will not be stayed
or avoided under the applicable law of the relevant jurisdiction. To be
exempt from the automatic stay in bankruptcy in the United
[[Page 32]]
States, the claim must arise from a securities contract or a repurchase
agreement under section 555 or 559, respectively, of the Bankruptcy Code
(11 U.S.C. 555 or 559), a qualified financial contract under section
11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or
a netting contract between or among financial institutions under
sections 401-407 of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (912 U.S.C. 4407), or the Regulation EE (12 CFR
part 231).
(3) 50 percent risk weight. (i) Revenue obligations of any public-
sector entity in an OECD country for which the underlying obligor is the
public-sector entity, but which are repayable solely from the revenues
generated by the project financed through the issuance of the
obligations.
(ii) The credit equivalent amount of derivative contracts,
calculated in accordance with section 3(b)(5) of this appendix A, that
do not qualify for inclusion in a lower risk category.
(iii) Loans secured by first mortgages on one-to-four family
residential properties, either owner occupied or rented, provided that
such loans are not otherwise 90 days or more past due, or on nonaccrual
or restructured. It is presumed that such loans will meet the prudent
underwriting standards. For the purposes of the risk-based capital
guidelines, a loan modified on a permanent or trial basis solely
pursuant to the U.S. Department of Treasury's Home Affordable Mortgage
Program will not be considered to have been restructured. If a bank
holds a first lien and junior lien on a one-to-four family residential
property and no other party holds an intervening lien, the transaction
is treated as a single loan secured by a first lien for the purposes of
both determining the loan-to-value ratio and assigning a risk weight to
the transaction. Furthermore, residential property loans made for the
purpose of construction financing are assigned to the 100% risk category
of section 3(a)(4) of this appendix A; however, these loans may be
included in the 50% risk category of this section 3(a)(3) of this
appendix A if they are subject to a legally binding sales contract and
satisfy the requirements of section 3(a)(3)(iv) of this appendix A.
(iv) Loans to residential real estate builders for one-to-four
family residential property construction, if the bank obtains sufficient
documentation demonstrating that the buyer of the home intends to
purchase the home (i.e., a legally binding written sales contract) and
has the ability to obtain a mortgage loan sufficient to purchase the
home (i.e., a firm written commitment for permanent financing of the
home upon completion), subject to the following additional criteria:
(A) The builder must incur at least the first 10% of the direct
costs (i.e., actual costs of the land, labor, and material) before any
drawdown is made under the construction loan and the construction loan
may not exceed 80% of the sales price of the resold home;
(B) The individual purchaser has made a substantial ``earnest money
deposit'' of no less than 3% of the sales price of the home that must be
subject to forfeiture by the individual purchaser if the sales contract
is terminated by the individual purchaser; however, the earnest money
deposit shall not be subject to forfeiture by reason of breach or
termination of the sales contract on the part of the builder;
(C) The earnest money deposit must be held in escrow by the bank
financing the builder or by an independent party in a fiduciary
capacity; the escrow agreement must provide that in the event of default
the escrow funds must be used to defray any cost incurred relating to
any cancellation of the sales contract by the buyer;
(D) If the individual purchaser terminates the contract or if the
loan fails to satisfy any other criterion under this section, then the
bank must immediately recategorize the loan at a 100% risk weight and
must accurately report the loan in the bank's next quarterly
Consolidated Reports of Condition and Income (Call Report);
(E) The individual purchaser must intend that the home will be
owner-occupied;
(F) The loan is made by the bank in accordance with prudent
underwriting standards;
(G) The loan is not more than 90 days past due, or on nonaccrual;
and
(H) The purchaser is an individual(s) and not a partnership, joint
venture, trust, corporation, or any other entity (including an entity
acting as a sole proprietorship) that is purchasing one or more of the
homes for speculative purposes.
(v) Loans secured by a first mortgage on multifamily residential
properties: \11b\
---------------------------------------------------------------------------
\11b\ The portion of multifamily residential property loans that is
sold subject to a pro rata loss sharing arrangement may be treated by
the selling bank as sold to the extent that the sales agreement provides
for the purchaser of the loan to share in any loss incurred on the loan
on a pro rata basis with the selling bank. The portion of multifamily
residential property loans sold subject to any loss sharing arrangement
other than pro rata sharing of the loss shall be accorded the same
treatment as any other asset sold under an agreement to repurchase or
sold with recourse under section 4(b) of this appendix A.
---------------------------------------------------------------------------
(A) The amortization of principal and interest occurs in not more
than 30 years;
(B) The minimum original maturity for repayment of principal is not
less than 7 years;
[[Page 33]]
(C) All principal and interest payments have been made on a timely
basis in accordance with the terms of the loan for at least one year
immediately preceding the risk weighting of the loan in the 50% risk
weight category, and the loan is not otherwise 90 days or more past due,
or on nonaccrual status;
(D) The loan is made in accordance with all applicable requirements
and prudent underwriting standards;
(E) If the rate of interest does not change over the term of the
loan:
(I) The current loan amount outstanding does not exceed 80% of the
current value of the property, as measured by either the value of the
property at origination of the loan (which is the lower of the purchase
price or the value as determined by the initial appraisal, or if
appropriate, the initial evaluation) or the most current appraisal, or
if appropriate, the most current evaluation; and
(II) In the most recent fiscal year, the ratio of annual net
operating income generated by the property (before payment of any debt
service on the loan) to annual debt service on the loan is not less than
120%;\11c\
---------------------------------------------------------------------------
\11c\ For the purposes of the debt service requirements in sections
3(a)(3)(v)(E)(II) and 3(a)(3)(v)(F)(II) of this appendix A, other forms
of debt service coverage that generate sufficient cash flows to provide
comparable protection to the institution may be considered for (a) a
loan secured by cooperative housing or (b) a multifamily residential
property loan if the purpose of the loan is for the development or
purchase of multifamily residential property primarily intended to
provide low- to moderate-income housing, including special operating
reserve accounts or special operating subsidies provided by federal,
state, local or private sources. However, the OCC reserves the right, on
a case-by-case basis, to review the adequacy of any other forms of
comparable debt service coverage relied on by the bank.
---------------------------------------------------------------------------
(F) If the rate of interest changes over the term of the loan:
(I) The current loan amount outstanding does not exceed 75% of the
current value of the property, as measured by either the value of the
property at origination of the loan (which is the lower of the purchase
price or the value as determined by the initial appraisal, or if
appropriate, the initial evaluation) or the most current appraisal, or
if appropriate, the most current evaluation; and
(II) In the most recent fiscal year, the ratio of annual net
operating income generated by the property (before payment of any debt
service on the loan) to annual debt service on the loan is not less than
115%; and
(G) If the loan was refinanced by the borrower:
(I) All principal and interest payments on the loan being refinanced
which were made in the preceding year prior to refinancing shall apply
in determining the one-year timely payment requirement under paragraph
(a)(3)(v)(C) of this section; and
(II) The net operating income generated by the property in the
preceding year prior to refinancing shall apply in determining the
applicable debt service requirements under paragraphs (a)(3)(v)(E) and
(a)(3)(v)(F) of this section.
(vi) Privately-issued mortgage-backed securities, i.e. those that do
not carry the guarantee of a government or government-sponsored agency,
if the privately-issued mortgage-backed securities are at the time the
mortgage-backed securities are originated fully secured by or otherwise
represent a sufficiently secure interest in mortgages that qualify for
the 50% risk weight under paragraphs (a)(3) (iii), (iv) and (v) of this
section, \12\ provided that they meet the following criteria:
---------------------------------------------------------------------------
\12\ If all of the underlying mortgages in the pool do not qualify
for the 50% risk weight, the bank should generally assign the entire
value of the security to the 100% risk category of section 3(a)(4) of
this appendix A; however, on a case-by-case basis, the OCC may allow the
bank to assign only the portion of the security which represents an
interest in, and the cash flows of, nonqualifying mortgages to the 100%
risk category, with the remainder being assigned a risk weight of 50%.
Before the OCC will consider a request to risk weight a mortgage-backed
security on a proportionate basis, the bank must have current
information for the reporting date that details the composition and cash
flows of the underlying pool of mortgages.
---------------------------------------------------------------------------
(A) The underlying assets must be held by an independent trustee
that has a first priority, perfected security interest in the underlying
assets for the benefit of the holders of the security;
(B) The holder of the security must have an undivided pro rata
ownership interest in the underlying assets or the trust that issues the
security must have no liabilities unrelated to the issued securities;
(C) The trust that issues the security must be structured such that
the cash flows from the underlying assets fully meet the cash flows
requirements of the security without undue reliance on any reinvestment
income; and
(D) There must not be any material reinvestment risk associated with
any funds awaiting distribution to the holder of the security.
[[Page 34]]
(4) 100 percent risk weight. All other assets not specified above,
\12a\ including:
---------------------------------------------------------------------------
\12a\ A bank subject to the market risk capital requirements
pursuant to appendix B of this part 3 may calculate the capital
requirement for qualifying securities borrowing transactions pursuant to
section 3(a)(1)(ii) of appendix B of this part 3.
---------------------------------------------------------------------------
(i) Claims on or guaranteed by depository institutions incorporated
in a non-OECD country, as well as claims on the central bank of a non-
OECD country, with a residual maturity exceeding one year.
(ii) All non-local currency claims on non-OECD central governments,
as well as local currency claims on non-OECD central governments that
are not included in section 3(a)(1)(v) of this appendix A.
(iii) Asset-or mortgage backed securities that are externally rated
are risk weighted in accordance with section 4(d) of this appendix A.
(iv) All stripped mortgage-backed securities, including interest
only portions (IOs), principal only portions (POs) and other similar
instruments, regardless of the issuer or guarantor.
(v) Obligations issued by any state or any political subdivision
thereof for the benefit of a private party or enterprise where that
party or enterprise, rather than the issuing state or political
subdivision, is responsible for the timely payment of principal and
interest on the obligation, e.g., industrial development bonds.
(vi) Claims on commercial enterprises owned by non-OECD and OECD
central governments.
(vii) Any investment in an unconsolidated subsidiary that is not
required to be deducted from total capital pursuant to section 2(c)(3)
of this appendix A.
(viii) Instruments issued by depository institutions incorporated in
OECD and non-OECD countries that qualify as capital of the issuer.
(ix) Investments in fixed assets, premises, and other real estate
owned.
(x) Claims representing capital of a securities firm notwithstanding
section 3(a)(2)(xiii) of this appendix A.
(5) [Reserved]
(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.
(b) Off-Balance Sheet Activities. The risk weight assigned to an
off-balance sheet item is determined by a two-step process. First, the
face amount of the off-balance sheet item is multiplied by the
appropriate credit conversion factor specified in this section. This
calculation translates the face amount of an off-balance sheet item into
an on-balance sheet credit equivalent amount. Second, the resulting
credit equivalent amount is then assigned to the proper risk category
using the criteria regarding obligors, guarantors, and collateral listed
in section 3(a) of this appendix A, or external credit rating in
accordance with section 4(d), if applicable. Collateral and guarantees
are applied to the face amount of an off-balance sheet item; however,
with respect to derivative contracts under section 3(b)(5) of this
appendix A, collateral and guarantees are applied to the credit
equivalent amounts of such derivative contracts. The following are the
credit conversion factors and the off-balance sheet items to which they
apply. However, direct credit substitutes, recourse obligations, and
securities issued in connection with asset securitizations are treated
as described in section 4 of this appendix A.
(1) 100 percent credit conversion factor. (i) [Reserved] \13\
---------------------------------------------------------------------------
\13\ [Reserved]
---------------------------------------------------------------------------
(ii) Risk participations purchased in bankers' acceptances;
(iii) [Reserved] \14\
---------------------------------------------------------------------------
\14\ [Reserved]
---------------------------------------------------------------------------
(iv) Contingent obligations with a certain draw down, e.g., legally
binding agreements to purchase assets as a specified future date.
(v) Indemnification of customers whose securities the bank has lent
as agent. If the customer is not indemnified against loss by the bank,
the transaction is excluded from the risk-based capital calculation.
\15\
---------------------------------------------------------------------------
\15\ When a bank lends its own securities, the transaction is
treated as a loan. When a bank lends its own securities or, acting as
agent, agrees to indemnify a customer, the transaction is assigned to
the risk weight appropriate to the obligor or collateral that is
delivered to the lending or indemnifying institution or to an
independent custodian acting on their behalf.
---------------------------------------------------------------------------
(2) 50 percent credit conversion factor. (i) Transaction-related
contingencies including, among other things, performance bonds and
performance-based standby letters of credit related to a particular
transaction. \16\ To the
[[Page 35]]
extent permitted by law or regulation, performance-based standby letters
of credit include such things as arrangements backing subcontractors'
and suppliers' performance, labor and materials contracts, and
construction bids;
---------------------------------------------------------------------------
\16\ For purposes of this section 3(b)(2)(i), a ``performance-based
standby letter of credit'' is any letter of credit, or similar
arrangement, however named or described, which represents an irrevocable
obligation to the beneficiary on the part of the issuer to make payment
on account of any default by the account party in the performance of a
non-financial or commercial obligation. Participations in performance-
based standby letters of credit are treated in accordance with section 4
of this appendix A.
---------------------------------------------------------------------------
(ii) Unused portion of commitments with an original maturity
exceeding one-year; \17\ however, commitments that are asset-backed
commercial paper liquidity facilities must satisfy the eligibility
requirements under section 3(b)(6)(ii) of this appendix A;
---------------------------------------------------------------------------
\17\ Participations in commitments are treated in accordance with
section 4 of this appendix A.
---------------------------------------------------------------------------
(iii) Revolving underwriting facilities, note issuance facilities,
and similar arrangements pursuant to which the bank's customer can issue
short-term debt obligations in its own name, but for which the bank has
a legally binding commitment to either:
(A) Purchase the obligations the customer is unable to sell by a
stated date; or
(B) Advance funds to its customer, if the obligations cannot be
sold.
(3) 20 percent credit conversion factor. (i) Trade-related
contingencies. These are short-term self-liquidating instruments used to
finance the movement of goods and are collateralized by the underlying
shipment. A commercial letter of credit is an example of such an
instrument.
(4) 10 percent credit conversion factor. Unused portion of asset-
backed commercial paper liquidity facilities with an original maturity
of one year or less that satisfy the eligibility requirements under
section 3(b)(6)(ii) of this appendix A.
(5) Zero percent credit conversion factor. (i) Unused portion of
commitments with an original maturity of one year or less, but excluding
any asset-backed commercial paper liquidity facilities;
(ii) Unused portion of commitments with an original maturity of
greater than one year, if they are unconditionally cancelable \18\ at
any time at the option of the bank and the bank has the contractual
right to make, and in fact does make, either--
---------------------------------------------------------------------------
\18\ See section 1(c)(26) of appendix A to this part.
---------------------------------------------------------------------------
(A) A separate credit decision based upon the borrower's current
financial condition, before each drawing under the lending facility; or
(B) An annual (or more frequent) credit review based upon the
borrower's current financial condition to determine whether or not the
lending facility should be continued; and
(iii) The unused portion of retail credit card lines or other
related plans that are unconditionally cancelable by the bank in
accordance with applicable law.
(6) Liquidity facility provided to asset-backed commercial paper.
(i) Noneligible asset-backed commercial paper liquidity facilities
treated as recourse or direct credit substitute. Unused portion of
asset-backed commercial paper liquidity facilities that do not meet the
criteria for an eligible liquidity facility provided to asset-backed
commercial paper in accordance with section 3(b)(6)(ii) of this appendix
A must be treated as recourse or as a direct credit substitute, and
assessed the appropriate risk-based capital charge in accordance with
section 4 of this appendix A.
(ii) Eligible asset-backed commercial paper liquidity facility.
Except as provided in section 3(b)(6)(iii) of this appendix A, in order
for the unused portion of an asset-backed commercial paper liquidity
facility to be eligible for either the 50 percent or 10 percent credit
conversion factors under section 3(b)(2)(ii) or 3(b)(4) of this appendix
A, the asset-backed commercial paper liquidity facility must satisfy the
following criteria:
(A) At the time of draw, the asset-backed commercial paper liquidity
facility must be subject to an asset quality test that:
(1) Precludes funding of assets that are 90 days or more past due or
in default; and
(2) If the assets that an asset-backed commercial paper liquidity
facility is required to fund are externally rated securities at the time
they are transferred into the program, the asset-backed commercial paper
liquidity facility must be used to fund only securities that are
externally rated investment grade at the time of funding. If the assets
are not externally rated at the time they are transferred into the
program, then they are not subject to this investment grade requirement.
(B) The asset-backed commercial paper liquidity facility must
provide that, prior to any draws, the bank's funding obligation is
reduced to cover only those assets that satisfy the funding criteria
under the asset quality test as provided in section 3(b)(6)(ii)(A) of
this appendix A.
(iii) Exception to eligibility requirements for assets guaranteed by
the United States Government or its agencies, or the central government
of an OECD country. Notwithstanding the eligibility requirements for
asset-backed commercial paper program liquidity facilities in section
3(b)(6)(ii), the unused portion of an asset-backed commercial paper
liquidity facility may still qualify for either the 50 percent or 10
percent credit conversion factors under section 3(b)(2)(ii) or 3(b)(4)
of this appendix A, if the assets required to be funded by the asset-
back commercial paper liquidity facility are guaranteed, either
conditionally or unconditionally, by the United
[[Page 36]]
States Government or its agencies, or the central government of an OECD
country.
(iv) Transition period for asset-backed commercial paper liquidity
facilities. Notwithstanding the eligibility requirements for asset-
backed commercial paper program liquidity facilities in section
3(b)(6)(i) of this appendix A, the unused portion of an asset-backed
commercial paper liquidity will be treated as eligible liquidity
facilities pursuant to section 3(b)(6)(ii) of this appendix A regardless
of their compliance with the definition of eligible liquidity facilities
until September 30, 2005. On that date and thereafter, the unused
portions of asset-backed commercial paper liquidity facilities that do
not meet the eligibility requirements in section 3(b)(6)(i) of this
appendix A will be treated as recourse obligations or direct credit
substitutes.
(7) Derivative contracts--(i) Calculation of credit equivalent
amounts. The credit equivalent amount of a derivative contract equals
the sum of the current credit exposure and the potential future credit
exposure of the derivative contract. The calculation of credit
equivalent amounts must be measured in U.S. dollars, regardless of the
currency or currencies specified in the derivative contract.
(A) Current credit exposure. The current credit exposure for a
single derivative contract is determined by the mark-to-market value of
the derivative contract. If the mark-to-market value is positive, then
the current credit exposure equals that mark-to-market value. If the
mark-to-market is zero or negative, then the current credit exposure is
zero. The current credit exposure for multiple derivative contracts
executed with a single counterparty and subject to a qualifying
bilateral netting contract is determined as provided by section
3(b)(5)(ii)(A) of this appendix A.
(B) Potential future credit exposure. The potential future credit
exposure for a single derivative contract, including a derivative
contract with negative mark-to-market value, is calculated by
multiplying the notional principal \19\ of the derivative contract by
one of the credit conversion factors in Table A--Conversion Factor
Matrix of this appendix A, for the appropriate category. \20\ The
potential future credit exposure for gold contracts shall be calculated
using the foreign exchange rate conversion factors. For any derivative
contract that does not fall within one of the specified categories in
Table A--Conversion Factor Matrix of this appendix A, the potential
future credit exposure shall be calculated using the other commodity
conversion factors. Subject to examiner review, banks should use the
effective rather than the apparent or stated notional amount in
calculating the potential future credit exposure. The potential future
credit exposure for multiple derivatives contracts executed with a
single counterparty and subject to a qualifying bilateral netting
contract is determined as provided by section 3(b)(5)(ii)(A) of this
appendix A.
---------------------------------------------------------------------------
\19\ For purposes of calculating either the potential future credit
exposure under section 3(b)(5)(i)(B) of this appendix A or the gross
potential future credit exposure under section 3(b)(5)(ii)(A)(2) of this
appendix A for foreign exchange contracts and other similar contracts in
which the notional principal is equivalent to the cash flows, total
notional principal is the net receipts to each party falling due on each
value date in each currency.
\20\ No potential future credit exposure is calculated for single
currency interest rate swaps in which payments are made based upon two
floating indices, so-called floating/floating or basis swaps; the credit
equivalent amount is measured solely on the basis of the current credit
exposure.
Table B--Conversion Factor Matrix \1\
----------------------------------------------------------------------------------------------------------------
Foreign
Interest exchange Precious Other
Remaining maturity \2\ rate rate and Equity \2\ metals commodity
gold
----------------------------------------------------------------------------------------------------------------
One year or less............................... 0.0 1.0 6.0 7.0 10.0
Over one to five years......................... 0.5 5.0 8.0 7.0 12.0
Over five years................................ 1.5 7.5 10.0 8.0 15.0
----------------------------------------------------------------------------------------------------------------
\1\ For derivative contracts with multiple exchanges of principal, the conversion factors are multiplied by the
number of remaining payments in the derivative contract.
\2\ For derivative contracts that automatically reset to zero value following a payment, the remaining maturity
equals the time until the next payment. However, interest rate contracts with remaining maturities of greater
than one year shall be subject to a minimum conversion factor of 0.5 percent.
(ii) Derivative contracts subject to a qualifying bilateral netting
contract--(A) Netting calculation. The credit equivalent amount for
multiple derivative contracts executed with a single counterparty and
subject to a qualifying bilateral netting contract as provided by
section (3)(b)(5)(ii)(B) of this appendix A
[[Page 37]]
is calculated by adding the net current credit exposure and the adjusted
sum of the potential future credit exposure for all derivative contracts
subject to the qualifying bilateral netting contract.
(1) Net current credit exposure. The net current credit exposure is
the net sum of all positive and negative mark-to-market values of the
individual derivative contracts subject to a qualifying bilateral
netting contract. If the net sum of the mark-to-market value is
positive, then the net current credit exposure equals that net sum of
the mark-to-market value. If the net sum of the mark-to-market value is
zero or negative, then the net current credit exposure is zero.
(2) Adjusted sum of the potential future credit exposure. The
adjusted sum of the potential future credit exposure is calculated as:
Anet=0.4xAgross+(0.6xNGRxAgross)
Anet is the adjusted sum of the potential future credit
exposure, Agross is the gross potential future credit
exposure, and NGR is the net to gross ratio. Agross is the
sum of the potential future credit exposure (as determined under section
3(b)(5)(i)(B) of this appendix A) for each individual derivative
contract subject to the qualifying bilateral netting contract. The NGR
is the ratio of the net current credit exposure to the gross current
credit exposure. In calculating the NGR, the gross current credit
exposure equals the sum of the positive current credit exposures (as
determined under section 3(b)(5)(i)(A) of this appendix A) of all
individual derivative contracts subject to the qualifying bilateral
netting contract.
(B) Qualifying bilateral netting contract. In determining the
current credit exposure for multiple derivative contracts executed with
a single counterparty, a bank may net derivative contracts subject to a
qualifying bilateral netting contract by offsetting positive and
negative mark-to-market values, provided that:
(1) The qualifying bilateral netting contract is in writing.
(2) The qualifying bilateral netting contract is not subject to a
walkaway clause.
(3) The qualifying bilateral netting contract creates a single legal
obligation for all individual derivative contracts covered by the
qualifying bilateral netting contract. In effect, the qualifying
bilateral netting contract must provide that the bank would have a
single claim or obligation either to receive or to pay only the net
amount of the sum of the positive and negative mark-to-market values on
the individual derivative contracts covered by the qualifying bilateral
netting contract. The single legal obligation for the net amount is
operative in the event that a counterparty, or a counterparty to whom
the qualifying bilateral netting contract has been assigned, fails to
perform due to any of the following events: default, insolvency,
bankruptcy, or other similar circumstances.
(4) The bank obtains a written and reasoned legal opinion(s) that
represents, with a high degree of certainty, that in the event of a
legal challenge, including one resulting from default, insolvency,
bankruptcy, or similar circumstances, the relevant court and
administrative authorities would find the bank's exposure to be the net
amount under:
(i) The law of the jurisdiction in which the counterparty is
chartered or the equivalent location in the case of noncorporate
entities, and if a branch of the counterparty is involved, then also
under the law of the jurisdiction in which the branch is located;
(ii) The law of the jurisdiction that governs the individual
derivative contracts covered by the bilateral netting contract; and
(iii) The law of the jurisdiction that governs the qualifying
bilateral netting contract.
(5) The bank establishes and maintains procedures to monitor
possible changes in relevant law and to ensure that the qualifying
bilateral netting contract continues to satisfy the requirement of this
section.
(6) The bank maintains in its files documentation adequate to
support the netting of a derivative contract. \21\
---------------------------------------------------------------------------
\21\ By netting individual derivative contracts for the purpose of
calculating its credit equivalent amount, a bank represents that
documentation adequate to support the netting of a set of derivative
contract is in the bank's files and available for inspection by the OCC.
Upon determination by the OCC that a bank's files are inadequate or that
a qualifying bilateral netting contract may not be legally enforceable
in any one of the bodies of law described in section
3(b)(5)(ii)(B)(3)(i) through (iii) of this appendix A, the underlying
derivative contracts may not be netted for the purposes of this section.
---------------------------------------------------------------------------
(iii) Risk weighting. Once the bank determines the credit equivalent
amount for a derivative contract or a set of derivative contracts
subject to a qualifying bilateral netting contract, the bank assigns
that amount to the risk weight category appropriate to the counterparty,
or, if relevant, the nature of any collateral or guarantee. \22\
However,
[[Page 38]]
the maximum weight that will be applied to the credit equivalent amount
of such derivative contract(s) is 50 percent.
---------------------------------------------------------------------------
\22\ Derivative contracts are an exception to the general rule of
applying collateral and guarantees to the face value of off-balance
sheet items. The sufficiency of collateral and guarantees is determined
on the basis of the credit equivalent amount of derivative contracts.
However, collateral and guarantees held against a qualifying bilateral
netting contract is not recognized for capital purposes unless it is
legally available for all contracts included in the qualifying bilateral
netting contract.
---------------------------------------------------------------------------
(iv) Exceptions. The following derivative contracts are not subject
to the above calculation, and therefore, are not part of the denominator
of a national bank's risk-based capital ratio:
(A) An exchange rate contract with an original maturity of 14
calendar days or less;\23\ and
---------------------------------------------------------------------------
\23\ Notwithstanding section 3(b)(5)(B) of this appendix A, gold
contracts do not qualify for this exception.
---------------------------------------------------------------------------
(B) A derivative contract that is traded on an exchange requiring
the daily payment of any variations in the market value of the contract.
Section 4. Recourse, Direct Credit Substitutes and Positions in
Securitizations
(a) Definitions. For purposes of this section 4 of this appendix A,
the following definitions apply:
(1) Credit derivative means a contract that allows one party (the
protection purchaser) to transfer the credit risk of an asset or off-
balance sheet credit exposure to another party (the protection
provider). The value of a credit derivative is dependent, at least in
part, on the credit performance of a ``reference asset.''
(2) Credit-enhancing interest-only strip means an on-balance sheet
asset that, in form or in substance:
(i) Represents the contractual right to receive some or all of the
interest due on transferred assets; and
(ii) Exposes the bank to credit risk directly or indirectly
associated with the transferred assets that exceeds its pro rata claim
on the assets whether through subordination provisions or other credit
enhancing techniques.
(3) Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of assets (including loan servicing assets) and that
obligate a bank to protect investors from losses arising from credit
risk in the assets transferred or the loans serviced. Credit-enhancing
representations and warranties include promises to protect a party from
losses resulting from the default or nonperformance of another party or
from an insufficiency in the value of the collateral. Credit-enhancing
representations and warranties do not include:
(i) Early-default clauses and similar warranties that permit the
return of, or premium refund clauses covering, 1-4 family residential
first mortgage loans (as described in section 3(a)(3)(iii) of this
appendix A) for a period not to exceed 120 days from the date of
transfer. These warranties may cover only those loans that were
originated within 1 year of the date of transfer;
(ii) Premium refund clauses that cover assets guaranteed, in whole
or in part, by the U.S. Government, a U.S. Government agency, or a U.S.
Government-sponsored enterprise, provided the premium refund clauses are
for a period not to exceed 120 days from the date of transfer; or
(iii) Warranties that permit the return of assets in instances of
fraud, misrepresentation or incomplete documentation.
(4) Direct credit substitute means an arrangement in which a bank
assumes, in form or in substance, credit risk associated with an on- or
off-balance sheet asset or exposure that was not previously owned by the
bank (third-party asset) and the risk assumed by the bank exceeds the
pro rata share of the bank's interest in the third-party asset. If a
bank has no claim on the third-party asset, then the bank's assumption
of any credit risk is a direct credit substitute. Direct credit
substitutes include:
(i) Financial standby letters of credit that support financial
claims on a third party that exceed a bank's pro rata share in the
financial claim;
(ii) Guarantees, surety arrangements, credit derivatives and similar
instruments backing financial claims that exceed a bank's pro rata share
in the financial claim;
(iii) Purchased subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
(iv) Credit derivative contracts under which the bank assumes more
than its pro rata share of credit risk on a third-party asset or
exposure;
(v) Loans or lines of credit that provide credit enhancement for the
financial obligations of a third party;
(vi) Purchased loan servicing assets if the servicer is responsible
for credit losses or if the servicer makes or assumes credit-enhancing
representations and warranties with respect to the loans serviced.
Mortgage servicer case advances that meet the conditions of section
4(a)(8)(i) and (ii) of this appendix A, are not direct credit
substitutes;
(vii) Clean-up calls on third-party assets. Clean-up calls that are
10% or less of the original pool balance and that are exercisable at the
option of the bank are not direct credit substitutes; and
(viii) Unused portion of noneligible asset-backed commercial paper
liquidity facilities.
(5) Externally rated means that an instrument or obligation has
received a credit rating from at least one nationally recognized
statistical rating organization.
(6) Face amount means the notional principal, or face value, amount
of an off-balance sheet item; the amortized cost of an asset not held
for trading purposes; and the fair value of a trading asset.
[[Page 39]]
(7) Financial asset means cash or other monetary instrument,
evidence of debt, evidence of an ownership interest in an entity, or a
contract that conveys a right to receive or exchange cash or another
financial instrument from another party.
(8) Financial standby letter of credit means a letter of credit or
similar arrangement that represents an irrevocable obligation to a
third-party beneficiary:
(i) To repay money borrowed by, or advanced to, or for the account
of, a second party (the account party); or
(ii) To make payment on behalf of the account party, in the event
that the account party fails to fulfill its obligation to the
beneficiary.
(9) Mortgage servicer cash advance means funds that a residential
mortgage servicer advances to ensure an uninterrupted flow of payments,
including advances made to cover foreclosure costs or other expenses to
facilitate the timely collection of the loan. A mortgage servicer cash
advance is not a recourse obligation or a direct credit substitute if:
(i) The servicer is entitled to full reimbursement and this right is
not subordinated to other claims on the cash flows from the underlying
asset pool; or
(ii) For any one loan, the servicer's obligation to make
nonreimbursable advances is contractually limited to an insignificant
amount of the outstanding principal amount of that loan.
(10) Nationally recognized statistical rating organization (NRSRO)
means an entity recognized by the Division of Market Regulation of the
Securities and Exchange Commission (or any successor Division)
(Commission) as a nationally recognized statistical rating organization
for various purposes, including the Commission's uniform net capital
requirements for brokers and dealers.
(11) Recourse means a bank's retention, in form or in substance, of
any credit risk directly or indirectly associated with an asset it has
sold that exceeds a pro rata share of that bank's claim on the asset. If
a bank has no claim on a sold asset, then the retention of any credit
risk is recourse. A recourse obligation typically arises when a bank
transfers assets and retains an explicit obligation to repurchase assets
or to absorb losses due to a default on the payment of principal or
interest or any other deficiency in the performance of the underlying
obligor or some other party. Recourse may also exist implicitly if a
bank provides credit enhancement beyond any contractual obligation to
support assets it has sold. The following are examples of recourse
arrangements:
(i) Credit-enhancing representations and warranties made on
transferred assets;
(ii) Loan servicing assets retained pursuant to an agreement under
which the bank will be responsible for losses associated with the loans
serviced. Mortgage servicer cash advances that meet the conditions of
section 4(a)(9)(i) and (ii) of this appendix A, are not recourse
arrangements;
(iii) Retained subordinated interests that absorb more than their
pro rata share of losses from the underlying assets;
(iv) Assets sold under an agreement to repurchase, if the assets are
not already included on the balance sheet;
(v) Loan strips sold without contractual recourse where the maturity
of the transferred portion of the loan is shorter than the maturity of
the commitment under which the loan is drawn;
(vi) Credit derivatives issued that absorb more than the bank's pro
rata share of losses from the transferred assets;
(vii) Clean-up calls. Clean-up calls that are 10% or less of the
original pool balance and that are exercisable at the option of the bank
are not recourse arrangements; and
(viii) Noneligible asset-backed commercial paper liquidity
facilities.
(12) Residual interest means any on-balance sheet asset that
represents an interest (including a beneficial interest) created by a
transfer that qualifies as a sale (in accordance with generally accepted
accounting principles) of financial assets, whether through a
securitization or otherwise, and that exposes a bank to any credit risk
directly or indirectly associated with the transferred asset that
exceeds a pro rata share of that bank's claim on the asset, whether
through subordination provisions or other credit enhancement techniques.
Residual interests generally include credit-enhancing interest-only
strips, spread accounts, cash collateral accounts, retained subordinated
interests (and other forms of overcollateralization) and similar assets
that function as a credit enhancement. Residual interests further
include those exposures that, in substance, cause the bank to retain the
credit risk of an asset or exposure that had qualified as a residual
interest before it was sold. Residual interests generally do not include
interests purchased from a third party.
(13) Risk participation means a participation in which the
originating party remains liable to the beneficiary for the full amount
of an obligation (e.g. a direct credit substitute) notwithstanding that
another party has acquired a participation in that obligation.
(14) Securitization means the pooling and repackaging by a special
purpose entity of assets or other credit exposures that can be sold to
investors. Securitization includes transactions that create stratified
credit risk positions whose performance is dependent upon an underlying
pool of credit exposures, including loans and commitments.
(15) Structured finance program means a program where receivable
interests and asset-
[[Page 40]]
backed securities issued by multiple participants are purchased by a
special purpose entity that repackages those exposures into securities
that can be sold to investors. Structured finance programs allocate
credit risks, generally, between the participants and credit enhancement
provided to the program.
(16) Traded position means a position retained, assumed or issued in
connection with a securitization that is externally rated, where there
is a reasonable expectation that, in the near future, the rating will be
relied upon by:
(i) Unaffiliated investors to purchase the position; or
(ii) An unaffiliated third party to enter into a transaction
involving the position, such as a purchase, loan or repurchase
agreement.
(b) Credit equivalent amounts and risk weights of recourse
obligations and direct credit substitutes--(1) Credit-equivalent amount.
Except as otherwise provided, the credit-equivalent amount for a
recourse obligation or direct credit substitute is the full amount of
the credit-enhanced assets for which the bank directly or indirectly
retains or assumes credit risk multiplied by a 100% conversion factor.
(2) Risk-weight factor. To determine the bank's risk-weighted assets
for off-balance sheet recourse obligations and direct credit
substitutes, the credit equivalent amount is assigned to the risk
category appropriate to the obligor in the underlying transaction, after
considering any associated guarantees or collateral. For a direct credit
substitute that is an on-balance sheet asset (e.g., a purchased
subordinated security), a bank must calculate risk-weighted assets using
the amount of the direct credit substitute and the full amount of the
assets it supports, i.e., all the more senior positions in the
structure.
(c) Credit equivalent amount and risk weight of participations in,
and syndications of, direct credit substitutes. The credit equivalent
amount for a participation interest in, or syndication of, a direct
credit substitute is calculated and risk weighted as follows:
(1) In the case of a direct credit substitute in which a bank has
conveyed a risk participation, the full amount of the assets that are
supported by the direct credit substitute is converted to a credit
equivalent amount using a 100% conversion factor. The pro rata share of
the credit equivalent amount that has been conveyed through a risk
participation is then assigned to whichever risk-weight category is
lower: the risk-weight category appropriate to the obligor in the
underlying transaction, after considering any associated guarantees or
collateral, or the risk-weight category appropriate to the party
acquiring the participation. The pro rata share of the credit equivalent
amount that has not been participated out is assigned to the risk-weight
category appropriate to the obligor after considering any associated
guarantees or collateral.
(2) In the case of a direct credit substitute in which the bank has
acquired a risk participation, the acquiring bank's pro rata share of
the direct credit substitute is multiplied by the full amount of the
assets that are supported by the direct credit substitute and converted
using a 100% credit conversion factor. The resulting credit equivalent
amount is then assigned to the risk-weight category appropriate to the
obligor in the underlying transaction, after considering any associated
guarantees or collateral.
(3) In the case of a direct credit substitute that takes the form of
a syndication where each bank or participating entity is obligated only
for its pro rata share of the risk and there is no recourse to the
originating entity, each bank's credit equivalent amount will be
calculated by multiplying only its pro rata share of the assets
supported by the direct credit substitute by a 100% conversion factor.
The resulting credit equivalent amount is then assigned to the risk-
weight category appropriate to the obligor in the underlying
transaction, after considering any associated guarantees or collateral.
(d) Externally rated positions: credit-equivalent amounts and risk
weights--(1) Traded positions. With respect to a recourse obligation,
direct credit substitute, residual interest (other than a credit-
enhancing interest-only strip) or asset- or mortgage-backed security
that is a ``traded position'' and that has received an external rating
on a long-term position that is one grade below investment grade or
better or a short-term position that is investment grade, the bank may
multiply the face amount of the position by the appropriate risk weight,
determined in accordance with Tables C or D of this appendix A. \24\ If
a traded position receives more than one external rating, the lowest
single rating will apply.
---------------------------------------------------------------------------
\24\ Stripped mortgage-backed securities or other similar
instruments, such as interest-only or principal-only strips, that are
not credit enhancing must be assigned to the 100% risk category.
[[Page 41]]
Table C
------------------------------------------------------------------------
Risk weight
Long-term rating category Examples (In percent)
------------------------------------------------------------------------
Highest or second highest AAA, AA............. 20
investment grade.
Third highest investment grade.... A................... 50
Lowest investment grade........... BBB................. 100
One category below investment BB.................. 200
grade.
------------------------------------------------------------------------
Table D
------------------------------------------------------------------------
Risk weight
Short-term rating category Examples (In percent)
------------------------------------------------------------------------
Highest investment grade.......... A-1, P-1............ 20
Second highest investment grade... A-2, P-2............ 50
Lowest investment grade........... A-3, P-3............ 100
------------------------------------------------------------------------
(2) Non-traded positions. A recourse obligation, direct credit
substitute, residual interest (but not a credit-enhancing interest-only
strip) or asset- or mortgage-backed security extended in connection with
a securitization that is not a ``traded position'' may be assigned a
risk weight in accordance with section 4(d)(1) of this appendix A if:
(i) It has been externally rated by more than one NRSRO;
(ii) It has received an external rating on a long-term position that
is one category below investment grade or better or a short-term
position that is investment grade by all NRSROs providing a rating;
(iii) The ratings are publicly available; and
(iv) The ratings are based on the same criteria used to rate traded
positions.
If the ratings are different, the lowest rating will determine the risk
category to which the recourse obligation, residual interest or direct
credit substitute will be assigned.
(e) Senior positions not externally rated. For a recourse
obligation, direct credit substitute, residual interest or asset- or
mortgage-backed security that is not externally rated but is senior or
preferred in all features to a traded position (including
collateralization and maturity), a bank may apply a risk weight to the
face amount of the senior position in accordance with section 4(d)(1) of
this appendix A, based upon the traded position, subject to any current
or prospective supervisory guidance and the bank satisfying the OCC that
this treatment is appropriate. This section will apply only if the
traded position provides substantive credit support to the unrated
position until the unrated position matures.
(f) Residual Interests--(1) Concentration limit on credit-enhancing
interest-only strips. In addition to the capital requirement provided by
section 4(f)(2) of this appendix A, a bank must deduct from Tier 1
capital all credit-enhancing interest-only strips in excess of 25
percent of Tier 1 capital in accordance with section 2(c)(2)(iv) of this
appendix A.
(2) Credit-enhancing interest-only strip capital requirement. After
applying the concentration limit to credit-enhancing interest-only
strips in accordance with section (f)(1), a bank must maintain risk-
based capital for a credit-enhancing interest-only strip equal to the
remaining amount of the credit-enhancing interest-only strip (net of any
existing associated deferred tax liability), even if the amount of risk-
based capital required to be maintained exceeds the full risk-based
capital requirement for the assets transferred. Transactions that, in
substance, result in the retention of credit risk associated with a
transferred credit-enhancing interest-only strip will be treated as if
the credit-enhancing interest-only strip was retained by the bank and
not transferred.
(3) Other residual interests capital requirement. Except as provided
in sections (d) or (e) of this section, a bank must maintain risk-based
capital for a residual interest (excluding a credit-enhancing interest-
only strip) equal to the face amount of the residual interest that is
retained on the balance sheet (net of any existing associated deferred
tax liability), even if the amount of risk-based capital required to be
maintained exceeds the full risk-based capital requirement for the
assets transferred. Transactions that, in substance, result in the
retention of credit risk associated with a transferred residual interest
will be treated as if the residual interest was retained by the bank and
not transferred.
(4) Residual interests and other recourse obligations. Where the
aggregate capital requirement for residual interests (including credit-
enhancing interest-only strips) and recourse obligations arising from
the same transfer of assets exceed the full risk-based capital
requirement for those assets, a bank must maintain risk-based capital
equal to the greater of the risk-based capital requirement for the
residual interest as calculated under sections 4(f)(1) through (3) of
this appendix A
[[Page 42]]
or the full risk-based capital requirement for the assets transferred.
(g) Positions that are not rated by an NRSRO. A position (but not a
residual interest) extended in connection with a securitization and that
is not rated by an NRSRO may be risk-weighted based on the bank's
determination of the credit rating of the position, as specified in
Table E of this appendix A, multiplied by the face amount of the
position. In order to qualify for this treatment, the bank's system for
determining the credit rating of the position must meet one of the three
alternative standards set out in section 4(g)(1)through (3) of this
appendix A.
Table E
------------------------------------------------------------------------
Risk weight
Rating category Examples (In percent)
------------------------------------------------------------------------
Investment grade.................. BBB, or better...... 100
One category below investment BB.................. 200
grade.
------------------------------------------------------------------------
(1) Internal risk rating used for asset-backed programs. A direct
credit substitute (but not a purchased credit-enhancing interest-only
strip) is assumed by a bank in connection with an asset-backed
commercial paper program sponsored by the bank and the bank is able to
demonstrate to the satisfaction of the OCC, prior to relying upon its
use, that the bank's internal credit risk rating system is adequate.
Adequate internal credit risk rating systems usually contain the
following criteria:
(i) The internal credit risk system is an integral part of the
bank's risk management system that explicitly incorporates the full
range of risks arising from a bank's participation in securitization
activities;
(ii) Internal credit ratings are linked to measurable outcomes, such
as the probability that the position will experience any loss, the
position's expected loss given default, and the degree of variance in
losses given default on that position;
(iii) The bank's internal credit risk system must separately
consider the risk associated with the underlying loans or borrowers, and
the risk associated with the structure of a particular securitization
transaction;
(iv) The bank's internal credit risk system must identify gradations
of risk among ``pass'' assets and other risk positions;
(v) The bank must have clear, explicit criteria that are used to
classify assets into each internal risk grade, including subjective
factors;
(vi) The bank must have independent credit risk management or loan
review personnel assigning or reviewing the credit risk ratings;
(vii) An internal audit procedure should periodically verify that
internal risk ratings are assigned in accordance with the bank's
established criteria.
(viii) The bank must monitor the performance of the internal credit
risk ratings assigned to nonrated, nontraded direct credit substitutes
over time to determine the appropriateness of the initial credit risk
rating assignment and adjust individual credit risk ratings, or the
overall internal credit risk ratings system, as needed; and
(ix) The internal credit risk system must make credit risk rating
assumptions that are consistent with, or more conservative than, the
credit risk rating assumptions and methodologies of NRSROs.
(2) Program Ratings. A direct credit substitute or recourse
obligation (but not a residual interest) is assumed or retained by a
bank in connection with a structured finance program and a NRSRO has
reviewed the terms of the program and stated a rating for positions
associated with the program. If the program has options for different
combinations of assets, standards, internal credit enhancements and
other relevant factors, and the NRSRO specifies ranges of rating
categories to them, the bank may apply the rating category applicable to
the option that corresponds to the bank's position. In order to rely on
a program rating, the bank must demonstrate to the OCC's satisfaction
that the credit risk rating assigned to the program meets the same
standards generally used by NRSROs for rating traded positions. The bank
must also demonstrate to the OCC's satisfaction that the criteria
underlying the NRSRO's assignment of ratings for the program are
satisfied for the particular position. If a bank participates in a
securitization sponsored by another party, the OCC may authorize the
bank to use this approach based on a program rating obtained by the
sponsor of the program.
(3) Computer Program. The bank is using an acceptable credit
assessment computer program to determine the rating of a direct credit
substitute or recourse obligation (but not a residual interest) extended
in connection with a structured finance program. A NRSRO must have
developed the computer program and the bank must demonstrate to the
OCC's satisfaction that ratings under the program correspond credibly
and reliably with the rating of traded positions.
(h) Limitations on risk-based capital requirements--(1) Low-level
exposure rule. If the maximum contractual exposure to loss retained
[[Page 43]]
or assumed by a bank is less than the effective risk-based capital
requirement, as determined in accordance with section 4(b) of this
appendix A, for the asset supported by the bank's position, the risk
based capital required under this appendix A is limited to the bank's
contractual exposure, less any recourse liability account established in
accordance with generally accepted accounting principles. This
limitation does not apply when a bank provides credit enhancement beyond
any contractual obligation to support assets that it has sold.
(2) Related on-balance sheet assets. If an asset is included in the
calculation of the risk-based capital requirement under this section 4
of this appendix A and also appears as an asset on a bank's balance
sheet, the asset is risk-weighted only under this section 4 of this
appendix A, except in the case of loan servicing assets and similar
arrangements with embedded recourse obligations or direct credit
substitutes. In that case, both the on-balance sheet servicing assets
and the related recourse obligations or direct credit substitutes must
both be separately risk weighted and incorporated into the risk-based
capital calculation.
(i) Alternative Capital Calculation for Small Business Obligations--
(1) Definitions. For purposes of this section 4(i):
(i) Qualified bank means a bank that:
(A) Is well capitalized as defined in 12 CFR 6.4 without applying
the capital treatment described in this section 4(i), or
(B) Is adequately capitalized as defined in 12 CFR 6.4 without
applying the capital treatment described in this section 4(i) and has
received written permission from the appropriate district office of the
OCC to apply the capital treatment described in this section 4(i).
(ii) Recourse has the meaning given to such term under generally
accepted accounting principles.
(iii) Small business means a business that meets the criteria for a
small business concern established by the Small Business Administration
in 13 CFR part 121 pursuant to 15 U.S.C. 632.
(2) Capital and reserve requirements. Notwithstanding the risk-based
capital treatment outlined in section 2(c)(4) and any other subsection
(other than subsection (i)) of this section 4, with respect to a
transfer of a small business loan or a lease of personal property with
recourse that is a sale under generally accepted accounting principles,
a qualified bank may elect to apply the following treatment:
(i) The bank establishes and maintains a non-capital reserve under
generally accepted accounting principles sufficient to meet the
reasonable estimated liability of the bank under the recourse
arrangement; and
(ii) For purposes of calculating the bank's risk-based capital
ratio, the bank includes only the face amount of its recourse in its
risk-weighted assets.
(3) Limit on aggregate amount of recourse. The total outstanding
amount of recourse retained by a qualified bank with respect to
transfers of small business loans and leases of personal property and
included in the risk-weighted assets of the bank as described in section
4(i)(2) of this appendix A may not exceed 15 percent of the bank's total
capital after adjustments and deductions, unless the OCC specifies a
greater amount by order.
(4) Bank that ceases to be qualified or that exceeds aggregate
limit. If a bank ceases to be a qualified bank or exceeds the aggregate
limit in section 4(i)(3) of this appendix A, the bank may continue to
apply the capital treatment described in section 4(i)(2) of this
appendix A to transfers of small business loans and leases of personal
property that occurred when the bank was qualified and did not exceed
the limit.
(5) Prompt Corrective Action not affected. (i) A bank shall compute
its capital without regard to this section 4(i) for purposes of prompt
corrective action (12 U.S.C. 1831o and 12 CFR part 6) unless the bank is
an adequately or well capitalized bank (without applying the capital
treatment described in this section 4(i)) and, after applying the
capital treatment described in this section 4(i), the bank would be well
capitalized.
(ii) A bank shall compute its capital without regard to this section
4(i) for purposes of 12 U.S.C. 1831o(g) regardless of the bank's capital
level.
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 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 5,
assets held by a VIE, provided that the following conditions are met:
(A) The VIE existed prior to the implementation date;
[[Page 44]]
(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 risk-
weighted 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 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.
(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.
[54 FR 4177, Jan. 27, 1989]
Editorial Note: For Federal Register citations affecting appendix A
to part 3 of title 12, see the List of CFR Sections Affected, which
appears in the Finding Aids section of the printed volume and at
www.fdsys.gov.
Sec. Appendix B to Part 3--Risk-Based Capital Guidelines; Market Risk
Adjustment
Section 1. Purpose, Applicability, Scope, and Effective Date
(a) Purpose. The purpose of this appendix is to ensure that banks
with significant exposure to market risk maintain adequate capital to
support that exposure. \1\ This appendix supplements and adjusts the
risk-based capital ratio calculations under appendix A of this part with
respect to those banks.
---------------------------------------------------------------------------
\1\ This appendix is based on a framework developed jointly by
supervisory authorities from the countries represented on the Basle
Committee on Banking Supervision and endorsed by the Group of Ten
Central Bank Governors. The framework is described in a Basle Committee
paper entitled ``Amendment to the Capital Accord to Incorporate Market
Risk,'' January 1996.
---------------------------------------------------------------------------
(b) Applicability. (1) This appendix applies to any national bank
whose trading activity \2\ (on a worldwide consolidated basis) equals:
---------------------------------------------------------------------------
\2\ Trading activity means the gross sum of trading assets and
liabilities as reported in the bank's most recent quarterly Consolidated
Report of Condition and Income (Call Report).
---------------------------------------------------------------------------
[[Page 45]]
(i) 10 percent or more of total assets; \3\ or
---------------------------------------------------------------------------
\3\ Total assets means quarter-end total assets as reported in the
bank's most recent Call Report.
---------------------------------------------------------------------------
(ii) $1 billion or more.
(2) The OCC may apply this appendix to any national bank if the OCC
deems it necessary or appropriate for safe and sound banking practices.
(3) The OCC may exclude a national bank otherwise meeting the
criteria of paragraph (b)(1) of this section from coverage under this
appendix if it determines the bank meets such criteria as a consequence
of accounting, operational, or similar considerations, and the OCC deems
it consistent with safe and sound banking practices.
(c) Scope. The capital requirements of this appendix support market
risk associated with a bank's covered positions.
(d) Effective date. This appendix is effective as of January 1,
1997. Compliance is not mandatory until January 1, 1998. Subject to
supervisory approval, a bank may opt to comply with this appendix as
early as January 1, 1997. \4\
---------------------------------------------------------------------------
\4\ A bank that voluntarily complies with the final rule prior to
January 1, 1998, must comply with all of its provisions.
---------------------------------------------------------------------------
Section 2. Definitions
For purposes of this appendix, the following definitions apply:
(a) Covered positions means all positions in a bank's trading
account, and all foreign exchange \5\ and commodity positions, whether
or not in the trading account. \6\ Positions include on-balance-sheet
assets and liabilities and off-balance-sheet items. Securities subject
to repurchase and lending agreements are included as if they are still
owned by the lender. Asset backed commercial paper liquidity facilities,
in form or in substance, in a bank's trading account are excluded from
covered positions, and instead, are subject to the risk-based capital
requirements as provided in appendix A of this part.
---------------------------------------------------------------------------
\5\ Subject to supervisory review, a bank may exclude structural
positions in foreign currencies from its covered positions.
\6\ The term trading account is defined in the instructions to the
Call Report.
---------------------------------------------------------------------------
(b) Market risk means the risk of loss resulting from movements in
market prices. Market risk consists of general market risk and specific
risk components.
(1) General market risk means changes in the market value of covered
positions resulting from broad market movements, such as changes in the
general level of interest rates, equity prices, foreign exchange rates,
or commodity prices.
(2) Specific risk means changes in the market value of specific
positions due to factors other than broad market movements and includes
default and event risk as well as idiosyncratic variations.
(c) Tier 1 and Tier 2 capital are the same as defined in appendix A
of this part.
(d) Tier 3 capital is subordinated debt that is unsecured; is fully
paid up; has an original maturity of at least two years; is not
redeemable before maturity without prior approval by the OCC; includes a
lock-in clause precluding payment of either interest or principal (even
at maturity) if the payment would cause the issuing bank's risk-based
capital ratio to fall or remain below the minimum required under
appendix A of this part; and does not contain and is not covered by any
covenants, terms, or restrictions that are inconsistent with safe and
sound banking practices.
(e) Value-at-risk (VAR) means the estimate of the maximum amount
that the value of covered positions could decline during a fixed holding
period within a stated confidence level, measured in accordance with
section 4 of this appendix.
Section 3. Adjustments to the Risk-Based Capital Ratio Calculations
(a) Risk-based capital ratio denominator. A bank subject to this
appendix shall calculate its risk-based capital ratio denominator as
follows:
(1) Adjusted risk-weighted assets. (i) Covered positions. Calculate
adjusted risk-weighted assets, which equal risk-weighted assets (as
determined in accordance with appendix A of this part), excluding the
risk-weighted amount of all covered positions (except foreign exchange
positions outside the trading account and over-the-counter derivatives
positions). \7\
---------------------------------------------------------------------------
\7\ Foreign exchange position outside the trading account and all
over-the-counter derivative positions, whether or not in the trading
account, must be included in adjusted risk-weighted assets as determined
in appendix A of this part 3.
---------------------------------------------------------------------------
(ii) Securities borrowing transactions. In calculating adjusted
risk-weighted assets, a bank also may exclude a receivable that results
from the bank's posting of cash collateral in a securities borrowing
transaction to the extent that the receivable is collateralized by the
market value of the borrowed securities and subject to the following
conditions:
(A) The borrowed securities must be includable in the trading
account and must be liquid and readily marketable;
(B) The borrowed securities must be marked to market daily;
(C) The receivable must be subject to a daily margining requirement;
and
[[Page 46]]
(D) (1) The transaction is a securities contract for the purposes of
section 555 of the Bankruptcy Code (11 U.S.C. 555), a qualified
financial contract for the purposes of section 11(e)(8) of the Federal
Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or a netting contract
between or among financial institutions for the purposes of sections
401-407 of the Federal Deposit Insurance Corporation Improvement Act of
1991 (12 U.S.C. 4401-4407), or the Board's Regulation EE (12 CFR part
231); or
(2) If the transaction does not meet the criteria set forth in
paragraph (a)(1)(ii)(D)(1) of this section, then either:
(i) The bank has conducted sufficient legal review to reach a well-
founded conclusion that:
(A) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and to
liquidate or set off collateral promptly upon an event of counterparty
default, including in a bankruptcy, insolvency, or other similar
proceeding of the counterparty; and
(B) Under applicable law of the relevant jurisdiction, its rights
under the agreement are legal, valid, binding, and enforceable and any
exercise of rights under the agreement will not be stayed or avoided; or
(ii) The transaction is either overnight or unconditionally
cancelable at any time by the bank, and the bank has conducted
sufficient legal review to reach a well-founded conclusion that:
(A) The securities borrowing agreement executed in connection with
the transaction provides the bank the right to accelerate, terminate,
and close-out on a net basis all transactions under the agreement and to
liquidate or set off collateral promptly upon an event of counterparty
default; and
(B) Under the law governing the agreement, its rights under the
agreement are legal, valid, binding, and enforceable.
(2) Measure for market risk. Calculate the measure for market risk,
which equals the sum of the VAR-based capital charge, the specific risk
add-on (if any), and the capital charge for de minimis exposure (if
any).
(i) VAR-based capital charge. The VAR-based capital charge equals
the higher of:
(A) The previous day's VAR measure; or
(B) The average of the daily VAR measures for each of the preceding
60 business days multiplied by three, except as provided in section 4(e)
of this appendix;
(ii) Specific risk add-on. The specific risk add-on is calculated in
accordance with section 5 of this appendix; and
(iii) Capital charge for de minimis exposure. The capital charge for
de minimis exposure is calculated in accordance with section 4(a) of
this appendix.
(3) Market risk equivalent assets. Calculate market risk equivalent
assets by multiplying the measure for market risk (as calculated in
paragraph (a)(2) of this section) by 12.5.
(4) Denominator calculation. Add market risk equivalent assets (as
calculated in paragraph (a)(3) of this section) to adjusted risk-
weighted assets (as calculated in paragraph (a)(1) of this section). The
resulting sum is the bank's risk-based capital ratio denominator.
(b) Risk-based capital ratio numerator. A bank subject to this
appendix shall calculate its risk-based capital ratio numerator by
allocating capital as follows:
(1) Credit risk allocation. Allocate Tier 1 and Tier 2 capital equal
to 8.0 percent of adjusted risk-weighted assets (as calculated in
paragraph (a)(1) of this section). \8\
---------------------------------------------------------------------------
\8\ A bank may not allocate Tier 3 capital to support credit risk
(as calculated under appendix A).
---------------------------------------------------------------------------
(2) Market risk allocation. Allocate Tier 1, Tier 2, and Tier 3
capital equal to the measure for market risk as calculated in paragraph
(a)(2) of this section. The sum of Tier 2 and Tier 3 capital allocated
for market risk must not exceed 250 percent of Tier 1 capital allocated
for market risk. (This requirement means that Tier 1 capital allocated
in this paragraph (b)(2) must equal at least 28.6 percent of the measure
for market risk.)
(3) Restrictions. (i) The sum of Tier 2 capital (both allocated and
excess) and Tier 3 capital (allocated in paragraph (b)(2) of this
section) may not exceed 100 percent of Tier 1 capital (both allocated
and excess). \9\
---------------------------------------------------------------------------
\9\ Excess Tier 1 capital means Tier 1 capital that has not been
allocated in paragraphs (b)(1) and (b)(2) of this section. Excess Tier 2
capital means Tier 2 capital that has not been allocated in paragraph
(b)(1) and (b)(2) of this section, subject to the restrictions in
paragraph (b)(3) of this section.
---------------------------------------------------------------------------
(ii) Term subordinated debt (and intermediate-term preferred stock
and related surplus) included in Tier 2 capital (both allocated and
excess) may not exceed 50 percent of Tier 1 capital (both allocated and
excess).
(4) Numerator calculation. Add Tier 1 capital (both allocated and
excess), Tier 2 capital (both allocated and excess), and Tier 3 capital
(allocated under paragraph (b)(2) of this section). The resulting sum is
the bank's risk-based capital ratio numerator.
Section 4. Internal Models
(a) General. For risk-based capital purposes, a bank subject to this
appendix must use its internal model to measure its daily VAR, in
accordance with the requirements of this section. \10\ The OCC may
permit a bank
[[Page 47]]
to use alternative techniques to measure the market risk of de minimis
exposures so long as the techniques adequately measure associated market
risk.
---------------------------------------------------------------------------
\10\ A bank's internal model may use any generally accepted
measurement techniques, such as variance-covariance models, historical
simulations, or Monte Carlo simulations. However, the level of
sophistication and accuracy of a bank's internal model must be
commensurate with the nature and size of its covered positions. A bank
that modifies its existing modeling procedures to comply with the
requirements of this appendix for risk-based capital purposes should,
nonetheless, continue to use the internal model it considers most
appropriate in evaluating risks for other purposes.
---------------------------------------------------------------------------
(b) Qualitative requirements. A bank subject to this appendix must
have a risk management system that meets the following minimum
qualitative requirements:
(1) The bank must have a risk control unit that reports directly to
senior management and is independent from business trading units.
(2) The bank's internal risk measurement model must be integrated
into the daily management process.
(3) The bank's policies and procedures must identify, and the bank
must conduct, appropriate stress tests and backtests. \11\ The bank's
policies and procedures must identify the procedures to follow in
response to the results of such tests.
---------------------------------------------------------------------------
\11\ Stress tests provide information about the impact of adverse
market events on a bank's covered positions. Backtests provide
information about the accuracy of an internal model by comparing a
bank's daily VAR measures to its corresponding daily trading profits and
losses.
---------------------------------------------------------------------------
(4) The bank must conduct independent reviews of its risk
measurement and risk management systems at least annually.
(c) Market risk factors. The bank's internal model must use risk
factors sufficient to measure the market risk inherent in all covered
positions. The risk factors must address interest rate risk, \12\ equity
price risk, foreign exchange rate risk, and commodity price risk.
---------------------------------------------------------------------------
\12\ For material exposures in the major currencies and markets,
modeling techniques must capture spread risk and must incorporate enough
segments of the yield curve--at least six--to capture differences in
volatility and less than perfect correlation of rates along the yield
curve.
---------------------------------------------------------------------------
(d) Quantitative requirements. For regulatory capital purposes, VAR
measures must meet the following quantitative requirements:
(1) The VAR measures must be calculated on a daily basis using a 99
percent, one-tailed confidence level with a price shock equivalent to a
ten-business day movement in rates and prices. In order to calculate VAR
measures based on a ten-day price shock, the bank may either calculate
ten-day figures directly or convert VAR figures based on holding periods
other than ten days to the equivalent of a ten-day holding period (for
instance, by multiplying a one-day VAR measure by the square root of
ten).
(2) The VAR measures must be based on an historical observation
period (or effective observation period for a bank using a weighting
scheme or other similar method) of at least one year. The bank must
update data sets at least once every three months or more frequently as
market conditions warrant.
(3) The VAR measures must include the risks arising from the non-
linear price characteristics of options positions and the sensitivity of
the market value of the positions to changes in the volatility of the
underlying rates or prices. A bank with a large or complex options
portfolio must measure the volatility of options positions by different
maturities.
(4) The VAR measures may incorporate empirical correlations within
and across risk categories, provided that the bank's process for
measuring correlations is sound. In the event that the VAR measures do
not incorporate empirical correlations across risk categories, then the
bank must add the separate VAR measures for the four major risk
categories to determine its aggregate VAR measure.
(e) Backtesting. (1) Beginning one year after a bank starts to
comply with this appendix, a bank must conduct backtesting by comparing
each of its most recent 250 business days' actual net trading profit or
loss \13\ with the corresponding daily VAR measures generated for
internal risk measurement purposes and calibrated to a one-day holding
period and a 99 percent, one-tailed confidence level.
---------------------------------------------------------------------------
\13\ Actual net trading profits and losses typically include such
things as realized and unrealized gains and losses on portfolio
positions as well as fee income and commissions associated with trading
activities.
---------------------------------------------------------------------------
(2) Once each quarter, the bank must identify the number of
exceptions, that is, the number of business days for which the magnitude
of the actual daily net trading loss, if any, exceeds the corresponding
daily VAR measure.
(3) A bank must use the multiplication factor indicated in Table 1
of this appendix in determining its capital charge for market risk under
section 3(a)(2)(i)(B) of this appendix until it obtains the next
quarter's backtesting results, unless the OCC determines that a
different adjustment or other action is appropriate.
[[Page 48]]
Table 1--Multiplication Factor Based on Results of Backtesting
------------------------------------------------------------------------
Multiplication
Number of exceptions factor
------------------------------------------------------------------------
4 or fewer.............................................. 3.00
5....................................................... 3.40
6....................................................... 3.50
7....................................................... 3.65
8....................................................... 3.75
9....................................................... 3.85
10 or more.............................................. 4.00
------------------------------------------------------------------------
Section 5. Specific Risk
(a) Specific risk surcharge. For purposes of section 3(a)(2)(ii) of
this appendix, a bank shall calculate its specific risk surcharge as
follows:
(1) Internal models that incorporate specific risk. (i) No specific
risk surcharge required for qualifying internal models. A bank that
incorporates specific risk in its internal model has no specific risk
surcharge for purposes of section 3(a)(2)(ii) of this appendix if the
bank demonstrates to the OCC that its internal model adequately measures
all aspects of specific risk, including default and event risk, of
covered debt and equity positions. In evaluating a bank's internal model
the OCC will take into account the extent to which the internal model:
(A) Explains the historical price variation in the trading
portfolio; and
(B) Captures concentrations.
(ii) Specific risk surcharge for modeled specific risk that fails to
adequately measure default or event risk. A bank that incorporates
specific risk in its internal model but fails to demonstrate that its
internal model adequately measures all aspects of specific risk,
including default and event risk, as provided by this section 5(a)(1),
must calculate its specific risk surcharge in accordance with one of the
following methods:
(A) If the bank's internal model separates the VAR measure into a
specific risk portion and a general market risk portion, then the
specific risk surcharge equals the previous day's specific risk portion.
(B) If the bank's internal model does not separate the VAR measure
into a specific risk portion and a general market risk portion, then the
specific risk surcharge equals the sum of the previous day's VAR measure
for subportfolios of covered debt and equity positions.
(2) Specific risk surcharge for specific risk not modeled. If a bank
does not model specific risk in accordance with section 5(a)(1) of this
appendix, then the bank shall calculate its specific risk surcharge
using the standard specific risk capital charge in accordance with
section 5(c) of this appendix.
(b) Covered debt and equity positions. If a model includes the
specific risk of covered debt positions but not covered equity positions
(or vice versa), then the bank may reduce its specific risk charge for
the included positions under section 5(a)(1)(ii) of this appendix. The
specific risk charge for the positions not included equals the standard
specific risk capital charge under paragraph (c) of this section.
(c) Standard specific risk capital charge. The standard specific
risk capital charge equals the sum of the components for covered debt
and equity positions as follows:
(1) Covered debt positions. (i) For purposes of this section 5,
covered debt positions means fixed-rate or floating-rate debt
instruments located in the trading account and instruments located in
the trading account with values that react primarily to changes in
interest rates, including certain non-convertible preferred stock,
convertible bonds, and instruments subject to repurchase and lending
agreements. Also included are derivatives (including written and
purchased options) for which the underlying instrument is a covered debt
instrument that is subject to a non-zero specific risk capital charge.
(A) For covered debt positions that are derivatives, a bank must
risk-weight (as described in paragraph (c)(1)(iii) of this section) the
market value of the effective notional amount of the underlying debt
instrument or index portfolio. Swaps must be included as the notional
position in the underlying debt instrument or index portfolio, with a
receiving side treated as a long position and a paying side treated as a
short position; and
(B) For covered debt positions that are options, whether long or
short, a bank must risk-weight (as described in paragraph (c)(1)(iii) of
this section) the market value of the effective notional amount of the
underlying debt instrument or index multiplied by the option's delta.
(ii) A bank may net long and short covered debt positions (including
derivatives) in identical debt issues or indices.
(iii) A bank must multiply the absolute value of the current market
value of each net long or short covered debt position by the appropriate
specific risk weighting factor indicated in Table 2 of this appendix.
The specific risk capital charge component for covered debt positions is
the sum of the weighted values.
Table 2--Specific Risk Weighting Factors for Covered Debt Positions
------------------------------------------------------------------------
Weighting
Remaining maturity factor
Category (contractual) (in
percent)
------------------------------------------------------------------------
Government \1\...................... N/A.................... 0.00
Qualifying \2\...................... 6 months or less....... 0.25
Over 6 months to 24 1.00
months.
Over 24 months......... 1.60
[[Page 49]]
Other \3\........................... N/A.................... 8.00
------------------------------------------------------------------------
\1\ The ``government'' category includes all debt instruments of central
governments of OECD countries (as defined in appendix A of this part)
including bonds, Treasury bills, and other short-term instruments, as
well as local currency instruments of non-OECD central governments to
the extent the bank has liabilities booked in that currency.
\2\ The ``qualifying'' category includes debt instruments of U.S.
government-sponsored agencies (as defined in appendix A of this part),
general obligation debt instruments issued by states and other
political subdivisions of OECD countries, multilateral development
banks (as defined in appendix A of this part), and debt instruments
issued by U.S. depository institutions or OECD-banks (as defined in
appendix A of this part) that do not qualify as capital of the issuing
institution. This category also includes other debt instruments,
including corporate debt and revenue instruments issued by states and
other political subdivisions of OECD countries, that are: (1) Rated
investment grade by at least two nationally recognized credit rating
services; (2) rated investment grade by one nationally recognized
credit rating agency and not rated less than investment grade by any
other credit rating agency; or (3) unrated, but deemed to be of
comparable investment quality by the reporting bank and the issuer has
instruments listed on a recognized stock exchange, subject to review
by the OCC.
\3\ The ``other'' category includes debt instruments that are not
included in the government or qualifying categories.
(2) Covered equity positions. (i) For purposes of this section 5,
covered equity positions means equity instruments located in the trading
account and instruments located in the trading account with values that
react primarily to changes in equity prices, including voting or non-
voting common stock, certain convertible bonds, and commitments to buy
or sell equity instruments. Also included are derivatives (including
written and purchased options) for which the underlying is a covered
equity position.
(A) For covered equity positions that are derivatives, a bank must
risk weight (as described in paragraph (c)(2)(iii) of this section) the
market value of the effective notional amount of the underlying equity
instrument or equity portfolio. Swaps must be included as the notional
position in the underlying equity instrument or index portfolio, with a
receiving side treated as a long position and a paying side treated as a
short position; and
(B) For covered equity positions that are options, whether long or
short, a bank must risk weight (as described in paragraph (c)(2)(iii) of
this section) the market value of the effective notional amount of the
underlying equity instrument or index multiplied by the option's delta.
(ii) A bank may net long and short covered equity positions
(including derivatives) in identical equity issues or equity indices in
the same market. \14\
---------------------------------------------------------------------------
\14\ A bank may also net positions in depository receipts against an
opposite position in the underlying equity or identical equity in
different markets, provided that the bank includes the costs of
conversion.
---------------------------------------------------------------------------
(iii)(A) A bank must multiply the absolute value of the current
market value of each net long or short covered equity position by a risk
weighting factor of 8.0 percent, or by 4.0 percent if the equity is held
in a portfolio that is both liquid and well-diversified. \15\ For
covered equity positions that are index contracts comprising a well-
diversified portfolio of equity instruments, the net long or short
position is multiplied by a risk weighting factor of 2.0 percent.
---------------------------------------------------------------------------
\15\ A portfolio is liquid and well-diversified if: (1) It is
characterized by a limited sensitivity to price changes of any single
equity issue or closely related group of equity issues held in the
portfolio; (2) the volatility of the portfolio's value is not dominated
by the volatility of any individual equity issue or by equity issues
from any single industry or economic sector; (3) it contains a large
number of individual equity positions, with no single position
representing a substantial portion of the portfolio's total market
value; and (4) it consists mainly of issues traded on organized
exchanges or in well-established over-the-counter markets.
---------------------------------------------------------------------------
(B) For covered equity positions from the following futures-related
arbitrage strategies, a bank may apply a 2.0 percent risk weighting
factor to one side (long or short) of each position with the opposite
side exempt from charge:
(1) Long and short positions in exactly the same index at different
dates or in different market centers; or
(2) Long and short positions in index contracts at the same date in
different but similar indices.
(C) For futures contracts on broadly-based indices that are matched
by offsetting positions in a basket of stocks comprising the index, a
bank may apply a 2.0 percent risk weighting factor to the futures and
stock basket positions (long and short), provided that such trades are
deliberately entered into and separately controlled, and that the basket
of stocks comprises at least 90 percent of the capitalization of the
index.
(iv) The specific risk capital charge component for covered equity
positions is the sum of the weighted values.
Section 6. Reservation of Authority
The OCC reserves the authority to modify the application of any of
the provisions in this appendix to any bank, upon reasonable
justification.
[61 FR 47367, Sept. 6, 1996, as amended at 62 FR 68067, Dec. 30, 1997;
65 FR 75858, Dec. 5, 2000; 69 FR 44916, July 28, 2004; 71 FR 8936, Feb.
22, 2006]
[[Page 50]]
Sec. Appendix C to Part 3--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
Part I General Provisions
Section 1 Purpose, Applicability, Reservation of Authority, and
Principle of Conservatism
Section 2 Definitions
Section 3 Minimum Risk-Based Capital Requirements
Part II Qualifying Capital
Section 11 Additional Deductions
Section 12 Deductions and Limitations Not Required
Section 13 Eligible Credit Reserves
Part III Qualification
Section 21 Qualification Process
Section 22 Qualification Requirements
Section 23 Ongoing Qualification
Section 24 Merger and Acquisition Transitional Arrangements
Part IV Risk-Weighted Assets for General Credit Risk
Section 31 Mechanics for Calculating Total Wholesale and Retail
Risk-Weighted Assets
Section 32 Counterparty Credit Risk of Repo-Style Transactions,
Eligible Margin Loans, and OTC Derivative Contracts
Section 33 Guarantees and Credit Derivatives: PD Substitution and
LGD Adjustment Approaches
Section 34 Guarantees and Credit Derivatives: Double Default
Treatment
Section 35 Risk-Based Capital Requirement for Unsettled Transactions
Part V Risk-Weighted Assets for Securitization Exposures
Section 41 Operational Criteria for Recognizing the Transfer of Risk
Section 42 Risk-Based Capital Requirement for Securitization
Exposures
Section 43 Ratings-Based Approach (RBA)
Section 44 Internal Assessment Approach (IAA)
Section 45 Supervisory Formula Approach (SFA)
Section 46 Recognition of Credit Risk Mitigants for Securitization
Exposures
Section 47 Risk-Based Capital Requirement for Early Amortization
Provisions
Part VI Risk-Weighted Assets for Equity Exposures
Section 51 Introduction and Exposure Measurement
Section 52 Simple Risk Weight Approach (SRWA)
Section 53 Internal Models Approach (IMA)
Section 54 Equity Exposures to Investment Funds
Section 55 Equity Derivative Contracts
Part VII Risk-Weighted Assets for Operational Risk
Section 61 Qualification Requirements for Incorporation of
Operational Risk Mitigants
Section 62 Mechanics of Risk-Weighted Asset Calculation
Part VIII Disclosure
Section 71 Disclosure Requirements
Part IX Transition Provisions
Section 81 Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
Part I. General Provisions
Section 1. Purpose, Applicability, Reservation of Authority, and
Principle of Conservatism
(a) Purpose. This appendix establishes:
(1) Minimum qualifying criteria for banks using bank-specific
internal risk measurement and management processes for calculating risk-
based capital requirements;
(2) Methodologies for such banks to calculate their risk-based
capital requirements; and
(3) Public disclosure requirements for such banks.
(b) Applicability. (1) This appendix applies to a bank that:
(i) Has consolidated assets, as reported on the most recent year-end
Consolidated Report of Condition and Income (Call Report) equal to $250
billion or more;
(ii) Has consolidated total on-balance sheet foreign exposure at the
most recent year-end equal to $10 billion or more (where total on-
balance sheet foreign exposure equals total cross-border claims less
claims with head office or guarantor located in another country plus
redistributed guaranteed amounts to the country of head office or
guarantor plus local country claims on local residents plus revaluation
gains on foreign exchange and derivative products, calculated in
accordance with the Federal Financial Institutions Examination Council
(FFIEC) 009 Country Exposure Report);
(iii) Is a subsidiary of a depository institution that uses 12 CFR
part 3, appendix C, 12 CFR part 208, appendix F, 12 CFR part 325,
appendix D, or 12 CFR part 567, appendix C, to calculate its risk-based
capital requirements; or
(iv) Is a subsidiary of a bank holding company that uses 12 CFR part
225, appendix G, to calculate its risk-based capital requirements.
(2) Any bank may elect to use this appendix to calculate its risk-
based capital requirements.
(3) A bank that is subject to this appendix must use this appendix
unless the OCC determines in writing that application of this appendix
is not appropriate in light of the bank's asset size, level of
complexity, risk profile, or scope of operations. 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
[[Page 51]]
the notice and response procedures in 12 CFR 3.12.
(c) Reservation of authority--(1) Additional capital in the
aggregate. The OCC may require a bank to hold an amount of capital
greater than otherwise required under this appendix if the OCC
determines that the bank's risk-based capital requirement under this
appendix is not commensurate with the bank's credit, market,
operational, or other risks. 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.
(2) Specific risk-weighted asset amounts. (i) If the OCC determines
that the risk-weighted asset amount calculated under this appendix by
the bank for one or more exposures is not commensurate with the risks
associated with those exposures, the OCC may require the bank to assign
a different risk-weighted asset amount to the exposures, to assign
different risk parameters to the exposures (if the exposures are
wholesale or retail exposures), or to use different model assumptions
for the exposures (if relevant), all as specified by the OCC.
(ii) If the OCC determines that the risk-weighted asset amount for
operational risk produced by the bank under this appendix is not
commensurate with the operational risks of the bank, the OCC may require
the bank to assign a different risk-weighted asset amount for
operational risk, to change elements of its operational risk analytical
framework, including distributional and dependence assumptions, or to
make other changes to the bank's operational risk management processes,
data and assessment systems, or quantification systems, all as specified
by the OCC.
(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 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.
(4) Other supervisory authority. Nothing in this appendix limits the
authority of the OCC under any other provision of law or regulation to
take supervisory or enforcement action, including action to address
unsafe or unsound practices or conditions, deficient capital levels, or
violations of law.
(d) Principle of conservatism. Notwithstanding the requirements of
this appendix, a bank may choose not to apply a provision of this
appendix to one or more exposures, provided that:
(1) The bank can demonstrate on an ongoing basis to the satisfaction
of the OCC that not applying the provision would, in all circumstances,
unambiguously generate a risk-based capital requirement for each such
exposure greater than that which would otherwise be required under this
appendix;
(2) The bank appropriately manages the risk of each such exposure;
(3) The bank notifies the OCC in writing prior to applying this
principle to each such exposure; and
(4) The exposures to which the bank applies this principle are not,
in the aggregate, material to the bank.
Section 2. Definitions
Advanced internal ratings-based (IRB) systems means a bank's
internal risk rating and segmentation system; risk parameter
quantification system; data management and maintenance system; and
control, oversight, and validation system for credit risk of wholesale
and retail exposures.
Advanced systems means a bank's advanced IRB systems, operational
risk management processes, operational risk data and assessment systems,
operational risk quantification systems, and, to the extent the bank
uses the following systems, the internal models methodology, double
default excessive correlation detection process, IMA for equity
exposures, and IAA for securitization exposures to ABCP programs.
Affiliate with respect to a company means any company that controls,
is controlled by, or is under common control with, the company.
Applicable external rating means:
(1) With respect to an exposure that has multiple external ratings
assigned by NRSROs, the lowest solicited external rating assigned to the
exposure by any NRSRO; and
(2) With respect to an exposure that has a single external rating
assigned by an NRSRO, the external rating assigned to the exposure by
the NRSRO.
Applicable inferred rating means:
(1) With respect to an exposure that has multiple inferred ratings,
the lowest inferred rating based on a solicited external rating; and
(2) With respect to an exposure that has a single inferred rating,
the inferred rating.
Asset-backed commercial paper (ABCP) program means a program that
primarily issues commercial paper that:
[[Page 52]]
(1) Has an external rating; and
(2) Is backed by underlying exposures held in a bankruptcy-remote
SPE.
Asset-backed commercial paper (ABCP) program sponsor means a bank
that:
(1) Establishes an ABCP program;
(2) Approves the sellers permitted to participate in an ABCP
program;
(3) Approves the exposures to be purchased by an ABCP program; or
(4) Administers the ABCP program by monitoring the underlying
exposures, underwriting or otherwise arranging for the placement of debt
or other obligations issued by the program, compiling monthly reports,
or ensuring compliance with the program documents and with the program's
credit and investment policy.
Backtesting means the comparison of a bank's internal estimates with
actual outcomes during a sample period not used in model development. In
this context, backtesting is one form of out-of-sample testing.
Bank holding company is defined in section 2 of the Bank Holding
Company Act (12 U.S.C. 1841).
Benchmarking means the comparison of a bank's internal estimates
with relevant internal and external data or with estimates based on
other estimation techniques.
Business environment and internal control factors means the
indicators of a bank's operational risk profile that reflect a current
and forward-looking assessment of the bank's underlying business risk
factors and internal control environment.
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of the bank, determined in accordance with
GAAP.
Clean-up call means a contractual provision that permits an
originating bank or servicer to call securitization exposures before
their stated maturity or call date. See also eligible clean-up call.
Commodity derivative contract means a commodity-linked swap,
purchased commodity-linked option, forward commodity-linked contract, or
any other instrument linked to commodities that gives rise to similar
counterparty credit risks.
Company means a corporation, partnership, limited liability company,
depository institution, business trust, special purpose entity,
association, or similar organization.
Control. A person or company controls a company if it:
(1) Owns, controls, or holds with power to vote 25 percent or more
of a class of voting securities of the company; or
(2) Consolidates the company for financial reporting purposes.
Controlled early amortization provision means an early amortization
provision that meets all the following conditions:
(1) The originating bank has appropriate policies and procedures to
ensure that it has sufficient capital and liquidity available in the
event of an early amortization;
(2) Throughout the duration of the securitization (including the
early amortization period), there is the same pro rata sharing of
interest, principal, expenses, losses, fees, recoveries, and other cash
flows from the underlying exposures based on the originating bank's and
the investors' relative shares of the underlying exposures outstanding
measured on a consistent monthly basis;
(3) The amortization period is sufficient for at least 90 percent of
the total underlying exposures outstanding at the beginning of the early
amortization period to be repaid or recognized as in default; and
(4) The schedule for repayment of investor principal is not more
rapid than would be allowed by straight-line amortization over an 18-
month period.
Credit derivative means a financial contract executed under standard
industry credit derivative documentation that allows one party (the
protection purchaser) to transfer the credit risk of one or more
exposures (reference exposure) to another party (the protection
provider). See also eligible credit derivative.
Credit-enhancing interest-only strip (CEIO) means an on-balance
sheet asset that, in form or in substance:
(1) Represents a contractual right to receive some or all of the
interest and no more than a minimal amount of principal due on the
underlying exposures of a securitization; and
(2) Exposes the holder to credit risk directly or indirectly
associated with the underlying exposures that exceeds a pro rata share
of the holder's claim on the underlying exposures, whether through
subordination provisions or other credit-enhancement techniques.
Credit-enhancing representations and warranties means
representations and warranties that are made or assumed in connection
with a transfer of underlying exposures (including loan servicing
assets) and that obligate a bank to protect another party from losses
arising from the credit risk of the underlying exposures. Credit-
enhancing representations and warranties include provisions to protect a
party from losses resulting from the default or nonperformance of the
obligors of the underlying exposures or from an insufficiency in the
value of the collateral backing the underlying exposures. Credit-
enhancing representations and warranties do not include:
(1) Early default clauses and similar warranties that permit the
return of, or premium refund clauses that cover, first-lien residential
mortgage exposures for a period
[[Page 53]]
not to exceed 120 days from the date of transfer, provided that the date
of transfer is within one year of origination of the residential
mortgage exposure;
(2) Premium refund clauses that cover underlying exposures
guaranteed, in whole or in part, by the U.S. government, a U.S.
government agency, or a U.S. government sponsored enterprise, provided
that the clauses are for a period not to exceed 120 days from the date
of transfer; or
(3) Warranties that permit the return of underlying exposures in
instances of misrepresentation, fraud, or incomplete documentation.
Credit risk mitigant means collateral, a credit derivative, or a
guarantee.
Credit-risk-weighted assets means 1.06 multiplied by the sum of:
(1) Total wholesale and retail risk-weighted assets;
(2) Risk-weighted assets for securitization exposures; and
(3) Risk-weighted assets for equity exposures.
Current exposure means, with respect to a netting set, the larger of
zero or the market value of a transaction or portfolio of transactions
within the netting set that would be lost upon default of the
counterparty, assuming no recovery on the value of the transactions.
Current exposure is also called replacement cost.
Default--(1) Retail. (i) A retail exposure of a bank is in default
if:
(A) The exposure is 180 days past due, in the case of a residential
mortgage exposure or revolving exposure;
(B) The exposure is 120 days past due, in the case of all other
retail exposures; or
(C) The bank has taken a full or partial charge-off, write-down of
principal, or material negative fair value adjustment of principal on
the exposure for credit-related reasons.
(ii) Notwithstanding paragraph (1)(i) of this definition, for a
retail exposure held by a non-U.S. subsidiary of the bank that is
subject to an internal ratings-based approach to capital adequacy
consistent with the Basel Committee on Banking Supervision's
``International Convergence of Capital Measurement and Capital
Standards: A Revised Framework'' in a non-U.S. jurisdiction, the bank
may elect to use the definition of default that is used in that
jurisdiction, provided that the bank has obtained prior approval from
the OCC to use the definition of default in that jurisdiction.
(iii) A retail exposure in default remains in default until the bank
has reasonable assurance of repayment and performance for all
contractual principal and interest payments on the exposure.
(2) Wholesale. (i) A bank's wholesale obligor is in default if:
(A) The bank determines that the obligor is unlikely to pay its
credit obligations to the bank in full, without recourse by the bank to
actions such as realizing collateral (if held); or
(B) The obligor is past due more than 90 days on any material credit
obligation(s) to the bank. \1\
---------------------------------------------------------------------------
\1\ Overdrafts are past due once the obligor has breached an advised
limit or been advised of a limit smaller than the current outstanding
balance.
---------------------------------------------------------------------------
(ii) An obligor in default remains in default until the bank has
reasonable assurance of repayment and performance for all contractual
principal and interest payments on all exposures of the bank to the
obligor (other than exposures that have been fully written-down or
charged-off).
Dependence means a measure of the association among operational
losses across and within units of measure.
Depository institution is defined in section 3 of the Federal
Deposit Insurance Act (12 U.S.C. 1813).
Derivative contract means a financial contract whose value is
derived from the values of one or more underlying assets, reference
rates, or indices of asset values or reference rates. Derivative
contracts include interest rate derivative contracts, exchange rate
derivative contracts, equity derivative contracts, commodity derivative
contracts, credit derivatives, and any other instrument that poses
similar counterparty credit risks. Derivative contracts also include
unsettled securities, commodities, and foreign exchange transactions
with a contractual settlement or delivery lag that is longer than the
lesser of the market standard for the particular instrument or five
business days.
Early amortization provision means a provision in the documentation
governing a securitization that, when triggered, causes investors in the
securitization exposures to be repaid before the original stated
maturity of the securitization exposures, unless the provision:
(1) Is triggered solely by events not directly related to the
performance of the underlying exposures or the originating bank (such as
material changes in tax laws or regulations); or
(2) Leaves investors fully exposed to future draws by obligors on
the underlying exposures even after the provision is triggered.
Economic downturn conditions means, with respect to an exposure held
by the bank, those conditions in which the aggregate default rates for
that exposure's wholesale or retail exposure subcategory (or subdivision
of such subcategory selected by the bank) in the exposure's national
jurisdiction (or subdivision of such jurisdiction selected by the bank)
are significantly higher than average.
[[Page 54]]
Effective maturity (M) of a wholesale exposure means:
(1) For wholesale exposures other than repo-style transactions,
eligible margin loans, and OTC derivative contracts described in
paragraph (2) or (3) of this definition:
(i) The weighted-average remaining maturity (measured in years,
whole or fractional) of the expected contractual cash flows from the
exposure, using the undiscounted amounts of the cash flows as weights;
or
(ii) The nominal remaining maturity (measured in years, whole or
fractional) of the exposure.
(2) For repo-style transactions, eligible margin loans, and OTC
derivative contracts subject to a qualifying master netting agreement
for which the bank does not apply the internal models approach in
paragraph (d) of section 32 of this appendix, the weighted-average
remaining maturity (measured in years, whole or fractional) of the
individual transactions subject to the qualifying master netting
agreement, with the weight of each individual transaction set equal to
the notional amount of the transaction.
(3) For repo-style transactions, eligible margin loans, and OTC
derivative contracts for which the bank applies the internal models
approach in paragraph (d) of section 32 of this appendix, the value
determined in paragraph (d)(4) of section 32 of this appendix.
Effective notional amount means, for an eligible guarantee or
eligible credit derivative, the lesser of the contractual notional
amount of the credit risk mitigant and the EAD of the hedged exposure,
multiplied by the percentage coverage of the credit risk mitigant. For
example, the effective notional amount of an eligible guarantee that
covers, on a pro rata basis, 40 percent of any losses on a $100 bond
would be $40.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating bank
or servicer;
(2) Is not structured to avoid allocating losses to securitization
exposures held by investors or otherwise structured to provide credit
enhancement to the securitization; and
(3) (i) For a traditional securitization, is only exercisable when
10 percent or less of the principal amount of the underlying exposures
or securitization exposures (determined as of the inception of the
securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10
percent or less of the principal amount of the reference portfolio of
underlying exposures (determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a credit derivative in the form of
a credit default swap, n\th\-to-default swap, total return swap, or any
other form of credit derivative approved by the OCC, provided that:
(1) The contract meets the requirements of an eligible guarantee and
has been confirmed by the protection purchaser and the protection
provider;
(2) Any assignment of the contract has been confirmed by all
relevant parties;
(3) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract includes the following credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that is
closely in line with the grace period of the reference exposure; and
(ii) Bankruptcy, insolvency, or inability of the obligor on the
reference exposure to pay its debts, or its failure or admission in
writing of its inability generally to pay its debts as they become due,
and similar events;
(4) The terms and conditions dictating the manner in which the
contract is to be settled are incorporated into the contract;
(5) If the contract allows for cash settlement, the contract
incorporates a robust valuation process to estimate loss reliably and
specifies a reasonable period for obtaining post-credit event valuations
of the reference exposure;
(6) If the contract requires the protection purchaser to transfer an
exposure to the protection provider at settlement, the terms of at least
one of the exposures that is permitted to be transferred under the
contract provides that any required consent to transfer may not be
unreasonably withheld;
(7) If the credit derivative is a credit default swap or n\th\-to-
default swap, the contract clearly identifies the parties responsible
for determining whether a credit event has occurred, specifies that this
determination is not the sole responsibility of the protection provider,
and gives the protection purchaser the right to notify the protection
provider of the occurrence of a credit event; and
(8) If the credit derivative is a total return swap and the bank
records net payments received on the swap as net income, the bank
records offsetting deterioration in the value of the hedged exposure
(either through reductions in fair value or by an addition to reserves).
Eligible credit reserves means all general allowances that have been
established through a charge against earnings to absorb credit losses
associated with on- or off-balance sheet wholesale and retail exposures,
including the allowance for loan and lease losses (ALLL) associated with
such exposures but excluding allocated transfer risk reserves
established pursuant to 12 U.S.C. 3904 and other specific reserves
created against recognized losses.
[[Page 55]]
Eligible double default guarantor, with respect to a guarantee or
credit derivative obtained by a bank, means:
(1) U.S.-based entities. A depository institution, a bank holding
company, a savings and loan holding company (as defined in 12 U.S.C.
1467a) provided all or substantially all of the holding company's
activities are permissible for a financial holding company under 12
U.S.C. 1843(k), a securities broker or dealer registered with the SEC
under the Securities Exchange Act of 1934 (15 U.S.C. 78o et seq.), or an
insurance company in the business of providing credit protection (such
as a monoline bond insurer or re-insurer) that is subject to supervision
by a State insurance regulator, if:
(i) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank assigned a PD to the
guarantor's rating grade that was equal to or lower than the PD
associated with a long-term external rating in the third-highest
investment-grade rating category; and
(ii) The bank currently assigns a PD to the guarantor's rating grade
that is equal to or lower than the PD associated with a long-term
external rating in the lowest investment-grade rating category; or
(2) Non-U.S.-based entities. A foreign bank (as defined in Sec.
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), a
non-U.S.-based securities firm, or a non-U.S.-based insurance company in
the business of providing credit protection, if:
(i) The bank demonstrates that the guarantor is subject to
consolidated supervision and regulation comparable to that imposed on
U.S. depository institutions, securities broker-dealers, or insurance
companies (as the case may be), or has issued and outstanding an
unsecured long-term debt security without credit enhancement that has a
long-term applicable external rating of at least investment grade;
(ii) At the time the guarantor issued the guarantee or credit
derivative or at any time thereafter, the bank assigned a PD to the
guarantor's rating grade that was equal to or lower than the PD
associated with a long-term external rating in the third-highest
investment-grade rating category; and
(iii) The bank currently assigns a PD to the guarantor's rating
grade that is equal to or lower than the PD associated with a long-term
external rating in the lowest investment-grade rating category.
Eligible guarantee means a guarantee that:
(1) Is written and unconditional;
(2) Covers all or a pro rata portion of all contractual payments of
the obligor on the reference exposure;
(3) Gives the beneficiary a direct claim against the protection
provider;
(4) Is not unilaterally cancelable by the protection provider for
reasons other than the breach of the contract by the beneficiary;
(5) Is legally enforceable against the protection provider in a
jurisdiction where the protection provider has sufficient assets against
which a judgment may be attached and enforced;
(6) Requires the protection provider to make payment to the
beneficiary on the occurrence of a default (as defined in the guarantee)
of the obligor on the reference exposure in a timely manner without the
beneficiary first having to take legal actions to pursue the obligor for
payment;
(7) Does not increase the beneficiary's cost of credit protection on
the guarantee in response to deterioration in the credit quality of the
reference exposure; and
(8) Is not provided by an affiliate of the bank, unless the
affiliate is an insured depository institution, bank, securities broker
or dealer, or insurance company that:
(i) Does not control the bank; and
(ii) Is subject to consolidated supervision and regulation
comparable to that imposed on U.S. depository institutions, securities
broker-dealers, or insurance companies (as the case may be).
Eligible margin loan means an extension of credit where:
(1) The extension of credit is collateralized exclusively by liquid
and readily marketable debt or equity securities, gold, or conforming
residential mortgages;
(2) The collateral is marked to market daily, and the transaction is
subject to daily margin maintenance requirements;
(3) The extension of credit is conducted under an agreement that
provides the bank the right to accelerate and terminate the extension of
credit and to liquidate or set off collateral promptly upon an event of
default (including upon an event of bankruptcy, insolvency, or similar
proceeding) of the counterparty, provided that, in any such case, any
exercise of rights under the agreement will not be stayed or avoided
under applicable law in the relevant jurisdictions; \2\ and
---------------------------------------------------------------------------
\2\ This requirement is met where all transactions under the
agreement are (i) executed under U.S. law and (ii) constitute
``securities contracts'' under section 555 of the Bankruptcy Code (11
U.S.C. 555), qualified financial contracts under section 11(e)(8) of the
Federal Deposit Insurance Act (12 U.S.C. 1821(e)(8)), or netting
contracts between or among financial institutions under sections 401-407
of the Federal Deposit Insurance Corporation Improvement Act of 1991 (12
U.S.C. 4401-4407) or the Federal Reserve Board's Regulation EE (12 CFR
part 231).
---------------------------------------------------------------------------
(4) The bank has conducted sufficient legal review to conclude with
a well-founded basis (and maintains sufficient written documentation of
that legal review) that the
[[Page 56]]
agreement meets the requirements of paragraph (3) of this definition and
is legal, valid, binding, and enforceable under applicable law in the
relevant jurisdictions.
Eligible operational risk offsets means amounts, not to exceed
expected operational loss, that:
(1) Are generated by internal business practices to absorb highly
predictable and reasonably stable operational losses, including reserves
calculated consistent with GAAP; and
(2) Are available to cover expected operational losses with a high
degree of certainty over a one-year horizon.
Eligible purchased wholesale exposure means a purchased wholesale
exposure that:
(1) The bank or securitization SPE purchased from an unaffiliated
seller and did not directly or indirectly originate;
(2) Was generated on an arm's-length basis between the seller and
the obligor (intercompany accounts receivable and receivables subject to
contra-accounts between firms that buy and sell to each other do not
satisfy this criterion);
(3) Provides the bank or securitization SPE with a claim on all
proceeds from the exposure or a pro rata interest in the proceeds from
the exposure;
(4) Has an M of less than one year; and
(5) When consolidated by obligor, does not represent a concentrated
exposure relative to the portfolio of purchased wholesale exposures.
Eligible securitization guarantor means:
(1) A sovereign entity, the Bank for International Settlements, the
International Monetary Fund, the European Central Bank, the European
Commission, a Federal Home Loan Bank, Federal Agricultural Mortgage
Corporation (Farmer Mac), a multilateral development bank, a depository
institution, a bank holding company, a savings and loan holding company
(as defined in 12 U.S.C. 1467a) provided all or substantially all of the
holding company's activities are permissible for a financial holding
company under 12 U.S.C. 1843(k), a foreign bank (as defined in Sec.
211.2 of the Federal Reserve Board's Regulation K (12 CFR 211.2)), or a
securities firm;
(2) Any other entity (other than a securitization SPE) that has
issued and outstanding an unsecured long-term debt security without
credit enhancement that has a long-term applicable external rating in
one of the three highest investment-grade rating categories; or
(3) Any other entity (other than a securitization SPE) that has a PD
assigned by the bank that is lower than or equal to the PD associated
with a long-term external rating in the third highest investment-grade
rating category.
Eligible servicer cash advance facility means a servicer cash
advance facility in which:
(1) The servicer is entitled to full reimbursement of advances,
except that a servicer may be obligated to make non-reimbursable
advances for a particular underlying exposure if any such advance is
contractually limited to an insignificant amount of the outstanding
principal balance of that exposure;
(2) The servicer's right to reimbursement is senior in right of
payment to all other claims on the cash flows from the underlying
exposures of the securitization; and
(3) The servicer has no legal obligation to, and does not, make
advances to the securitization if the servicer concludes the advances
are unlikely to be repaid.
Equity derivative contract means an equity-linked swap, purchased
equity-linked option, forward equity-linked contract, or any other
instrument linked to equities that gives rise to similar counterparty
credit risks.
Equity exposure means:
(1) A security or instrument (whether voting or non-voting) that
represents a direct or indirect ownership interest in, and is a residual
claim on, the assets and income of a company, unless:
(i) The issuing company is consolidated with the bank under GAAP;
(ii) The bank is required to deduct the ownership interest from tier
1 or tier 2 capital under this appendix;
(iii) The ownership interest incorporates a payment or other similar
obligation on the part of the issuing company (such as an obligation to
make periodic payments); or
(iv) The ownership interest is a securitization exposure;
(2) A security or instrument that is mandatorily convertible into a
security or instrument described in paragraph (1) of this definition;
(3) An option or warrant that is exercisable for a security or
instrument described in paragraph (1) of this definition; or
(4) Any other security or instrument (other than a securitization
exposure) to the extent the return on the security or instrument is
based on the performance of a security or instrument described in
paragraph (1) of this definition.
Excess spread for a period means:
(1) Gross finance charge collections and other income received by a
securitization SPE (including market interchange fees) over a period
minus interest paid to the holders of the securitization exposures,
servicing fees, charge-offs, and other senior trust or similar expenses
of the SPE over the period; divided by
(2) The principal balance of the underlying exposures at the end of
the period.
Exchange rate derivative contract means a cross-currency interest
rate swap, forward foreign-exchange contract, currency option purchased,
or any other instrument linked to
[[Page 57]]
exchange rates that gives rise to similar counterparty credit risks.
Excluded mortgage exposure means any one- to four-family residential
pre-sold construction loan for a residence for which the purchase
contract is cancelled that would receive a 100 percent risk weight under
section 618(a)(2) of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act and under and 12 CFR part 3, appendix
A, section 3(a)(3)(iii).
Expected credit loss (ECL) means:
(1) For a wholesale exposure to a non-defaulted obligor or segment
of non-defaulted retail exposures that is carried at fair value with
gains and losses flowing through earnings or that is classified as held-
for-sale and is carried at the lower of cost or fair value with losses
flowing through earnings, zero.
(2) For all other wholesale exposures to non-defaulted obligors or
segments of non-defaulted retail exposures, the product of PD times LGD
times EAD for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, the bank's impairment estimate for allowance
purposes for the exposure or segment.
(4) Total ECL is the sum of expected credit losses for all wholesale
and retail exposures other than exposures for which the bank has applied
the double default treatment in section 34 of this appendix.
Expected exposure (EE) means the expected value of the probability
distribution of non-negative credit risk exposures to a counterparty at
any specified future date before the maturity date of the longest term
transaction in the netting set. Any negative market values in the
probability distribution of market values to a counterparty at a
specified future date are set to zero to convert the probability
distribution of market values to the probability distribution of credit
risk exposures.
Expected operational loss (EOL) means the expected value of the
distribution of potential aggregate operational losses, as generated by
the bank's operational risk quantification system using a one-year
horizon.
Expected positive exposure (EPE) means the weighted average over
time of expected (non-negative) exposures to a counterparty where the
weights are the proportion of the time interval that an individual
expected exposure represents. When calculating risk-based capital
requirements, the average is taken over a one-year horizon.
Exposure at default (EAD). (1) For the on-balance sheet component of
a wholesale exposure or segment of retail exposures (other than an OTC
derivative contract, or a repo-style transaction or eligible margin loan
for which the bank determines EAD under section 32 of this appendix),
EAD means:
(i) If the exposure or segment is a security classified as
available-for-sale, the bank's carrying value (including net accrued but
unpaid interest and fees) for the exposure or segment less any allocated
transfer risk reserve for the exposure or segment, less any unrealized
gains on the exposure or segment, and plus any unrealized losses on the
exposure or segment; or
(ii) If the exposure or segment is not a security classified as
available-for-sale, the bank's carrying value (including net accrued but
unpaid interest and fees) for the exposure or segment less any allocated
transfer risk reserve for the exposure or segment.
(2) For the off-balance sheet component of a wholesale exposure or
segment of retail exposures (other than an OTC derivative contract, or a
repo-style transaction or eligible margin loan for which the bank
determines EAD under section 32 of this appendix) in the form of a loan
commitment, line of credit, trade-related letter of credit, or
transaction-related contingency, EAD means the bank's best estimate of
net additions to the outstanding amount owed the bank, including
estimated future additional draws of principal and accrued but unpaid
interest and fees, that are likely to occur over a one-year horizon
assuming the wholesale exposure or the retail exposures in the segment
were to go into default. This estimate of net additions must reflect
what would be expected during economic downturn conditions. Trade-
related letters of credit are short-term, self-liquidating instruments
that are used to finance the movement of goods and are collateralized by
the underlying goods. Transaction-related contingencies relate to a
particular transaction and include, among other things, performance
bonds and performance-based letters of credit.
(3) For the off-balance sheet component of a wholesale exposure or
segment of retail exposures (other than an OTC derivative contract, or a
repo-style transaction or eligible margin loan for which the bank
determines EAD under section 32 of this appendix) in the form of
anything other than a loan commitment, line of credit, trade-related
letter of credit, or transaction-related contingency, EAD means the
notional amount of the exposure or segment.
(4) EAD for OTC derivative contracts is calculated as described in
section 32 of this appendix. A bank also may determine EAD for repo-
style transactions and eligible margin loans as described in section 32
of this appendix.
(5) For wholesale or retail exposures in which only the drawn
balance has been securitized, the bank must reflect its share of the
exposures' undrawn balances in EAD. Undrawn balances of revolving
exposures for which the drawn balances have been securitized must be
allocated between the seller's and investors' interests on a pro rata
[[Page 58]]
basis, based on the proportions of the seller's and investors' shares of
the securitized drawn balances.
Exposure category means any of the wholesale, retail,
securitization, or equity exposure categories.
External operational loss event data means, with respect to a bank,
gross operational loss amounts, dates, recoveries, and relevant causal
information for operational loss events occurring at organizations other
than the bank.
External rating means a credit rating that is assigned by an NRSRO
to an exposure, provided:
(1) The credit rating fully reflects the entire amount of credit
risk with regard to all payments owed to the holder of the exposure. If
a holder is owed principal and interest on an exposure, the credit
rating must fully reflect the credit risk associated with timely
repayment of principal and interest. If a holder is owed only principal
on an exposure, the credit rating must fully reflect only the credit
risk associated with timely repayment of principal; and
(2) The credit rating is published in an accessible form and is or
will be included in the transition matrices made publicly available by
the NRSRO that summarize the historical performance of positions rated
by the NRSRO.
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the bank (including cash held for the bank
by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that have an applicable external
rating of one category below investment grade or higher;
(iv) Short-term debt instruments that have an applicable external
rating of at least investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded;
(vii) Money market mutual fund shares and other mutual fund shares
if a price for the shares is publicly quoted daily; or
(viii) Conforming residential mortgages; and
(2) In which the bank has a perfected, first priority security
interest or, outside of the United States, the legal equivalent thereof
(with the exception of cash on deposit and notwithstanding the prior
security interest of any custodial agent).
GAAP means generally accepted accounting principles as used in the
United States.
Gain-on-sale means an increase in the equity capital (as reported on
Schedule RC of the Call Report) of a bank that results from a
securitization (other than an increase in equity capital that results
from the bank's receipt of cash in connection with the securitization).
Guarantee means a financial guarantee, letter of credit, insurance,
or other similar financial instrument (other than a credit derivative)
that allows one party (beneficiary) to transfer the credit risk of one
or more specific exposures (reference exposure) to another party
(protection provider). See also eligible guarantee.
High volatility commercial real estate (HVCRE) exposure means a
credit facility that finances or has financed the acquisition,
development, or construction (ADC) of real property, unless the facility
finances:
(1) One- to four-family residential properties; or
(2) Commercial real estate projects in which:
(i) The loan-to-value ratio is less than or equal to the applicable
maximum supervisory loan-to-value ratio in the OCC's real estate lending
standards at 12 CFR part 34, Subpart D;
(ii) The borrower has contributed capital to the project in the form
of cash or unencumbered readily marketable assets (or has paid
development expenses out-of-pocket) of at least 15 percent of the real
estate's appraised ``as completed'' value; and
(iii) The borrower contributed the amount of capital required by
paragraph (2)(ii) of this definition before the bank advances funds
under the credit facility, and the capital contributed by the borrower,
or internally generated by the project, is contractually required to
remain in the project throughout the life of the project. The life of a
project concludes only when the credit facility is converted to
permanent financing or is sold or paid in full. Permanent financing may
be provided by the bank that provided the ADC facility as long as the
permanent financing is subject to the bank's underwriting criteria for
long-term mortgage loans.
Inferred rating. A securitization exposure has an inferred rating
equal to the external rating referenced in paragraph (2)(i) of this
definition if:
(1) The securitization exposure does not have an external rating;
and
(2) Another securitization exposure issued by the same issuer and
secured by the same underlying exposures:
(i) Has an external rating;
(ii) Is subordinated in all respects to the unrated securitization
exposure;
(iii) Does not benefit from any credit enhancement that is not
available to the unrated securitization exposure; and
(iv) Has an effective remaining maturity that is equal to or longer
than that of the unrated securitization exposure.
Interest rate derivative contract means a single-currency interest
rate swap, basis swap, forward rate agreement, purchased interest
[[Page 59]]
rate option, when-issued securities, or any other instrument linked to
interest rates that gives rise to similar counterparty credit risks.
Internal operational loss event data means, with respect to a bank,
gross operational loss amounts, dates, recoveries, and relevant causal
information for operational loss events occurring at the bank.
Investing bank means, with respect to a securitization, a bank that
assumes the credit risk of a securitization exposure (other than an
originating bank of the securitization). In the typical synthetic
securitization, the investing bank sells credit protection on a pool of
underlying exposures to the originating bank.
Investment fund means a company:
(1) All or substantially all of the assets of which are financial
assets; and
(2) That has no material liabilities.
Investors' interest EAD means, with respect to a securitization, the
EAD of the underlying exposures multiplied by the ratio of:
(1) The total amount of securitization exposures issued by the
securitization SPE to investors; divided by
(2) The outstanding principal amount of underlying exposures.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The bank's empirically based best estimate of the long-run
default-weighted average economic loss, per dollar of EAD, the bank
would expect to incur if the obligor (or a typical obligor in the loss
severity grade assigned by the bank to the exposure) were to default
within a one-year horizon over a mix of economic conditions, including
economic downturn conditions; or
(iii) The bank's empirically based best estimate of the economic
loss, per dollar of EAD, the bank would expect to incur if the obligor
(or a typical obligor in the loss severity grade assigned by the bank to
the exposure) were to default within a one-year horizon during economic
downturn conditions.
(2) For a segment of retail exposures, the greatest of:
(i) Zero;
(ii) The bank's empirically based best estimate of the long-run
default-weighted average economic loss, per dollar of EAD, the bank
would expect to incur if the exposures in the segment were to default
within a one-year horizon over a mix of economic conditions, including
economic downturn conditions; or
(iii) The bank's empirically based best estimate of the economic
loss, per dollar of EAD, the bank would expect to incur if the exposures
in the segment were to default within a one-year horizon during economic
downturn conditions.
(3) The economic loss on an exposure in the event of default is all
material credit-related losses on the exposure (including accrued but
unpaid interest or fees, losses on the sale of collateral, direct
workout costs, and an appropriate allocation of indirect workout costs).
Where positive or negative cash flows on a wholesale exposure to a
defaulted obligor or a defaulted retail exposure (including proceeds
from the sale of collateral, workout costs, additional extensions of
credit to facilitate repayment of the exposure, and draw-downs of unused
credit lines) occur after the date of default, the economic loss must
reflect the net present value of cash flows as of the default date using
a discount rate appropriate to the risk of the defaulted exposure.
Main index means the Standard & Poor's 500 Index, the FTSE All-World
Index, and any other index for which the bank can demonstrate to the
satisfaction of the OCC that the equities represented in the index have
comparable liquidity, depth of market, and size of bid-ask spreads as
equities in the Standard & Poor's 500 Index and FTSE All-World Index.
Multilateral development bank means the International Bank for
Reconstruction and Development, the International Finance Corporation,
the Inter-American Development Bank, the Asian Development Bank, the
African Development Bank, the European Bank for Reconstruction and
Development, the European Investment Bank, the European Investment Fund,
the Nordic Investment Bank, the Caribbean Development Bank, the Islamic
Development Bank, the Council of Europe Development Bank, and any other
multilateral lending institution or regional development bank in which
the U.S. government is a shareholder or contributing member or which the
OCC determines poses comparable credit risk.
Nationally recognized statistical rating organization (NRSRO) means
an entity registered with the SEC as a nationally recognized statistical
rating organization under section 15E of the Securities Exchange Act of
1934 (15 U.S.C. 78o-7).
Netting set means a group of transactions with a single counterparty
that are subject to a qualifying master netting agreement or qualifying
cross-product master netting agreement. For purposes of the internal
models methodology in paragraph (d) of section 32 of this appendix, each
transaction that is not subject to such a master netting agreement is
its own netting set.
N\th\-to-default credit derivative means a credit derivative that
provides credit protection only for the n\th\-defaulting reference
exposure in a group of reference exposures.
Obligor means the legal entity or natural person contractually
obligated on a wholesale exposure, except that a bank may treat
[[Page 60]]
the following exposures as having separate obligors:
(1) Exposures to the same legal entity or natural person denominated
in different currencies;
(2) (i) An income-producing real estate exposure for which all or
substantially all of the repayment of the exposure is reliant on the
cash flows of the real estate serving as collateral for the exposure;
the bank, in economic substance, does not have recourse to the borrower
beyond the real estate collateral; and no cross-default or cross-
acceleration clauses are in place other than clauses obtained solely out
of an abundance of caution; and
(ii) Other credit exposures to the same legal entity or natural
person; and
(3) (i) A wholesale exposure authorized under section 364 of the
U.S. Bankruptcy Code (11 U.S.C. 364) to a legal entity or natural person
who is a debtor-in-possession for purposes of Chapter 11 of the
Bankruptcy Code; and
(ii) Other credit exposures to the same legal entity or natural
person.
Operational loss means a loss (excluding insurance or tax effects)
resulting from an operational loss event. Operational loss includes all
expenses associated with an operational loss event except for
opportunity costs, forgone revenue, and costs related to risk management
and control enhancements implemented to prevent future operational
losses.
Operational loss event means an event that results in loss and is
associated with any of the following seven operational loss event type
categories:
(1) Internal fraud, which means the operational loss event type
category that comprises operational losses resulting from an act
involving at least one internal party of a type intended to defraud,
misappropriate property, or circumvent regulations, the law, or company
policy, excluding diversity- and discrimination-type events.
(2) External fraud, which means the operational loss event type
category that comprises operational losses resulting from an act by a
third party of a type intended to defraud, misappropriate property, or
circumvent the law. Retail credit card losses arising from non-
contractual, third-party initiated fraud (for example, identity theft)
are external fraud operational losses. All other third-party initiated
credit losses are to be treated as credit risk losses.
(3) Employment practices and workplace safety, which means the
operational loss event type category that comprises operational losses
resulting from an act inconsistent with employment, health, or safety
laws or agreements, payment of personal injury claims, or payment
arising from diversity- and discrimination-type events.
(4) Clients, products, and business practices, which means the
operational loss event type category that comprises operational losses
resulting from the nature or design of a product or from an
unintentional or negligent failure to meet a professional obligation to
specific clients (including fiduciary and suitability requirements).
(5) Damage to physical assets, which means the operational loss
event type category that comprises operational losses resulting from the
loss of or damage to physical assets from natural disaster or other
events.
(6) Business disruption and system failures, which means the
operational loss event type category that comprises operational losses
resulting from disruption of business or system failures.
(7) Execution, delivery, and process management, which means the
operational loss event type category that comprises operational losses
resulting from failed transaction processing or process management or
losses arising from relations with trade counterparties and vendors.
Operational risk means the risk of loss resulting from inadequate or
failed internal processes, people, and systems or from external events
(including legal risk but excluding strategic and reputational risk).
Operational risk exposure means the 99.9\th\ percentile of the
distribution of potential aggregate operational losses, as generated by
the bank's operational risk quantification system over a one-year
horizon (and not incorporating eligible operational risk offsets or
qualifying operational risk mitigants).
Originating bank, with respect to a securitization, means a bank
that:
(1) Directly or indirectly originated or securitized the underlying
exposures included in the securitization; or
(2) Serves as an ABCP program sponsor to the securitization.
Other retail exposure means an exposure (other than a securitization
exposure, an equity exposure, a residential mortgage exposure, an
excluded mortgage exposure, a qualifying revolving exposure, or the
residual value portion of a lease exposure) that is managed as part of a
segment of exposures with homogeneous risk characteristics, not on an
individual-exposure basis, and is either:
(1) An exposure to an individual for non-business purposes; or
(2) An exposure to an individual or company for business purposes if
the bank's consolidated business credit exposure to the individual or
company is $1 million or less.
Over-the-counter (OTC) derivative contract means a derivative
contract that is not traded on an exchange that requires the daily
receipt and payment of cash-variation margin.
Probability of default (PD) means:
[[Page 61]]
(1) For a wholesale exposure to a non-defaulted obligor, the bank's
empirically based best estimate of the long-run average one-year default
rate for the rating grade assigned by the bank to the obligor, capturing
the average default experience for obligors in the rating grade over a
mix of economic conditions (including economic downturn conditions)
sufficient to provide a reasonable estimate of the average one-year
default rate over the economic cycle for the rating grade.
(2) For a segment of non-defaulted retail exposures, the bank's
empirically based best estimate of the long-run average one-year default
rate for the exposures in the segment, capturing the average default
experience for exposures in the segment over a mix of economic
conditions (including economic downturn conditions) sufficient to
provide a reasonable estimate of the average one-year default rate over
the economic cycle for the segment and adjusted upward as appropriate
for segments for which seasoning effects are material. For purposes of
this definition, a segment for which seasoning effects are material is a
segment where there is a material relationship between the time since
origination of exposures within the segment and the bank's best estimate
of the long-run average one-year default rate for the exposures in the
segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, 100 percent.
Protection amount (P) means, with respect to an exposure hedged by
an eligible guarantee or eligible credit derivative, the effective
notional amount of the guarantee or credit derivative, reduced to
reflect any currency mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in section 33 of this appendix).
Publicly traded means traded on:
(1) Any exchange registered with the SEC as a national securities
exchange under section 6 of the Securities Exchange Act of 1934 (15
U.S.C. 78f); or
(2) Any non-U.S.-based securities exchange that:
(i) Is registered with, or approved by, a national securities
regulatory authority; and
(ii) Provides a liquid, two-way market for the instrument in
question, meaning that there are enough independent bona fide offers to
buy and sell so that a sales price reasonably related to the last sales
price or current bona fide competitive bid and offer quotations can be
determined promptly and a trade can be settled at such a price within
five business days.
Qualifying central counterparty means a counterparty (for example, a
clearinghouse) that:
(1) Facilitates trades between counterparties in one or more
financial markets by either guaranteeing trades or novating contracts;
(2) Requires all participants in its arrangements to be fully
collateralized on a daily basis; and
(3) The bank demonstrates to the satisfaction of the OCC is in sound
financial condition and is subject to effective oversight by a national
supervisory authority.
Qualifying cross-product master netting agreement means a qualifying
master netting agreement that provides for termination and close-out
netting across multiple types of financial transactions or qualifying
master netting agreements in the event of a counterparty's default,
provided that:
(1) The underlying financial transactions are OTC derivative
contracts, eligible margin loans, or repo-style transactions; and
(2) The bank obtains a written legal opinion verifying the validity
and enforceability of the agreement under applicable law of the relevant
jurisdictions if the counterparty fails to perform upon an event of
default, including upon an event of bankruptcy, insolvency, or similar
proceeding.
Qualifying master netting agreement means any written, legally
enforceable bilateral agreement, provided that:
(1) The agreement creates a single legal obligation for all
individual transactions covered by the agreement upon an event of
default, including bankruptcy, insolvency, or similar proceeding, of the
counterparty;
(2) The agreement provides the bank the right to accelerate,
terminate, and close-out on a net basis all transactions under the
agreement and to liquidate or set off collateral promptly upon an event
of default, including upon an event of bankruptcy, insolvency, or
similar proceeding, of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions;
(3) The bank has conducted sufficient legal review to conclude with
a well-founded basis (and maintains sufficient written documentation of
that legal review) that:
(i) The agreement meets the requirements of paragraph (2) of this
definition; and
(ii) In the event of a legal challenge (including one resulting from
default or from bankruptcy, insolvency, or similar proceeding) the
relevant court and administrative authorities would find the agreement
to be legal, valid, binding, and enforceable under the law of the
relevant jurisdictions;
(4) The bank establishes and maintains procedures to monitor
possible changes in relevant law and to ensure that the agreement
continues to satisfy the requirements of this definition; and
(5) The agreement does not contain a walkaway clause (that is, a
provision that permits a non-defaulting counterparty to make a lower
payment than it would make otherwise under the agreement, or no payment
at all, to a defaulter or the estate of a
[[Page 62]]
defaulter, even if the defaulter or the estate of the defaulter is a net
creditor under the agreement).
Qualifying revolving exposure (QRE) means an exposure (other than a
securitization exposure or equity exposure) to an individual that is
managed as part of a segment of exposures with homogeneous risk
characteristics, not on an individual-exposure basis, and:
(1) Is revolving (that is, the amount outstanding fluctuates,
determined largely by the borrower's decision to borrow and repay, up to
a pre-established maximum amount);
(2) Is unsecured and unconditionally cancelable by the bank to the
fullest extent permitted by Federal law; and
(3) Has a maximum exposure amount (drawn plus undrawn) of up to
$100,000.
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the bank acts as agent for
a customer and indemnifies the customer against loss, provided that:
(1) The transaction is based solely on liquid and readily marketable
securities, cash, gold, or conforming residential mortgages;
(2) The transaction is marked-to-market daily and subject to daily
margin maintenance requirements;
(3)(i) The transaction is a ``securities contract'' or ``repurchase
agreement'' under section 555 or 559, respectively, of the Bankruptcy
Code (11 U.S.C. 555 or 559), a qualified financial contract under
section 11(e)(8) of the Federal Deposit Insurance Act (12 U.S.C.
1821(e)(8)), or a netting contract between or among financial
institutions under sections 401-407 of the Federal Deposit Insurance
Corporation Improvement Act of 1991 (12 U.S.C. 4401-4407) or the Federal
Reserve Board's Regulation EE (12 CFR part 231); or
(ii) If the transaction does not meet the criteria set forth in
paragraph (3)(i) of this definition, then either:
(A) The transaction is executed under an agreement that provides the
bank the right to accelerate, terminate, and close-out the transaction
on a net basis and to liquidate or set off collateral promptly upon an
event of default (including upon an event of bankruptcy, insolvency, or
similar proceeding) of the counterparty, provided that, in any such
case, any exercise of rights under the agreement will not be stayed or
avoided under applicable law in the relevant jurisdictions; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by
the bank; and
(2) Executed under an agreement that provides the bank the right to
accelerate, terminate, and close-out the transaction on a net basis and
to liquidate or set off collateral promptly upon an event of
counterparty default; and
(4) The bank has conducted sufficient legal review to conclude with
a well-founded basis (and maintains sufficient written documentation of
that legal review) that the agreement meets the requirements of
paragraph (3) of this definition and is legal, valid, binding, and
enforceable under applicable law in the relevant jurisdictions.
Residential mortgage exposure means an exposure (other than a
securitization exposure, equity exposure, or excluded mortgage exposure)
that is managed as part of a segment of exposures with homogeneous risk
characteristics, not on an individual-exposure basis, and is:
(1) An exposure that is primarily secured by a first or subsequent
lien on one- to four-family residential property; or
(2) An exposure with an original and outstanding amount of $1
million or less that is primarily secured by a first or subsequent lien
on residential property that is not one to four family.
Retail exposure means a residential mortgage exposure, a qualifying
revolving exposure, or an other retail exposure.
Retail exposure subcategory means the residential mortgage exposure,
qualifying revolving exposure, or other retail exposure subcategory.
Risk parameter means a variable used in determining risk-based
capital requirements for wholesale and retail exposures, specifically
probability of default (PD), loss given default (LGD), exposure at
default (EAD), or effective maturity (M).
Scenario analysis means a systematic process of obtaining expert
opinions from business managers and risk management experts to derive
reasoned assessments of the likelihood and loss impact of plausible
high-severity operational losses. Scenario analysis may include the
well-reasoned evaluation and use of external operational loss event
data, adjusted as appropriate to ensure relevance to a bank's
operational risk profile and control structure.
SEC means the U.S. Securities and Exchange Commission.
Securitization means a traditional securitization or a synthetic
securitization.
Securitization exposure means an on-balance sheet or off-balance
sheet credit exposure that arises from a traditional or synthetic
securitization (including credit-enhancing representations and
warranties).
Securitization special purpose entity (securitization SPE) means a
corporation, trust, or other entity organized for the specific purpose
of holding underlying exposures of a securitization, the activities of
which are limited to those appropriate to accomplish this purpose, and
the structure of which is intended to isolate the underlying exposures
held by the entity from the credit risk of the seller of the underlying
exposures to the entity.
[[Page 63]]
Senior securitization exposure means a securitization exposure that
has a first priority claim on the cash flows from the underlying
exposures. When determining whether a securitization exposure has a
first priority claim on the cash flows from the underlying exposures, a
bank is not required to consider amounts due under interest rate or
currency derivative contracts, fees due, or other similar payments. Both
the most senior commercial paper issued by an ABCP program and a
liquidity facility that supports the ABCP program may be senior
securitization exposures if the liquidity facility provider's right to
reimbursement of the drawn amounts is senior to all claims on the cash
flows from the underlying exposures except amounts due under interest
rate or currency derivative contracts, fees due, or other similar
payments.
Servicer cash advance facility means a facility under which the
servicer of the underlying exposures of a securitization may advance
cash to ensure an uninterrupted flow of payments to investors in the
securitization, including advances made to cover foreclosure costs or
other expenses to facilitate the timely collection of the underlying
exposures. See also eligible servicer cash advance facility.
Sovereign entity means a central government (including the U.S.
government) or an agency, department, ministry, or central bank of a
central government.
Sovereign exposure means:
(1) A direct exposure to a sovereign entity; or
(2) An exposure directly and unconditionally backed by the full
faith and credit of a sovereign entity.
Subsidiary means, with respect to a company, a company controlled by
that company.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties through the use of
one or more credit derivatives or guarantees (other than a guarantee
that transfers only the credit risk of an individual retail exposure);
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels of
seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures; and
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities).
Tier 1 capital is defined in 12 CFR part 3, appendix A, as modified
in part II of this appendix.
Tier 2 capital is defined in 12 CFR part 3, appendix A, as modified
in part II of this appendix.
Total qualifying capital means the sum of tier 1 capital and tier 2
capital, after all deductions required in this appendix.
Total risk-weighted assets means:
(1) The sum of:
(i) Credit risk-weighted assets; and
(ii) Risk-weighted assets for operational risk; minus
(2) Excess eligible credit reserves not included in tier 2 capital.
Total wholesale and retail risk-weighted assets means the sum of
risk-weighted assets for wholesale exposures to non-defaulted obligors
and segments of non-defaulted retail exposures; risk-weighted assets for
wholesale exposures to defaulted obligors and segments of defaulted
retail exposures; risk-weighted assets for assets not defined by an
exposure category; and risk-weighted assets for non-material portfolios
of exposures (all as determined in section 31 of this appendix) and
risk-weighted assets for unsettled transactions (as determined in
section 35 of this appendix) minus the amounts deducted from capital
pursuant to 12 CFR part 3, appendix A (excluding those deductions
reversed in section 12 of this appendix).
Traditional securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is transferred to one or more third parties other than through
the use of credit derivatives or guarantees;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches reflecting different levels of
seniority;
(3) Performance of the securitization exposures depends upon the
performance of the underlying exposures;
(4) All or substantially all of the underlying exposures are
financial exposures (such as loans, commitments, credit derivatives,
guarantees, receivables, asset-backed securities, mortgage-backed
securities, other debt securities, or equity securities);
(5) The underlying exposures are not owned by an operating company;
(6) The underlying exposures are not owned by a small business
investment company described in section 302 of the Small Business
Investment Act of 1958 (15 U.S.C. 682); and
(7) The underlying exposures are not owned by a firm an investment
in which qualifies as a community development investment under 12 U.S.C.
24(Eleventh).
(8) The OCC may determine that a transaction in which the underlying
exposures are owned by an investment firm that exercises substantially
unfettered control over the
[[Page 64]]
size and composition of its assets, liabilities, and off-balance sheet
exposures is not a traditional securitization based on the transaction's
leverage, risk profile, or economic substance.
(9) The OCC may deem a transaction that meets the definition of a
traditional securitization, notwithstanding paragraph (5), (6), or (7)
of this definition, to be a traditional securitization based on the
transaction's leverage, risk profile, or economic substance.
Tranche means all securitization exposures associated with a
securitization that have the same seniority level.
Underlying exposures means one or more exposures that have been
securitized in a securitization transaction.
Unexpected operational loss (UOL) means the difference between the
bank's operational risk exposure and the bank's expected operational
loss.
Unit of measure means the level (for example, organizational unit or
operational loss event type) at which the bank's operational risk
quantification system generates a separate distribution of potential
operational losses.
Value-at-Risk (VaR) means the estimate of the maximum amount that
the value of one or more exposures could decline due to market price or
rate movements during a fixed holding period within a stated confidence
interval.
Wholesale exposure means a credit exposure to a company, natural
person, sovereign entity, or governmental entity (other than a
securitization exposure, retail exposure, excluded mortgage exposure, or
equity exposure). Examples of a wholesale exposure include:
(1) A non-tranched guarantee issued by a bank on behalf of a
company;
(2) A repo-style transaction entered into by a bank with a company
and any other transaction in which a bank posts collateral to a company
and faces counterparty credit risk;
(3) An exposure that a bank treats as a covered position under 12
CFR part 3, appendix B for which there is a counterparty credit risk
capital requirement;
(4) A sale of corporate loans by a bank to a third party in which
the bank retains full recourse;
(5) An OTC derivative contract entered into by a bank with a
company;
(6) An exposure to an individual that is not managed by a bank as
part of a segment of exposures with homogeneous risk characteristics;
and
(7) A commercial lease.
Wholesale exposure subcategory means the HVCRE or non-HVCRE
wholesale exposure subcategory.
Section 3. Minimum Risk-Based Capital Requirements
(a) Except as modified by paragraph (c) of this section or by
section 23 of this appendix, each bank must meet a minimum ratio of:
(1) Total qualifying capital to total risk-weighted assets of 8.0
percent; and
(2) Tier 1 capital to total risk-weighted assets of 4.0 percent.
(b) Each bank must hold capital commensurate with the level and
nature of all risks to which the bank is exposed.
(c) When a bank subject to 12 CFR part 3, appendix B calculates its
risk-based capital requirements under this appendix, the bank must also
refer to 12 CFR part 3, appendix B for supplemental rules to calculate
risk-based capital requirements adjusted for market risk.
Part II. Qualifying Capital
Section 11. Additional Deductions
(a) General. A bank that uses this appendix must make the same
deductions from its tier 1 capital and tier 2 capital required in 12 CFR
part 3, appendix A, except that:
(1) A bank is not required to deduct certain equity investments and
CEIOs (as provided in section 12 of this appendix); and
(2) A bank also must make the deductions from capital required by
paragraphs (b) and (c) of this section.
(b) Deductions from tier 1 capital. A bank must deduct from tier 1
capital any gain-on-sale associated with a securitization exposure as
provided in paragraph (a) of section 41 and paragraphs (a)(1), (c),
(g)(1), and (h)(1) of section 42 of this appendix.
(c) Deductions from tier 1 and tier 2 capital. A bank must deduct
the exposures specified in paragraphs (c)(1) through (c)(7) in this
section 50 percent from tier 1 capital and 50 percent from tier 2
capital. If the amount deductible from tier 2 capital exceeds the bank's
actual tier 2 capital, however, the bank must deduct the excess from
tier 1 capital.
(1) Credit-enhancing interest-only strips (CEIOs). In accordance
with paragraphs (a)(1) and (c) of section 42 of this appendix, any CEIO
that does not constitute gain-on-sale.
(2) Non-qualifying securitization exposures. In accordance with
paragraphs (a)(4) and (c) of section 42 of this appendix, any
securitization exposure that does not qualify for the Ratings-Based
Approach, the Internal Assessment Approach, or the Supervisory Formula
Approach under sections 43, 44, and 45 of this appendix, respectively.
(3) Securitizations of non-IRB exposures. In accordance with
paragraphs (c) and (g)(4) of section 42 of this appendix, certain
exposures to a securitization any underlying exposure of which is not a
wholesale exposure, retail
[[Page 65]]
exposure, securitization exposure, or equity exposure.
(4) Low-rated securitization exposures. In accordance with section
43 and paragraph (c) of section 42 of this appendix, any securitization
exposure that qualifies for and must be deducted under the Ratings-Based
Approach.
(5) High-risk securitization exposures subject to the Supervisory
Formula Approach. In accordance with paragraphs (b) and (c) of section
45 of this appendix and paragraph (c) of section 42 of this appendix,
certain high-risk securitization exposures (or portions thereof) that
qualify for the Supervisory Formula Approach.
(6) Eligible credit reserves shortfall. In accordance with paragraph
(a)(1) of section 13 of this appendix, any eligible credit reserves
shortfall.
(7) Certain failed capital markets transactions. In accordance with
paragraph (e)(3) of section 35 of this appendix, the bank's exposure on
certain failed capital markets transactions.
Section 12. Deductions and Limitations Not Required
(a) Deduction of CEIOs. A bank is not required to make the
deductions from capital for CEIOs in 12 CFR part 3, appendix A, section
2(c).
(b) Deduction of certain equity investments. A bank is not required
to make the deductions from capital for nonfinancial equity investments
in 12 CFR part 3, appendix A, section 2(c).
Section 13. Eligible Credit Reserves
(a) Comparison of eligible credit reserves to expected credit
losses--(1) Shortfall of eligible credit reserves. If a bank's eligible
credit reserves are less than the bank's total expected credit losses,
the bank must deduct the shortfall amount 50 percent from tier 1 capital
and 50 percent from tier 2 capital. If the amount deductible from tier 2
capital exceeds the bank's actual tier 2 capital, the bank must deduct
the excess amount from tier 1 capital.
(2) Excess eligible credit reserves. If a bank's eligible credit
reserves exceed the bank's total expected credit losses, the bank may
include the excess amount in tier 2 capital to the extent that the
excess amount does not exceed 0.6 percent of the bank's credit-risk-
weighted assets.
(b) Treatment of allowance for loan and lease losses. Regardless of
any provision in 12 CFR part 3, appendix A, the ALLL is included in tier
2 capital only to the extent provided in paragraph (a)(2) of this
section and in section 24 of this appendix.
Part III. Qualification
Section 21. Qualification Process
(a) Timing. (1) A bank that is described in paragraph (b)(1) of
section 1 of this appendix must adopt a written implementation plan no
later than six months after the later of April 1, 2008, or the date the
bank meets a criterion in that section. The implementation plan must
incorporate an explicit first floor period start date no later than 36
months after the later of April 1, 2008, or the date the bank meets at
least one criterion under paragraph (b)(1) of section 1 of this
appendix. The OCC may extend the first floor period start date.
(2) A bank that elects to be subject to this appendix under
paragraph (b)(2) of section 1 of this appendix must adopt a written
implementation plan.
(b) Implementation plan. (1) The bank's implementation plan must
address in detail how the bank complies, or plans to comply, with the
qualification requirements in section 22 of this appendix. The bank also
must maintain a comprehensive and sound planning and governance process
to oversee the implementation efforts described in the plan. At a
minimum, the plan must:
(i) Comprehensively address the qualification requirements in
section 22 of this appendix for the bank and each consolidated
subsidiary (U.S. and foreign-based) of the bank with respect to all
portfolios and exposures of the bank and each of its consolidated
subsidiaries;
(ii) Justify and support any proposed temporary or permanent
exclusion of business lines, portfolios, or exposures from application
of the advanced approaches in this appendix (which business lines,
portfolios, and exposures must be, in the aggregate, immaterial to the
bank);
(iii) Include the bank's self-assessment of:
(A) The bank's current status in meeting the qualification
requirements in section 22 of this appendix; and
(B) The consistency of the bank's current practices with the OCC's
supervisory guidance on the qualification requirements;
(iv) Based on the bank's self-assessment, identify and describe the
areas in which the bank proposes to undertake additional work to comply
with the qualification requirements in section 22 of this appendix or to
improve the consistency of the bank's current practices with the OCC's
supervisory guidance on the qualification requirements (gap analysis);
(v) Describe what specific actions the bank will take to address the
areas identified in the gap analysis required by paragraph (b)(1)(iv) of
this section;
(vi) Identify objective, measurable milestones, including delivery
dates and a date when the bank's implementation of the
[[Page 66]]
methodologies described in this appendix will be fully operational;
(vii) Describe resources that have been budgeted and are available
to implement the plan; and
(viii) Receive approval of the bank's board of directors.
(2) The bank must submit the implementation plan, together with a
copy of the minutes of the board of directors' approval, to the OCC at
least 60 days before the bank proposes to begin its parallel run, unless
the OCC waives prior notice.
(c) Parallel run. Before determining its risk-based capital
requirements under this appendix and following adoption of the
implementation plan, the bank must conduct a satisfactory parallel run.
A satisfactory parallel run is a period of no less than four consecutive
calendar quarters during which the bank complies with the qualification
requirements in section 22 of this appendix to the satisfaction of the
OCC. During the parallel run, the bank must report to the OCC on a
calendar quarterly basis its risk-based capital ratios using 12 CFR part
3, appendix A and the risk-based capital requirements described in this
appendix. During this period, the bank is subject to 12 CFR part 3,
appendix A.
(d) Approval to calculate risk-based capital requirements under this
appendix. The OCC will notify the bank of the date that the bank may
begin its first floor period if the OCC determines that:
(1) The bank fully complies with all the qualification requirements
in section 22 of this appendix;
(2) The bank has conducted a satisfactory parallel run under
paragraph (c) of this section; and
(3) The bank has an adequate process to ensure ongoing compliance
with the qualification requirements in section 22 of this appendix.
(e) Transitional floor periods. Following a satisfactory parallel
run, a bank is subject to three transitional floor periods.
(1) Risk-based capital ratios during the transitional floor
periods--(i) Tier 1 risk-based capital ratio. During a bank's
transitional floor periods, the bank's tier 1 risk-based capital ratio
is equal to the lower of:
(A) The bank's floor-adjusted tier 1 risk-based capital ratio; or
(B) The bank's advanced approaches tier 1 risk-based capital ratio.
(ii) Total risk-based capital ratio. During a bank's transitional
floor periods, the bank's total risk-based capital ratio is equal to the
lower of:
(A) The bank's floor-adjusted total risk-based capital ratio; or
(B) The bank's advanced approaches total risk-based capital ratio.
(2) Floor-adjusted risk-based capital ratios. (i) A bank's floor-
adjusted tier 1 risk-based capital ratio during a transitional floor
period is equal to the bank's tier 1 capital as calculated under 12 CFR
part 3, appendix A, divided by the product of:
(A) The bank's total risk-weighted assets as calculated under 12 CFR
part 3, appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(ii) A bank's floor-adjusted total risk-based capital ratio during a
transitional floor period is equal to the sum of the bank's tier 1 and
tier 2 capital as calculated under 12 CFR part 3, appendix A, divided by
the product of:
(A) The bank's total risk-weighted assets as calculated under 12 CFR
part 3, appendix A; and
(B) The appropriate transitional floor percentage in Table 1.
(iii) A bank that meets the criteria in paragraph (b)(1) or (b)(2)
of section 1 of this appendix as of April 1, 2008, must use 12 CFR part
3, appendix A during the parallel run and as the basis for its
transitional floors.
Table 1--Transitional Floors
------------------------------------------------------------------------
Transitional floor
Transitional floor period percentage
------------------------------------------------------------------------
First floor period........................ 95 percent.
Second floor period....................... 90 percent.
Third floor period........................ 85 percent.
------------------------------------------------------------------------
(3) Advanced approaches risk-based capital ratios. (i) A bank's
advanced approaches tier 1 risk-based capital ratio equals the bank's
tier 1 risk-based capital ratio as calculated under this appendix (other
than this section on transitional floor periods).
(ii) A bank's advanced approaches total risk-based capital ratio
equals the bank's total risk-based capital ratio as calculated under
this appendix (other than this section on transitional floor periods).
(4) Reporting. During the transitional floor periods, a bank must
report to the OCC on a calendar quarterly basis both floor-adjusted
risk-based capital ratios and both advanced approaches risk-based
capital ratios.
(5) Exiting a transitional floor period. A bank may not exit a
transitional floor period until the bank has spent a minimum of four
consecutive calendar quarters in the period and the OCC has determined
that the bank may exit the floor period. The OCC's determination will be
based on an assessment of the bank's ongoing compliance with the
qualification requirements in section 22 of this appendix.
(6) Interagency study. After the end of the second transition year
(2010), the Federal banking agencies will publish a study that evaluates
the advanced approaches to determine if there are any material
deficiencies. For any primary Federal supervisor to authorize any
institution to exit the third
[[Page 67]]
transitional floor period, the study must determine that there are no
such material deficiencies that cannot be addressed by then-existing
tools, or, if such deficiencies are found, they are first remedied by
changes to this appendix. Notwithstanding the preceding sentence, a
primary Federal supervisor that disagrees with the finding of material
deficiency may not authorize any institution under its jurisdiction to
exit the third transitional floor period unless it provides a public
report explaining its reasoning.
Section 22. Qualification Requirements
(a) Process and systems requirements. (1) A bank must have a
rigorous process for assessing its overall capital adequacy in relation
to its risk profile and a comprehensive strategy for maintaining an
appropriate level of capital.
(2) The systems and processes used by a bank for risk-based capital
purposes under this appendix must be consistent with the bank's internal
risk management processes and management information reporting systems.
(3) Each bank must have an appropriate infrastructure with risk
measurement and management processes that meet the qualification
requirements of this section and are appropriate given the bank's size
and level of complexity. Regardless of whether the systems and models
that generate the risk parameters necessary for calculating a bank's
risk-based capital requirements are located at any affiliate of the
bank, the bank itself must ensure that the risk parameters and reference
data used to determine its risk-based capital requirements are
representative of its own credit risk and operational risk exposures.
(b) Risk rating and segmentation systems for wholesale and retail
exposures. (1) A bank must have an internal risk rating and segmentation
system that accurately and reliably differentiates among degrees of
credit risk for the bank's wholesale and retail exposures.
(2) For wholesale exposures:
(i) A bank must have an internal risk rating system that accurately
and reliably assigns each obligor to a single rating grade (reflecting
the obligor's likelihood of default). A bank may elect, however, not to
assign to a rating grade an obligor to whom the bank extends credit
based solely on the financial strength of a guarantor, provided that all
of the bank's exposures to the obligor are fully covered by eligible
guarantees, the bank applies the PD substitution approach in paragraph
(c)(1) of section 33 of this appendix to all exposures to that obligor,
and the bank immediately assigns the obligor to a rating grade if a
guarantee can no longer be recognized under this appendix. The bank's
wholesale obligor rating system must have at least seven discrete rating
grades for non-defaulted obligors and at least one rating grade for
defaulted obligors.
(ii) Unless the bank has chosen to directly assign LGD estimates to
each wholesale exposure, the bank must have an internal risk rating
system that accurately and reliably assigns each wholesale exposure to a
loss severity rating grade (reflecting the bank's estimate of the LGD of
the exposure). A bank employing loss severity rating grades must have a
sufficiently granular loss severity grading system to avoid grouping
together exposures with widely ranging LGDs.
(3) For retail exposures, a bank must have an internal system that
groups retail exposures into the appropriate retail exposure
subcategory, groups the retail exposures in each retail exposure
subcategory into separate segments with homogeneous risk
characteristics, and assigns accurate and reliable PD and LGD estimates
for each segment on a consistent basis. The bank's system must identify
and group in separate segments by subcategories exposures identified in
paragraphs (c)(2)(ii) and (iii) of section 31 of this appendix.
(4) The bank's internal risk rating policy for wholesale exposures
must describe the bank's rating philosophy (that is, must describe how
wholesale obligor rating assignments are affected by the bank's choice
of the range of economic, business, and industry conditions that are
considered in the obligor rating process).
(5) The bank's internal risk rating system for wholesale exposures
must provide for the review and update (as appropriate) of each obligor
rating and (if applicable) each loss severity rating whenever the bank
receives new material information, but no less frequently than annually.
The bank's retail exposure segmentation system must provide for the
review and update (as appropriate) of assignments of retail exposures to
segments whenever the bank receives new material information, but
generally no less frequently than quarterly.
(c) Quantification of risk parameters for wholesale and retail
exposures. (1) The bank must have a comprehensive risk parameter
quantification process that produces accurate, timely, and reliable
estimates of the risk parameters for the bank's wholesale and retail
exposures.
(2) Data used to estimate the risk parameters must be relevant to
the bank's actual wholesale and retail exposures, and of sufficient
quality to support the determination of risk-based capital requirements
for the exposures.
(3) The bank's risk parameter quantification process must produce
appropriately conservative risk parameter estimates where the bank has
limited relevant data, and any
[[Page 68]]
adjustments that are part of the quantification process must not result
in a pattern of bias toward lower risk parameter estimates.
(4) The bank's risk parameter estimation process should not rely on
the possibility of U.S. government financial assistance, except for the
financial assistance that the U.S. government has a legally binding
commitment to provide.
(5) Where the bank's quantifications of LGD directly or indirectly
incorporate estimates of the effectiveness of its credit risk management
practices in reducing its exposure to troubled obligors prior to
default, the bank must support such estimates with empirical analysis
showing that the estimates are consistent with its historical experience
in dealing with such exposures during economic downturn conditions.
(6) PD estimates for wholesale obligors and retail segments must be
based on at least five years of default data. LGD estimates for
wholesale exposures must be based on at least seven years of loss
severity data, and LGD estimates for retail segments must be based on at
least five years of loss severity data. EAD estimates for wholesale
exposures must be based on at least seven years of exposure amount data,
and EAD estimates for retail segments must be based on at least five
years of exposure amount data.
(7) Default, loss severity, and exposure amount data must include
periods of economic downturn conditions, or the bank must adjust its
estimates of risk parameters to compensate for the lack of data from
periods of economic downturn conditions.
(8) The bank's PD, LGD, and EAD estimates must be based on the
definition of default in this appendix.
(9) The bank must review and update (as appropriate) its risk
parameters and its risk parameter quantification process at least
annually.
(10) The bank must at least annually conduct a comprehensive review
and analysis of reference data to determine relevance of reference data
to the bank's exposures, quality of reference data to support PD, LGD,
and EAD estimates, and consistency of reference data to the definition
of default contained in this appendix.
(d) Counterparty credit risk model. A bank must obtain the prior
written approval of the OCC under section 32 of this appendix to use the
internal models methodology for counterparty credit risk.
(e) Double default treatment. A bank must obtain the prior written
approval of the OCC under section 34 of this appendix to use the double
default treatment.
(f) Securitization exposures. A bank must obtain the prior written
approval of the OCC under section 44 of this appendix to use the
Internal Assessment Approach for securitization exposures to ABCP
programs.
(g) Equity exposures model. A bank must obtain the prior written
approval of the OCC under section 53 of this appendix to use the
Internal Models Approach for equity exposures.
(h) Operational risk--(1) Operational risk management processes. A
bank must:
(i) Have an operational risk management function that:
(A) Is independent of business line management; and
(B) Is responsible for designing, implementing, and overseeing the
bank's operational risk data and assessment systems, operational risk
quantification systems, and related processes;
(ii) Have and document a process (which must capture business
environment and internal control factors affecting the bank's
operational risk profile) to identify, measure, monitor, and control
operational risk in bank products, activities, processes, and systems;
and
(iii) Report operational risk exposures, operational loss events,
and other relevant operational risk information to business unit
management, senior management, and the board of directors (or a
designated committee of the board).
(2) Operational risk data and assessment systems. A bank must have
operational risk data and assessment systems that capture operational
risks to which the bank is exposed. The bank's operational risk data and
assessment systems must:
(i) Be structured in a manner consistent with the bank's current
business activities, risk profile, technological processes, and risk
management processes; and
(ii) Include credible, transparent, systematic, and verifiable
processes that incorporate the following elements on an ongoing basis:
(A) Internal operational loss event data. The bank must have a
systematic process for capturing and using internal operational loss
event data in its operational risk data and assessment systems.
(1) The bank's operational risk data and assessment systems must
include a historical observation period of at least five years for
internal operational loss event data (or such shorter period approved by
the OCC to address transitional situations, such as integrating a new
business line).
(2) The bank must be able to map its internal operational loss event
data into the seven operational loss event type categories.
(3) The bank may refrain from collecting internal operational loss
event data for individual operational losses below established dollar
threshold amounts if the bank can demonstrate to the satisfaction of the
OCC that the thresholds are reasonable, do not exclude important
internal operational loss event data, and permit the bank to capture
[[Page 69]]
substantially all the dollar value of the bank's operational losses.
(B) External operational loss event data. The bank must have a
systematic process for determining its methodologies for incorporating
external operational loss event data into its operational risk data and
assessment systems.
(C) Scenario analysis. The bank must have a systematic process for
determining its methodologies for incorporating scenario analysis into
its operational risk data and assessment systems.
(D) Business environment and internal control factors. The bank must
incorporate business environment and internal control factors into its
operational risk data and assessment systems. The bank must also
periodically compare the results of its prior business environment and
internal control factor assessments against its actual operational
losses incurred in the intervening period.
(3) Operational risk quantification systems. (i) The bank's
operational risk quantification systems:
(A) Must generate estimates of the bank's operational risk exposure
using its operational risk data and assessment systems;
(B) Must employ a unit of measure that is appropriate for the bank's
range of business activities and the variety of operational loss events
to which it is exposed, and that does not combine business activities or
operational loss events with demonstrably different risk profiles within
the same loss distribution;
(C) Must include a credible, transparent, systematic, and verifiable
approach for weighting each of the four elements, described in paragraph
(h)(2)(ii) of this section, that a bank is required to incorporate into
its operational risk data and assessment systems;
(D) May use internal estimates of dependence among operational
losses across and within units of measure if the bank can demonstrate to
the satisfaction of the OCC that its process for estimating dependence
is sound, robust to a variety of scenarios, and implemented with
integrity, and allows for the uncertainty surrounding the estimates. If
the bank has not made such a demonstration, it must sum operational risk
exposure estimates across units of measure to calculate its total
operational risk exposure; and
(E) Must be reviewed and updated (as appropriate) whenever the bank
becomes aware of information that may have a material effect on the
bank's estimate of operational risk exposure, but the review and update
must occur no less frequently than annually.
(ii) With the prior written approval of the OCC, a bank may generate
an estimate of its operational risk exposure using an alternative
approach to that specified in paragraph (h)(3)(i) of this section. A
bank proposing to use such an alternative operational risk
quantification system must submit a proposal to the OCC. In determining
whether to approve a bank's proposal to use an alternative operational
risk quantification system, the OCC will consider the following
principles:
(A) Use of the alternative operational risk quantification system
will be allowed only on an exception basis, considering the size,
complexity, and risk profile of the bank;
(B) The bank must demonstrate that its estimate of its operational
risk exposure generated under the alternative operational risk
quantification system is appropriate and can be supported empirically;
and
(C) A bank must not use an allocation of operational risk capital
requirements that includes entities other than depository institutions
or the benefits of diversification across entities.
(i) Data management and maintenance. (1) A bank must have data
management and maintenance systems that adequately support all aspects
of its advanced systems and the timely and accurate reporting of risk-
based capital requirements.
(2) A bank must retain data using an electronic format that allows
timely retrieval of data for analysis, validation, reporting, and
disclosure purposes.
(3) A bank must retain sufficient data elements related to key risk
drivers to permit adequate monitoring, validation, and refinement of its
advanced systems.
(j) Control, oversight, and validation mechanisms. (1) The bank's
senior management must ensure that all components of the bank's advanced
systems function effectively and comply with the qualification
requirements in this section.
(2) The bank's board of directors (or a designated committee of the
board) must at least annually review the effectiveness of, and approve,
the bank's advanced systems.
(3) A bank must have an effective system of controls and oversight
that:
(i) Ensures ongoing compliance with the qualification requirements
in this section;
(ii) Maintains the integrity, reliability, and accuracy of the
bank's advanced systems; and
(iii) Includes adequate governance and project management processes.
(4) The bank must validate, on an ongoing basis, its advanced
systems. The bank's validation process must be independent of the
advanced systems' development, implementation, and operation, or the
validation process must be subjected to an independent review of its
adequacy and effectiveness. Validation must include:
(i) An evaluation of the conceptual soundness of (including
developmental evidence supporting) the advanced systems;
[[Page 70]]
(ii) An ongoing monitoring process that includes verification of
processes and benchmarking; and
(iii) An outcomes analysis process that includes back-testing.
(5) The bank must have an internal audit function independent of
business-line management that at least annually assesses the
effectiveness of the controls supporting the bank's advanced systems and
reports its findings to the bank's board of directors (or a committee
thereof).
(6) The bank must periodically stress test its advanced systems. The
stress testing must include a consideration of how economic cycles,
especially downturns, affect risk-based capital requirements (including
migration across rating grades and segments and the credit risk
mitigation benefits of double default treatment).
(k) Documentation. The bank must adequately document all material
aspects of its advanced systems.
Section 23. Ongoing Qualification
(a) Changes to advanced systems. A bank must meet all the
qualification requirements in section 22 of this appendix on an ongoing
basis. A bank must notify the OCC when the bank makes any change to an
advanced system that would result in a material change in the bank's
risk-weighted asset amount for an exposure type, or when the bank makes
any significant change to its modeling assumptions.
(b) Failure to comply with qualification requirements. (1) If the
OCC determines that a bank that uses this appendix and has conducted a
satisfactory parallel run fails to comply with the qualification
requirements in section 22 of this appendix, the OCC will notify the
bank in writing of the bank's failure to comply.
(2) The bank must establish and submit a plan satisfactory to the
OCC to return to compliance with the qualification requirements.
(3) In addition, if the OCC determines that the bank's risk-based
capital requirements are not commensurate with the bank's credit,
market, operational, or other risks, the OCC may require such a bank to
calculate its risk-based capital requirements:
(i) Under 12 CFR part 3, appendix A; or
(ii) Under this appendix with any modifications provided by the OCC.
Section 24. Merger and Acquisition Transitional Arrangements
(a) Mergers and acquisitions of companies without advanced systems.
If a bank merges with or acquires a company that does not calculate its
risk-based capital requirements using advanced systems, the bank may use
12 CFR part 3, appendix A to determine the risk-weighted asset amounts
for, and deductions from capital associated with, the merged or acquired
company's exposures for up to 24 months after the calendar quarter
during which the merger or acquisition consummates. The OCC may extend
this transition period for up to an additional 12 months. Within 90 days
of consummating the merger or acquisition, the bank must submit to the
OCC an implementation plan for using its advanced systems for the
acquired company. During the period when 12 CFR part 3, appendix A apply
to the merged or acquired company, any ALLL, net of allocated transfer
risk reserves established pursuant to 12 U.S.C. 3904, associated with
the merged or acquired company's exposures may be included in the
acquiring bank's tier 2 capital up to 1.25 percent of the acquired
company's risk-weighted assets. All general allowances of the merged or
acquired company must be excluded from the bank's eligible credit
reserves. In addition, the risk-weighted assets of the merged or
acquired company are not included in the bank's credit-risk-weighted
assets but are included in total risk-weighted assets. If a bank relies
on this paragraph, the bank must disclose publicly the amounts of risk-
weighted assets and qualifying capital calculated under this appendix
for the acquiring bank and under 12 CFR part 3, appendix A for the
acquired company.
(b) Mergers and acquisitions of companies with advanced systems--(1)
If a bank merges with or acquires a company that calculates its risk-
based capital requirements using advanced systems, the bank may use the
acquired company's advanced systems to determine the risk-weighted asset
amounts for, and deductions from capital associated with, the merged or
acquired company's exposures for up to 24 months after the calendar
quarter during which the acquisition or merger consummates. The OCC may
extend this transition period for up to an additional 12 months. Within
90 days of consummating the merger or acquisition, the bank must submit
to the OCC an implementation plan for using its advanced systems for the
merged or acquired company.
(2) If the acquiring bank is not subject to the advanced approaches
in this appendix at the time of acquisition or merger, during the period
when 12 CFR part 3, appendix A apply to the acquiring bank, the ALLL
associated with the exposures of the merged or acquired company may not
be directly included in tier 2 capital. Rather, any excess eligible
credit reserves associated with the merged or acquired company's
exposures may be included in the bank's tier 2 capital up to 0.6 percent
of the credit-risk-weighted assets associated with those exposures.
[[Page 71]]
Part IV. Risk-Weighted Assets for General Credit Risk
Section 31. Mechanics for Calculating Total Wholesale and Retail Risk-
Weighted Assets
(a) Overview. A bank must calculate its total wholesale and retail
risk-weighted asset amount in four distinct phases:
(1) Phase 1--categorization of exposures;
(2) Phase 2--assignment of wholesale obligors and exposures to
rating grades and segmentation of retail exposures;
(3) Phase 3--assignment of risk parameters to wholesale exposures
and segments of retail exposures; and
(4) Phase 4--calculation of risk-weighted asset amounts.
(b) Phase 1--Categorization. The bank must determine which of its
exposures are wholesale exposures, retail exposures, securitization
exposures, or equity exposures. The bank must categorize each retail
exposure as a residential mortgage exposure, a QRE, or an other retail
exposure. The bank must identify which wholesale exposures are HVCRE
exposures, sovereign exposures, OTC derivative contracts, repo-style
transactions, eligible margin loans, eligible purchased wholesale
exposures, unsettled transactions to which section 35 of this appendix
applies, and eligible guarantees or eligible credit derivatives that are
used as credit risk mitigants. The bank must identify any on-balance
sheet asset that does not meet the definition of a wholesale, retail,
equity, or securitization exposure, as well as any non-material
portfolio of exposures described in paragraph (e)(4) of this section.
(c) Phase 2--Assignment of wholesale obligors and exposures to
rating grades and retail exposures to segments--(1) Assignment of
wholesale obligors and exposures to rating grades.
(i) The bank must assign each obligor of a wholesale exposure to a
single obligor rating grade and must assign each wholesale exposure to
which it does not directly assign an LGD estimate to a loss severity
rating grade.
(ii) The bank must identify which of its wholesale obligors are in
default.
(2) Segmentation of retail exposures. (i) The bank must group the
retail exposures in each retail subcategory into segments that have
homogeneous risk characteristics.
(ii) The bank must identify which of its retail exposures are in
default. The bank must segment defaulted retail exposures separately
from non-defaulted retail exposures.
(iii) If the bank determines the EAD for eligible margin loans using
the approach in paragraph (b) of section 32 of this appendix, the bank
must identify which of its retail exposures are eligible margin loans
for which the bank uses this EAD approach and must segment such eligible
margin loans separately from other retail exposures.
(3) Eligible purchased wholesale exposures. A bank may group its
eligible purchased wholesale exposures into segments that have
homogeneous risk characteristics. A bank must use the wholesale exposure
formula in Table 2 in this section to determine the risk-based capital
requirement for each segment of eligible purchased wholesale exposures.
(d) Phase 3--Assignment of risk parameters to wholesale exposures
and segments of retail exposures--(1) Quantification process. Subject to
the limitations in this paragraph (d), the bank must:
(i) Associate a PD with each wholesale obligor rating grade;
(ii) Associate an LGD with each wholesale loss severity rating grade
or assign an LGD to each wholesale exposure;
(iii) Assign an EAD and M to each wholesale exposure; and
(iv) Assign a PD, LGD, and EAD to each segment of retail exposures.
(2) Floor on PD assignment. The PD for each wholesale obligor or
retail segment may not be less than 0.03 percent, except for exposures
to or directly and unconditionally guaranteed by a sovereign entity, the
Bank for International Settlements, the International Monetary Fund, the
European Commission, the European Central Bank, or a multilateral
development bank, to which the bank assigns a rating grade associated
with a PD of less than 0.03 percent.
(3) Floor on LGD estimation. The LGD for each segment of residential
mortgage exposures (other than segments of residential mortgage
exposures for which all or substantially all of the principal of each
exposure is directly and unconditionally guaranteed by the full faith
and credit of a sovereign entity) may not be less than 10 percent.
(4) Eligible purchased wholesale exposures. A bank must assign a PD,
LGD, EAD, and M to each segment of eligible purchased wholesale
exposures. If the bank can estimate ECL (but not PD or LGD) for a
segment of eligible purchased wholesale exposures, the bank must assume
that the LGD of the segment equals 100 percent and that the PD of the
segment equals ECL divided by EAD. The estimated ECL must be calculated
for the exposures without regard to any assumption of recourse or
guarantees from the seller or other parties.
(5) Credit risk mitigation--credit derivatives, guarantees, and
collateral. (i) A bank may take into account the risk reducing effects
of eligible guarantees and eligible credit derivatives in support of a
wholesale exposure by applying the PD substitution or LGD adjustment
treatment to the exposure as provided in section 33 of this appendix or,
if applicable, applying double default treatment to the exposure as
provided in section 34 of this appendix. A bank may decide separately
for each wholesale exposure that qualifies for the double default
treatment under section
[[Page 72]]
34 of this appendix whether to apply the double default treatment or to
use the PD substitution or LGD adjustment treatment without recognizing
double default effects.
(ii) A bank may take into account the risk reducing effects of
guarantees and credit derivatives in support of retail exposures in a
segment when quantifying the PD and LGD of the segment.
(iii) Except as provided in paragraph (d)(6) of this section, a bank
may take into account the risk reducing effects of collateral in support
of a wholesale exposure when quantifying the LGD of the exposure and may
take into account the risk reducing effects of collateral in support of
retail exposures when quantifying the PD and LGD of the segment.
(6) EAD for OTC derivative contracts, repo-style transactions, and
eligible margin loans. (i) A bank must calculate its EAD for an OTC
derivative contract as provided in paragraphs (c) and (d) of section 32
of this appendix. A bank may take into account the risk-reducing effects
of financial collateral in support of a repo-style transaction or
eligible margin loan and of any collateral in support of a repo-style
transaction that is included in the bank's VaR-based measure under 12
CFR part 3, appendix B through an adjustment to EAD as provided in
paragraphs (b) and (d) of section 32 of this appendix. A bank that takes
collateral into account through such an adjustment to EAD under section
32 of this appendix may not reflect such collateral in LGD.
(ii) A bank may attribute an EAD of zero to:
(A) Derivative contracts that are publicly traded on an exchange
that requires the daily receipt and payment of cash-variation margin;
(B) Derivative contracts and repo-style transactions that are
outstanding with a qualifying central counterparty (but not for those
transactions that a qualifying central counterparty has rejected); and
(C) Credit risk exposures to a qualifying central counterparty in
the form of clearing deposits and posted collateral that arise from
transactions described in paragraph (d)(6)(ii)(B) of this section.
(7) Effective maturity. An exposure's M must be no greater than five
years and no less than one year, except that an exposure's M must be no
less than one day if the exposure has an original maturity of less than
one year and is not part of a bank's ongoing financing of the obligor.
An exposure is not part of a bank's ongoing financing of the obligor if
the bank:
(i) Has a legal and practical ability not to renew or roll over the
exposure in the event of credit deterioration of the obligor;
(ii) Makes an independent credit decision at the inception of the
exposure and at every renewal or roll over; and
(iii) Has no substantial commercial incentive to continue its credit
relationship with the obligor in the event of credit deterioration of
the obligor.
(e) Phase 4--Calculation of risk-weighted assets--(1) Non-defaulted
exposures. (i) A bank must calculate the dollar risk-based capital
requirement for each of its wholesale exposures to a non-defaulted
obligor (except eligible guarantees and eligible credit derivatives that
hedge another wholesale exposure and exposures to which the bank applies
the double default treatment in section 34 of this appendix) and
segments of non-defaulted retail exposures by inserting the assigned
risk parameters for the wholesale obligor and exposure or retail segment
into the appropriate risk-based capital formula specified in Table 2 and
multiplying the output of the formula (K) by the EAD of the exposure or
segment. Alternatively, a bank may apply a 300 percent risk weight to
the EAD of an eligible margin loan if the bank is not able to meet the
agencies' requirements for estimation of PD and LGD for the margin loan.
[[Page 73]]
[GRAPHIC] [TIFF OMITTED] TR07DE07.005
(ii) The sum of all the dollar risk-based capital requirements for
each wholesale exposure to a non-defaulted obligor and segment of non-
defaulted retail exposures calculated in paragraph (e)(1)(i) of this
section and in paragraph (e) of section 34 of this appendix equals the
total dollar risk-based capital requirement for those exposures and
segments.
(iii) The aggregate risk-weighted asset amount for wholesale
exposures to non-defaulted obligors and segments of non-defaulted retail
exposures equals the total dollar risk-based capital requirement
calculated in paragraph (e)(1)(ii) of this section multiplied by 12.5.
(2) Wholesale exposures to defaulted obligors and segments of
defaulted retail exposures. (i) The dollar risk-based capital
requirement for each wholesale exposure to a defaulted obligor equals
0.08 multiplied by the EAD of the exposure.
(ii) The dollar risk-based capital requirement for a segment of
defaulted retail exposures equals 0.08 multiplied by the EAD of the
segment.
(iii) The sum of all the dollar risk-based capital requirements for
each wholesale exposure to a defaulted obligor calculated in paragraph
(e)(2)(i) of this section plus the dollar risk-based capital
requirements for each segment of defaulted retail exposures
[[Page 74]]
calculated in paragraph (e)(2)(ii) of this section equals the total
dollar risk-based capital requirement for those exposures and segments.
(iv) The aggregate risk-weighted asset amount for wholesale
exposures to defaulted obligors and segments of defaulted retail
exposures equals the total dollar risk-based capital requirement
calculated in paragraph (e)(2)(iii) of this section multiplied by 12.5.
(3) Assets not included in a defined exposure category. (i) A bank
may assign a risk-weighted asset amount of zero to cash owned and held
in all offices of the bank or in transit and for gold bullion held in
the bank's own vaults, or held in another bank's vaults on an allocated
basis, to the extent the gold bullion assets are offset by gold bullion
liabilities.
(ii) The risk-weighted asset amount for the residual value of a
retail lease exposure equals such residual value.
(iii) The risk-weighted asset amount for any other on-balance-sheet
asset that does not meet the definition of a wholesale, retail,
securitization, or equity exposure equals the carrying value of the
asset.
(4) Non-material portfolios of exposures. The risk-weighted asset
amount of a portfolio of exposures for which the bank has demonstrated
to the OCC's satisfaction that the portfolio (when combined with all
other portfolios of exposures that the bank seeks to treat under this
paragraph) is not material to the bank is the sum of the carrying values
of on-balance sheet exposures plus the notional amounts of off-balance
sheet exposures in the portfolio. For purposes of this paragraph (e)(4),
the notional amount of an OTC derivative contract that is not a credit
derivative is the EAD of the derivative as calculated in section 32 of
this appendix.
Section 32. Counterparty Credit Risk of Repo-Style Transactions,
Eligible Margin Loans, and OTC Derivative Contracts
(a) In General. (1) This section describes two methodologies--a
collateral haircut approach and an internal models methodology--that a
bank may use instead of an LGD estimation methodology to recognize the
benefits of financial collateral in mitigating the counterparty credit
risk of repo-style transactions, eligible margin loans, collateralized
OTC derivative contracts, and single product netting sets of such
transactions and to recognize the benefits of any collateral in
mitigating the counterparty credit risk of repo-style transactions that
are included in a bank's VaR-based measure under 12 CFR part 3, appendix
B. A third methodology, the simple VaR methodology, is available for
single product netting sets of repo-style transactions and eligible
margin loans.
(2) This section also describes the methodology for calculating EAD
for an OTC derivative contract or a set of OTC derivative contracts
subject to a qualifying master netting agreement. A bank also may use
the internal models methodology to estimate EAD for qualifying cross-
product master netting agreements.
(3) A bank may only use the standard supervisory haircut approach
with a minimum 10-business-day holding period to recognize in EAD the
benefits of conforming residential mortgage collateral that secures
repo-style transactions (other than repo-style transactions included in
the bank's VaR-based measure under 12 CFR part 3, appendix B), eligible
margin loans, and OTC derivative contracts.
(4) A bank may use any combination of the three methodologies for
collateral recognition; however, it must use the same methodology for
similar exposures.
(b) EAD for eligible margin loans and repo-style transactions--(1)
General. A bank may recognize the credit risk mitigation benefits of
financial collateral that secures an eligible margin loan, repo-style
transaction, or single-product netting set of such transactions by
factoring the collateral into its LGD estimates for the exposure.
Alternatively, a bank may estimate an unsecured LGD for the exposure, as
well as for any repo-style transaction that is included in the bank's
VaR-based measure under 12 CFR part 3, appendix B, and determine the EAD
of the exposure using:
(i) The collateral haircut approach described in paragraph (b)(2) of
this section;
(ii) For netting sets only, the simple VaR methodology described in
paragraph (b)(3) of this section; or
(iii) The internal models methodology described in paragraph (d) of
this section.
(2) Collateral haircut approach--(i) EAD equation. A bank may
determine EAD for an eligible margin loan, repo-style transaction, or
netting set by setting EAD equal to max {0, [([Sigma]E-[Sigma]C) +
[Sigma](Es x Hs) + [Sigma](Efx x Hfx)]{time} , where:
(A) [Sigma]E equals the value of the exposure (the sum of the
current market values of all instruments, gold, and cash the bank has
lent, sold subject to repurchase, or posted as collateral to the
counterparty under the transaction (or netting set));
(B) [Sigma]C equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the transaction (or netting set));
(C) Es equals the absolute value of the net position in a given
instrument or in gold (where the net position in a given instrument or
in gold equals the sum of the current market values of the instrument or
gold the bank has lent, sold subject to repurchase, or posted as
collateral to the counterparty minus the sum of the current
[[Page 75]]
market values of that same instrument or gold the bank has borrowed,
purchased subject to resale, or taken as collateral from the
counterparty);
(D) Hs equals the market price volatility haircut appropriate to the
instrument or gold referenced in Es;
(E) Efx equals the absolute value of the net position of instruments
and cash in a currency that is different from the settlement currency
(where the net position in a given currency equals the sum of the
current market values of any instruments or cash in the currency the
bank has lent, sold subject to repurchase, or posted as collateral to
the counterparty minus the sum of the current market values of any
instruments or cash in the currency the bank has borrowed, purchased
subject to resale, or taken as collateral from the counterparty); and
(F) Hfx equals the haircut appropriate to the mismatch between the
currency referenced in Efx and the settlement currency.
(ii) Standard supervisory haircuts. (A) Under the standard
supervisory haircuts approach:
(1) A bank must use the haircuts for market price volatility (Hs) in
Table 3, as adjusted in certain circumstances as provided in paragraph
(b)(2)(ii)(A)(3) and (4) of this section;
Table 3--Standard Supervisory Market Price Volatility Haircuts \1\
----------------------------------------------------------------------------------------------------------------
Issuers exempt
Applicable external rating grade Residual maturity for debt securities from the 3 basis Other issuers
category for debt securities point floor
----------------------------------------------------------------------------------------------------------------
Two highest investment-grade <= 1 year............................. 0.005 0.01
rating categories for long-term 1 year, <= 5 years......... 0.02 0.04
ratings/highest investment-grade 5 years................... 0.04 0.08
rating category for short-term
ratings.
----------------------------------------------------------------------------------------------------------------
Two lowest investment-grade rating <= 1 year............................. 0.01 0.02
categories for both short- and 1 year, <= 5 years........ 0.03 0.06
long-term ratings. 5 years................... 0.06 0.12
----------------------------------------------------------------------------------------------------------------
One rating category below All................................... 0.15 0.25
investment grade.
----------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold.....0.15.......
----------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds), c0.25rming
residential mortgages, and nonfinancial collateral.
----------------------------------------------------------------------------------------------------------------
Mutual funds.........................Highest haircut applicable to any security in which the
fund can invest.
----------------------------------------------------------------------------------------------------------------
Cash on deposit with the bank (including a certificate of deposi0 issued
by the bank).
----------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 3 are based on a ten-business-day holding period.
(2) For currency mismatches, a bank must use a haircut for foreign
exchange rate volatility (Hfx) of 8 percent, as adjusted in certain
circumstances as provided in paragraph (b)(2)(ii)(A)(3) and (4) of this
section.
(3) For repo-style transactions, a bank may multiply the supervisory
haircuts provided in paragraphs (b)(2)(ii)(A)(1) and (2) of this section
by the square root of \1/2\ (which equals 0.707107).
(4) A bank must adjust the supervisory haircuts upward on the basis
of a holding period longer than ten business days (for eligible margin
loans) or five business days (for repo-style transactions) where and as
appropriate to take into account the illiquidity of an instrument.
(iii) Own internal estimates for haircuts. With the prior written
approval of the OCC, a bank may calculate haircuts (Hs and Hfx) using
its own internal estimates of the volatilities of market prices and
foreign exchange rates.
(A) To receive OCC approval to use its own internal estimates, a
bank must satisfy the following minimum quantitative standards:
(1) A bank must use a 99th percentile one-tailed confidence
interval.
(2) The minimum holding period for a repo-style transaction is five
business days and for an eligible margin loan is ten business days. When
a bank calculates an own-estimates haircut on a TN-day
holding period, which is different from the minimum holding period for
the transaction type, the applicable haircut (HM) is
calculated using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR07DE07.014
(i) TM equals 5 for repo-style transactions and 10 for eligible
margin loans;
(ii) TN equals the holding period used by the bank to derive HN; and
(iii) HN equals the haircut based on the holding period TN.
(3) A bank must adjust holding periods upwards where and as
appropriate to take into account the illiquidity of an instrument.
[[Page 76]]
(4) The historical observation period must be at least one year.
(5) A bank must update its data sets and recompute haircuts no less
frequently than quarterly and must also reassess data sets and haircuts
whenever market prices change materially.
(B) With respect to debt securities that have an applicable external
rating of investment grade, a bank may calculate haircuts for categories
of securities. For a category of securities, the bank must calculate the
haircut on the basis of internal volatility estimates for securities in
that category that are representative of the securities in that category
that the bank has lent, sold subject to repurchase, posted as
collateral, borrowed, purchased subject to resale, or taken as
collateral. In determining relevant categories, the bank must at a
minimum take into account:
(1) The type of issuer of the security;
(2) The applicable external rating of the security;
(3) The maturity of the security; and
(4) The interest rate sensitivity of the security.
(C) With respect to debt securities that have an applicable external
rating of below investment grade and equity securities, a bank must
calculate a separate haircut for each individual security.
(D) Where an exposure or collateral (whether in the form of cash or
securities) is denominated in a currency that differs from the
settlement currency, the bank must calculate a separate currency
mismatch haircut for its net position in each mismatched currency based
on estimated volatilities of foreign exchange rates between the
mismatched currency and the settlement currency.
(E) A bank's own estimates of market price and foreign exchange rate
volatilities may not take into account the correlations among securities
and foreign exchange rates on either the exposure or collateral side of
a transaction (or netting set) or the correlations among securities and
foreign exchange rates between the exposure and collateral sides of the
transaction (or netting set).
(3) Simple VaR methodology. With the prior written approval of the
OCC, a bank may estimate EAD for a netting set using a VaR model that
meets the requirements in paragraph (b)(3)(iii) of this section. In such
event, the bank must set EAD equal to max {0, [([Sigma]E--[Sigma]C) +
PFE]{time} , where:
(i) [Sigma]E equals the value of the exposure (the sum of the
current market values of all instruments, gold, and cash the bank has
lent, sold subject to repurchase, or posted as collateral to the
counterparty under the netting set);
(ii) [Sigma]C equals the value of the collateral (the sum of the
current market values of all instruments, gold, and cash the bank has
borrowed, purchased subject to resale, or taken as collateral from the
counterparty under the netting set); and
(iii) PFE (potential future exposure) equals the bank's empirically
based best estimate of the 99th percentile, one-tailed confidence
interval for an increase in the value of ([Sigma]E--
[Sigma]C) over a five-business-day holding period for repo-style
transactions or over a ten-business-day holding period for eligible
margin loans using a minimum one-year historical observation period of
price data representing the instruments that the bank has lent, sold
subject to repurchase, posted as collateral, borrowed, purchased subject
to resale, or taken as collateral. The bank must validate its VaR model,
including by establishing and maintaining a rigorous and regular back-
testing regime.
(c) EAD for OTC derivative contracts. (1) A bank must determine the
EAD for an OTC derivative contract that is not subject to a qualifying
master netting agreement using the current exposure methodology in
paragraph (c)(5) of this section or using the internal models
methodology described in paragraph (d) of this section.
(2) A bank must determine the EAD for multiple OTC derivative
contracts that are subject to a qualifying master netting agreement
using the current exposure methodology in paragraph (c)(6) of this
section or using the internal models methodology described in paragraph
(d) of this section.
(3) Counterparty credit risk for credit derivatives. Notwithstanding
the above, (i) A bank that purchases a credit derivative that is
recognized under section 33 or 34 of this appendix as a credit risk
mitigant for an exposure that is not a covered position under 12 CFR
part 3, appendix B need not compute a separate counterparty credit risk
capital requirement under this section so long as the bank does so
consistently for all such credit derivatives and either includes all or
excludes all such credit derivatives that are subject to a master
netting agreement from any measure used to determine counterparty credit
risk exposure to all relevant counterparties for risk-based capital
purposes.
(ii) A bank that is the protection provider in a credit derivative
must treat the credit derivative as a wholesale exposure to the
reference obligor and need not compute a counterparty credit risk
capital requirement for the credit derivative under this section, so
long as it does so consistently for all such credit derivatives and
either includes all or excludes all such credit derivatives that are
subject to a master netting agreement from any measure used to determine
counterparty credit risk exposure to all relevant counterparties for
risk-based capital purposes (unless the bank is treating the credit
derivative as a covered position under 12 CFR part 3, appendix B, in
which case the bank must compute a supplemental counterparty credit risk
capital requirement under this section).
[[Page 77]]
(4) Counterparty credit risk for equity derivatives. A bank must
treat an equity derivative contract as an equity exposure and compute a
risk-weighted asset amount for the equity derivative contract under part
VI (unless the bank is treating the contract as a covered position under
12 CFR part 3, appendix B). In addition, if the bank is treating the
contract as a covered position under 12 CFR part 3, appendix B and in
certain other cases described in section 55 of this appendix, the bank
must also calculate a risk-based capital requirement for the
counterparty credit risk of an equity derivative contract under this
part.
(5) Single OTC derivative contract. Except as modified by paragraph
(c)(7) of this section, the EAD for a single OTC derivative contract
that is not subject to a qualifying master netting agreement is equal to
the sum of the bank's current credit exposure and potential future
credit exposure (PFE) on the derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the mark-to-market
value of the derivative contract or zero.
(ii) PFE. The PFE for a single OTC derivative contract, including an
OTC derivative contract with a negative mark-to-market value, is
calculated by multiplying the notional principal amount of the
derivative contract by the appropriate conversion factor in Table 4. For
purposes of calculating either the PFE under this paragraph or the gross
PFE under paragraph (c)(6) of this section for exchange rate contracts
and other similar contracts in which the notional principal amount is
equivalent to the cash flows, notional principal amount is the net
receipts to each party falling due on each value date in each currency.
For any OTC derivative contract that does not fall within one of the
specified categories in Table 4, the PFE must be calculated using the
``other'' conversion factors. A bank must use an OTC derivative
contract's effective notional principal amount (that is, its apparent or
stated notional principal amount multiplied by any multiplier in the OTC
derivative contract) rather than its apparent or stated notional
principal amount in calculating PFE. PFE of the protection provider of a
credit derivative is capped at the net present value of the amount of
unpaid premiums.
Table 4--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment- investment- Precious
Remaining maturity \2\ Interest rate exchange rate grade grade Equity metals Other
and gold reference reference (except
obligor) \3\ obligor) gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less........................................... 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Over one to five years..................................... 0.005 0.05 0.05 0.10 0.08 0.07 0.12
Over five years............................................ 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For an OTC derivative contract with multiple exchanges of principal, the conversion factor is multiplied by the number of remaining payments in the
derivative contract.
\2\ For an OTC derivative contract that is structured such that on specified dates any outstanding exposure is settled and the terms are reset so that
the market value of the contract is zero, the remaining maturity equals the time until the next reset date. For an interest rate derivative contract
with a remaining maturity of greater than one year that meets these criteria, the minimum conversion factor is 0.005.
\3\ A bank must use the column labeled ``Credit (investment-grade reference obligor)'' for a credit derivative whose reference obligor has an
outstanding unsecured long-term debt security without credit enhancement that has a long-term applicable external rating of at least investment grade.
A bank must use the column labeled ``Credit (non-investment-grade reference obligor)'' for all other credit derivatives.
(6) Multiple OTC derivative contracts subject to a qualifying master
netting agreement. Except as modified by paragraph (c)(7) of this
section, the EAD for multiple OTC derivative contracts subject to a
qualifying master netting agreement is equal to the sum of the net
current credit exposure and the adjusted sum of the PFE exposure for all
OTC derivative contracts subject to the qualifying master netting
agreement.
(i) Net current credit exposure. The net current credit exposure is
the greater of:
(A) The net sum of all positive and negative mark-to-market values
of the individual OTC derivative contracts subject to the qualifying
master netting agreement; or
(B) zero.
(ii) Adjusted sum of the PFE. The adjusted sum of the PFE, Anet, is
calculated as Anet = (0.4xAgross)+(0.6xNGRxAgross), where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts (as
determined under paragraph (c)(5)(ii) of this section) for each
individual OTC derivative contract subject to the qualifying master
netting agreement); and
(B) NGR = the net to gross ratio (that is, the ratio of the net
current credit exposure to the gross current credit exposure). In
calculating the NGR, the gross current credit exposure equals the sum of
the positive current credit exposures (as determined under paragraph
(c)(5)(i) of this section) of all individual OTC derivative contracts
subject to the qualifying master netting agreement.
[[Page 78]]
(7) Collateralized OTC derivative contracts. A bank may recognize
the credit risk mitigation benefits of financial collateral that secures
an OTC derivative contract or single-product netting set of OTC
derivatives by factoring the collateral into its LGD estimates for the
contract or netting set. Alternatively, a bank may recognize the credit
risk mitigation benefits of financial collateral that secures such a
contract or netting set that is marked to market on a daily basis and
subject to a daily margin maintenance requirement by estimating an
unsecured LGD for the contract or netting set and adjusting the EAD
calculated under paragraph (c)(5) or (c)(6) of this section using the
collateral haircut approach in paragraph (b)(2) of this section. The
bank must substitute the EAD calculated under paragraph (c)(5) or (c)(6)
of this section for [Sigma]E in the equation in paragraph (b)(2)(i) of
this section and must use a ten-business-day minimum holding period (TM
= 10).
(d) Internal models methodology. (1) With prior written approval
from the OCC, a bank may use the internal models methodology in this
paragraph (d) to determine EAD for counterparty credit risk for OTC
derivative contracts (collateralized or uncollateralized) and single-
product netting sets thereof, for eligible margin loans and single-
product netting sets thereof, and for repo-style transactions and
single-product netting sets thereof. A bank that uses the internal
models methodology for a particular transaction type (OTC derivative
contracts, eligible margin loans, or repo-style transactions) must use
the internal models methodology for all transactions of that transaction
type. A bank may choose to use the internal models methodology for one
or two of these three types of exposures and not the other types. A bank
may also use the internal models methodology for OTC derivative
contracts, eligible margin loans, and repo-style transactions subject to
a qualifying cross-product netting agreement if:
(i) The bank effectively integrates the risk mitigating effects of
cross-product netting into its risk management and other information
technology systems; and
(ii) The bank obtains the prior written approval of the OCC. A bank
that uses the internal models methodology for a transaction type must
receive approval from the OCC to cease using the methodology for that
transaction type or to make a material change to its internal model.
(2) Under the internal models methodology, a bank uses an internal
model to estimate the expected exposure (EE) for a netting set and then
calculates EAD based on that EE.
(i) The bank must use its internal model's probability distribution
for changes in the market value of a netting set that are attributable
to changes in market variables to determine EE.
(ii) Under the internal models methodology, EAD = [alpha] x
effective EPE, or, subject to OCC approval as provided in paragraph
(d)(7), a more conservative measure of EAD.
[GRAPHIC] [TIFF OMITTED] TR07DE07.026
(that is, effective EPE is the time-weighted average of effective EE
where the weights are the proportion that an individual effective EE
represents in a one-year time interval) where:
(1) Effective EEtk = max (Effective EEtk-1,
EEtk) (that is, for a specific datetk, effective
EE is the greater of EE at that date or the effective EE at the previous
date); and
(2) tk represents the kth future time period in the model
and there are n time periods represented in the model over the first
year; and
(B) [alpha] = 1.4 except as provided in paragraph (d)(6), or when
the OCC has determined that the bank must set [alpha] higher based on
the bank's specific characteristics of counterparty credit risk.
(iii) A bank may include financial collateral currently posted by
the counterparty as collateral (but may not include other forms of
collateral) when calculating EE.
(iv) If a bank hedges some or all of the counterparty credit risk
associated with a netting set using an eligible credit derivative, the
bank may take the reduction in exposure to the counterparty into account
when estimating EE. If the bank recognizes this reduction in exposure to
the counterparty in its estimate of EE, it must also use its internal
model to estimate a separate EAD for the bank's exposure to the
protection provider of the credit derivative.
(3) To obtain OCC approval to calculate the distributions of
exposures upon which the EAD calculation is based, the bank must
demonstrate to the satisfaction of the OCC that it has been using for at
least one year an internal model that broadly meets the following
minimum standards, with which the bank must maintain compliance:
(i) The model must have the systems capability to estimate the
expected exposure to the counterparty on a daily basis (but is not
expected to estimate or report expected exposure on a daily basis).
(ii) The model must estimate expected exposure at enough future
dates to reflect accurately all the future cash flows of contracts in
the netting set.
(iii) The model must account for the possible non-normality of the
exposure distribution, where appropriate.
(iv) The bank must measure, monitor, and control current
counterparty exposure and the exposure to the counterparty over the
whole life of all contracts in the netting set.
[[Page 79]]
(v) The bank must be able to measure and manage current exposures
gross and net of collateral held, where appropriate. The bank must
estimate expected exposures for OTC derivative contracts both with and
without the effect of collateral agreements.
(vi) The bank must have procedures to identify, monitor, and control
specific wrong-way risk throughout the life of an exposure. Wrong-way
risk in this context is the risk that future exposure to a counterparty
will be high when the counterparty's probability of default is also
high.
(vii) The model must use current market data to compute current
exposures. When estimating model parameters based on historical data, at
least three years of historical data that cover a wide range of economic
conditions must be used and must be updated quarterly or more frequently
if market conditions warrant. The bank should consider using model
parameters based on forward-looking measures, where appropriate.
(viii) A bank must subject its internal model to an initial
validation and annual model review process. The model review should
consider whether the inputs and risk factors, as well as the model
outputs, are appropriate.
(4) Maturity. (i) If the remaining maturity of the exposure or the
longest-dated contract in the netting set is greater than one year, the
bank must set M for the exposure or netting set equal to the lower of
five years or M(EPE), \3\ where:
---------------------------------------------------------------------------
\3\ Alternatively, a bank that uses an internal model to calculate a
one-sided credit valuation adjustment may use the effective credit
duration estimated by the model as M(EPE) in place of the formula in
paragraph (d)(4).
[GRAPHIC] [TIFF OMITTED] TR07DE07.015
(B) dfk is the risk-free discount factor for future time
period tk; and
(C) [Delta]tk = tk-tk-1.
(ii) If the remaining maturity of the exposure or the longest-dated
contract in the netting set is one year or less, the bank must set M for
the exposure or netting set equal to one year, except as provided in
paragraph (d)(7) of section 31 of this appendix.
(5) Collateral agreements. A bank may capture the effect on EAD of a
collateral agreement that requires receipt of collateral when exposure
to the counterparty increases but may not capture the effect on EAD of a
collateral agreement that requires receipt of collateral when
counterparty credit quality deteriorates. For this purpose, a collateral
agreement means a legal contract that specifies the time when, and
circumstances under which, the counterparty is required to pledge
collateral to the bank for a single financial contract or for all
financial contracts in a netting set and confers upon the bank a
perfected, first priority security interest (notwithstanding the prior
security interest of any custodial agent), or the legal equivalent
thereof, in the collateral posted by the counterparty under the
agreement. This security interest must provide the bank with a right to
close out the financial positions and liquidate the collateral upon an
event of default of, or failure to perform by, the counterparty under
the collateral agreement. A contract would not satisfy this requirement
if the bank's exercise of rights under the agreement may be stayed or
avoided under applicable law in the relevant jurisdictions. Two methods
are available to capture the effect of a collateral agreement:
(i) With prior written approval from the OCC, a bank may include the
effect of a collateral agreement within its internal model used to
calculate EAD. The bank may set EAD equal to the expected exposure at
the end of the margin period of risk. The margin period of risk means,
with respect to a netting set subject to a collateral agreement, the
time period from the most recent exchange of collateral with a
counterparty until the next required exchange of collateral plus the
period of time required to sell and realize the proceeds of the least
liquid collateral that can be delivered under the terms of the
collateral agreement and, where applicable, the period of time required
to re-hedge the resulting market risk, upon the default of the
counterparty. The minimum margin period of risk is five business days
for repo-style transactions and ten business days for other transactions
when liquid financial collateral is posted under a daily
[[Page 80]]
margin maintenance requirement. This period should be extended to cover
any additional time between margin calls; any potential closeout
difficulties; any delays in selling collateral, particularly if the
collateral is illiquid; and any impediments to prompt re-hedging of any
market risk.
(ii) A bank that can model EPE without collateral agreements but
cannot achieve the higher level of modeling sophistication to model EPE
with collateral agreements can set effective EPE for a collateralized
netting set equal to the lesser of:
(A) The threshold, defined as the exposure amount at which the
counterparty is required to post collateral under the collateral
agreement, if the threshold is positive, plus an add-on that reflects
the potential increase in exposure of the netting set over the margin
period of risk. The add-on is computed as the expected increase in the
netting set's exposure beginning from current exposure of zero over the
margin period of risk. The margin period of risk must be at least five
business days for netting sets consisting only of repo-style
transactions subject to daily re-margining and daily marking-to-market,
and ten business days for all other netting sets; or
(B) Effective EPE without a collateral agreement.
(6) Own estimate of alpha. With prior written approval of the OCC, a
bank may calculate alpha as the ratio of economic capital from a full
simulation of counterparty exposure across counterparties that
incorporates a joint simulation of market and credit risk factors
(numerator) and economic capital based on EPE (denominator), subject to
a floor of 1.2. For purposes of this calculation, economic capital is
the unexpected losses for all counterparty credit risks measured at a
99.9 percent confidence level over a one-year horizon. To receive
approval, the bank must meet the following minimum standards to the
satisfaction of the OCC:
(i) The bank's own estimate of alpha must capture in the numerator
the effects of:
(A) The material sources of stochastic dependency of distributions
of market values of transactions or portfolios of transactions across
counterparties;
(B) Volatilities and correlations of market risk factors used in the
joint simulation, which must be related to the credit risk factor used
in the simulation to reflect potential increases in volatility or
correlation in an economic downturn, where appropriate; and
(C) The granularity of exposures (that is, the effect of a
concentration in the proportion of each counterparty's exposure that is
driven by a particular risk factor).
(ii) The bank must assess the potential model uncertainty in its
estimates of alpha.
(iii) The bank must calculate the numerator and denominator of alpha
in a consistent fashion with respect to modeling methodology, parameter
specifications, and portfolio composition.
(iv) The bank must review and adjust as appropriate its estimates of
the numerator and denominator of alpha on at least a quarterly basis and
more frequently when the composition of the portfolio varies over time.
(7) Other measures of counterparty exposure. With prior written
approval of the OCC, a bank may set EAD equal to a measure of
counterparty credit risk exposure, such as peak EAD, that is more
conservative than an alpha of 1.4 (or higher under the terms of
paragraph (d)(2)(ii)(B) of this section) times EPE for every
counterparty whose EAD will be measured under the alternative measure of
counterparty exposure. The bank must demonstrate the conservatism of the
measure of counterparty credit risk exposure used for EAD. For material
portfolios of new OTC derivative products, the bank may assume that the
current exposure methodology in paragraphs (c)(5) and (c)(6) of this
section meets the conservatism requirement of this paragraph for a
period not to exceed 180 days. For immaterial portfolios of OTC
derivative contracts, the bank generally may assume that the current
exposure methodology in paragraphs (c)(5) and (c)(6) of this section
meets the conservatism requirement of this paragraph.
Section 33. Guarantees and Credit Derivatives: PD Substitution and LGD
Adjustment Approaches
(a) Scope. (1) This section applies to wholesale exposures for
which:
(i) Credit risk is fully covered by an eligible guarantee or
eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis
in which the bank and the protection provider share losses
proportionately) by an eligible guarantee or eligible credit derivative.
(2) Wholesale exposures on which there is a tranching of credit risk
(reflecting at least two different levels of seniority) are
securitization exposures subject to the securitization framework in part
V.
(3) A bank may elect to recognize the credit risk mitigation
benefits of an eligible guarantee or eligible credit derivative covering
an exposure described in paragraph (a)(1) of this section by using the
PD substitution approach or the LGD adjustment approach in paragraph (c)
of this section or, if the transaction qualifies, using the double
default treatment in section 34 of this appendix. A bank's PD and LGD
for the hedged exposure may not be lower than the PD and LGD floors
described in paragraphs (d)(2) and (d)(3) of section 31 of this
appendix.
(4) If multiple eligible guarantees or eligible credit derivatives
cover a single exposure described in paragraph (a)(1) of this section,
[[Page 81]]
a bank may treat the hedged exposure as multiple separate exposures each
covered by a single eligible guarantee or eligible credit derivative and
may calculate a separate risk-based capital requirement for each
separate exposure as described in paragraph (a)(3) of this section.
(5) If a single eligible guarantee or eligible credit derivative
covers multiple hedged wholesale exposures described in paragraph (a)(1)
of this section, a bank must treat each hedged exposure as covered by a
separate eligible guarantee or eligible credit derivative and must
calculate a separate risk-based capital requirement for each exposure as
described in paragraph (a)(3) of this section.
(6) A bank must use the same risk parameters for calculating ECL as
it uses for calculating the risk-based capital requirement for the
exposure.
(b) Rules of recognition. (1) A bank may only recognize the credit
risk mitigation benefits of eligible guarantees and eligible credit
derivatives.
(2) A bank may only recognize the credit risk mitigation benefits of
an eligible credit derivative to hedge an exposure that is different
from the credit derivative's reference exposure used for determining the
derivative's cash settlement value, deliverable obligation, or
occurrence of a credit event if:
(i) The reference exposure ranks pari passu (that is, equally) with
or is junior to the hedged exposure; and
(ii) The reference exposure and the hedged exposure are exposures to
the same legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to assure payments under the credit
derivative are triggered when the obligor fails to pay under the terms
of the hedged exposure.
(c) Risk parameters for hedged exposures--(1) PD substitution
approach--(i) Full coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is greater than or equal to the EAD of the hedged exposure, a
bank may recognize the guarantee or credit derivative in determining the
bank's risk-based capital requirement for the hedged exposure by
substituting the PD associated with the rating grade of the protection
provider for the PD associated with the rating grade of the obligor in
the risk-based capital formula applicable to the guarantee or credit
derivative in Table 2 and using the appropriate LGD as described in
paragraph (c)(1)(iii) of this section. If the bank determines that full
substitution of the protection provider's PD leads to an inappropriate
degree of risk mitigation, the bank may substitute a higher PD than that
of the protection provider.
(ii) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the EAD of the hedged exposure, the bank must
treat the hedged exposure as two separate exposures (protected and
unprotected) in order to recognize the credit risk mitigation benefit of
the guarantee or credit derivative.
(A) The bank must calculate its risk-based capital requirement for
the protected exposure under section 31 of this appendix, where PD is
the protection provider's PD, LGD is determined under paragraph
(c)(1)(iii) of this section, and EAD is P. If the bank determines that
full substitution leads to an inappropriate degree of risk mitigation,
the bank may use a higher PD than that of the protection provider.
(B) The bank must calculate its risk-based capital requirement for
the unprotected exposure under section 31 of this appendix, where PD is
the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to
reflect the guarantee or credit derivative), and EAD is the EAD of the
original hedged exposure minus P.
(C) The treatment in this paragraph (c)(1)(ii) is applicable when
the credit risk of a wholesale exposure is covered on a partial pro rata
basis or when an adjustment is made to the effective notional amount of
the guarantee or credit derivative under paragraph (d), (e), or (f) of
this section.
(iii) LGD of hedged exposures. The LGD of a hedged exposure under
the PD substitution approach is equal to:
(A) The lower of the LGD of the hedged exposure (not adjusted to
reflect the guarantee or credit derivative) and the LGD of the guarantee
or credit derivative, if the guarantee or credit derivative provides the
bank with the option to receive immediate payout upon triggering the
protection; or
(B) The LGD of the guarantee or credit derivative, if the guarantee
or credit derivative does not provide the bank with the option to
receive immediate payout upon triggering the protection.
(2) LGD adjustment approach--(i) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the EAD
of the hedged exposure, the bank's risk-based capital requirement for
the hedged exposure is the greater of:
(A) The risk-based capital requirement for the exposure as
calculated under section 31 of this appendix, with the LGD of the
exposure adjusted to reflect the guarantee or credit derivative; or
(B) The risk-based capital requirement for a direct exposure to the
protection provider as calculated under section 31 of this appendix,
using the PD for the protection provider,
[[Page 82]]
the LGD for the guarantee or credit derivative, and an EAD equal to the
EAD of the hedged exposure.
(ii) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in paragraphs (a) and (b) of this
section and the protection amount (P) of the guarantee or credit
derivative is less than the EAD of the hedged exposure, the bank must
treat the hedged exposure as two separate exposures (protected and
unprotected) in order to recognize the credit risk mitigation benefit of
the guarantee or credit derivative.
(A) The bank's risk-based capital requirement for the protected
exposure would be the greater of:
(1) The risk-based capital requirement for the protected exposure as
calculated under section 31 of this appendix, with the LGD of the
exposure adjusted to reflect the guarantee or credit derivative and EAD
set equal to P; or
(2) The risk-based capital requirement for a direct exposure to the
guarantor as calculated under section 31 of this appendix, using the PD
for the protection provider, the LGD for the guarantee or credit
derivative, and an EAD set equal to P.
(B) The bank must calculate its risk-based capital requirement for
the unprotected exposure under section 31 of this appendix, where PD is
the obligor's PD, LGD is the hedged exposure's LGD (not adjusted to
reflect the guarantee or credit derivative), and EAD is the EAD of the
original hedged exposure minus P.
(3) M of hedged exposures. The M of the hedged exposure is the same
as the M of the exposure if it were unhedged.
(d) Maturity mismatch. (1) A bank that recognizes an eligible
guarantee or eligible credit derivative in determining its risk-based
capital requirement for a hedged exposure must adjust the effective
notional amount of the credit risk mitigant to reflect any maturity
mismatch between the hedged exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a
credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest
possible remaining time before the obligor is scheduled to fulfill its
obligation on the exposure. If a credit risk mitigant has embedded
options that may reduce its term, the bank (protection purchaser) must
use the shortest possible residual maturity for the credit risk
mitigant. If a call is at the discretion of the protection provider, the
residual maturity of the credit risk mitigant is at the first call date.
If the call is at the discretion of the bank (protection purchaser), but
the terms of the arrangement at origination of the credit risk mitigant
contain a positive incentive for the bank to call the transaction before
contractual maturity, the remaining time to the first call date is the
residual maturity of the credit risk mitigant. For example, where there
is a step-up in cost in conjunction with a call feature or where the
effective cost of protection increases over time even if credit quality
remains the same or improves, the residual maturity of the credit risk
mitigant will be the remaining time to the first call.
(4) A credit risk mitigant with a maturity mismatch may be
recognized only if its original maturity is greater than or equal to one
year and its residual maturity is greater than three months.
(5) When a maturity mismatch exists, the bank must apply the
following adjustment to the effective notional amount of the credit risk
mitigant: Pm = E x (t - 0.25)/(T - 0.25), where:
(i) Pm = effective notional amount of the credit risk mitigant,
adjusted for maturity mismatch;
(ii) E = effective notional amount of the credit risk mitigant;
(iii) t = the lesser of T or the residual maturity of the credit
risk mitigant, expressed in years; and
(iv) T = the lesser of five or the residual maturity of the hedged
exposure, expressed in years.
(e) Credit derivatives without restructuring as a credit event. If a
bank recognizes an eligible credit derivative that does not include as a
credit event a restructuring of the hedged exposure involving
forgiveness or postponement of principal, interest, or fees that results
in a credit loss event (that is, a charge-off, specific provision, or
other similar debit to the profit and loss account), the bank must apply
the following adjustment to the effective notional amount of the credit
derivative: Pr = Pm x 0.60, where:
(1) Pr = effective notional amount of the credit risk mitigant,
adjusted for lack of restructuring event (and maturity mismatch, if
applicable); and
(2) Pm = effective notional amount of the credit risk mitigant
adjusted for maturity mismatch (if applicable).
(f) Currency mismatch. (1) If a bank recognizes an eligible
guarantee or eligible credit derivative that is denominated in a
currency different from that in which the hedged exposure is
denominated, the bank must apply the following formula to the effective
notional amount of the guarantee or credit derivative: Pc = Pr x (1 -
HFX), where:
(i) Pc = effective notional amount of the credit risk mitigant,
adjusted for currency mismatch (and maturity mismatch and lack of
restructuring event, if applicable);
(ii) Pr = effective notional amount of the credit risk mitigant
(adjusted for maturity mismatch and lack of restructuring event, if
applicable); and
(iii) HFX = haircut appropriate for the currency mismatch
between the credit risk mitigant and the hedged exposure.
[[Page 83]]
(2) A bank must set HFX equal to 8 percent unless it
qualifies for the use of and uses its own internal estimates of foreign
exchange volatility based on a ten-business-day holding period and daily
marking-to-market and remargining. A bank qualifies for the use of its
own internal estimates of foreign exchange volatility if it qualifies
for:
(i) The own-estimates haircuts in paragraph (b)(2)(iii) of section
32 of this appendix;
(ii) The simple VaR methodology in paragraph (b)(3) of section 32 of
this appendix; or
(iii) The internal models methodology in paragraph (d) of section 32
of this appendix.
(3) A bank must adjust HFX calculated in paragraph (f)(2)
of this section upward if the bank revalues the guarantee or credit
derivative less frequently than once every ten business days using the
square root of time formula provided in paragraph (b)(2)(iii)(A)(2) of
section 32 of this appendix.
Section 34. Guarantees and Credit Derivatives: Double Default Treatment
(a) Eligibility and operational criteria for double default
treatment. A bank may recognize the credit risk mitigation benefits of a
guarantee or credit derivative covering an exposure described in
paragraph (a)(1) of section 33 of this appendix by applying the double
default treatment in this section if all the following criteria are
satisfied.
(1) The hedged exposure is fully covered or covered on a pro rata
basis by:
(i) An eligible guarantee issued by an eligible double default
guarantor; or
(ii) An eligible credit derivative that meets the requirements of
paragraph (b)(2) of section 33 of this appendix and is issued by an
eligible double default guarantor.
(2) The guarantee or credit derivative is:
(i) An uncollateralized guarantee or uncollateralized credit
derivative (for example, a credit default swap) that provides protection
with respect to a single reference obligor; or
(ii) An nth-to-default credit derivative (subject to the
requirements of paragraph (m) of section 42 of this appendix).
(3) The hedged exposure is a wholesale exposure (other than a
sovereign exposure).
(4) The obligor of the hedged exposure is not:
(i) An eligible double default guarantor or an affiliate of an
eligible double default guarantor; or
(ii) An affiliate of the guarantor.
(5) The bank does not recognize any credit risk mitigation benefits
of the guarantee or credit derivative for the hedged exposure other than
through application of the double default treatment as provided in this
section.
(6) The bank has implemented a process (which has received the
prior, written approval of the OCC) to detect excessive correlation
between the creditworthiness of the obligor of the hedged exposure and
the protection provider. If excessive correlation is present, the bank
may not use the double default treatment for the hedged exposure.
(b) Full coverage. If the transaction meets the criteria in
paragraph (a) of this section and the protection amount (P) of the
guarantee or credit derivative is at least equal to the EAD of the
hedged exposure, the bank may determine its risk-weighted asset amount
for the hedged exposure under paragraph (e) of this section.
(c) Partial coverage. If the transaction meets the criteria in
paragraph (a) of this section and the protection amount (P) of the
guarantee or credit derivative is less than the EAD of the hedged
exposure, the bank must treat the hedged exposure as two separate
exposures (protected and unprotected) in order to recognize double
default treatment on the protected portion of the exposure.
(1) For the protected exposure, the bank must set EAD equal to P and
calculate its risk-weighted asset amount as provided in paragraph (e) of
this section.
(2) For the unprotected exposure, the bank must set EAD equal to the
EAD of the original exposure minus P and then calculate its risk-
weighted asset amount as provided in section 31 of this appendix.
(d) Mismatches. For any hedged exposure to which a bank applies
double default treatment, the bank must make applicable adjustments to
the protection amount as required in paragraphs (d), (e), and (f) of
section 33 of this appendix.
(e) The double default dollar risk-based capital requirement. The
dollar risk-based capital requirement for a hedged exposure to which a
bank has applied double default treatment is KDD multiplied
by the EAD of the exposure. KDD is calculated according to
the following formula: KDD = Ko x (0.15 + 160 x
PDg),
Where:
(1)
[GRAPHIC] [TIFF OMITTED] TR07DE07.016
[[Page 84]]
(2) PDg = PD of the protection provider.
(3) PDo = PD of the obligor of the hedged exposure.
(4) LGDg = (i) The lower of the LGD of the hedged exposure
(not adjusted to reflect the guarantee or credit derivative) and the LGD
of the guarantee or credit derivative, if the guarantee or credit
derivative provides the bank with the option to receive immediate payout
on triggering the protection; or
(ii) The LGD of the guarantee or credit derivative, if the guarantee or
credit derivative does not provide the bank with the option to
receive immediate payout on triggering the protection.
(5) [rho]OS (asset value correlation of the obligor) is
calculated according to the appropriate formula for (R)
provided in Table 2 in section 31 of this appendix, with PD
equal to PDo.
(6) b (maturity adjustment coefficient) is calculated according to the
formula for b provided in Table 2 in section 31 of this
appendix, with PD equal to the lesser of PDo and
PDg.
(7) M (maturity) is the effective maturity of the guarantee or credit
derivative, which may not be less than one year or greater
than five years.
Section 35. Risk-Based Capital Requirement for Unsettled Transactions
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or
commodities transaction in which the buyer is obligated to make payment
only if the seller has made delivery of the securities or commodities
and the seller is obligated to deliver the securities or commodities
only if the buyer has made payment.
(2) Payment-versus-payment (PvP) transaction means a foreign
exchange transaction in which each counterparty is obligated to make a
final transfer of one or more currencies only if the other counterparty
has made a final transfer of one or more currencies.
(3) Normal settlement period. A transaction has a normal settlement
period if the contractual settlement period for the transaction is equal
to or less than the market standard for the instrument underlying the
transaction and equal to or less than five business days.
(4) Positive current exposure. The positive current exposure of a
bank for a transaction is the difference between the transaction value
at the agreed settlement price and the current market price of the
transaction, if the difference results in a credit exposure of the bank
to the counterparty.
(b) Scope. This section applies to all transactions involving
securities, foreign exchange instruments, and commodities that have a
risk of delayed settlement or delivery. This section does not apply to:
(1) Transactions accepted by a qualifying central counterparty that
are subject to daily marking-to-market and daily receipt and payment of
variation margin;
(2) Repo-style transactions, including unsettled repo-style
transactions (which are addressed in sections 31 and 32 of this
appendix);
(3) One-way cash payments on OTC derivative contracts (which are
addressed in sections 31 and 32 of this appendix); or
(4) Transactions with a contractual settlement period that is longer
than the normal settlement period (which are treated as OTC derivative
contracts and addressed in sections 31 and 32 of this appendix).
(c) System-wide failures. In the case of a system-wide failure of a
settlement or clearing system, the OCC may waive risk-based capital
requirements for unsettled and failed transactions until the situation
is rectified.
(d) Delivery-versus-payment (DvP) and payment-versus-payment (PvP)
transactions. A bank must hold risk-based capital against any DvP or PvP
transaction with a normal settlement period if the bank's counterparty
has not made delivery or payment within five business days after the
settlement date. The bank must determine its risk-weighted asset amount
for such a transaction by multiplying the positive current exposure of
the transaction for the bank by the appropriate risk weight in Table 5.
Table 5--Risk Weights for Unsettled DvP and PvP Transactions
------------------------------------------------------------------------
Risk weight to be
Number of business days after contractual settlement applied to
date positive current
exposure (percent)
------------------------------------------------------------------------
From 5 to 15........................................ 100
From 16 to 30....................................... 625
From 31 to 45....................................... 937.5
46 or more.......................................... 1,250
------------------------------------------------------------------------
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A bank must hold risk-based capital against
any non-DvP/non-PvP transaction with a normal settlement period if the
bank has delivered cash, securities, commodities, or currencies to its
counterparty but has not received its corresponding deliverables by the
end of the same business day. The bank must continue to hold risk-based
capital against the transaction until the bank has received its
corresponding deliverables.
(2) From the business day after the bank has made its delivery until
five business days after the counterparty delivery is due, the bank must
calculate its risk-based capital requirement for the transaction by
treating the current market value of the deliverables owed to the bank
as a wholesale exposure.
[[Page 85]]
(i) A bank may assign an obligor rating to a counterparty for which
it is not otherwise required under this appendix to assign an obligor
rating on the basis of the applicable external rating of any outstanding
unsecured long-term debt security without credit enhancement issued by
the counterparty.
(ii) A bank may use a 45 percent LGD for the transaction rather than
estimating LGD for the transaction provided the bank uses the 45 percent
LGD for all transactions described in paragraphs (e)(1) and (e)(2) of
this section.
(iii) A bank may use a 100 percent risk weight for the transaction
provided the bank uses this risk weight for all transactions described
in paragraphs (e)(1) and (e)(2) of this section.
(3) If the bank has not received its deliverables by the fifth
business day after the counterparty delivery was due, the bank must
deduct the current market value of the deliverables owed to the bank 50
percent from tier 1 capital and 50 percent from tier 2 capital.
(f) Total risk-weighted assets for unsettled transactions. Total
risk-weighted assets for unsettled transactions is the sum of the risk-
weighted asset amounts of all DvP, PvP, and non-DvP/non-PvP
transactions.
Part V. Risk-Weighted Assets for Securitization Exposures
Section 41. Operational Criteria for Recognizing the Transfer of Risk
(a) Operational criteria for traditional securitizations. A bank
that transfers exposures it has originated or purchased to a
securitization SPE or other third party in connection with a traditional
securitization may exclude the exposures from the calculation of its
risk-weighted assets only if each of the conditions in this paragraph
(a) is satisfied. A bank that meets these conditions must hold risk-
based capital against any securitization exposures it retains in
connection with the securitization. A bank that fails to meet these
conditions must hold risk-based capital against the transferred
exposures as if they had not been securitized and must deduct from tier
1 capital any after-tax gain-on-sale resulting from the transaction. The
conditions are:
(1) The transfer is considered a sale under GAAP;
(2) The bank has transferred to third parties credit risk associated
with the underlying exposures; and
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls.
(b) Operational criteria for synthetic securitizations. For
synthetic securitizations, a bank may recognize for risk-based capital
purposes the use of a credit risk mitigant to hedge underlying exposures
only if each of the conditions in this paragraph (b) is satisfied. A
bank that fails to meet these conditions must hold risk-based capital
against the underlying exposures as if they had not been synthetically
securitized. The conditions are:
(1) The credit risk mitigant is financial collateral, an eligible
credit derivative from an eligible securitization guarantor or an
eligible guarantee from an eligible securitization guarantor;
(2) The bank transfers credit risk associated with the underlying
exposures to third parties, and the terms and conditions in the credit
risk mitigants employed do not include provisions that:
(i) Allow for the termination of the credit protection due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the bank to alter or replace the underlying exposures
to improve the credit quality of the pool of underlying exposures;
(iii) Increase the bank's cost of credit protection in response to
deterioration in the credit quality of the underlying exposures;
(iv) Increase the yield payable to parties other than the bank in
response to a deterioration in the credit quality of the underlying
exposures; or
(v) Provide for increases in a retained first loss position or
credit enhancement provided by the bank after the inception of the
securitization;
(3) The bank obtains a well-reasoned opinion from legal counsel that
confirms the enforceability of the credit risk mitigant in all relevant
jurisdictions; and
(4) Any clean-up calls relating to the securitization are eligible
clean-up calls.
Section 42. Risk-Based Capital Requirement for Securitization Exposures
(a) Hierarchy of approaches. Except as provided elsewhere in this
section:
(1) A bank must deduct from tier 1 capital any after-tax gain-on-
sale resulting from a securitization and must deduct from total capital
in accordance with paragraph (c) of this section the portion of any CEIO
that does not constitute gain-on-sale.
(2) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and qualifies for the Ratings-Based
Approach in section 43 of this appendix, a bank must apply the Ratings-
Based Approach to the exposure.
(3) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the bank may either apply the Internal Assessment
Approach in section 44 of this appendix to the exposure (if the bank,
the exposure, and the relevant ABCP program qualify for the Internal
Assessment Approach) or the Supervisory Formula Approach in section 45
of this appendix to the exposure (if the bank and the exposure
[[Page 86]]
qualify for the Supervisory Formula Approach).
(4) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and does not qualify for the Ratings-
Based Approach, the Internal Assessment Approach, or the Supervisory
Formula Approach, the bank must deduct the exposure from total capital
in accordance with paragraph (c) of this section.
(5) If a securitization exposure is an OTC derivative contract
(other than a credit derivative) that has a first priority claim on the
cash flows from the underlying exposures (notwithstanding amounts due
under interest rate or currency derivative contracts, fees due, or other
similar payments), with approval of the OCC, a bank may choose to set
the risk-weighted asset amount of the exposure equal to the amount of
the exposure as determined in paragraph (e) of this section rather than
apply the hierarchy of approaches described in paragraphs (a) (1)
through (4) of this section.
(b) Total risk-weighted assets for securitization exposures. A
bank's total risk-weighted assets for securitization exposures is equal
to the sum of its risk-weighted assets calculated using the Ratings-
Based Approach in section 43 of this appendix, the Internal Assessment
Approach in section 44 of this appendix, and the Supervisory Formula
Approach in section 45 of this appendix, and its risk-weighted assets
amount for early amortization provisions calculated in section 47 of
this appendix.
(c) Deductions. (1) If a bank must deduct a securitization exposure
from total capital, the bank must take the deduction 50 percent from
tier 1 capital and 50 percent from tier 2 capital. If the amount
deductible from tier 2 capital exceeds the bank's tier 2 capital, the
bank must deduct the excess from tier 1 capital.
(2) A bank may calculate any deduction from tier 1 capital and tier
2 capital for a securitization exposure net of any deferred tax
liabilities associated with the securitization exposure.
(d) Maximum risk-based capital requirement. Regardless of any other
provisions of this part, unless one or more underlying exposures does
not meet the definition of a wholesale, retail, securitization, or
equity exposure, the total risk-based capital requirement for all
securitization exposures held by a single bank associated with a single
securitization (including any risk-based capital requirements that
relate to an early amortization provision of the securitization but
excluding any risk-based capital requirements that relate to the bank's
gain-on-sale or CEIOs associated with the securitization) may not exceed
the sum of:
(1) The bank's total risk-based capital requirement for the
underlying exposures as if the bank directly held the underlying
exposures; and
(2) The total ECL of the underlying exposures.
(e) Amount of a securitization exposure. (1) The amount of an on-
balance sheet securitization exposure that is not a repo-style
transaction, eligible margin loan, or OTC derivative contract (other
than a credit derivative) is:
(i) The bank's carrying value minus any unrealized gains and plus
any unrealized losses on the exposure, if the exposure is a security
classified as available-for-sale; or
(ii) The bank's carrying value, if the exposure is not a security
classified as available-for-sale.
(2) The amount of an off-balance sheet securitization exposure that
is not an OTC derivative contract (other than a credit derivative) is
the notional amount of the exposure. For an off-balance-sheet
securitization exposure to an ABCP program, such as a liquidity
facility, the notional amount may be reduced to the maximum potential
amount that the bank could be required to fund given the ABCP program's
current underlying assets (calculated without regard to the current
credit quality of those assets).
(3) The amount of a securitization exposure that is a repo-style
transaction, eligible margin loan, or OTC derivative contract (other
than a credit derivative) is the EAD of the exposure as calculated in
section 32 of this appendix.
(f) Overlapping exposures. If a bank has multiple securitization
exposures that provide duplicative coverage of the underlying exposures
of a securitization (such as when a bank provides a program-wide credit
enhancement and multiple pool-specific liquidity facilities to an ABCP
program), the bank is not required to hold duplicative risk-based
capital against the overlapping position. Instead, the bank may apply to
the overlapping position the applicable risk-based capital treatment
that results in the highest risk-based capital requirement.
(g) Securitizations of non-IRB exposures. If a bank has a
securitization exposure where any underlying exposure is not a wholesale
exposure, retail exposure, securitization exposure, or equity exposure,
the bank must:
(1) If the bank is an originating bank, deduct from tier 1 capital
any after-tax gain-on-sale resulting from the securitization and deduct
from total capital in accordance with paragraph (c) of this section the
portion of any CEIO that does not constitute gain-on-sale;
(2) If the securitization exposure does not require deduction under
paragraph (g)(1), apply the RBA in section 43 of this appendix to the
securitization exposure if the exposure qualifies for the RBA;
(3) If the securitization exposure does not require deduction under
paragraph (g)(1) and
[[Page 87]]
does not qualify for the RBA, apply the IAA in section 44 of this
appendix to the exposure (if the bank, the exposure, and the relevant
ABCP program qualify for the IAA); and
(4) If the securitization exposure does not require deduction under
paragraph (g)(1) and does not qualify for the RBA or the IAA, deduct the
exposure from total capital in accordance with paragraph (c) of this
section.
(h) Implicit support. If a bank provides support to a securitization
in excess of the bank's contractual obligation to provide credit support
to the securitization (implicit support):
(1) The bank must hold regulatory capital against all of the
underlying exposures associated with the securitization as if the
exposures had not been securitized and must deduct from tier 1 capital
any after-tax gain-on-sale resulting from the securitization; and
(2) The bank must disclose publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The regulatory capital impact to the bank of providing such
implicit support.
(i) Eligible servicer cash advance facilities. Regardless of any
other provisions of this part, a bank is not required to hold risk-based
capital against the undrawn portion of an eligible servicer cash advance
facility.
(j) Interest-only mortgage-backed securities. Regardless of any
other provisions of this part, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than
100 percent.
(k) Small-business loans and leases on personal property transferred
with recourse. (1) Regardless of any other provisions of this appendix,
a bank that has transferred small-business loans and leases on personal
property (small-business obligations) with recourse must include in
risk-weighted assets only the contractual amount of retained recourse if
all the following conditions are met:
(i) The transaction is a sale under GAAP.
(ii) The bank establishes and maintains, pursuant to GAAP, a non-
capital reserve sufficient to meet the bank's reasonably estimated
liability under the recourse arrangement.
(iii) The loans and leases are to businesses that meet the criteria
for a small-business concern established by the Small Business
Administration under section 3(a) of the Small Business Act (15 U.S.C.
632).
(iv) The bank is well capitalized, as defined in the OCC's prompt
corrective action regulation at 12 CFR part 6. For purposes of
determining whether a bank is well capitalized for purposes of this
paragraph, the bank's capital ratios must be calculated without regard
to the capital treatment for transfers of small-business obligations
with recourse specified in paragraph (k)(1) of this section.
(2) The total outstanding amount of recourse retained by a bank on
transfers of small-business obligations receiving the capital treatment
specified in paragraph (k)(1) of this section cannot exceed 15 percent
of the bank's total qualifying capital.
(3) If a bank ceases to be well capitalized or exceeds the 15
percent capital limitation, the preferential capital treatment specified
in paragraph (k)(1) of this section will continue to apply to any
transfers of small-business obligations with recourse that occurred
during the time that the bank was well capitalized and did not exceed
the capital limit.
(4) The risk-based capital ratios of the bank must be calculated
without regard to the capital treatment for transfers of small-business
obligations with recourse specified in paragraph (k)(1) of this section
as provided in 12 CFR part 3, Appendix A.
(l) Nth-to-default credit derivatives--(1) First-to-default credit
derivatives--(i) Protection purchaser. A bank that obtains credit
protection on a group of underlying exposures through a first-to-default
credit derivative must determine its risk-based capital requirement for
the underlying exposures as if the bank synthetically securitized the
underlying exposure with the lowest risk-based capital requirement and
had obtained no credit risk mitigant on the other underlying exposures.
(ii) Protection provider. A bank that provides credit protection on
a group of underlying exposures through a first-to-default credit
derivative must determine its risk-weighted asset amount for the
derivative by applying the RBA in section 43 of this appendix (if the
derivative qualifies for the RBA) or, if the derivative does not qualify
for the RBA, by setting its risk-weighted asset amount for the
derivative equal to the product of:
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the individual
underlying exposures, up to a maximum of 100 percent.
(2) Second-or-subsequent-to-default credit derivatives--(i)
Protection purchaser. (A) A bank that obtains credit protection on a
group of underlying exposures through a n\th\-to-default credit
derivative (other than a first-to-default credit derivative) may
recognize the credit risk mitigation benefits of the derivative only if:
(1) The bank also has obtained credit protection on the same
underlying exposures in the form of first-through-(n-1)-to-default
credit derivatives; or
(2) If n-1 of the underlying exposures have already defaulted.
(B) If a bank satisfies the requirements of paragraph (m)(2)(i)(A)
of this section, the bank must determine its risk-based capital
requirement for the underlying exposures as if the bank had only
synthetically
[[Page 88]]
securitized the underlying exposure with the nth lowest risk-
based capital requirement and had obtained no credit risk mitigant on
the other underlying exposures.
(ii) Protection provider. A bank that provides credit protection on
a group of underlying exposures through a nth-to-default
credit derivative (other than a first-to-default credit derivative) must
determine its risk-weighted asset amount for the derivative by applying
the RBA in section 43 of this appendix (if the derivative qualifies for
the RBA) or, if the derivative does not qualify for the RBA, by setting
its risk-weighted asset amount for the derivative equal to the product
of:
(A) The protection amount of the derivative;
(B) 12.5; and
(C) The sum of the risk-based capital requirements of the individual
underlying exposures (excluding the n-1 underlying exposures with the
lowest risk-based capital requirements), up to a maximum of 100 percent.
Section 43. Ratings-Based Approach (RBA)
(a) Eligibility requirements for use of the RBA--(1) Originating
bank. An originating bank must use the RBA to calculate its risk-based
capital requirement for a securitization exposure if the exposure has
two or more external ratings or inferred ratings (and may not use the
RBA if the exposure has fewer than two external ratings or inferred
ratings).
(2) Investing bank. An investing bank must use the RBA to calculate
its risk-based capital requirement for a securitization exposure if the
exposure has one or more external or inferred ratings (and may not use
the RBA if the exposure has no external or inferred rating).
(b) Ratings-based approach. (1) A bank must determine the risk-
weighted asset amount for a securitization exposure by multiplying the
amount of the exposure (as defined in paragraph (e) of section 42 of
this appendix) by the appropriate risk weight provided in Table 6 and
Table 7.
(2) A bank must apply the risk weights in Table 6 when the
securitization exposure's applicable external or applicable inferred
rating represents a long-term credit rating, and must apply the risk
weights in Table 7 when the securitization exposure's applicable
external or applicable inferred rating represents a short-term credit
rating.
(i) A bank must apply the risk weights in column 1 of Table 6 or
Table 7 to the securitization exposure if:
(A) N (as calculated under paragraph (e)(6) of section 45 of this
appendix) is six or more (for purposes of this section only, if the
notional number of underlying exposures is 25 or more or if all of the
underlying exposures are retail exposures, a bank may assume that N is
six or more unless the bank knows or has reason to know that N is less
than six); and
(B) The securitization exposure is a senior securitization exposure.
(ii) A bank must apply the risk weights in column 3 of Table 6 or
Table 7 to the securitization exposure if N is less than six, regardless
of the seniority of the securitization exposure.
(iii) Otherwise, a bank must apply the risk weights in column 2 of
Table 6 or Table 7.
Table 6--Long-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3
-----------------------------------------------
Risk weights Risk weights Risk weights
Applicable external or inferred rating (Illustrative rating for senior for non-senior for
example) securitization securitization securitization
exposures exposures exposures
backed by backed by backed by non-
granular pools granular pools granular pools
----------------------------------------------------------------------------------------------------------------
Highest investment grade (for example, AAA)..................... 7% 12% 20%
Second highest investment grade (for example, AA)............... 8% 15% 25%
Third-highest investment grade--positive designation (for 10% 18% 35%
example, A+)...................................................
Third-highest investment grade (for example, A)................. 12% 20%
Third-highest investment grade--negative designation (for 20% 35%
example, A-)...................................................
-------------------------------
Lowest investment grade--positive designation (for example, 35% 50%
BBB+)..........................................................
Lowest investment grade (for example, BBB)...................... 60% 75%
-----------------------------------------------
Lowest investment grade--negative designation (for example, BBB-
).............................................................. 100%
One category below investment grade--positive designation (for
example, BB+).................................................. 250%
One category below investment grade (for example, BB)........... 425%
One category below investment grade--negative designation (for
example, BB-).................................................. 650%
More than one category below investment grade................... Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------
[[Page 89]]
Table 7--Short-Term Credit Rating Risk Weights Under RBA and IAA
----------------------------------------------------------------------------------------------------------------
Column 1 Column 2 Column 3
-----------------------------------------------
Risk weights Risk weights Risk weights
Applicable external or inferred rating (Illustrative rating for senior for non-senior for
example) securitization securitization securitization
exposures exposures exposures
backed by backed by backed by non-
granular pools granular pools granular pools
----------------------------------------------------------------------------------------------------------------
Highest investment grade (for example, A1)...................... 7% 12% 20%
Second highest investment grade (for example, A2)............... 12% 20% 35%
Third highest investment grade (for example, A3)................ 60% 75% 75%
All other ratings............................................... Deduction from tier 1 and tier 2 capital.
----------------------------------------------------------------------------------------------------------------
Section 44. Internal Assessment Approach (IAA)
(a) Eligibility requirements. A bank may apply the IAA to calculate
the risk-weighted asset amount for a securitization exposure that the
bank has to an ABCP program (such as a liquidity facility or credit
enhancement) if the bank, the ABCP program, and the exposure qualify for
use of the IAA.
(1) Bank qualification criteria.A bank qualifies for use of the IAA
if the bank has received the prior written approval of the OCC. To
receive such approval, the bank must demonstrate to the OCC's
satisfaction that the bank's internal assessment process meets the
following criteria:
(i) The bank's internal credit assessments of securitization
exposures must be based on publicly available rating criteria used by an
NRSRO.
(ii) The bank's internal credit assessments of securitization
exposures used for risk-based capital purposes must be consistent with
those used in the bank's internal risk management process, management
information reporting systems, and capital adequacy assessment process.
(iii) The bank's internal credit assessment process must have
sufficient granularity to identify gradations of risk. Each of the
bank's internal credit assessment categories must correspond to an
external rating of an NRSRO.
(iv) The bank's internal credit assessment process, particularly the
stress test factors for determining credit enhancement requirements,
must be at least as conservative as the most conservative of the
publicly available rating criteria of the NRSROs that have provided
external ratings to the commercial paper issued by the ABCP program.
(A) Where the commercial paper issued by an ABCP program has an
external rating from two or more NRSROs and the different NRSROs'
benchmark stress factors require different levels of credit enhancement
to achieve the same external rating equivalent, the bank must apply the
NRSRO stress factor that requires the highest level of credit
enhancement.
(B) If any NRSRO that provides an external rating to the ABCP
program's commercial paper changes its methodology (including stress
factors), the bank must evaluate whether to revise its internal
assessment process.
(v) The bank must have an effective system of controls and oversight
that ensures compliance with these operational requirements and
maintains the integrity and accuracy of the internal credit assessments.
The bank must have an internal audit function independent from the ABCP
program business line and internal credit assessment process that
assesses at least annually whether the controls over the internal credit
assessment process function as intended.
(vi) The bank must review and update each internal credit assessment
whenever new material information is available, but no less frequently
than annually.
(vii) The bank must validate its internal credit assessment process
on an ongoing basis and at least annually.
(2) ABCP-program qualification criteria. An ABCP program qualifies
for use of the IAA if all commercial paper issued by the ABCP program
has an external rating.
(3) Exposure qualification criteria.A securitization exposure
qualifies for use of the IAA if the exposure meets the following
criteria:
(i) The bank initially rated the exposure at least the equivalent of
investment grade.
(ii) The ABCP program has robust credit and investment guidelines
(that is, underwriting standards) for the exposures underlying the
securitization exposure.
(iii) The ABCP program performs a detailed credit analysis of the
sellers of the exposures underlying the securitization exposure.
(iv) The ABCP program's underwriting policy for the exposures
underlying the securitization exposure establishes minimum asset
eligibility criteria that include the prohibition of the purchase of
assets that are significantly past due or of assets that are defaulted
(that is, assets that have been charged off or written down by the
seller prior to being placed into the ABCP program
[[Page 90]]
or assets that would be charged off or written down under the program's
governing contracts), as well as limitations on concentration to
individual obligors or geographic areas and the tenor of the assets to
be purchased.
(v) The aggregate estimate of loss on the exposures underlying the
securitization exposure considers all sources of potential risk, such as
credit and dilution risk.
(vi) Where relevant, the ABCP program incorporates structural
features into each purchase of exposures underlying the securitization
exposure to mitigate potential credit deterioration of the underlying
exposures. Such features may include wind-down triggers specific to a
pool of underlying exposures.
(b) Mechanics.A bank that elects to use the IAA to calculate the
risk-based capital requirement for any securitization exposure must use
the IAA to calculate the risk-based capital requirements for all
securitization exposures that qualify for the IAA approach. Under the
IAA, a bank must map its internal assessment of such a securitization
exposure to an equivalent external rating from an NRSRO. Under the IAA,
a bank must determine the risk-weighted asset amount for such a
securitization exposure by multiplying the amount of the exposure (as
defined in paragraph (e) of section 42 of this appendix) by the
appropriate risk weight in Table 6 and Table 7 in paragraph (b) of
section 43 of this appendix.
Section 45. Supervisory Formula Approach (SFA)
(a) Eligibility requirements. A bank may use the SFA to determine
its risk-based capital requirement for a securitization exposure only if
the bank can calculate on an ongoing basis each of the SFA parameters in
paragraph (e) of this section.
(b) Mechanics. Under the SFA, a securitization exposure incurs a
deduction from total capital (as described in paragraph (c) of section
42 of this appendix) and/or an SFA risk-based capital requirement, as
determined in paragraph (c) of this section. The risk-weighted asset
amount for the securitization exposure equals the SFA risk-based capital
requirement for the exposure multiplied by 12.5.
(c) The SFA risk-based capital requirement. (1) If KIRB
is greater than or equal to L + T, the entire exposure must be deducted
from total capital.
(2) If KIRB is less than or equal to L, the exposure's
SFA risk-based capital requirement is UE multiplied by TP multiplied by
the greater of:
(i) 0.0056 * T; or
(ii) S[L + T] - S[L].
(3) If KIRB is greater than L and less than L + T, the
bank must deduct from total capital an amount equal to
UE*TP*(KIRB - L), and the exposure's SFA risk-based capital
requirement is UE multiplied by TP multiplied by the greater of:
(i) 0.0056 * (T - (KIRB - L)); or
(ii) S[L + T] - S[KIRB].
(d) The supervisory formula:
[[Page 91]]
[GRAPHIC] [TIFF OMITTED] TR07DE07.017
(11) In these expressions, [beta][Y; a, b] refers to the cumulative
beta distribution with parameters a and b evaluated at Y. In the case
where N = 1 and EWALGD = 100 percent, S[Y] in formula (1) must be
calculated with K[Y] set equal to the product of KIRB and Y,
and d set equal to 1 - KIRB.
(e) SFA parameters--(1) Amount of the underlying exposures (UE). UE
is the EAD of any underlying exposures that are wholesale and retail
exposures (including the amount of any funded spread accounts, cash
collateral accounts, and other similar funded credit enhancements) plus
the amount of any underlying exposures that are securitization exposures
(as defined in paragraph (e) of section 42 of this appendix) plus the
adjusted carrying value of any underlying exposures that are equity
exposures (as defined in paragraph (b) of section 51 of this appendix).
(2) Tranche percentage (TP). TP is the ratio of the amount of the
bank's securitization
[[Page 92]]
exposure to the amount of the tranche that contains the securitization
exposure.
(3) Capital requirement on underlying exposures (KIRB). (i)
KIRB is the ratio of:
(A) The sum of the risk-based capital requirements for the
underlying exposures plus the expected credit losses of the underlying
exposures (as determined under this appendix as if the underlying
exposures were directly held by the bank); to
(B) UE.
(ii) The calculation of KIRB must reflect the effects of
any credit risk mitigant applied to the underlying exposures (either to
an individual underlying exposure, to a group of underlying exposures,
or to the entire pool of underlying exposures).
(iii) All assets related to the securitization are treated as
underlying exposures, including assets in a reserve account (such as a
cash collateral account).
(4) Credit enhancement level (L). (i) L is the ratio of:
(A) The amount of all securitization exposures subordinated to the
tranche that contains the bank's securitization exposure; to
(B) UE.
(ii) A bank must determine L before considering the effects of any
tranche-specific credit enhancements.
(iii) Any gain-on-sale or CEIO associated with the securitization
may not be included in L.
(iv) Any reserve account funded by accumulated cash flows from the
underlying exposures that is subordinated to the tranche that contains
the bank's securitization exposure may be included in the numerator and
denominator of L to the extent cash has accumulated in the account.
Unfunded reserve accounts (that is, reserve accounts that are to be
funded from future cash flows from the underlying exposures) may not be
included in the calculation of L.
(v) In some cases, the purchase price of receivables will reflect a
discount that provides credit enhancement (for example, first loss
protection) for all or certain tranches of the securitization. When this
arises, L should be calculated inclusive of this discount if the
discount provides credit enhancement for the securitization exposure.
(5) Thickness of tranche (T). T is the ratio of:
(i) The amount of the tranche that contains the bank's
securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N). (i) Unless the bank elects to
use the formula provided in paragraph (f) of this section,
[GRAPHIC] [TIFF OMITTED] TR07DE07.018
where EADi represents the EAD associated with the ith
instrument in the pool of underlying exposures.
(ii) Multiple exposures to one obligor must be treated as a single
underlying exposure.
(iii) In the case of a re-securitization (that is, a securitization
in which some or all of the underlying exposures are themselves
securitization exposures), the bank must treat each underlying exposure
as a single underlying exposure and must not look through to the
originally securitized underlying exposures.
(7) Exposure-weighted average loss given default (EWALGD). EWALGD is
calculated as:
[GRAPHIC] [TIFF OMITTED] TR07DE07.019
where LGDi represents the average LGD associated with all
exposures to the ith obligor. In the case of a re-securitization, an LGD
of 100 percent must be assumed for the underlying exposures that are
themselves securitization exposures.
(f) Simplified method for computing N and EWALGD. (1) If all
underlying exposures of a securitization are retail exposures, a bank
may apply the SFA using the following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in paragraphs (f)(3) and (f)(4) of this
section, a bank may employ a simplified method for calculating N and
EWALGD.
(3) If C1 is no more than 0.03, a bank may set EWALGD =
0.50 if none of the underlying exposures is a securitization exposure or
EWALGD = 1 if one or more of the underlying exposures is a
securitization exposure, and may set N equal to the following amount:
[GRAPHIC] [TIFF OMITTED] TR07DE07.020
[[Page 93]]
where:
(i) Cm is the ratio of the sum of the amounts of the `m'
largest underlying exposures to UE; and
(ii) The level of m is to be selected by the bank.
(4) Alternatively, if only C1 is available and
C1 is no more than 0.03, the bank may set EWALGD = 0.50 if
none of the underlying exposures is a securitization exposure or EWALGD
= 1 if one or more of the underlying exposures is a securitization
exposure and may set N = 1/C1.
Section 46. Recognition of Credit Risk Mitigants for Securitization
Exposures
(a) General. An originating bank that has obtained a credit risk
mitigant to hedge its securitization exposure to a synthetic or
traditional securitization that satisfies the operational criteria in
section 41 of this appendix may recognize the credit risk mitigant, but
only as provided in this section. An investing bank that has obtained a
credit risk mitigant to hedge a securitization exposure may recognize
the credit risk mitigant, but only as provided in this section. A bank
that has used the RBA in section 43 of this appendix or the IAA in
section 44 of this appendix to calculate its risk-based capital
requirement for a securitization exposure whose external or inferred
rating (or equivalent internal rating under the IAA) reflects the
benefits of a credit risk mitigant provided to the associated
securitization or that supports some or all of the underlying exposures
may not use the credit risk mitigation rules in this section to further
reduce its risk-based capital requirement for the exposure to reflect
that credit risk mitigant.
(b) Collateral--(1) Rules of recognition. A bank may recognize
financial collateral in determining the bank's risk-based capital
requirement for a securitization exposure (other than a repo-style
transaction, an eligible margin loan, or an OTC derivative contract for
which the bank has reflected collateral in its determination of exposure
amount under section 32 of this appendix) as follows. The bank's risk-
based capital requirement for the collateralized securitization exposure
is equal to the risk-based capital requirement for the securitization
exposure as calculated under the RBA in section 43 of this appendix or
under the SFA in section 45 of this appendix multiplied by the ratio of
adjusted exposure amount (SE*) to original exposure amount (SE), where:
(i) SE* = max {0, [SE--C x (1-Hs-Hfx)]{time} ;
(ii) SE = the amount of the securitization exposure calculated under
paragraph (e) of section 42 of this appendix;
(iii) C = the current market value of the collateral;
(iv) Hs = the haircut appropriate to the collateral type; and
(v) Hfx=the haircut appropriate for any currency mismatch between
the collateral and the exposure.
(2) Mixed collateral. Where the collateral is a basket of different
asset types or a basket of assets denominated in different currencies,
the haircut on the basket will be
[GRAPHIC] [TIFF OMITTED] TR07DE07.023
where ai is the current market value of the asset in the
basket divided by the current market value of all assets in the basket
and Hi is the haircut applicable to that asset.
(3) Standard supervisory haircuts. Unless a bank qualifies for use
of and uses own-estimates haircuts in paragraph (b)(4) of this section:
(i) A bank must use the collateral type haircuts (Hs) in Table 3;
(ii) A bank must use a currency mismatch haircut (Hfx) of 8 percent
if the exposure and the collateral are denominated in different
currencies;
(iii) A bank must multiply the supervisory haircuts obtained in
paragraphs (b)(3)(i) and (ii) by the square root of 6.5 (which equals
2.549510); and
(iv) A bank must adjust the supervisory haircuts upward on the basis
of a holding period longer than 65 business days where and as
appropriate to take into account the illiquidity of the collateral.
(4) Own estimates for haircuts. With the prior written approval of
the OCC, a bank may calculate haircuts using its own internal estimates
of market price volatility and foreign exchange volatility, subject to
paragraph (b)(2)(iii) of section 32 of this appendix. The minimum
holding period (TM) for securitization exposures is 65 business days.
(c) Guarantees and credit derivatives--(1) Limitations on
recognition. A bank may only recognize an eligible guarantee or eligible
credit derivative provided by an eligible securitization guarantor in
determining the bank's risk-based capital requirement for a
securitization exposure.
(2) ECL for securitization exposures. When a bank recognizes an
eligible guarantee or eligible credit derivative provided by an eligible
securitization guarantor in determining the bank's risk-based capital
requirement for a securitization exposure, the bank must also:
(i) Calculate ECL for the protected portion of the exposure using
the same risk parameters that it uses for calculating the risk-weighted
asset amount of the exposure as described in paragraph (c)(3) of this
section; and
(ii) Add the exposure's ECL to the bank's total ECL.
[[Page 94]]
(3) Rules of recognition. A bank may recognize an eligible guarantee
or eligible credit derivative provided by an eligible securitization
guarantor in determining the bank's risk-based capital requirement for
the securitization exposure as follows:
(i) Full coverage.If the protection amount of the eligible guarantee
or eligible credit derivative equals or exceeds the amount of the
securitization exposure, the bank may set the risk-weighted asset amount
for the securitization exposure equal to the risk-weighted asset amount
for a direct exposure to the eligible securitization guarantor (as
determined in the wholesale risk weight function described in section 31
of this appendix), using the bank's PD for the guarantor, the bank's LGD
for the guarantee or credit derivative, and an EAD equal to the amount
of the securitization exposure (as determined in paragraph (e) of
section 42 of this appendix).
(ii) Partial coverage.If the protection amount of the eligible
guarantee or eligible credit derivative is less than the amount of the
securitization exposure, the bank may set the risk-weighted asset amount
for the securitization exposure equal to the sum of:
(A) Covered portion. The risk-weighted asset amount for a direct
exposure to the eligible securitization guarantor (as determined in the
wholesale risk weight function described in section 31 of this
appendix), using the bank's PD for the guarantor, the bank's LGD for the
guarantee or credit derivative, and an EAD equal to the protection
amount of the credit risk mitigant; and
(B) Uncovered portion. (1) 1.0 minus the ratio of the protection
amount of the eligible guarantee or eligible credit derivative to the
amount of the securitization exposure); multiplied by
(2) The risk-weighted asset amount for the securitization exposure
without the credit risk mitigant (as determined in sections 42-45 of
this appendix).
(4) Mismatches. The bank must make applicable adjustments to the
protection amount as required in paragraphs (d), (e), and (f) of section
33 of this appendix for any hedged securitization exposure and any more
senior securitization exposure that benefits from the hedge. In the
context of a synthetic securitization, when an eligible guarantee or
eligible credit derivative covers multiple hedged exposures that have
different residual maturities, the bank must use the longest residual
maturity of any of the hedged exposures as the residual maturity of all
the hedged exposures.
Section 47. Risk-Based Capital Requirement for Early Amortization
Provisions
(a) General. (1) An originating bank must hold risk-based capital
against the sum of the originating bank's interest and the investors'
interest in a securitization that:
(i) Includes one or more underlying exposures in which the borrower
is permitted to vary the drawn amount within an agreed limit under a
line of credit; and
(ii) Contains an early amortization provision.
(2) For securitizations described in paragraph (a)(1) of this
section, an originating bank must calculate the risk-based capital
requirement for the originating bank's interest under sections 42-45 of
this appendix, and the risk-based capital requirement for the
investors'interest under paragraph (b) of this section.
(b) Risk-weighted asset amount for investors'interest. The
originating bank's risk-weighted asset amount for the investors'
interest in the securitization is equal to the product of the following
5 quantities:
(1) The investors'interest EAD;
(2) The appropriate conversion factor in paragraph (c) of this
section;
(3) KIRB(as defined in paragraph (e)(3) of section 45 of
this appendix);
(4) 12.5; and
(5) The proportion of the underlying exposures in which the borrower
is permitted to vary the drawn amount within an agreed limit under a
line of credit.
(c) Conversion factor.(1) (i) Except as provided in paragraph (c)(2)
of this section, to calculate the appropriate conversion factor, a bank
must use Table 8 for a securitization that contains a controlled early
amortization provision and must use Table 9 for a securitization that
contains a non-controlled early amortization provision. In circumstances
where a securitization contains a mix of retail and nonretail exposures
or a mix of committed and uncommitted exposures, a bank may take a pro
rata approach to determining the conversion factor for the
securitization's early amortization provision. If a pro rata approach is
not feasible, a bank must treat the mixed securitization as a
securitization of nonretail exposures if a single underlying exposure is
a nonretail exposure and must treat the mixed securitization as a
securitization of committed exposures if a single underlying exposure is
a committed exposure.
(ii) To find the appropriate conversion factor in the tables, a bank
must divide the three-month average annualized excess spread of the
securitization by the excess spread trapping point in the securitization
structure. In securitizations that do not require excess spread to be
trapped, or that specify trapping points based primarily on performance
measures other than the three-month average annualized excess spread,
the excess spread trapping point is 4.5 percent.
[[Page 95]]
Table 8--Controlled Early Amortization Provisions
------------------------------------------------------------------------
Uncommitted Committed
------------------------------------------------------------------------
Retail Credit Lines............ Three-month average 90% CF
annualized excess
spread Conversion
Factor (CF).
133.33% of trapping
point or more, 0% CF.
less than 133.33% to
100% of trapping
point, 1% CF.
less than 100% to 75%
of trapping point, 2%
CF.
less than 75% to 50%
of trapping point,
10% CF.
less than 50% to 25%
of trapping point,
20% CF.
less than 25% of
trapping point, 40%
CF.
Non-retail Credit Lines........ 90% CF................ 90% CF
------------------------------------------------------------------------
Table 9--Non-Controlled Early Amortization Provisions
------------------------------------------------------------------------
Uncommitted Committed
------------------------------------------------------------------------
Retail Credit Lines............ Three-month average 100% CF
annualized excess
spread Conversion
Factor (CF).
133.33% of trapping
point or more, 0% CF.
less than 133.33% to
100% of trapping
point, 5% CF.
less than 100% to 75%
of trapping point,
15% CF.
less than 75% to 50%
of trapping point,
50% CF.
less than 50% of
trapping point, 100%
CF.
Non-retail Credit Lines........ 100% CF............... 100% CF
------------------------------------------------------------------------
(2) For a securitization for which all or substantially all of the
underlying exposures are residential mortgage exposures, a bank may
calculate the appropriate conversion factor using paragraph (c)(1) of
this section or may use a conversion factor of 10 percent. If the bank
chooses to use a conversion factor of 10 percent, it must use that
conversion factor for all securitizations for which all or substantially
all of the underlying exposures are residential mortgage exposures.
Part VI. Risk-Weighted Assets for Equity Exposures
Section 51. Introduction and Exposure Measurement
(a) General. To calculate its risk-weighted asset amounts for equity
exposures that are not equity exposures to investment funds, a bank may
apply either the Simple Risk Weight Approach (SRWA) in section 52 of
this appendix or, if it qualifies to do so, the Internal Models Approach
(IMA) in section 53 of this appendix. A bank must use the look-through
approaches in section 54 of this appendix to calculate its risk-weighted
asset amounts for equity exposures to investment funds.
(b) Adjusted carrying value. For purposes of this part, the adjusted
carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the
bank's carrying value of the exposure reduced by any unrealized gains on
the exposure that are reflected in such carrying value but excluded from
the bank's tier 1 and tier 2 capital; and
(2) For the off-balance sheet component of an equity exposure, the
effective notional principal amount of the exposure, the size of which
is equivalent to a hypothetical on-balance sheet position in the
underlying equity instrument that would evidence the same change in fair
value (measured in dollars) for a given small change in the price of the
underlying equity instrument, minus the adjusted carrying value of the
on-balance sheet component of the exposure as calculated in paragraph
(b)(1) of this section. For unfunded equity commitments that are
unconditional, the effective notional principal amount is the notional
amount of the commitment. For unfunded equity commitments that are
conditional, the effective notional principal amount is the bank's best
estimate of the amount that would be funded under economic downturn
conditions.
Section 52. Simple Risk Weight Approach (SRWA)
(a) General. Under the SRWA, a bank's aggregate risk-weighted asset
amount for its equity exposures is equal to the sum of the risk-weighted
asset amounts for each of the bank's individual equity exposures (other
than equity exposures to an investment fund) as determined in this
section and the risk-weighted asset amounts for each of the bank's
individual equity exposures to an investment fund as determined in
section 54 of this appendix.
(b) SRWA computation for individual equity exposures. A bank must
determine the risk-weighted asset amount for an individual equity
exposure (other than an equity exposure to an investment fund) by
multiplying the adjusted carrying value of the equity exposure or the
effective portion and ineffective
[[Page 96]]
portion of a hedge pair (as defined in paragraph (c) of this section) by
the lowest applicable risk weight in this paragraph (b).
(1) 0 percent risk weight equity exposures. An equity exposure to an
entity whose credit exposures are exempt from the 0.03 percent PD floor
in paragraph (d)(2) of section 31 of this appendix is assigned a 0
percent risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a
Federal Home Loan Bank or Farmer Mac is assigned a 20 percent risk
weight.
(3) 100 percent risk weight equity exposures. The following equity
exposures are assigned a 100 percent risk weight:
(i) Community development equity exposures. An equity exposure that
qualifies as a community development investment under 12 U.S.C. 24
(Eleventh), excluding equity exposures to an unconsolidated small
business investment company and equity exposures held through a
consolidated small business investment company described in section 302
of the Small Business Investment Act of 1958 (15 U.S.C. 682).
(ii) Effective portion of hedge pairs. The effective portion of a
hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding
exposures to an investment firm that would meet the definition of a
traditional securitization were it not for the OCC's application of
paragraph (8) of that definition and has greater than immaterial
leverage, to the extent that the aggregate adjusted carrying value of
the exposures does not exceed 10 percent of the bank's tier 1 capital
plus tier 2 capital.
(A) To compute the aggregate adjusted carrying value of a bank's
equity exposures for purposes of this paragraph (b)(3)(iii), the bank
may exclude equity exposures described in paragraphs (b)(1), (b)(2),
(b)(3)(i), and (b)(3)(ii) of this section, the equity exposure in a
hedge pair with the smaller adjusted carrying value, and a proportion of
each equity exposure to an investment fund equal to the proportion of
the assets of the investment fund that are not equity exposures or that
meet the criterion of paragraph (b)(3)(i) of this section. If a bank
does not know the actual holdings of the investment fund, the bank may
calculate the proportion of the assets of the fund that are not equity
exposures based on the terms of the prospectus, partnership agreement,
or similar contract that defines the fund's permissible investments. If
the sum of the investment limits for all exposure classes within the
fund exceeds 100 percent, the bank must assume for purposes of this
paragraph (b)(3)(iii) that the investment fund invests to the maximum
extent possible in equity exposures.
(B) When determining which of a bank's equity exposures qualify for
a 100 percent risk weight under this paragraph, a bank first must
include equity exposures to unconsolidated small business investment
companies or held through consolidated small business investment
companies described in section 302 of the Small Business Investment Act
of 1958 (15 U.S.C. 682), then must include publicly traded equity
exposures (including those held indirectly through investment funds),
and then must include non-publicly traded equity exposures (including
those held indirectly through investment funds).
(4) 300 percent risk weight equity exposures.A publicly traded
equity exposure (other than an equity exposure described in paragraph
(b)(6) of this section and including the ineffective portion of a hedge
pair) is assigned a 300 percent risk weight.
(5) 400 percent risk weight equity exposures.An equity exposure
(other than an equity exposure described in paragraph (b)(6) of this
section) that is not publicly traded is assigned a 400 percent risk
weight.
(6) 600 percent risk weight equity exposures.An equity exposure to
an investment firm that:
(i) Would meet the definition of a traditional securitization were
it not for the OCC's application of paragraph (8) of that definition;
and
(ii) Has greater than immaterial leverage is assigned a 600 percent
risk weight.
(c) Hedge transactions--(1) Hedge pair.A hedge pair is two equity
exposures that form an effective hedge so long as each equity exposure
is publicly traded or has a return that is primarily based on a publicly
traded equity exposure.
(2) Effective hedge.Two equity exposures form an effective hedge if
the exposures either have the same remaining maturity or each has a
remaining maturity of at least three months; the hedge relationship is
formally documented in a prospective manner (that is, before the bank
acquires at least one of the equity exposures); the documentation
specifies the measure of effectiveness (E) the bank will use for the
hedge relationship throughout the life of the transaction; and the hedge
relationship has an E greater than or equal to 0.8. A bank must measure
E at least quarterly and must use one of three alternative measures of
E:
(i) Under the dollar-offset method of measuring effectiveness, the
bank must determine the ratio of value change (RVC). The RVC is the
ratio of the cumulative sum of the periodic changes in value of one
equity exposure to the cumulative sum of the periodic changes in the
value of the other equity exposure. If RVC is positive, the hedge is not
effective and E equals 0. If RVC is negative and greater than or equal
to -1 (that is, between zero and -1), then E equals the absolute value
of RVC. If RVC is negative and less than -1, then E equals 2 plus RVC.
(ii) Under the variability-reduction method of measuring
effectiveness:
[[Page 97]]
[GRAPHIC] [TIFF OMITTED] TR07DE07.021
(A) Xt = At - Bt;
(B)At = the value at time t of one exposure in a hedge
pair; and
(C)Bt = the value at time t of the other exposure in a
hedge pair.
(iii) Under the regression method of measuring effectiveness, E
equals the coefficient of determination of a regression in which the
change in value of one exposure in a hedge pair is the dependent
variable and the change in value of the other exposure in a hedge pair
is the independent variable. However, if the estimated regression
coefficient is positive, then the value of E is zero.
(3) The effective portion of a hedge pair is E multiplied by the
greater of the adjusted carrying values of the equity exposures forming
a hedge pair.
(4) The ineffective portion of a hedge pair is (1-E) multiplied by
the greater of the adjusted carrying values of the equity exposures
forming a hedge pair.
Section 53. Internal Models Approach (IMA)
(a) General. A bank may calculate its risk-weighted asset amount for
equity exposures using the IMA by modeling publicly traded and non-
publicly traded equity exposures (in accordance with paragraph (c) of
this section) or by modeling only publicly traded equity exposures (in
accordance with paragraph (d) of this section).
(b) Qualifying criteria. To qualify to use the IMA to calculate
risk-based capital requirements for equity exposures, a bank must
receive prior written approval from the OCC. To receive such approval,
the bank must demonstrate to the OCC's satisfaction that the bank meets
the following criteria:
(1) The bank must have one or more models that:
(i) Assess the potential decline in value of its modeled equity
exposures;
(ii) Are commensurate with the size, complexity, and composition of
the bank's modeled equity exposures; and
(iii) Adequately capture both general market risk and idiosyncratic
risk.
(2) The bank's model must produce an estimate of potential losses
for its modeled equity exposures that is no less than the estimate of
potential losses produced by a VaR methodology employing a 99.0 percent,
one-tailed confidence interval of the distribution of quarterly returns
for a benchmark portfolio of equity exposures comparable to the bank's
modeled equity exposures using a long-term sample period.
(3) The number of risk factors and exposures in the sample and the
data period used for quantification in the bank's model and benchmarking
exercise must be sufficient to provide confidence in the accuracy and
robustness of the bank's estimates.
(4) The bank's model and benchmarking process must incorporate data
that are relevant in representing the risk profile of the bank's modeled
equity exposures, and must include data from at least one equity market
cycle containing adverse market movements relevant to the risk profile
of the bank's modeled equity exposures. In addition, the bank's
benchmarking exercise must be based on daily market prices for the
benchmark portfolio. If the bank's model uses a scenario methodology,
the bank must demonstrate that the model produces a conservative
estimate of potential losses on the bank's modeled equity exposures over
a relevant long-term market cycle. If the bank employs risk factor
models, the bank must demonstrate through empirical analysis the
appropriateness of the risk factors used.
(5) The bank must be able to demonstrate, using theoretical
arguments and empirical evidence, that any proxies used in the modeling
process are comparable to the bank's modeled equity exposures and that
the bank has made appropriate adjustments for differences. The bank must
derive any proxies for its modeled equity exposures and benchmark
portfolio using historical market data that are relevant to the bank's
modeled equity exposures and benchmark portfolio (or, where not, must
use appropriately adjusted data), and such proxies must be robust
estimates of the risk of the bank's modeled equity exposures.
(c) Risk-weighted assets calculation for a bank modeling publicly
traded and non-publicly traded equity exposures. If a bank models
publicly traded and non-publicly traded equity exposures, the bank's
aggregate risk-weighted asset amount for its equity exposures is equal
to the sum of:
(1) The risk-weighted asset amount of each equity exposure that
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under
section 52 of this appendix) and each equity exposure to
[[Page 98]]
an investment fund (as determined under section 54 of this appendix);
and
(2) The greater of:
(i) The estimate of potential losses on the bank's equity exposures
(other than equity exposures referenced in paragraph (c)(1) of this
section) generated by the bank's internal equity exposure model
multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value
of the bank's publicly traded equity exposures that do not belong to a
hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent
risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of
this appendix, and are not equity exposures to an investment fund;
(B) 200 percent multiplied by the aggregate ineffective portion of
all hedge pairs; and
(C) 300 percent multiplied by the aggregate adjusted carrying value
of the bank's equity exposures that are not publicly traded, do not
qualify for a 0 percent, 20 percent, or 100 percent risk weight under
paragraphs (b)(1) through (b)(3)(i) of section 52 of this appendix, and
are not equity exposures to an investment fund.
(d) Risk-weighted assets calculation for a bank using the IMA only
for publicly traded equity exposures. If a bank models only publicly
traded equity exposures, the bank's aggregate risk-weighted asset amount
for its equity exposures is equal to the sum of:
(1) The risk-weighted asset amount of each equity exposure that
qualifies for a 0 percent, 20 percent, or 100 percent risk weight under
paragraphs (b)(1) through (b)(3)(i) of section 52 (as determined under
section 52 of this appendix), each equity exposure that qualifies for a
400 percent risk weight under paragraph (b)(5) of section 52 or a 600
percent risk weight under paragraph (b)(6) of section 52 (as determined
under section 52 of this appendix), and each equity exposure to an
investment fund (as determined under section 54 of this appendix); and
(2) The greater of:
(i) The estimate of potential losses on the bank's equity exposures
(other than equity exposures referenced in paragraph (d)(1) of this
section) generated by the bank's internal equity exposure model
multiplied by 12.5; or
(ii) The sum of:
(A) 200 percent multiplied by the aggregate adjusted carrying value
of the bank's publicly traded equity exposures that do not belong to a
hedge pair, do not qualify for a 0 percent, 20 percent, or 100 percent
risk weight under paragraphs (b)(1) through (b)(3)(i) of section 52 of
this appendix, and are not equity exposures to an investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion of
all hedge pairs.
Section 54. Equity Exposures to Investment Funds
(a) Available approaches. (1) Unless the exposure meets the
requirements for a community development equity exposure in paragraph
(b)(3)(i) of section 52 of this appendix, a bank must determine the
risk-weighted asset amount of an equity exposure to an investment fund
under the Full Look-Through Approach in paragraph (b) of this section,
the Simple Modified Look-Through Approach in paragraph (c) of this
section, the Alternative Modified Look-Through Approach in paragraph (d)
of this section, or, if the investment fund qualifies for the Money
Market Fund Approach, the Money Market Fund Approach in paragraph (e) of
this section.
(2) The risk-weighted asset amount of an equity exposure to an
investment fund that meets the requirements for a community development
equity exposure in paragraph (b)(3)(i) of section 52 of this appendix is
its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge
pair and the bank does not use the Full Look-Through Approach, the bank
may use the ineffective portion of the hedge pair as determined under
paragraph (c) of section 52 of this appendix as the adjusted carrying
value for the equity exposure to the investment fund. The risk-weighted
asset amount of the effective portion of the hedge pair is equal to its
adjusted carrying value.
(b) Full Look-Through Approach. A bank that is able to calculate a
risk-weighted asset amount for its proportional ownership share of each
exposure held by the investment fund (as calculated under this appendix
as if the proportional ownership share of each exposure were held
directly by the bank) may either:
(1) Set the risk-weighted asset amount of the bank's exposure to the
fund equal to the product of:
(i) The aggregate risk-weighted asset amounts of the exposures held
by the fund as if they were held directly by the bank; and
(ii) The bank's proportional ownership share of the fund; or
(2) Include the bank's proportional ownership share of each exposure
held by the fund in the bank's IMA.
(c) Simple Modified Look-Through Approach. Under this approach, the
risk-weighted asset amount for a bank's equity exposure to an investment
fund equals the adjusted carrying value of the equity exposure
multiplied by the highest risk weight in Table 10 that applies to any
exposure the fund is permitted to hold under its prospectus, partnership
agreement, or similar contract that defines the fund's permissible
investments (excluding derivative contracts that are used for hedging
rather than speculative purposes
[[Page 99]]
and that do not constitute a material portion of the fund's exposures).
Table 10--Modified Look-Through Approaches for Equity Exposures to
Investment Funds
------------------------------------------------------------------------
Risk weight Exposure class
------------------------------------------------------------------------
0 percent................................ Sovereign exposures with a
long-term applicable
external rating in the
highest investment-grade
rating category and
sovereign exposures of the
United States.
20 percent............................... Non-sovereign exposures with
a long-term applicable
external rating in the
highest or second-highest
investment-grade rating
category; exposures with a
short-term applicable
external rating in the
highest investment-grade
rating category; and
exposures to, or guaranteed
by, depository institutions,
foreign banks (as defined in
12 CFR 211.2), or securities
firms subject to
consolidated supervision and
regulation comparable to
that imposed on U.S.
securities broker-dealers
that are repo-style
transactions or bankers'
acceptances.
50 percent............................... Exposures with a long-term
applicable external rating
in the third-highest
investment-grade rating
category or a short-term
applicable external rating
in the second-highest
investment-grade rating
category.
100 percent.............................. Exposures with a long-term or
short-term applicable
external rating in the
lowest investment-grade
rating category.
200 percent.............................. Exposures with a long-term
applicable external rating
one rating category below
investment grade.
300 percent.............................. Publicly traded equity
exposures.
400 percent.............................. Non-publicly traded equity
exposures; exposures with a
long-term applicable
external rating two rating
categories or more below
investment grade; and
exposures without an
external rating (excluding
publicly traded equity
exposures).
1,250 percent............................ OTC derivative contracts and
exposures that must be
deducted from regulatory
capital or receive a risk
weight greater than 400
percent under this appendix.
------------------------------------------------------------------------
(d) Alternative Modified Look-Through Approach. Under this approach,
a bank may assign the adjusted carrying value of an equity exposure to
an investment fund on a pro rata basis to different risk weight
categories in Table 10 based on the investment limits in the fund's
prospectus, partnership agreement, or similar contract that defines the
fund's permissible investments. The risk-weighted asset amount for the
bank's equity exposure to the investment fund equals the sum of each
portion of the adjusted carrying value assigned to an exposure class
multiplied by the applicable risk weight. If the sum of the investment
limits for exposure classes within the fund exceeds 100 percent, the
bank must assume that the fund invests to the maximum extent permitted
under its investment limits in the exposure class with the highest risk
weight under Table 10, and continues to make investments in order of the
exposure class with the next highest risk weight under Table 10 until
the maximum total investment level is reached. If more than one exposure
class applies to an exposure, the bank must use the highest applicable
risk weight. A bank may exclude derivative contracts held by the fund
that are used for hedging rather than for speculative purposes and do
not constitute a material portion of the fund's exposures.
(e) Money Market Fund Approach. The risk-weighted asset amount for a
bank's equity exposure to an investment fund that is a money market fund
subject to 17 CFR 270.2a-7 and that has an applicable external rating in
the highest investment-grade rating category equals the adjusted
carrying value of the equity exposure multiplied by 7 percent.
Section 55. Equity Derivative Contracts
Under the IMA, in addition to holding risk-based capital against an
equity derivative contract under this part, a bank must hold risk-based
capital against the counterparty credit risk in the equity derivative
contract by also treating the equity derivative contract as a wholesale
exposure and computing a supplemental risk-weighted asset amount for the
contract under part IV. Under the SRWA, a bank may choose not to hold
risk-based capital against the counterparty credit risk of equity
derivative contracts, as long as it does so for all such contracts.
Where the equity derivative contracts are subject to a qualified master
netting agreement, a bank using the SRWA must either include all or
exclude all of the contracts from any measure used to determine
counterparty credit risk exposure.
Part VII. Risk-Weighted Assets for Operational Risk
Section 61. Qualification Requirements for Incorporation of Operational
Risk Mitigants
(a) Qualification to use operational risk mitigants. A bank may
adjust its estimate of operational risk exposure to reflect qualifying
operational risk mitigants if:
(1) The bank's operational risk quantification system is able to
generate an estimate of the bank's operational risk exposure (which does
not incorporate qualifying operational risk mitigants) and an estimate
of
[[Page 100]]
the bank's operational risk exposure adjusted to incorporate qualifying
operational risk mitigants; and
(2) The bank's methodology for incorporating the effects of
insurance, if the bank uses insurance as an operational risk mitigant,
captures through appropriate discounts to the amount of risk mitigation:
(i) The residual term of the policy, where less than one year;
(ii) The cancellation terms of the policy, where less than one year;
(iii) The policy's timeliness of payment;
(iv) The uncertainty of payment by the provider of the policy; and
(v) Mismatches in coverage between the policy and the hedged
operational loss event.
(b) Qualifying operational risk mitigants. Qualifying operational
risk mitigants are:
(1) Insurance that:
(i) Is provided by an unaffiliated company that has a claims payment
ability that is rated in one of the three highest rating categories by a
NRSRO;
(ii) Has an initial term of at least one year and a residual term of
more than 90 days;
(iii) Has a minimum notice period for cancellation by the provider
of 90 days;
(iv) Has no exclusions or limitations based upon regulatory action
or for the receiver or liquidator of a failed depository institution;
and
(v) Is explicitly mapped to a potential operational loss event; and
(2) Operational risk mitigants other than insurance for which the
OCC has given prior written approval. In evaluating an operational risk
mitigant other than insurance, the OCC will consider whether the
operational risk mitigant covers potential operational losses in a
manner equivalent to holding regulatory capital.
Section 62. Mechanics of Risk-Weighted Asset Calculation
(a) If a bank does not qualify to use or does not have qualifying
operational risk mitigants, the bank's dollar risk-based capital
requirement for operational risk is its operational risk exposure minus
eligible operational risk offsets (if any).
(b) If a bank qualifies to use operational risk mitigants and has
qualifying operational risk mitigants, the bank's dollar risk-based
capital requirement for operational risk is the greater of:
(1) The bank's operational risk exposure adjusted for qualifying
operational risk mitigants minus eligible operational risk offsets (if
any); or
(2) 0.8 multiplied by the difference between:
(i) The bank's operational risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The bank's risk-weighted asset amount for operational risk
equals the bank's dollar risk-based capital requirement for operational
risk determined under paragraph (a) or (b) of this section multiplied by
12.5.
Part VIII. Disclosure
Section 71. Disclosure Requirements
(a) Each bank must publicly disclose each quarter its total and tier
1 risk-based capital ratios and their components (that is, tier 1
capital, tier 2 capital, total qualifying capital, and total risk-
weighted assets). \4\
---------------------------------------------------------------------------
\4\ Other public disclosure requirements continue to apply--for
example, Federal securities law and regulatory reporting requirements.
---------------------------------------------------------------------------
(b) A bank must comply with paragraph (b) of section 71 of appendix
G to the Federal Reserve Board's Regulation Y (12 CFR part 225, appendix
G) unless it is a consolidated subsidiary of a bank holding company or
depository institution that is subject to these requirements.
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 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
[[Page 101]]
(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.
(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 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.
[72 FR 69396, 69429, Dec. 7, 2007, 73 FR 21690, Apr. 22, 2008; 75 FR
4646, Jan. 28, 2010]
PART 4_ORGANIZATION AND FUNCTIONS, AVAILABILITY AND RELEASE OF INFORMATION,
CONTRACTING OUTREACH PROGRAM, POST-EMPLOYMENT RESTRICTIONS FOR SENIOR
EXAMINERS--Table of Contents
Subpart A_Organization and Functions
Sec.
4.1 Purpose.
4.2 Office of the Comptroller of the Currency.
4.3 Comptroller of the Currency.
4.4 Washington office.
4.5 District and field offices.
4.6 Frequency of examination of national banks.
4.7 Frequency of examination of Federal agencies and branches.
Subpart B_Availability of Information Under the Freedom of Information
Act
4.11 Purpose and scope.
4.12 Information available under the FOIA.
4.13 Publication in the Federal Register.
4.14 Public inspection and copying.
4.15 How to request records.
4.16 Predisclosure notice for confidential commercial information.
4.17 FOIA request fees.
4.18 How to track a FOIA request.
Subpart C_Release of Non-Public OCC Information
4.31 Purpose and scope.
4.32 Definitions.
4.33 Requirements for a request of records or testimony.
4.34 Where to submit a request.
[[Page 102]]
4.35 Consideration of requests.
4.36 Disclosure of non-public OCC information.
4.37 Persons and entities with access to OCC information; prohibition on
dissemination.
4.38 Restrictions on dissemination of released information.
4.39 Notification of parties and procedures for sharing and using OCC
records in litigation.
4.40 Fees for services.
Appendix A to Subpart C--Model Stipulation for Protective Order and
Model Protective Order
Subpart D_Minority-, Women-, and Individuals With Disabilities-Owned
Business Contracting Outreach Program; Contracting for Goods and
Services
4.61 Purpose.
4.62 Definitions.
4.63 Policy.
4.64 Promotion.
4.65 Certification.
4.66 Oversight and monitoring.
Subpart E_One-Year Restrictions on Post-Employment Activities of Senior
Examiners
4.72 Scope and purpose.
4.73 Definitions.
4.74 One-year post-employment restrictions.
4.75 Effective date; waivers.
4.76 Penalties.
Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C. 552.
Subpart B also issued under 5 U.S.C. 552; E.O. 12600 (3 CFR 1987 Comp.,
p. 235). Subpart C also issued under 5 U.S.C. 301, 552; 12 U.S.C. 161,
481, 482, 484(a), 1442, 1817(a)(2) and (3), 1818(u) and (v), 1820(d)(6),
1920(k), 1821(c), 1821(o), 1821(t), 1831m, 1831p-1, 1831o, 1867, 1951 et
seq., 2601 et seq., 2801 et seq., 2901 et seq., 3101 et seq., 3401 et
seq.; 15 U.S.C. 77uu(b), 78q(c)(3); 18 U.S.C. 641, 1905, 1906; 29 U.S.C.
1204; 31 U.S.C. 9701; 42 U.S.C. 3601; 44 U.S.C. 3506, 3510. Subpart D
also issued under 12 U.S.C. 1833e.
Effective Date Note: At 75 FR 75576, Dec. 3, 2010, the authority
citation for part 4 was revised, effective Jan 3, 2011. For the
convenience of the user, the revised text is set forth as follows:
Authority: 12 U.S.C. 93a. Subpart A also issued under 5 U.S.C. 552.
Subpart B also issued under 5 U.S.C. 552; E.O. 12600 (3 CFR 1987 Comp.,
p. 235). Subpart C also issued under 5 U.S.C. 301, 552; 12 U.S.C. 161,
481, 482, 484(a), 1442, 1817(a)(2) and (3), 1818(u) and (v), 1820(d)(6),
1820(k), 1821(c), 1821(o), 1821(t), 1831m, 1831p-1, 1831o, 1867, 1951 et
seq., 2601 et seq., 2801 et seq., 2901 et seq., 3101 et seq., 3401 et
seq.; 15 U.S.C. 77uu(b), 78q(c)(3); 18 U.S.C. 641, 1905, 1906; 29 U.S.C.
1204; 31 U.S.C. 5318(g)(2), 9701; 42 U.S.C. 3601; 44 U.S.C. 3506, 3510.
Subpart D also issued under 12 U.S.C. 1833e.
Source: 60 FR 57322, Nov. 15, 1995, unless otherwise noted.
Subpart A_Organization and Functions
Sec. 4.1 Purpose.
This subpart describes the organization and functions of the Office
of the Comptroller of the Currency (OCC), and provides the OCC's
principal addresses.
Sec. 4.2 Office of the Comptroller of the Currency.
The OCC supervises and regulates national banks and Federal branches
and agencies of foreign banks by examining these institutions to
determine compliance with applicable laws and regulations; approving or
denying applications for new charters or for changes in corporate or
banking structure; approving or denying activities; taking supervisory
or enforcement actions; appointing receivers and conservators; and
issuing rules and regulations applicable to these institutions, their
subsidiaries, and affiliates.
Sec. 4.3 Comptroller of the Currency.
The Comptroller of the Currency (Comptroller), as head of the OCC,
is responsible for all OCC programs and functions. The Comptroller is
appointed by the President, by and with the advice and consent of the
Senate, for a term of five years. The Comptroller serves as a member of
the board of the Federal Deposit Insurance Corporation, a member of the
Federal Financial Institutions Examination Council, and a member of the
board of the Neighborhood Reinvestment Corporation. The Comptroller is
advised and assisted by OCC staff, who perform the duties and functions
that the Comptroller directs.
Sec. 4.4 Washington office.
The Washington office of the OCC is the main office and headquarters
of the OCC. The Washington office directs OCC policy, oversees OCC
operations, and is responsible for the direct supervision of certain
national banks, including the largest national banks (through the Large
Bank Supervision
[[Page 103]]
Department) and other national banks requiring special supervision. The
Washington office is located at 250 E Street, SW, Washington, DC 20219.
[60 FR 57322, Nov. 15, 1995, as amended at 73 FR 22236, Apr. 24, 2008]
Sec. 4.5 District and field offices.
(a) District offices. Each district office of the OCC is responsible
for the direct supervision of the national banks and Federal branches
and agencies of foreign banks in its district, with the exception of the
national banks supervised by the Washington office. The six district
offices cover the United States, Puerto Rico, the Virgin Islands, Guam,
and the Northern Mariana Islands. The office address and the
geographical composition of each district follows:
------------------------------------------------------------------------
District Office address Geographical composition
------------------------------------------------------------------------
Northeastern Office of the Comptroller Connecticut, Delaware,
District. of the Currency, 340 District of Columbia,
Madison Avenue, 5th northeast Kentucky,
Floor New York, NY 10173- Maine, Maryland,
0002. Massachusetts, New
Hampshire, New Jersey,
New York, North
Carolina, Pennsylvania,
Puerto Rico, Rhode
Island, South Carolina,
Vermont, the Virgin
Islands, Virginia, and
West Virginia.
Central District.. Office of the Comptroller Illinois, Indiana,
of the Currency, One northeast and southeast
Financial Place, Suite Iowa, central Kentucky,
2700, 440 South LaSalle Michigan, Minnesota,
Street, Chicago, IL eastern Missouri, North
60605. Dakota, Ohio, and
Wisconsin.
Southern District. Office of the Comptroller Alabama, Arkansas,
of the Currency, 500 Florida, Georgia,
North Akard Street, southern Kentucky,
Suite 1600, Dallas, TX Louisiana, Mississippi,
75201. Oklahoma, Tennessee, and
Texas.
Western District.. Office of the Comptroller Alaska, Arizona,
of the Currency, 1225 California, Colorado,
17th Street, Suite 300, Hawaii, Idaho, central
Denver, CO 80202. and western Iowa,
Kansas, western
Missouri, Montana,
Nebraska, Nevada, New
Mexico, Oregon, South
Dakota, Utah,
Washington, Wyoming, and
Guam.
------------------------------------------------------------------------
(b) Field offices and duty stations. Field offices and duty stations
support the bank supervisory responsibilities of the district offices.
[60 FR 57322, Nov. 15, 1995, as amended at 73 FR 22236, Apr. 24, 2008]
Sec. 4.6 Frequency of examination of national banks.
(a) General. The OCC examines national banks pursuant to authority
conferred by 12 U.S.C. 481 and the requirements of 12 U.S.C. 1820(d).
The OCC is required to conduct a full-scope, on-site examination of
every national bank at least once during each 12-month period.
(b) 18-month rule for certain small institutions. The OCC may
conduct a full-scope, on-site examination of a national bank at least
once during each 18-month period, rather than each 12-month period as
provided in paragraph (a) of this section, if the following conditions
are satisfied:
(1) The bank has total assets of less than $500 million;
(2) The bank is well capitalized as defined in part 6 of this
chapter;
(3) At the most recent examination, the OCC:
(i) Assigned the bank a rating of 1 or 2 for management as part of
the bank's rating under the Uniform Financial Institutions Rating
System; and
(ii) Assigned the bank a composite rating of 1 or 2 under the
Uniform Financial Institutions Rating System;
(4) The bank currently is not subject to a formal enforcement
proceeding or order by the FDIC, OCC or the Federal Reserve System; and
(5) No person acquired control of the bank during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(c) Authority to conduct more frequent examinations. This section
does not limit the authority of the OCC to examine any national bank as
frequently as the agency deems necessary.
[63 FR 16380, Apr. 2, 1998, as amended at 72 FR 17802, Apr. 10, 2007]
Sec. 4.7 Frequency of examination of Federal agencies and branches.
(a) General. The OCC examines Federal agencies and Federal branches
(as
[[Page 104]]
these entities are defined in Sec. 28.11 (h) and (i), respectively, of
this chapter) pursuant to the authority conferred by 12 U.S.C.
3105(c)(1)(C). Except as noted in paragraph (b) of this section, the OCC
will conduct a full-scope, on-site examination of every Federal branch
and agency at least once during each 12-month period.
(b) 18-month rule for certain small institutions--(1) Mandatory
standards. The OCC may conduct a full-scope, on-site examination at
least once during each 18-month period, rather than each 12-month period
as provided in paragraph (a) of this section, if the Federal branch or
agency:
(i) Has total assets of less than $500 million;
(ii) Has received a composite ROCA supervisory rating (which rates
risk management, operational controls, compliance, and asset quality) of
1 or 2 at its most recent examination;
(iii) Satisfies the requirements of either the following paragraph
(b)(1)(iii) (A) or (B):
(A) The foreign bank's most recently reported capital adequacy
position consists of, or is equivalent to, Tier 1 and total risk-based
capital ratios of at least 6 percent and 10 percent, respectively, on a
consolidated basis; or
(B) The branch or agency has maintained on a daily basis, over the
past three quarters, eligible assets in an amount not less than 108
percent of the preceding quarter's average third party liabilities
(determined consistent with applicable federal and state law), and
sufficient liquidity is currently available to meet its obligations to
third parties;
(iv) Is not subject to a formal enforcement action or order by the
Federal Reserve Board, the Federal Deposit Insurance Corporation, or the
OCC; and
(v) Has not experienced a change in control during the preceding 12-
month period in which a full-scope, on-site examination would have been
required but for this section.
(2) Discretionary standards. In determining whether a Federal branch
or agency that meets the standards of paragraph (b)(1) of this section
should not be eligible for an 18-month examination cycle pursuant to
this paragraph (b), the OCC may consider additional factors, including
whether:
(i) Any of the individual components of the ROCA rating of the
Federal branch or agency is rated ``3'' or worse;
(ii) The results of any off-site supervision indicate a
deterioration in the condition of the Federal branch or agency;
(iii) The size, relative importance, and role of a particular office
when reviewed in the context of the foreign bank's entire U.S.
operations otherwise necessitate an annual examination; and
(iv) The condition of the foreign bank gives rise to such a need.
(c) Authority to conduct more frequent examinations. Nothing in
paragraph (a) or (b) of this section limits the authority of the OCC to
examine any Federal branch or agency as frequently as the OCC deems
necessary.
[63 FR 46120, Aug. 28, 1998, as amended at 64 FR 56952, Oct. 22, 1999;
72 FR 17802, Apr. 10, 2007]
Subpart B_Availability of Information Under the Freedom of Information
Act
Sec. 4.11 Purpose and scope.
(a) Purpose. This subpart sets forth the standards, policies, and
procedures that the OCC applies in administering the Freedom of
Information Act (FOIA) (5 U.S.C. 552) to facilitate the OCC's
interaction with the banking industry and the public.
(b) Scope. (1) This subpart describes the information that the FOIA
requires the OCC to disclose to the public (Sec. 4.12), and the three
methods by which the OCC discloses that information under the FOIA
(Sec. Sec. 4.13, 4.14, and 4.15).
(2) This subpart also sets forth predisclosure notice procedures
that the OCC follows, in accordance with Executive Order 12600 (3 CFR,
1987 Comp., p. 235), when the OCC receives a request under Sec. 4.15
for disclosure of records that arguably are exempt from disclosure as
confidential commercial information (Sec. 4.16). Finally, this subpart
describes the fees that the OCC assesses for the services it renders in
providing information under the FOIA (Sec. 4.17).
[[Page 105]]
(3) This subpart does not apply to a request for records pursuant to
the Privacy Act (5 U.S.C. 552a). A person requesting records from the
OCC pursuant to the Privacy Act should refer to 31 CFR part 1, subpart
C, and appendix J of subpart C.
Sec. 4.12 Information available under the FOIA.
(a) General. In accordance with the FOIA, OCC records are available
to the public, except the exempt records described in paragraph (b) of
this section.
(b) Exemptions from availability. The following records, or portions
thereof, are exempt from disclosure under the FOIA:
(1) A record that is specifically authorized, under criteria
established by an Executive order, to be kept secret in the interest of
national defense or foreign policy, and that is properly classified
pursuant to that Executive order;
(2) A record relating solely to the internal personnel rules and
practices of an agency;
(3) A record specifically exempted from disclosure by statute (other
than 5 U.S.C. 552b), provided that the statute requires that the matters
be withheld from the public in such a manner as to leave no discretion
on the issue, establishes particular criteria for withholding, or refers
to particular types of matters to be withheld;
(4) A record that is privileged or contains trade secrets, or
commercial or financial information, furnished in confidence, that
relates to the business, personal, or financial affairs of any person
(see Sec. 4.16 for notice requirements regarding disclosure of
confidential commercial information);
(5) An intra-agency or interagency memorandum or letter not
routinely available by law to a private party in litigation, including
memoranda, reports, and other documents prepared by OCC employees, and
records of deliberations and discussions at meetings of OCC employees;
(6) A personnel, medical, or similar record, including a financial
record, or any portion thereof, where disclosure would constitute a
clearly unwarranted invasion of personal privacy;
(7) A record or information compiled for law enforcement purposes,
but only to the extent that the OCC reasonably believes that producing
the record or information may:
(i) Interfere with enforcement proceedings;
(ii) Deprive a person of the right to a fair trial or an impartial
adjudication;
(iii) Constitute an unwarranted invasion of personal privacy;
(iv) Disclose the identity of a confidential source, including a
State, local, or foreign agency or authority, or any private institution
that furnished information on a confidential basis;
(v) Disclose information furnished by a confidential source, in the
case of a record or information compiled by a criminal law enforcement
authority in the course of a criminal investigation, or by an agency
conducting a lawful national security intelligence investigation;
(vi) Disclose techniques and procedures for law enforcement
investigations or prosecutions, or disclose guidelines for law
enforcement investigations or prosecutions if such disclosure reasonably
could be expected to risk circumvention of the law; or
(vii) Endanger the life or physical safety of any individual;
(8) A record contained in or related to an examination, operating,
or condition report prepared by, on behalf of, or for the use of the OCC
or any other agency responsible for regulating or supervising financial
institutions; and
(9) A record containing or relating to geological and geophysical
information and data, including maps, concerning wells.
(c) Discretionary disclosure of exempt records. Even if a record is
exempt under paragraph (b) of this section, the OCC may elect, on a
case-by-case basis, not to apply the exemption to the requested record.
The OCC's election not to apply an exemption to a requested record has
no precedential significance as to the application or nonapplication of
the exemption to any other requested record, regardless of who requests
the record or when the OCC receives the request. The OCC will provide
predisclosure notice to submitters of confidential commercial
information in accordance with Sec. 4.16.
[[Page 106]]
(d) Segregability. The OCC provides copies of reasonably segregable
portions of a record to any person properly requesting the record
pursuant to Sec. 4.15, after redacting any portion that is exempt under
paragraph (b) of this section. The OCC will note the location and extent
of any deletion, and identify the FOIA exemption under which material
has been deleted, on the released portion of the material, unless doing
so would harm an interest protected by the exemption under paragraph (b)
of this section pursuant to which the deletion was made. Where
technically feasible, the amount of information redacted and the
exemption pursuant to which the redaction was made will be indicated at
the site(s) of the deletion.
[60 FR 57322, Nov. 15, 1995, as amended at 75 FR 17850, Apr. 8, 2010]
Sec. 4.13 Publication in the Federal Register.
The OCC publishes certain documents in the Federal Register for the
guidance of the public, including the following:
(a) Proposed and final rules; and
(b) Certain notices and policy statements of concern to the general
public.
Sec. 4.14 Public inspection and copying.
(a) Available information. Subject to the exemptions listed in Sec.
4.12(b), the OCC makes the following information readily available for
public inspection and copying:
(1) Any final order, agreement, or other enforceable document issued
in the adjudication of an OCC enforcement case, including a final order
published pursuant to 12 U.S.C. 1818(u);
(2) Any final opinion issued in the adjudication of an OCC
enforcement case;
(3) Any statement of general policy or interpretation of general
applicability not published in the Federal Register;
(4) Any administrative staff manual or instruction to staff that may
affect a member of the public as such;
(5) A current index identifying the information referred to in
paragraphs (a)(1) through (a)(4) of this section issued, adopted, or
promulgated after July 4, 1967;
(6) A list of available OCC publications;
(7) A list of forms available from the OCC, and specific forms and
instructions; \1\
---------------------------------------------------------------------------
\1\ Some forms and instructions that national banks use, such as the
Consolidated Report of Condition and Income (FFIEC 031-034), are not
available from the OCC. The OCC will provide information on where
persons may obtain these forms and instructions upon request.
---------------------------------------------------------------------------
(8) Any public Community Reinvestment Act performance evaluation;
(9) Any public securities-related filing required under part 11 or
16 of this chapter;
(10) Any public comment letter regarding a proposed rule; and
(11) The public file (as defined in 12 CFR 5.9) with respect to a
pending application described in part 5 of this chapter.
(b) Redaction of identifying details. To the extent necessary to
prevent an invasion of personal privacy, the OCC may redact identifying
details from any information described in paragraph (a) of this section
before making the information available for public inspection and
copying.
(c) Addresses. The information described in paragraphs (a)(1)
through (a)(10) of this section is available from the Disclosure
Officer, Communications Division, Office of the Comptroller of the
Currency, 250 E Street, SW, Washington, DC 20219. The information
described in paragraph (a)(11) of this section is available from the
Licensing Manager at the appropriate district office at the address
listed in Sec. 4.5(a), or in the case of banks supervised by the
Multinational Banking Department, from the Licensing Manager,
Multinational Banking, Office of the Comptroller of the Currency, 250 E
Street, SW, Washington, DC 20219.
Sec. 4.15 How to request records.
(a) Available information. Subject to the exemptions described in
Sec. 4.12(b), any OCC record is available to any person upon specific
request in accordance with this section.
(b) Where to submit request or appeal--(1) General. Except as
provided in paragraph (b)(2) of this section, a person requesting a
record or filing an administrative appeal under this section must submit
the request or appeal to the
[[Page 107]]
Disclosure Officer, Communications Division, Office of the Comptroller
of the Currency, 250 E Street, SW, Washington, DC 20219.
(2) Exceptions--(i) Records at the Federal Deposit Insurance
Corporation. A person requesting any of the following records, other
than blank forms (see Sec. 4.14(a)(7)), must submit the request to the
Disclosure Group, Federal Deposit Insurance Corporation, 550-17th
Street, NW, Washington, DC 20429, (800) 945-2186:
(A) Consolidated Report of Condition and Income (FFIEC 031, 032,
033, 034);
(B) Annual Report of Trust Assets (FFIEC 001);
(C) Uniform Bank Performance Report; and
(D) Special Report.
(ii) Records of another agency. When the OCC receives a request for
records in its possession that another Federal agency either generated
or provided to the OCC, the OCC promptly informs the requester and
immediately forwards the request to that agency for processing in
accordance with that agency's regulations.
(c) Request for records--(1) Contact information and what the
request for records must include. A person requesting records under this
section must state, in writing:
(i) The requester's full name, address, telephone number and, at the
requester's option, electronic mail address.
(ii) A reasonable description of the records sought (including
sufficient detail to enable OCC employees who are familiar with the
subject matter of the request to locate the records with a reasonable
amount of effort);
(iii) A statement agreeing to pay all fees that the OCC assesses
under Sec. 4.17;
(iv) A description of how the requester intends to use the records,
if a requester seeks placement in a lower fee category (i.e., a fee
category other than ``commercial use requester'') under Sec. 4.17; and
(v) Whether the requester prefers the OCC to deliver a copy of the
records or to allow the requester to inspect the records at the
appropriate OCC office.
(2) Initial determination. The OCC's Director of Communications or
that person's delegate initially determines whether to grant a request
for OCC records.
(3) If request is granted. If the OCC grants a request for records,
in whole or in part, the OCC promptly discloses the records in one of
two ways, depending on the requester's stated preference:
(i) The OCC may deliver a copy of the records to the requester. If
the OCC delivers a copy of the records to the requester, the OCC
duplicates the records at reasonable and proper times that do not
interfere with their use by the OCC or preclude other persons from
making inspections; or
(ii) The OCC may allow the requester to inspect the records at
reasonable and proper times that do not interfere with their use by the
OCC or preclude other persons from making inspections. If the OCC allows
the requester to inspect the records, the OCC may place a reasonable
limit on the number of records that a person may inspect during a day.
(4) If request is denied. If the OCC denies a request for records,
in whole or in part, the OCC notifies the requester by mail. The
notification is dated and contains a brief statement of the reasons for
the denial, sets forth the name and title or position of the official
making the decision, and advises the requester of the right to an
administrative appeal in accordance with paragraph (d) of this section.
(d) Administrative appeal of a denial--(1) Procedure. A requester
must submit an administrative appeal of denial of a request for records
in writing within 35 days of the date of the initial determination. The
appeal must include the circumstances and arguments supporting
disclosure of the requested records.
(2) Appellate determination. The Comptroller or the Comptroller's
delegate determines whether to grant an appeal of a denial of a request
for OCC records.
(3) If appeal is granted. If the OCC grants an appeal, in whole or
in part, the OCC treats the request as if it were originally granted, in
whole or in part, by the OCC in accordance with paragraph (c)(3) of this
section.
(4) If appeal is denied. If the OCC denies an appeal, in whole or in
part, the OCC notifies the requester by mail. The
[[Page 108]]
notification contains a brief statement of the reasons for the denial,
sets forth the name and title or position of the official making the
decision, and advises the requester of the right to judicial review of
the denial under 5 U.S.C. 552(a)(4)(B).
(e) Judicial review--(1) General. If the OCC denies an appeal
pursuant to paragraph (d) of this section, or if the OCC fails to make a
determination within the time limits specified in paragraph (f) of this
section, the requester may commence an action to compel disclosure of
records, pursuant to 5 U.S.C. 552(a)(4)(B), in the United States
district court in:
(i) The district where the requester resides;
(ii) The district where the requester's principal place of business
is located;
(iii) The district where the records are located; or
(iv) The District of Columbia.
(2) Service of process. In commencing an action described in
paragraph (e)(1) of this section, the requester, in addition to
complying with the Federal Rules of Civil Procedure (28 U.S.C. appendix)
for service upon the United States or agencies thereof, must serve
process on the Chief Counsel or the Chief Counsel's delegate at the
following location: Office of the Comptroller of the Currency, 250 E
Street, SW, Washington, DC 20219.
(f) Time limits for responding to FOIA requests. (1) The OCC makes
an initial determination to grant or deny a request for records within
20 days (excluding Saturday, Sundays, and holidays) after the date of
receipt of the request, as described in paragraph (g) of this section,
except as stated in paragraph (f)(3) of this section.
(2) Appeal. The OCC makes a determination to grant or deny an
administrative appeal within 20 business days after the date of receipt
of the appeal, as described in paragraph (g) of this section, except as
stated in paragraph (f)(3) of this section.
(3) Extension of time. The time limits set forth in paragraphs
(f)(1) and (2) of this section may be extended as follows:
(i) In unusual circumstances. The OCC may extend the time limits in
unusual circumstances for a maximum of 10 business days. If the OCC
extends the time limits, the OCC provides written notice to the person
making the request or appeal, containing the reason for the extension
and the date on which the OCC expects to make a determination. Unusual
circumstances exist when the OCC requires additional time to:
(A) Search for and collect the requested records from field
facilities or other buildings that are separate from the office
processing the request or appeal;
(B) Search for, collect, and appropriately examine a voluminous
amount of requested records;
(C) Consult with another agency that has a substantial interest in
the determination of the request; or
(D) Allow two or more components of the OCC that have substantial
interest in the determination of the request to consult with each other;
(ii) By agreement. A requester may agree to extend the time limits
for any amount of time;
(iii) By judicial action. If a requester commences an action
pursuant to paragraph (e) of this section for failure to comply with the
time limits set forth in this paragraph (f), a court with jurisdiction
may, pursuant to 5 U.S.C. 552(a)(6)(C), allow the OCC additional time to
complete the review of the records requested; or
(iv) Tolling of time limits. (A) The OCC may toll the 20-day time
period to:
(1) Make one request for additional information from the requester;
or
(2) Clarify the applicability or amount of any fees, if necessary,
with the requester.
(B) The tolling period ends upon the OCC's receipt of requested
information from the requester or resolution of the fee issue.
(g) Date of receipt of request or appeal. The date of receipt of a
request for records or an appeal is the date that OCC Communications
Division receives a request that satisfies the requirements of paragraph
(c)(1) or (d)(1) of this section, except as provided in Sec. 4.17(d).
[60 FR 57322, Nov. 15, 1995, as amended at 75 FR 17850, Apr. 8, 2010]
[[Page 109]]
Sec. 4.16 Predisclosure notice for confidential commercial information.
(a) Definitions. For purposes of this section, the following
definitions apply:
(1) Confidential commercial information means records that arguably
contain material exempt from release under Exemption 4 of the FOIA (5
U.S.C. 552(b)(4); Sec. 4.12(b)(4)), because disclosure reasonably could
cause substantial competitive harm to the submitter.
(2) Submitter means any person or entity that provides confidential
commercial information to the OCC. This term includes corporations,
State governments, foreign governments, and banks and their employees,
officers, directors, and principal shareholders.
(b) Notice to submitter--(1) When provided. In accordance with
Executive Order 12600 (3 CFR, 1987 Comp., p. 235), when the OCC receives
a request under Sec. 4.15(c) or, where appropriate, an appeal under
Sec. 4.15(d) for disclosure of confidential commercial information, the
OCC provides a submitter with prompt written notice of the receipt of
that request (except as provided in paragraph (b)(2) of this section) in
the following circumstances:
(i) With respect to confidential commercial information submitted to
the OCC prior to January 1, 1988, if:
(A) The records are less than 10 years old and the submitter
designated the information as confidential commercial information;
(B) The OCC reasonably believes that disclosure of the information
may cause substantial competitive harm to the submitter; or
(C) The information is subject to a prior express OCC commitment of
confidentiality; and
(ii) With respect to confidential commercial information submitted
to the OCC on or after January 1, 1988, if:
(A) The submitter in good faith designated the information as
confidential commercial information;
(B) The OCC designated the class of information to which the
requested information belongs as confidential commercial information; or
(C) The OCC reasonably believes that disclosure of the information
may cause substantial competitive harm to the submitter.
(2) Exceptions. The OCC generally does not provide notice under
paragraph (b)(1) of this section if the OCC determines that:
(i) It will not disclose the information;
(ii) The information already has been disclosed officially to the
public;
(iii) The OCC is required by law (other than 5 U.S.C. 552) to
disclose the information;
(iv) The OCC acquired the information in the course of a lawful
investigation of a possible violation of criminal law;
(v) The submitter had an opportunity to designate the requested
information as confidential commercial information at the time of
submission of the information or a reasonable time thereafter and did
not do so, unless the OCC has substantial reason to believe that
disclosure of the information would result in competitive harm; or
(vi) The OCC determines that the submitter's designation under
paragraph (b)(1)(ii)(A) of this section is frivolous; in such case,
however, the OCC will provide the submitter with written notice of any
final administrative determination to disclose the information at least
10 business days prior to the date that the OCC intends to disclose the
information.
(3) Content of notice. The OCC either describes in the notice the
exact nature of the confidential commercial information requested or
includes with the notice copies of the records or portions of records
containing that information.
(4) Expiration of notice period. The OCC provides notice under this
paragraph (b) with respect to information that the submitter designated
under paragraph (b)(1)(ii)(A) of this section only for a period of 10
years after the date of the submitter's designation, unless the
submitter requests and justifies to the OCC's satisfaction a specific
notice period of greater duration.
(5) Certification of confidentiality. If possible, the submitter
should support the claim of confidentiality with a statement or
certification that the requested information is confidential commercial
information that the submitter has not disclosed to the public. This
statement should be prepared by an officer or authorized representative
[[Page 110]]
if the submitter is a corporation or other entity.
(c) Notice to requester. If the OCC provides notice to a submitter
under paragraph (b) of this section, the OCC notifies the person
requesting confidential commercial information (requester) that it has
provided notice to the submitter. The OCC also advises the requester
that if there is a delay in its decision whether to grant or deny access
to the information sought, the delay may be considered a denial of
access to the information, and that the requester may proceed with an
administrative appeal or seek judicial review. However, the requester
may agree to a voluntary extension of time to allow the OCC to review
the submitter's objection to disclosure (see Sec. 4.15(f)(3)(ii)).
(d) Opportunity to object to disclosure. Within 10 days after
receiving notice under paragraph (b) of this section, the submitter may
provide the OCC with a detailed statement of objection to disclosure of
the information. That statement must specify the grounds for withholding
any of the information under any exemption of the FOIA. Any statement
that the submitter provides under this paragraph (d) may be subject to
disclosure under the FOIA.
(e) Notice of intent to disclose. The OCC considers carefully a
submitter's objection and specific grounds for nondisclosure prior to
determining whether to disclose the requested information. If the OCC
decides to disclose information over the objection of the submitter, the
OCC provides to the submitter, with a copy to the requester, a written
notice that includes:
(1) A statement of the OCC's reasons for not sustaining the
submitter's objections to disclosure;
(2) A description of the information to be disclosed;
(3) The anticipated disclosure date, which is not less than 10
business days after the OCC mails the written notice required under this
paragraph (e); and
(4) A statement that the submitter must notify the OCC immediately
if the submitter intends to seek injunctive relief.
(f) Notice of requester's lawsuit. Whenever the OCC receives service
of process indicating that a requester has brought suit seeking to
compel the OCC to disclose information covered by paragraph (b)(1) of
this section, the OCC promptly notifies the submitter.
Sec. 4.17 FOIA request fees.
(a) Definitions. For purposes of this section, the following
definitions apply:
(1) Actual costs means those expenditures that the OCC incurs in
providing services (including searching for, reviewing, and duplicating
records) in response to a request for records under Sec. 4.15.
(2) Search means the process of locating a record in response to a
request, including page-by-page or line-by-line identification of
material within a record. The OCC may perform a search manually or by
electronic means.
(3) Review means the process of examining a record located in
response to a request to determine which portions of that record should
be released. It also includes processing a record for disclosure.
(4) Duplication means the process of copying a record in response to
a request. A copy may take the form of a paper copy, microform,
audiovisual materials, or machine readable material (e.g., magnetic tape
or disk), among others.
(5) Commercial use requester means a person who seeks records for a
use or purpose that furthers the commercial, trade, or profit interests
of the requester or the person on whose behalf the request is made.
(6) Educational institution requester means a person who seeks
records on behalf of a public or private educational institution,
including a preschool, an elementary or secondary school, an institution
of undergraduate or graduate higher education, an institution of
professional education, or an institution of vocational education that
operates a program of scholarly research.
(7) Noncommercial scientific institution requester means a person
who is not a ``commercial use requester,'' as that term is defined in
paragraph (a)(5) of this section, and who seeks records on behalf of an
institution operated solely for the purpose of conducting scientific
research, the results of which are not
[[Page 111]]
intended to promote any particular product or industry.
(8) Requester who is a representative of the news media means any
person who, or entity that, gathers information of potential interest to
a segment of the public, uses editorial skills to turn the raw materials
into a distinct work, and distributes that work to an audience. A
freelance journalist shall be regarded as working for a news media
entity if the person can demonstrate a solid basis for expecting
publication through that entity, whether or not the journalist is
actually employed by that entity. A publication contract is one example
of a basis for expecting publication that ordinarily would satisfy this
standard. The OCC also may consider the past publication record of the
requester in determining whether she or he qualifies as a
``representative of the news media.''
(b) Fees--(1) General. The hourly and per page rate that the OCC
generally charges requesters is set forth in the ``Notice of Comptroller
of the Currency Fees'' (Notice) described in 12 CFR 8.8. Any interested
person may request a copy of the Notice from the OCC by mail or may
obtain a copy at the location described in Sec. 4.14(c). The OCC may
contract with a commercial service to search for, duplicate, or
disseminate records, provided that the OCC determines that the fee
assessed upon a requester is no greater than if the OCC performed the
tasks itself. The OCC does not contract out responsibilities that the
FOIA provides that the OCC alone may discharge, such as determining the
applicability of an exemption or whether to waive or reduce a fee.
(2) Fee categories. The OCC assesses a fee based on the fee category
in which the OCC places the requester. If the request states how the
requester intends to use the requested records (see Sec.
4.15(c)(1)(iv)), the OCC may place the requester in a lower fee
category; otherwise, the OCC categorizes the requester as a ``commercial
use requester.'' If the OCC reasonably doubts the requester's stated
intended use, or if that use is not clear from the request, the OCC may
place the requester in the ``commercial use'' category or may seek
additional clarification. The fee categories are as follows:
(i) Commercial use requesters. The OCC assesses a fee for a
requester in this category for the actual cost of search, review, and
duplication. A requester in this category does not receive any free
search, review, or duplication services.
(ii) Educational institution requesters, noncommercial scientific
institution requesters, and requesters who are representatives of the
news media. The OCC assesses a fee for a requester in this category for
the actual cost of duplication. A requester in this category receives
100 free pages.
(iii) All other requesters. The OCC assesses a fee for a requester
who does not fit into either of the above categories for the actual cost
of search and duplication. A requester in this category receives 100
free pages and two hours of free search time.
(3) Special services. The OCC may, in its discretion, accommodate a
request for special services. The OCC may recover the actual cost of
providing any special services.
(4) Waiving or reducing a fee. The OCC may waive or reduce a fee
under this section whenever, in its opinion, disclosure of records is in
the public interest because the disclosure:
(i) Is likely to contribute significantly to public understanding of
the operations or activities of the government; and
(ii) Is not primarily in the commercial interest of the requester.
(5) Fee for unsuccessful search. The OCC may assess a fee for time
spent searching for records, even if the OCC does not locate the records
requested.
(6) No fee if the time limit passes and the OCC has not responded to
the request. The OCC will not assess search or duplication fees, as
applicable, if it fails to respond to a requester's FOIA request within
the time limits specified under 12 CFR 4.15, and no ``unusual''
circumstances (as defined in 5 U.S.C. 552(a)(6)(B) and Sec.
4.15(f)(3)(i)) or ``exceptional'' circumstances (as defined in 5 U.S.C.
552(a)(6)(C)) apply to the processing of the request.
(c) Payment of fees--(1) General. The OCC generally assesses a fee
when it delivers the records in response to the request, if any. A
requester must send
[[Page 112]]
payment within 30 calendar days of the billing date to the
Communications Division, Office of the Comptroller of the Currency, 250
E Street, SW., Washington, DC 20219.
(2) Fee likely to exceed $25. If the OCC estimates that a fee is
likely to exceed $25, the OCC notifies the requester of the estimated
fee, unless the requester has indicated in advance a willingness to pay
a fee as high as the estimated fee. If so notified by the OCC, the
requester may confer with OCC employees to revise the request to reflect
a lower fee.
(3) Fee likely to exceed $250. If the OCC estimates that a fee is
likely to exceed $250, the OCC notifies the requester of the estimated
fee. In this circumstance, the OCC may require, as a condition to
processing the request, that the requester:
(i) Provide satisfactory assurance of full payment, if the requester
has a history of prompt payment; or
(ii) Pay the estimated fee in full, if the requester does not have a
history of prompt payment.
(4) Failure to pay a fee. If the requester fails to pay a fee within
30 days of the date of the billing, the OCC may require, as a condition
to processing any further request, that the requester pay any unpaid
fee, plus interest (as provided in paragraph (c)(5) of this section),
and any estimated fee in full for that further request.
(5) Interest on unpaid fee. The OCC may assess interest charges on
an unpaid fee beginning on the 31st day following the billing date. The
OCC charges interest at the rate prescribed in 31 U.S.C. 3717.
(d) Tolling of time limits. Under the circumstances described in
paragraphs (c) (2), (3), and (4) of this section, the time limits set
forth in Sec. 4.15(f) (i.e., 20 business days from the receipt of a
request for records and 20 business days from the receipt of an
administrative appeal, plus any permissible extension) begin only after
the OCC receives a revised request under paragraph (c)(2) of this
section, an assurance of payment under paragraph (c)(3)(i) of this
section, or the required payments under paragraph (c)(3)(i) or (c)(4) of
this section.
(e) Aggregating requests. When the OCC reasonably believes that a
requester or group of requesters is attempting to break a request into a
series of requests for the purpose of evading the assessment of a fee,
the OCC may aggregate the requests and assess a fee accordingly.
[60 FR 57322, Nov. 15, 1995, as amended at 75 FR 17850, Apr. 8, 2010]
Sec. 4.18 How to track a FOIA request.
(a) Tracking number. The OCC will issue a tracking number to all
FOIA requesters within 5 days of the receipt of the request (as
described in Sec. 4.15(g)) in the OCC's Communications Department. The
tracking number will be sent via electronic mail if the requester has
provided an electronic mail address. Otherwise, the OCC will mail the
tracking number to the requester's physical address, as provided in the
FOIA request.
(b) Web site. FOIA requesters may check the status of their FOIA
request(s) at https://appsec.occ.gov/publicaccesslink/.
(c) If a requester does not have Internet access. Requesters without
Internet access may continue to contact the Disclosure Officer,
Communications Division, Office of the Comptroller of the Currency, at
(202) 874-4700 to check the status of their FOIA request(s).
[75 FR 17851, Apr. 8, 2010]
Subpart C_Release of Non-Public OCC Information
Sec. 4.31 Purpose and scope.
(a) Purpose. The purposes of this subpart are to:
(1) Afford an orderly mechanism for the OCC to process expeditiously
requests for non-public OCC information; to address the release of non-
public OCC information without a request; and, when appropriate, for the
OCC to assert evidentiary privileges in litigation;
(2) Recognize the public's interest in obtaining access to relevant
and necessary information and the countervailing public interest of
maintaining
[[Page 113]]
the effectiveness of the OCC supervisory process and appropriate
confidentiality of OCC supervisory information;
(3) Ensure that the OCC's information is used in a manner that
supports the public interest and the interests of the OCC;
(4) Ensure that OCC resources are used in the most efficient manner
consistent with the OCC's statutory mission;
(5) Minimize burden on national banks, the public, and the OCC;
(6) Limit the expenditure of government resources for private
purposes; and
(7) Maintain the OCC's impartiality among private litigants.
(b) Scope. (1) This subpart applies to requests for, and
dissemination of, non-public OCC information, including requests for
records or testimony arising out of civil lawsuits and administrative
proceedings to which the OCC is not a party and the release of non-
public OCC information without a specific request. Lawsuits and
administrative proceedings to which the OCC is not a party include
proceedings in which a Federal agency is a party in opposition to the
private requester.
(2) This subpart does not apply to:
(i) A request for a record or testimony in a proceeding in which the
OCC is a party; or
(ii) A request for a record that is required to be disclosed under
the Freedom of Information Act (FOIA) (5 U.S.C. 552), as described in
Sec. 4.12.
(3) A request for a record or testimony made by the Board of
Governors of the Federal Reserve System, the Federal Deposit Insurance
Corporation, a government agency of the United States or a foreign
government, a state agency with authority to investigate violations of
criminal law, or a state bank regulatory agency is governed solely by
Sec. 4.37(c).
[60 FR 57322, Nov. 15, 1995, as amended at 63 FR 62929, Nov. 10, 1998;
64 FR 29216, June 1, 1999]
Effective Date Note: At 75 FR 75576, Dec. 3, 2010, Sec. 4.31 was
amended by adding (b)(4), effective Jan. 3, 2011. For the convenience of
the user, the added text is set forth as follows:
Sec. 4.31 Purpose and scope.
* * * * *
(b) * * *
(4) For purposes of Sec. Sec. 4.35(a)(1), 4.36(a) and 4.37(c) of
this part, the OCC's decision to disclose records or testimony involving
a Suspicious Activity Report (SAR) filed pursuant to the regulations
implementing 12 U.S.C. 5318(g), or any information that would reveal the
existence of a SAR, is governed by 12 CFR 21.11(k).
Sec. 4.32 Definitions.
(a) Complete request means a request containing sufficient
information to allow the OCC to make an informed decision.
(b) Non-public OCC information. Non-public OCC information:
(1) Means information that the OCC is not required to release under
the FOIA (5 U.S.C. 552) or that the OCC has not yet published or made
available pursuant to 12 U.S.C. 1818(u) and includes:
(i) A record created or obtained by the OCC in connection with the
OCC's performance of its responsibilities, such as a record concerning
supervision, licensing, regulation, and examination of a national bank,
a bank holding company, or an affiliate;
(ii) A record compiled by the OCC in connection with the OCC's
enforcement responsibilities;
(iii) A report of examination, supervisory correspondence, an
investigatory file compiled by the OCC in connection with an
investigation, and any internal agency memorandum, whether the
information is in the possession of the OCC or some other individual or
entity;
(iv) Confidential OCC information obtained by a third party or
otherwise incorporated in the records of a third party, including
another government agency;
(v) Testimony from, or an interview with, a current or former OCC
employee, officer, or agent concerning information acquired by that
person in the course of his or her performance of official duties with
the OCC or due to that person's official status at the OCC;
(vi) Confidential information relating to operating and no longer
operating
[[Page 114]]
national banks as well as their subsidiaries and their affiliates; and
(vii) A Suspicious Activity Report filed by the OCC, a national
bank, or a Federal branch or agency of a foreign bank licensed or
chartered by the OCC under 12 CFR 21.11; and
(2) Is the property of the Comptroller. A report of examination is
loaned to the bank or holding company for its confidential use only.
(c) Relevant means could contribute substantially to the resolution
of one or more specifically identified issues in the case.
(d) Show a compelling need means, in support of a request for
testimony, demonstrate with as much detail as is necessary under the
circumstances, that the requested information is relevant and that the
relevant material contained in the testimony is not available from any
other source. Sources, without limitation, include the books and records
of other persons or entities and non-public OCC records that have been,
or might be, released.
(e) Supervised entity includes a national bank, a subsidiary of a
national bank, a Federal branch or agency of a foreign bank licensed by
the OCC as defined under 12 CFR 28.11(h) and (i), or any other entity
supervised by the OCC.
(f) Testimony means an interview or sworn testimony on the record.
[60 FR 57322, Nov. 15, 1995, as amended at 63 FR 62929, Nov. 10, 1998;
64 FR 29216, June 1, 1999]
Effective Date Note: At 75 FR 75576, Dec. 3, 2010, Sec. 4.32 was
amended by removing paragraph (b)(1)(vii), adding the word ``and'' at
the end of paragraph (b)(1)(v) and removing, at the end of paragraph
(b)(1)(vi), ``; and'' and adding a period in its place, effective Jan.
3, 2011.
Sec. 4.33 Requirements for a request of records or testimony.
(a) Generally--(1) Form of request. A person seeking non-public OCC
information must submit a request in writing to the OCC. The requester
must explain, in as detailed a description as is necessary under the
circumstances, the bases for the request and how the requested non-
public OCC information relates to the issues in the lawsuit or matter.
(2) Expedited request. A requester seeking a response in less than
60 days must explain why the request was not submitted earlier and why
the OCC should expedite the request.
(3) Request arising from adversarial matters. Where the requested
information is to be used in connection with an adversarial matter:
(i) The OCC generally will require that the lawsuit or
administrative action has been filed before it will consider the
request;
(ii) The request must include:
(A) A copy of the complaint or other pleading setting forth the
assertions in the case;
(B) The caption and docket number of the case;
(C) The name, address, and phone number of counsel to each party in
the case; and
(D) A description of any prior judicial decisions or pending motions
in the case that may bear on the asserted relevance of the requested
information;
(iii) The request must also:
(A) Show that the information is relevant to the purpose for which
it is sought;
(B) Show that other evidence reasonably suited to the requester's
needs is not available from any other source;
(C) Show that the need for the information outweighs the public
interest considerations in maintaining the confidentiality of the OCC
information and outweighs the burden on the OCC to produce the
information;
(D) Explain how the issues in the case and the status of the case
warrant that the OCC allow disclosure; and
(E) Identify any other issue that may bear on the question of waiver
of privilege by the OCC.
(b) Request for records. If the request is for a record, the
requester must adequately describe the record or records sought by type
and date.
(c) Request for testimony--(1) Generally. A requester seeking
testimony:
(i) Must show a compelling need for the requested information; and
(ii) Should request OCC testimony with sufficient time to obtain the
testimony in deposition form.
(2) Trial or hearing testimony. A requester seeking testimony at a
trial or
[[Page 115]]
hearing must show that a deposition would not suffice.
Sec. 4.34 Where to submit a request.
(a) A request for non-public OCC information. A person requesting
information under this subpart, requesting authentication of a record
under Sec. 4.39(d), or submitting a notification of the issuance of a
subpoena or compulsory process under Sec. 4.37, shall send the request
or notification to: Office of the Comptroller of the Currency, 250 E
Street, SW, Washington, DC 20219, Attention: Director, Litigation
Division.
(b) Combined requests for non-public and other OCC information. A
person requesting public OCC information and non-public OCC information
under this subpart may submit a combined request for both to the address
in paragraph (a) of this section. If a requester decides to submit a
combined request under this section, the OCC will process the combined
request under this subpart and not under subpart B of this part (FOIA).
(c) Request by government agencies. A request made pursuant to Sec.
4.37(c) must be submitted:
(1) In a civil action, to the Director of the OCC's Litigation
Division at the Washington office; or
(2) In a criminal action, to the appropriate district counsel or the
Director of the OCC's Enforcement and Compliance Division at the
Washington office.
[60 FR 57322, Nov. 15, 1995, as amended at 64 FR 29216, June 1, 1999]
Sec. 4.35 Consideration of requests.
(a) In general--(1) OCC discretion. The OCC decides whether to
release non-public OCC information based on its weighing of all
appropriate factors including the requestor's fulfilling of the
requirements enumerated in Sec. 4.33. Each decision is at the sole
discretion of the Comptroller or the Comptroller's delegate and is a
final agency decision. OCC action on a request for non-public OCC
information exhausts administrative remedies for discovery of the
information.
(2) Bases for denial. The OCC may deny a request for non-public OCC
information for reasons that include the following:
(i) The requester was unsuccessful in showing that the information
is relevant to the pending matter;
(ii) The requester seeks testimony and the requestor did not show a
compelling need for the information;
(iii) The request arises from an adversarial matter and other
evidence reasonably suited to the requester's need is available from
another source;
(iv) A lawsuit or administrative action has not yet been filed and
the request was made in connection with potential litigation; or
(v) The production of the information would be contrary to the
public interest or unduly burdensome to the OCC.
(3) Additional information. A requester must submit a complete
request. The OCC may require the requester to provide additional
information to complete a request. Consistent with the purposes stated
in Sec. 4.31, the OCC may inquire into the circumstances of any case
underlying the request and rely on sources of information other than the
requester, including other parties.
(4) Time required by the OCC to respond. The OCC generally will
process requests in the order in which they are received. The OCC will
notify the requester in writing of the final decision. Absent exigent or
unusual circumstances, the OCC will respond to a request within 60 days
from the date that the OCC receives a request that it deems a complete
request. Consistent with Sec. 4.33(a)(2), the OCC weighs a request to
respond to provide information in less than 60 days against the
unfairness to other requesters whose pending requests may be delayed and
the burden imposed on the OCC by the expedited processing.
(5) Notice to subject national banks. Following receipt of a request
for non-public OCC information, the OCC generally notifies the national
bank that is the subject of the requested information, unless the OCC,
in its discretion, determines that to do so would advantage or prejudice
any of the parties in the matter at issue.
(b) Testimony. (1) The OCC generally will not authorize a current
OCC employee to provide expert or opinion evidence for a private party.
(2) The OCC may restrict the scope of any authorized testimony and
may act
[[Page 116]]
to ensure that the scope of testimony given by the OCC employee adheres
to the scope authorized by the OCC.
(3) Once a request for testimony has been submitted, and before the
requested testimony occurs, a party to the relevant case, who did not
join in the request and who wishes to question the witness beyond the
scope of testimony sought by the request, shall timely submit the
party's own request for OCC information pursuant to this subpart.
(4) The OCC may offer the requester the employee's written
declaration in lieu of testimony.
(c) Release of non-public OCC information by others. In appropriate
cases, the OCC may respond to a request for information by authorizing a
party to the case who is in possession of non-public OCC information to
release the information to the requester. An OCC authorization to
release records does not preclude the party in possession from asserting
its own privilege, arguing that the records are not relevant, or
asserting any other argument for which it has standing to protect the
records from release.
Effective Date Note: At 75 FR 75576, Dec. 3, 2010, Sec. 4.35 was
amended by removing the word ``or'' at the end of paragraph (a)(2)(iv),
removing the period in paragraph (a)(2)(v), adding in lieu thereof ``;
or'' and adding a new paragraph (a)(2)(vi), effective Jan. 3, 2011. For
the convenience of the user, the added text is set forth as follows:
Sec. 4.35 Consideration of requests.
(a) * * *
(2) * * *
(vi) When prohibited by law.
Sec. 4.36 Disclosure of non-public OCC information.
(a) Discretionary disclosure of non-public OCC information. The OCC
may make non-public OCC information available to a supervised entity and
to other persons, that in the sole discretion of the Comptroller may be
necessary or appropriate, without a request for records or testimony.
(b) OCC policy. It is the OCC's policy regarding non-public OCC
information that such information is confidential and privileged.
Accordingly, the OCC will not normally disclose this information to
third parties.
(c) Conditions and limitations. The OCC may impose any conditions or
limitations on disclosures under this section, including the
restrictions on dissemination contained in Sec. 4.38, that it
determines are necessary to effect the purposes of this section.
(d) Unauthorized disclosures prohibited. All non-public OCC
information remains the property of the OCC. No supervised entity,
government agency, person, or other party to whom the information is
made available, or any officer, director, employee, or agent thereof,
may disclose non-public OCC information without the prior written
permission of the OCC, except in published statistical material that
does not disclose, either directly or when used in conjunction with
other publicly available information, the affairs of any individual,
corporation, or other entity. Except as authorized by the OCC, no person
obtaining access to non-public OCC information under this section may
make a copy of the information and no person may remove non-public OCC
information from the premises of the institution, agency, or other party
in authorized possession of the information.
[63 FR 62929, Nov. 10, 1998, as amended at 64 FR 29216, June 1, 1999]
Sec. 4.37 Persons and entities with access to OCC information; prohibition on
dissemination.
(a) Current and former OCC employees or agents--(1) Generally.
Except as authorized by this subpart or otherwise by the OCC, no current
or former OCC employee or agent may, in any manner, disclose or permit
the disclosure of any non-public OCC information to anyone other than an
employee or agent of the Comptroller for use in the performance of OCC
duties.
(2) Duty of person served. Any current or former OCC employee or
agent subpoenaed or otherwise requested to provide information covered
by this subpart must immediately notify the OCC as provided in this
paragraph. The OCC may intervene, attempt to have the compulsory process
withdrawn, and register appropriate objections when a current or former
OCC employee or agent receives a subpoena and the subpoena requires the
current or former
[[Page 117]]
employee or agent to appear or produce OCC information. If necessary,
the current or former employee or agent must appear as required and
respectfully decline to produce the information sought, citing this
subpart as authority and United States ex rel. Touhy v. Ragen, 340 U.S.
462 (1951). The current or former OCC employee or agent must immediately
notify the OCC if subpoenaed or otherwise asked for non-public OCC
information:
(i) In a civil action, by notifying the Director of the OCC's
Litigation Division at the Washington office; or
(ii) In a criminal action, by notifying the appropriate district
counsel for current and former district employees or agents; or the
Director of the OCC's Enforcement and Compliance Division at the
Washington office, for current and former Washington employees or
agents.
(b) Non-OCC employees or entities--(1) Generally. (i) Without OCC
approval, no person, national bank, or other entity, including one in
lawful possession of non-public OCC information under paragraph (b)(2)
of this section, may disclose information covered by this subpart in any
manner, except:
(A) After the requester has sought the information from the OCC
pursuant to the procedures set forth in this subpart; and
(B) As ordered by a Federal court in a judicial proceeding in which
the OCC has had the opportunity to appear and oppose discovery.
(ii) Any person who discloses or uses non-public OCC information
except as expressly permitted by the Comptroller of the Currency or as
ordered by a Federal court, under paragraph (b)(1)(i) of this section,
may be subject to the penalties provided in 18 U.S.C. 641.
(2) Exception for national banks. When necessary or appropriate for
bank business purposes, a national bank or holding company, or any
director, officer, or employee thereof, may disclose non-public OCC
information, including information contained in, or related to, OCC
reports of examination, to a person or organization officially connected
with the bank as officer, director, employee, attorney, auditor, or
independent auditor. A national bank or holding company or a director,
officer, or employee thereof may also release non-public OCC information
to a consultant under this paragraph if the consultant is under a
written contract to provide services to the bank and the consultant has
a written agreement with the bank in which the consultant:
(i) States its awareness of, and agreement to abide by, the
prohibition on the dissemination of non-public OCC information contained
in paragraph (b)(1) of this section; and
(ii) Agrees not to use the non-public OCC information for any
purpose other than as provided under its contract to provide services to
the bank.
(3) Duty of person or entity served. Any person, national bank, or
other entity served with a request, subpoena, order, motion to compel,
or other judicial or administrative process to provide non-public OCC
information shall:
(i) Immediately notify the Director of the OCC's Litigation Division
at the Washington, DC office and inform the Director of all relevant
facts, including the documents and information requested, so that the
OCC may intervene in the judicial or administrative action if
appropriate;
(ii) Inform the requester of the substance of these rules and, in
particular, of the obligation to follow the request procedures in
Sec. Sec. 4.33 and 4.34; and
(iii) At the appropriate time, inform the court or tribunal that
issued the process of the substance of these rules.
(4) Actions of the OCC following notice of service. Following
receipt of notice pursuant to paragraph (b)(3) of this section, the OCC
may direct the requester to comply with Sec. Sec. 4.33 and 4.34,
intervene in the judicial or administrative action, attempt to have the
compulsory process withdrawn, or register other appropriate objections.
(5) Return of records. The OCC may require any person in possession
of OCC records to return the records to the OCC.
(c) Disclosure to government agencies. When not prohibited by law,
the Comptroller may make available to the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, and,
in the Comptroller's sole discretion, to certain other government
agencies of the
[[Page 118]]
United States and foreign governments, state agencies with authority to
investigate violations of criminal law, and state bank regulatory
agencies, a copy of a report of examination, testimony, or other non-
public OCC information for their use, when necessary, in the performance
of their official duties. All non-public OCC information made available
pursuant to this paragraph is OCC property, and the OCC may condition
its use on appropriate confidentiality protections, including the
mechanisms identified in Sec. 4.37.
(d) Intention of OCC not to waive rights. The possession by any of
the entities or individuals described in paragraphs (a), (b), and (c) of
this section of non-public OCC information does not constitute a waiver
by the OCC of its right to control, or impose limitations on, the
subsequent use and dissemination of the information.
[60 FR 57322, Nov. 15, 1995. Redesignated and amended at 63 FR 62929,
Nov. 10, 1998; 64 FR 29217, June 1, 1999]
Effective Date Note: At 75 FR 75576, Dec. 3, 2010, Sec. 4.37 was
amended in (c) by removing the reference to ``Sec. 4.37'' in the last
sentence and adding in lieu thereof ``Sec. 4.38.'', effective Jan. 3,
2011.
Sec. 4.38 Restrictions on dissemination of released information.
(a) Records. The OCC may condition a decision to release non-public
OCC information on entry of a protective order by the court or
administrative tribunal presiding in the particular case or, in non-
adversarial matters, on a written agreement of confidentiality. In a
case in which a protective order has already been entered, the OCC may
condition approval for release of non-public OCC information upon the
inclusion of additional or amended provisions in the protective order.
The OCC may authorize a party who obtained records for use in one case
to provide them to another party in another case.
(b) Testimony. The OCC may condition its authorization of deposition
testimony on an agreement of the parties to appropriate limitations,
such as an agreement to keep the transcript of the testimony under seal
or to make the transcript available only to the parties, the court, and
the jury. Upon request or on its own initiative, the OCC may allow use
of a transcript in other litigation. The OCC may require the requester,
at the requester's expense, to furnish the OCC with a copy of the
transcript. The OCC employee whose deposition was transcribed does not
waive his or her right to review the transcript and to note errors.
[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]
Sec. 4.39 Notification of parties and procedures for sharing and using OCC
records in litigation.
(a) Responsibility of litigants to notify parties of a request for
testimony. Upon submitting a request to the OCC for the testimony of an
OCC employee or former employee, the requester shall notify all other
parties to the case that a request has been submitted.
(b) Responsibility of litigants to share released records. The
requester shall promptly notify other parties to a case of the release
of non-public OCC information obtained pursuant to this subpart, and,
upon entry of a protective order, shall provide copies of OCC
information, including OCC information obtained pursuant to Sec. 4.15,
to the other parties.
(c) Retrieval and destruction of released records. At the conclusion
of an action:
(1) The requester shall retrieve any non-public OCC information from
the court's file as soon as the court no longer requires the
information;
(2) Each party shall destroy the non-public OCC information covered
by the protective order; and
(3) Each party shall certify to the OCC that the non-public OCC
information covered by the protective order has been destroyed.
(d) Authentication for use as evidence. Upon request, the OCC
authenticates released records to facilitate their use as evidence.
Requesters who require authenticated records or certificates of
nonexistence of records should, as early as possible, request
certificates from the OCC's Litigation Division pursuant to Sec.
4.34(a).
[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]
[[Page 119]]
Sec. 4.40 Fees for services.
(a) Fees for records search, copying, and certification. The
requester shall pay a fee to the OCC, or to a commercial copier under
contract to the OCC, for any records search, copying, or certification
in accordance with the standards specified in Sec. 4.17. The OCC may
require a requester to remit payment prior to providing the requested
information.
(b) Witness fees and mileage. A person whose request for testimony
of a current OCC employee is approved shall, upon completion of the
testimonial appearance, tender promptly to the OCC payment for the
witness fees and mileage. The litigant shall compute these amounts in
accordance with 28 U.S.C. 1821. A litigant whose request for testimony
of a former OCC employee is approved shall tender promptly to the
witness any witness fees or mileage due in accordance with 28 U.S.C.
1821.
[60 FR 57322, Nov. 15, 1995. Redesignated at 63 FR 62929, Nov. 10, 1998]
Sec. Appendix A to Subpart C of Part 4--Model Stipulation for Protective
Order and Model Protective Order
I. Model Stipulation
CASE CAPTION
Model Stipulation for Protective Order
Whereas, counsel for ------------ have applied to the Comptroller of
the Currency (hereinafter ``Comptroller'') pursuant to 12 CFR part 4,
Subpart C, for permission to have made available, in connection with the
captioned action, certain records; and
Whereas, such records are deemed by the Comptroller to be
confidential and privileged, pursuant to 12 U.S.C. 481; 5 U.S.C.
552(b)(8); 18 U.S.C. 641, 1906; and 12 CFR 4.12, and part 4, Subpart C;
and
Whereas, following consideration by the Comptroller of the
application of the above described party, the Comptroller has determined
that the particular circumstances of the captioned action warrant making
certain possibly relevant records as denoted in appendix ``A'' to this
Stipulation [records to be specified by type and date] available to the
parties in this action, provided that appropriate protection of their
confidentiality can be secured;
Therefore, it is hereby stipulated by and between the parties
hereto, through their respective attorneys that they will be bound by
the following protective order which may be entered by the Court without
further notice.
Dated this ------------ day of --------------, 19----.
________________________________________________________________________
Attorney for Plaintiff
________________________________________________________________________
Attorney for Defendant
II. Model Protective Order
CASE CAPTION
Model Protective Order
Whereas, counsel for ------------ have applied to the Comptroller of
the Currency (hereinafter Comptroller'') pursuant to 12 CFR part 4,
Subpart C, for permission to have made available, in connection with the
captioned action, certain records; and
Whereas, such records are deemed by the Comptroller to be
confidential and privileged, pursuant to 12 U.S.C. 481; 5 U.S.C.
552(b)(8); 18 U.S.C. 641, 1906; and 12 CFR 4.12, and part 4, Subpart C;
Whereas, following consideration by the Comptroller of the
application of the above described party, the Comptroller has determined
that the particular circumstances of the captioned action warrant making
certain possibly relevant records available to the parties in this
action, provided that appropriate protection of their confidentiality
can be secured;
Now, Therefore, it is Ordered That:
1. The records, as denoted in appendix ``A'' to the Stipulation for
this Protective Order, upon being furnished [or released for use] by the
Comptroller, shall be disclosed only to the parties to this action,
their counsel, and the court [and the jury].
2. The parties to this action and their counsel shall keep such
records and any information contained in such records confidential and
shall in no way divulge the same to any person or entity, except to such
experts, consultants and non-party witnesses to whom the records and
their contents shall be disclosed, solely for the purpose of properly
preparing for and trying the action.
3. No person to whom information and records covered by this Order
are disclosed shall make any copies or otherwise use such information or
records or their contents for any purpose whatsoever, except in
connection with this action.
4. Any party or other person who wishes to use the information or
records or their contents in any other action shall make a separate
application to the Comptroller pursuant to 12 CFR part 4, Subpart C.
5. Should any records covered by this Order be filed with the Court
or utilized as exhibits at depositions in the captioned action, or
should information or records or their contents covered by this Order be
disclosed in
[[Page 120]]
the transcripts of depositions or the trial in the captioned action,
such records, exhibits and transcripts shall be filed in sealed
envelopes or other sealed containers marked with the title of this
action, identifying each document and article therein and bearing a
statement substantially in the following form:
CONFIDENTIAL
Pursuant to the Order of the Court dated ------------ this envelope
containing the above-identified papers filed by (the name of the party)
is not to be opened nor the contents thereof displayed or revealed
except to the parties to this action or their counsel or by further
Order of the Court.
6. FOR JURY TRIAL: Any party offering any of the records into
evidence shall offer only those pages, or portions thereof, that are
relevant and material to the issues to be decided in the action and
shall block out any portion of any page that contains information not
relevant or material. Furthermore, the name of any person or entity
contained on any page of the records who is not a party to this action,
or whose name is not otherwise relevant or material to the action, shall
be blocked out prior to the admission of such page into evidence. Any
disagreement regarding what portion of any page that should be blocked
out in this manner shall be resolved by the Court in camera, and the
Court shall decide its admissibility into evidence.
7. At the conclusion of this action, all parties shall certify to
the Comptroller that the records covered by this Order have been
destroyed. Furthermore, counsel for ------------, pursuant to 12 CFR
4.39(c), shall retrieve any records covered by this Order that may have
been filed with the Court.
So Ordered:
________________________________________________________________________
Judge
Date
[60 FR 57322, Nov. 15, 1995, as amended at 64 FR 29217, June 1, 1999]
Subpart D_Minority- , Women- , and Individuals With Disabilities-Owned
Business Contracting Outreach Program; Contracting for Goods and
Services
Sec. 4.61 Purpose.
Pursuant to the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989, Sec. 1216(c), Pub. L. 101-73, 103 Stat. 183,
529 (12 U.S.C. 1833e(c)) and consistent with the Rehabilitation Act of
1973, as amended (29 U.S.C. 701 et seq.), this subpart establishes the
OCC Minority- , Women- , and Individuals with Disabilities-Owned
Business Contracting Outreach Program (Outreach Program). The Outreach
Program is intended to ensure that firms owned and operated by
minorities, women, and individuals with disabilities have the
opportunity to participate, to the maximum extent possible, in all
contracting activities of the OCC.
Sec. 4.62 Definitions.
(a) Minority- and/or women-owned (small and large) businesses and
entities owned by minorities and women (MWOB) means firms at least 51
percent unconditionally-owned by one or more members of a minority group
or by one or more women who are citizens of the United States. In the
case of publicly-owned companies, at least 51 percent of each class of
voting stock must be unconditionally-owned by one or more members of a
minority group or by one or more women who are citizens of the United
States. In the case of a partnership, at least 51 percent of the
partnership interest must be unconditionally-owned by one or more
members of a minority group or by one or more women who are citizens of
the United States. Additionally, for the foregoing cases, the management
and daily business operations must be controlled by one or more such
individuals.
(b) Minority means any African American, Native American (i.e.,
American Indian, Eskimo, Aleut and Native Hawaiian), Hispanic American,
Asian-Pacific American, or Subcontinent-Asian American.
(c) Individual with disabilities-owned (small and large) businesses
and entities owned by individuals with disabilities (IDOB) means firms
at least 51 percent unconditionally-owned by one or more members who are
individuals with disabilities and citizens of the United States. In the
case of publicly-owned companies, at least 51 percent of each class of
voting stock must be unconditionally-owned by one or more members who
are individuals with disabilities and who are citizens of the United
States. In the case of a partnership, at least 51 percent of the
partnership interest must be unconditionally-owned
[[Page 121]]
by one or more members who are individuals with disabilities and
citizens of the United States. Additionally, for the foregoing cases,
the management and daily business operations must be controlled by one
or more such individuals.
(d) Individual with disabilities means any person who has a physical
or mental impairment that substantially limits one or more of such
person's major life activities, has a record of such an impairment, or
is regarded as having such an impairment. For purposes of this part, it
does not include an individual who is currently engaging in the illegal
use of drugs nor an individual who has a currently contagious disease or
infection and who, by reason of such disease or infection, would
constitute a direct threat to the health or safety of other individuals
or who, by reason of the currently contagious disease or infection, is
unable to perform the duties of the job as defined by the IDOB.
(e) Unconditional ownership means ownership that is not subject to
conditions or similar arrangements which cause the benefits of the
Outreach Program to accrue to persons other than the participating MWOB
or IDOB.
Sec. 4.63 Policy.
The OCC's policy is to ensure that MWOBs and IDOBs have the
opportunity to participate, to the maximum extent possible, in contracts
awarded by the OCC. The OCC awards contracts consistent with the
principles of full and open competition and best value acquisition, and
with the concept of contracting for agency needs at the lowest
practicable cost. The OCC ensures that MWOBs and IDOBs have the
opportunity to participate fully in all contracting activities that the
OCC enters into for goods and services, whether generated by the
headquarters office in Washington, DC, or any other office of the OCC.
Contracting opportunities may include small purchase awards, contracts
above the small purchase threshold, and delivery orders issued against
other governmental agency contracts.
Sec. 4.64 Promotion.
(a) Scope. The OCC, under the direction of the Deputy Comptroller
for Resource Management, engages in promotion and outreach activities
designed to identify MWOBs and IDOBs capable of providing goods and
services needed by the OCC, to facilitate interaction between the OCC
and the MWOBs and IDOBs community, and to indicate the OCC's commitment
to doing business with that community. The Outreach Program is designed
to facilitate OCC's participation in business promotion events sponsored
by other government agencies and attended by minorities, women and
individuals with disabilities. Once the OCC has identified a prospective
participant, it will assist the minority- or women-owned business or
individual with disabilities-owned business in understanding the OCC's
needs and contracting process.
(b) Outreach activities. OCC's Outreach Program includes the
following:
(1) Obtaining various lists and directories of MWOBs and IDOBs
maintained by government agencies;
(2) Contacting appropriate firms for participation in the OCC's
Outreach Program;
(3) Participating in business promotion events comprised of or
attended by MWOBs and IDOBs to explain OCC contracting opportunities and
to obtain names of potential MWOBs and IDOBs;
(4) Ensuring that the OCC contracting staff understands and actively
promotes this Outreach Program; and
(5) Registering MWOBs and IDOBs in the Department of the Treasury's
database to facilitate their participation in the competitive
procurement process for OCC contracts. This database is used by OCC
procurement staff to identify firms to be solicited for OCC
procurements.
Sec. 4.65 Certification.
(a) Objective. To preserve the integrity and foster the Outreach
Program's objectives, each prospective MWOB or IDOB must demonstrate
that it meets the ownership and control requirements for participation
in the Outreach Program.
(b) MWOB. A prospective MWOB may demonstrate its eligibility for
participation in the Outreach Program by:
[[Page 122]]
(1) Submitting a valid MWOB certification received from another
government agency whose definition of MWOB is substantially similar to
that specified in Sec. 4.62(a);
(2) Self-certifying MWOB ownership status by filing with the OCC a
completed and signed certification form as prescribed by the Federal
Acquisition Regulation, 48 CFR 53.301-129; or
(3) Submitting a valid MWOB certification received from the Small
Business Administration.
(c) IDOB. A prospective IDOB may demonstrate its eligibility for
participation in the Outreach Program by:
(1) Submitting a valid IDOB certification received from another
government agency whose definition of IDOB is substantially similar to
that specified in Sec. 4.62(c); or
(2) Self-certifying IDOB ownership status by filing with the OCC a
completed and signed certification as prescribed in the Federal
Acquisition Regulation, 48 CFR 53.301-129, and adding an additional
certifying statement to read as follows:
I certify that I am an individual with disabilities as defined in 12
CFR 4.62(d), and that my firm, (Name of Firm) qualifies as an individual
with disabilities-owned business as defined in 12 CFR 4.62(c).
Sec. 4.66 Oversight and monitoring.
The Deputy Comptroller for Resource Management shall appoint an
Outreach Program Manager, who shall appoint an Outreach Program
Specialist. The Outreach Program Manager is primarily responsible for
program advocacy, oversight and monitoring.
Subpart E_One-Year Restrictions on Post-Employment Activities of Senior
Examiners
Source: 70 FR 69637, Nov. 17, 2005, unless otherwise noted.
Sec. 4.72 Scope and purpose.
This subpart describes those OCC examiners who are subject to the
post-employment restrictions set forth in section 10(k) of the Federal
Deposit Insurance Act (FDI Act) (12 U.S.C. 1820(k)) and implements those
restrictions for officers and employees of the OCC.
Sec. 4.73 Definitions.
For purposes of this subpart:
Bank holding company means any company that controls a bank (as
provided in section 2 of the Bank Holding Company Act of 1956 (12 U.S.C.
1841 et seq.)).
Consultant. For purposes of this subpart, a consultant for a
national bank, bank holding company, or other company shall include only
an individual who works directly on matters for, or on behalf of, such
bank, bank holding company, or other company.
Control has the meaning given in section 2 of the Bank Holding
Company Act (12 U.S.C. 1841(a)). For purposes of this subpart, a foreign
bank shall be deemed to control any branch or agency of the foreign
bank.
Depository institution has the meaning given in section 3 of the FDI
Act (12 U.S.C. 1813(c)). For purposes of this subpart, a depository
institution includes an uninsured branch or agency of a foreign bank, if
such branch or agency is located in any State.
Federal Reserve means the Board of Governors of the Federal Reserve
System and the Federal Reserve Banks.
Foreign bank means any foreign bank or company described in section
8(a) of the International Banking Act of 1978 (12 U.S.C. 3106(a)).
Insured depository institution has the meaning given in section 3 of
the FDI Act (12 U.S.C. 1813(c)(2)).
National bank means a national banking association or a Federal
branch or agency of a foreign bank.
Senior examiner. For purposes of this subpart, an officer or
employee of the OCC is considered to be the ``senior examiner'' for a
particular national bank if--
(1) The officer or employee has been authorized by the OCC to
conduct examinations on behalf of the OCC;
(2) The officer or employee has been assigned continuing, broad, and
lead responsibility for examining the national bank; and
(3) The officer's or employee's responsibilities for examining the
national bank--
[[Page 123]]
(i) Represent a substantial portion of the officer's or employee's
assigned responsibilities; and
(ii) Require the officer or employee to interact routinely with
officers or employees of the national bank or its affiliates.
Sec. 4.74 One-year post-employment restrictions.
An officer or employee of the OCC who serves as the senior examiner
of a national bank for two or more months during the last twelve months
of such individual's employment with the OCC may not, within one year
after leaving the employment of the OCC, knowingly accept compensation
as an employee, officer, director or consultant from the national bank,
or any company (including a bank holding company) that controls the
national bank.
Sec. 4.75 Effective date; waivers.
The post-employment restrictions set forth in section 10(k) of the
FDI Act and Sec. 4.74 do not apply to any officer or employee of the
OCC, or any former officer or employee of the OCC, if--
(a) The individual ceased to be an officer or employee of the OCC
before December 17, 2005; or
(b) The Comptroller of the Currency certifies, in writing and on a
case-by-case basis, that granting the individual a waiver of the
restrictions would not affect the integrity of the OCC's supervisory
program.
Sec. 4.76 Penalties.
(a) Penalties under section 10(k) of FDI Act. If a senior examiner
of a national bank, after leaving the employment of the OCC, accepts
compensation as an employee, officer, director, or consultant from that
bank, or any company (including a bank holding company) that controls
that bank, then the examiner shall, in accordance with section 10(k)(6)
of the FDI Act, be subject to one of the following penalties--
(1) An order--
(i) Removing the individual from office or prohibiting the
individual from further participation in the affairs of the relevant
national bank, bank holding company, or other company that controls such
institution for a period of up to five years; and
(ii) Prohibiting the individual from participating in the affairs of
any insured depository institution for a period of up to five years; or
(2) A civil monetary penalty of not more than $250,000.
(b) Enforcement by appropriate Federal banking agency. Violations of
Sec. 4.74 shall be administered or enforced by the appropriate Federal
banking agency for the depository institution or depository institution
holding company that provided compensation to the former senior
examiner. For purposes of this paragraph, the appropriate Federal
banking agency for a company that is not a depository institution or
depository institution holding company shall be the Federal banking
agency that formerly employed the senior examiner.
(c) Scope of prohibition orders. Any senior examiner who is subject
to an order issued under paragraph (a) of this section shall, as
required by 12 U.S.C. 1820(k)(6)(B), be subject to paragraphs (6) and
(7) of section 8(e) of the FDI Act (12 U.S.C. 1818(e)(6)-(7)) in the
same manner and to the same extent as a person subject to an order
issued under section 8(e).
(d) Procedures. The procedures applicable to actions under paragraph
(a) of this section are provided in section 10(k)(6) of the FDI Act (12
U.S.C. 1820(k)(6)) and in 12 CFR part 19.
(e) Remedies not exclusive. The OCC may seek both of the penalties
described in paragraph (a) of this section. In addition, a senior
examiner who accepts compensation as described in Sec. 4.74 may be
subject to other administrative, civil or criminal remedies or penalties
as provided in law.
PART 5_RULES, POLICIES, AND PROCEDURES FOR CORPORATE ACTIVITIES--Table of
Contents
Sec.
5.1 Scope.
Subpart A_Rules of General Applicability
5.2 Rules of general applicability.
5.3 Definitions.
5.4 Filing required.
5.5 Fees.
5.6 [Reserved]
5.7 Investigations.
[[Page 124]]
5.8 Public notice.
5.9 Public availability.
5.10 Comments.
5.11 Hearings and other meetings.
5.12 Computation of time.
5.13 Decisions.
Subpart B_Initial Activities
5.20 Organizing a bank.
5.24 Conversion.
5.26 Fiduciary powers.
Subpart C_Expansion of Activities
5.30 Establishment, acquisition, and relocation of a branch.
5.32 Expedited procedures for certain reorganizations.
5.33 Business combinations.
5.34 Operating subsidiaries.
5.35 Bank service companies.
5.36 Other equity investments.
5.37 Investment in bank premises.
5.39 Financial subsidiaries.
Subpart D_Other Changes in Activities and Operations
5.40 Change in location of main office.
5.42 Corporate title.
5.46 Changes in permanent capital.
5.47 Subordinated debt as capital.
5.48 Voluntary liquidation.
5.50 Change in bank control; reporting of stock loans.
5.51 Changes in directors and senior executive officers.
5.52 Change of address.
5.53 Change in asset composition.
Subpart E_Payment of Dividends
5.60 Authority, scope, and exceptions to rules of general applicability.
5.61 Definitions.
5.62 Date of declaration of dividend.
5.63 Capital limitation under 12 U.S.C. 56.
5.64 Earnings limitation under 12 U.S.C. 60.
5.65 Restrictions on undercapitalized institutions.
5.66 Dividends payable in property other than cash.
5.67 Fractional shares.
Subpart F_Federal Branches and Agencies
5.70 Federal branches and agencies.
Authority: 12 U.S.C. 1 et seq., 93a, 215a-2, 215a-3, 481, and
section 5136A of the Revised Statutes (12 U.S.C. 24a).
Source: 61 FR 60363, Nov. 27, 1996, unless otherwise noted.
Sec. 5.1 Scope.
This part establishes rules, policies and procedures of the Office
of the Comptroller of the Currency (OCC) for corporate activities and
transactions involving national banks. It contains information on rules
of general and specific applicability, where and how to file, and
requirements and policies applicable to filings. This part also
establishes the corporate filing procedures for Federal branches and
agencies of foreign banks.
Subpart A_Rules of General Applicability
Sec. 5.2 Rules of general applicability.
(a) General. The rules in this subpart apply to all sections in this
part unless otherwise stated.
(b) Exceptions. The OCC may adopt materially different procedures
for a particular filing, or class of filings, in exceptional
circumstances or for unusual transactions, after providing notice of the
change to the applicant and to any other party that the OCC determines
should receive notice.
(c) Additional information. The ``Comptroller's Licensing Manual''
(Manual) provides additional guidance, including policies, procedures,
and sample forms. The Manual is available on the OCC's Internet Web page
at http://www.occ.treas.gov. Printed copies are available for a fee from
Publications, Communications Division, Comptroller of the Currency, 250
E Street, SW., Washington, DC 20219-0001.
(d) Electronic filing. The OCC may permit electronic filing for any
class of filings. The Manual identifies filings that may be made
electronically and describes the procedures that the OCC requires in
those cases.
[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 17892, Apr. 14, 2003]
Sec. 5.3 Definitions.
(a) Applicant means a person or entity that submits a notice or
application to the OCC under this part.
(b) Application means a submission requesting OCC approval to engage
in various corporate activities and transactions.
(c) Appropriate district office means:
[[Page 125]]
(1) The Licensing Department for all national bank subsidiaries of
those holding companies assigned to the Washington, DC, licensing unit;
(2) The appropriate OCC district office for all national bank
subsidiaries of certain holding companies assigned to a district office
licensing unit;
(3) The OCC's district office where the national bank's supervisory
office is located for all other banks; or
(4) The licensing unit in the Northeastern District Office for
Federal branches and agencies of foreign banks.
(d) Capital and surplus means:
(1) A bank's Tier 1 and Tier 2 capital calculated under the OCC's
risk-based capital standards set forth in appendix A to 12 CFR part 3 as
reported in the bank's Consolidated Report of Condition and Income filed
under 12 U.S.C. 161; plus
(2) The balance of a bank's allowance for loan and lease losses not
included in the bank's Tier 2 capital, for purposes of the calculation
of risk-based capital described in paragraph (d)(1) of this section, as
reported in the bank's Consolidated Report of Condition and Income filed
under 12 U.S.C. 161.
(e) Central city means the city or cities identified as central
cities by the Director of the Office of Management and Budget.
(f) Depository institution means any bank or savings association.
(g) Eligible bank means a national bank that:
(1) Is well capitalized as defined in 12 CFR 6.4(b)(1);
(2) Has a composite rating of 1 or 2 under the Uniform Financial
Institutions Rating System (CAMELS);
(3) Has a Community Reinvestment Act (CRA), 12 U.S.C. 2901 et seq. ,
rating of ``Outstanding'' or ``Satisfactory''; and
(4) Is not subject to a cease and desist order, consent order,
formal written agreement, or Prompt Corrective Action directive (see 12
CFR part 6, subpart B) or, if subject to any such order, agreement, or
directive, is informed in writing by the OCC that the bank may be
treated as an ``eligible bank'' for purposes of this part.
(h) Eligible depository institution means a state bank or a Federal
or state savings association that meets the criteria for an ``eligible
bank'' under Sec. 5.3(g) and is FDIC-insured.
(i) Filing means an application or notice submitted to the OCC under
this part.
(j) Notice means a submission notifying the OCC that a national bank
intends to engage in or has commenced certain corporate activities or
transactions.
(k) Short-distance relocation means moving the premises of a branch
or main office within a:
(1) One thousand foot-radius of the site if the branch is located
within a central city of an MSA;
(2) One-mile radius of the site if the branch is not located within
a central city, but is located within an MSA; or
(3) Two-mile radius of the site if the branch is not located within
an MSA.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 68
FR 70698, Dec. 19, 2003; 73 FR 22236, Apr. 24, 2008]
Sec. 5.4 Filing required.
(a) Filing. A depository institution shall file an application or
notice with the OCC to engage in corporate activities and transactions
as described in this part.
(b) Availability of forms. Individual sample forms and instructions
for filings are available in the Manual and from each district office.
(c) Other applications accepted. At the request of the applicant,
the OCC may accept an application form or other filing submitted to
another Federal agency that covers the proposed action or transaction
and contains substantially the same information as required by the OCC.
The OCC may also require the applicant to submit supplemental
information.
(d) Where to file. An applicant should address a filing or other
submission under this part to the attention of the Director for District
Licensing at the appropriate district office. However, the OCC may
advise an applicant through a pre-filing communication to send the
filing or submission directly to the Licensing Department or elsewhere
as otherwise directed by the OCC. Relevant addresses are listed in the
Manual.
[[Page 126]]
(e) Incorporation of other material. An applicant may incorporate
any material contained in any other application or filing filed with the
OCC or other Federal agency by reference, provided that the material is
attached to the application and is current and responsive to the
information requested by the OCC. The filing must clearly indicate that
the information is so incorporated and include a cross-reference to the
information incorporated.
[61 FR 60363, Nov. 27, 1996, as amended at 73 FR 22236, Apr. 24, 2008]
Sec. 5.5 Fees.
An applicant shall submit the appropriate filing fee, if any, in
connection with its filing. An applicant shall pay the fee by check
payable to the Comptroller of the Currency or by other means acceptable
to the OCC. The OCC publishes a fee schedule annually in the ``Notice of
Comptroller of the Currency fees,'' described in 12 CFR 8.8. The OCC
generally does not refund the filing fees.
Sec. 5.6 [Reserved]
Sec. 5.7 Investigations.
(a) Authority. The OCC may examine or investigate and evaluate facts
related to a filing to the extent necessary to reach an informed
decision.
(b) Fees. The OCC may assess fees for investigations or examinations
conducted under paragraph (a) of this section. The OCC publishes the
rates, described in 12 CFR 8.6, annually in the ``Notice of Comptroller
of the Currency fees.''
Sec. 5.8 Public notice.
(a) General. An applicant shall publish a public notice of its
filing in a newspaper of general circulation in the community in which
the applicant proposes to engage in business, on the date of filing, or
as soon as practicable before or after the date of filing.
(b) Contents of the public notice. The public notice shall state
that a filing is being made, the date of the filing, the name of the
applicant, the subject matter of the filing, that the public may submit
comments to the OCC, the address of the appropriate office(s) where
comments should be sent, the closing date of the public comment period,
and any other information that the OCC requires.
(c) Confirmation of public notice. The applicant shall mail or
otherwise deliver a statement containing the date of publication, the
name and address of the newspaper that published the public notice, a
copy of the public notice, and any other information that the OCC
requires, to the appropriate district office promptly following
publication.
(d) Multiple transactions. The OCC may consider more than one
transaction, or a series of transactions, to be a single filing for
purposes of the publication requirements of this section. When filing a
single public notice for multiple transactions, the applicant shall
explain in the notice how the transactions are related.
(e) Joint public notices accepted. Upon the request of an applicant
for a transaction subject to the OCC's public notice requirements and
public notice required by another Federal agency, the OCC may accept
publication of a single joint notice containing the information required
by both the OCC and the other Federal agency, provided that the notice
states that comments must be submitted to both the OCC and, if
applicable, the other Federal agency.
(f) Public notice by the OCC. In addition to the foregoing, the OCC
may require or give public notice and request comment on any filing and
in any manner the OCC determines appropriate for the particular filing.
Sec. 5.9 Public availability.
(a) General. The OCC provides a copy of the public file to any
person who requests it. A requestor should submit a request for the
public file concerning a pending application to the appropriate district
office. A requestor should submit a request for the public file
concerning a decided or closed application to the Disclosure Officer,
Communications Division, at the address listed in the Manual. Requests
should be in writing. The OCC may impose a fee in accordance with 12 CFR
4.17 and with the rates the OCC publishes annually in the ``Notice of
Comptroller of the Currency Fees'' described in 12 CFR 8.8.
[[Page 127]]
(b) Public file. A public file consists of the portions of the
filing, supporting data, supplementary information, and information
submitted by interested persons, to the extent that those documents have
not been afforded confidential treatment. Applicants and other
interested persons may request that confidential treatment be afforded
information submitted to the OCC pursuant to paragraph (c) of this
section.
(c) Confidential treatment. The applicant or an interested person
submitting information may request that specific information be treated
as confidential under the Freedom of Information Act, 5 U.S.C. 552 (see
12 CFR 4.12(b)). A submitter should draft its request for confidential
treatment narrowly to extend only to those portions of a document it
considers to be confidential. If a submitter requests confidential
treatment for information that the OCC does not consider to be
confidential, the OCC may include that information in the public file
after providing notice to the submitter. Moreover, at its own
initiative, the OCC may determine that certain information should be
treated as confidential and withhold that information from the public
file. A person requesting information withheld from the public file
should submit the request to the Disclosure Officer, Communications
Division, under the procedures described in 12 CFR part 4, subpart B.
That request may be subject to the predisclosure notice procedures of 12
CFR 4.16.
Sec. 5.10 Comments.
(a) Submission of comments. During the comment period, any person
may submit written comments on a filing to the appropriate district
office.
(b) Comment period--(1) General. Unless otherwise stated, the
comment period is 30 days after publication of the public notice
required by Sec. 5.8(a).
(2) Extension. The OCC may extend the comment period if:
(i) The applicant fails to file all required publicly available
information on a timely basis to permit review by interested persons or
makes a request for confidential treatment not granted by the OCC that
delays the public availability of that information;
(ii) Any person requesting an extension of time satisfactorily
demonstrates to the OCC that additional time is necessary to develop
factual information that the OCC determines is necessary to consider the
application; or
(iii) The OCC determines that other extenuating circumstances exist.
(3) Applicant response. The OCC may give the applicant an
opportunity to respond to comments received.
Sec. 5.11 Hearings and other meetings.
(a) Hearing requests. Prior to the end of the comment period, any
person may submit to the appropriate district office a written request
for a hearing on a filing. The request must describe the nature of the
issues or facts to be presented and the reasons why written submissions
would be insufficient to make an adequate presentation of those issues
or facts to the OCC. A person requesting a hearing shall simultaneously
submit a copy of the request to the applicant.
(b) Action on a hearing request. The OCC may grant or deny a request
for a hearing and may limit the issues to those it deems relevant or
material. The OCC generally grants a hearing request only if the OCC
determines that written submissions would be insufficient or that a
hearing would otherwise benefit the decisionmaking process. The OCC also
may order a hearing if it concludes that a hearing would be in the
public interest.
(c) Denial of a hearing request. If the OCC denies a hearing
request, it shall notify the person requesting the hearing of the reason
for the denial.
(d) OCC procedures prior to the hearing--(1) Notice of Hearing. The
OCC issues a Notice of Hearing if it grants a request for a hearing or
orders a hearing because it is in the public interest. The OCC sends a
copy of the Notice of Hearing to the applicant, to the person requesting
the hearing, and anyone else requesting a copy. The Notice of Hearing
states the subject and date of the filing, the time and place of the
hearing, and the issues to be addressed.
(2) Presiding officer. The OCC appoints a presiding officer to
conduct the hearing. The presiding officer is responsible
[[Page 128]]
for all procedural questions not governed by this section.
(e) Participation in the hearing. Any person who wishes to appear
(participant) shall notify the appropriate district office of his or her
intent to participate in the hearing within ten days from the date the
OCC issues the Notice of Hearing. At least five days before the hearing,
each participant shall submit to the appropriate district office, the
applicant, and any other person the OCC requires, the names of
witnesses, and one copy of each exhibit the participant intends to
present.
(f) Transcripts. The OCC arranges for a hearing transcript. The
person requesting the hearing generally bears the cost of one copy of
the transcript for his or her use.
(g) Conduct of the hearing--(1) Presentations. Subject to the
rulings of the presiding officer, the applicant and participants may
make opening statements and present witnesses, material, and data.
(2) Information submitted. A person presenting documentary material
shall furnish one copy to the OCC, and one copy to the applicant and
each participant.
(3) Laws not applicable to hearings. The Administrative Procedure
Act (5 U.S.C. 551 et seq.), the Federal Rules of Evidence (28 U.S.C.
appendix), the Federal Rules of Civil Procedure (28 U.S.C. Rule 1 et
seq.), and the OCC's Rules of Practice and Procedure (12 CFR part 19) do
not apply to hearings under this section.
(h) Closing the hearing record. At the applicant's or participant's
request, the OCC may keep the hearing record open for up to 14 days
following the OCC's receipt of the transcript. The OCC resumes
processing the filing after the record closes.
(i) Other meetings--(1) Public meetings. The OCC may arrange for a
public meeting in connection with an application, either upon receipt of
a written request for such a meeting which is made during the comment
period, or upon the OCC's own initiative. Public meetings will be
arranged and presided over by a presiding officer.
(2) Private meetings. The OCC may arrange a meeting with an
applicant or other interested parties to an application, or with an
applicant and other interested parties to an application, to clarify and
narrow the issues and to facilitate the resolution of the issues.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]
Sec. 5.12 Computation of time.
In computing the period of days, the OCC includes the day of the act
(e.g., the date an application is received by the OCC) from which the
period begins to run and the last day of the period, regardless of
whether it is a Saturday, Sunday, or legal holiday.
Sec. 5.13 Decisions.
(a) General. The OCC may approve, conditionally approve, or deny a
filing after appropriate review and consideration of the record. In
deciding an application under this part, the OCC may consider the
activities, resources, or condition of an affiliate of the applicant
that may reasonably reflect on or affect the applicant.
(1) Conditional approval. The OCC may impose conditions on any
approval, including to address a significant supervisory, CRA (if
applicable), or compliance concern, if the OCC determines that the
conditions are necessary or appropriate to ensure that approval is
consistent with relevant statutory and regulatory standards and OCC
policies thereunder and safe and sound banking practices.
(2) Expedited review. The OCC grants eligible banks expedited review
within a specified time after filing or commencement of the public
comment period, including any extension of the comment period granted
pursuant to Sec. 5.10, as described in applicable sections of this
part.
(i) The OCC may extend the expedited review process for a filing
subject to the CRA up to an additional 10 days if a comment contains
specific assertions concerning a bank's CRA performance that, if true,
would indicate a reasonable possibility that:
(A) A bank's CRA rating would be less than satisfactory,
institution-wide, or, where applicable, in a state or multistate MSA; or
(B) A bank's CRA performance would be less than satisfactory in an
MSA, or in the non-MSA portion of a state, in
[[Page 129]]
which it seeks to expand through approval of an application for a
deposit facility as defined in 12 U.S.C. 2902(3).
(ii) The OCC will remove a filing from expedited review procedures,
if the OCC concludes that the filing, or an adverse comment regarding
the filing, presents a significant supervisory, CRA (if applicable), or
compliance concern, or raises a significant legal or policy issue,
requiring additional OCC review. The OCC will provide the applicant with
a written explanation if it decides not to process an application from
an eligible bank under expedited review pursuant to this paragraph
(a)(2)(ii). For purposes of this section, a significant CRA concern
exists if the OCC concludes that:
(A) A bank's CRA rating is less than satisfactory, institution-wide,
or, where applicable, in a state or multistate MSA; or
(B) A bank's CRA performance is less than satisfactory in an MSA, or
in the non-MSA portion of a state, in which it seeks to expand through
approval of an application for a deposit facility as defined in 12
U.S.C. 2902(3).
(iii) Adverse comments that the OCC determines do not raise a
significant supervisory, CRA (if applicable), or compliance concern, or
a significant legal or policy issue, or are frivolous, filed primarily
as a means of delaying action on the filing, or that raise a CRA concern
that the OCC determines has been satisfactorily resolved, do not affect
the OCC's decision under paragraphs (a)(2)(i) or (a)(2)(ii) of this
section. The OCC considers a CRA concern to have been satisfactorily
resolved if the OCC previously reviewed (e.g., in an examination or an
application) a concern presenting substantially the same issue in
substantially the same assessment area during substantially the same
time, and the OCC determines that the concern would not warrant denial
or imposition of a condition on approval of the application.
(iv) If a bank files an application for any activity or transaction
that is dependent upon the approval of another application under this
part, or if requests for approval for more than one activity or
transaction are combined in a single application under applicable
sections of this part, none of the subject applications may be deemed
approved upon expiration of the applicable time periods, unless all of
the applications are subject to expedited review procedures and the
longest of the time periods expires without the OCC issuing a decision
or notifying the bank that the filings are not eligible for expedited
review under the standards in paragraph (a)(2)(ii) of this section.
(b) Denial. The OCC may deny a filing if:
(1) A significant supervisory, CRA (if applicable), or compliance
concern exists with respect to the applicant;
(2) Approval of the filing is inconsistent with applicable law,
regulation, or OCC policy thereunder; or
(3) The applicant fails to provide information requested by the OCC
that is necessary for the OCC to make an informed decision.
(c) Required information and abandonment of filing. A filing must
contain information required by the applicable section set forth in this
part. To the extent necessary to evaluate an application, the OCC may
require an applicant to provide additional information. The OCC may deem
a filing abandoned if information required or requested by the OCC in
connection with the filing is not furnished within the time period
specified by the OCC. The OCC may return an application without a
decision if it finds the filing to be materially deficient. A filing is
materially deficient if it lacks sufficient information for the OCC to
make a determination under the applicable statutory or regulatory
criteria.
(d) Notification of final disposition. The OCC notifies the
applicant, and any person who makes a written request, of the final
disposition of a filing, including confirmation of an expedited review
under this part. If the OCC denies a filing, the OCC notifies the
applicant in writing of the reasons for the denial.
(e) Publication of decision. The OCC will issue a public decision
when a decision represents a new or changed policy or presents issues of
general interest to the public or the banking industry. In rendering its
decisions, the OCC may elect not to disclose information that the OCC
deems to be private or confidential.
[[Page 130]]
(f) Appeal. An applicant may file an appeal of an OCC decision with
the Deputy Comptroller for Licensing or with the Ombudsman. Relevant
addresses and telephone numbers are located in the Manual. In the event
the Deputy Comptroller for Licensing was the deciding official of the
matter appealed, or was involved personally and substantially in the
matter, the appeal may be referred instead to the Chief Counsel.
(g) Extension of time. When the OCC approves or conditionally
approves a filing, the OCC generally gives the applicant a specified
period of time to commence that new or expanded activity. The OCC does
not generally grant an extension of the time specified to commence a new
or expanded corporate activity approved under this part, unless the OCC
determines that the delay is beyond the applicant's control.
(h) Nullifying a decision--(1) Material misrepresentation or
omission. An applicant shall certify that any filing or supporting
material submitted to the OCC contains no material misrepresentations or
omissions. The OCC may review and verify any information filed in
connection with a notice or an application. If the OCC discovers a
material misrepresentation or omission after the OCC has rendered a
decision on the filing, the OCC may nullify its decision. Any person
responsible for any material misrepresentation or omission in a filing
or supporting materials may be subject to enforcement action and other
penalties, including criminal penalties provided in 18 U.S.C. 1001.
(2) Other nullifications. The OCC may nullify any decision on a
filing that is:
(i) Contrary to law, regulation, or OCC policy thereunder; or
(ii) Granted due to clerical or administrative error, or a material
mistake of law or fact.
[61 FR 60363, Nov. 27, 1996, as amended at 73 FR 22236, Apr. 24, 2008]
Subpart B_Initial Activities
Sec. 5.20 Organizing a bank.
(a) Authority. 12 U.S.C. 21, 22, 24(Seventh), 26, 27, 92a, 93a,
1814(b), 1816, and 2903.
(b) Licensing requirements. Any person desiring to establish a
national bank shall submit an application and obtain prior OCC approval.
(c) Scope. This section describes the procedures and requirements
governing OCC review and approval of an application to establish a
national bank, including a national bank with a special purpose.
Information regarding an application to establish an interim national
bank solely to facilitate a business combination is set forth in Sec.
5.33.
(d) Definitions. For purposes of this section:
(1) Bankers' bank means a bank owned exclusively (except to the
extent directors' qualifying shares are required by law) by other
depository institutions or depository institution holding companies (as
that term is defined in section 3 of the Federal Deposit Insurance Act,
12 U.S.C. 1813), the activities of which are limited by its articles of
association exclusively to providing services to or for other depository
institutions, their holding companies, and the officers, directors, and
employees of such institutions and companies, and to providing
correspondent banking services at the request of other depository
institutions or their holding companies.
(2) Control means control as used in section 2 of the Bank Holding
Company Act, 12 U.S.C. 1841(a)(2).
(3) Final approval means the OCC action issuing a charter
certificate and authorizing a national bank to open for business.
(4) Holding company means any company that controls or proposes to
control a national bank whether or not the company is a bank holding
company under section 2 of the Bank Holding Company Act, 12 U.S.C.
1841(a)(1).
(5) Lead depository institution means the largest depository
institution controlled by a bank holding company based on a comparison
of the average total assets controlled by each depository institution as
reported in its Consolidated Report of Condition and Income required to
be filed for the immediately preceding four calendar quarters.
(6) Organizing group means five or more persons acting on their own
behalf, or serving as representatives of a sponsoring holding company,
who
[[Page 131]]
apply to the OCC for a national bank charter.
(7) Preliminary approval means a decision by the OCC permitting an
organizing group to go forward with the organization of the proposed
national bank. A preliminary approval generally is subject to certain
conditions that an applicant must satisfy before the OCC will grant
final approval.
(e) Statutory requirements--(1) General. The OCC charters a national
bank under the authority of the National Bank Act of 1864, as amended,
12 U.S.C. 1 et seq. The bank may be a special purpose bank that limits
its activities to fiduciary activities or to any other activities within
the business of banking. A special purpose bank that conducts activities
other than fiduciary activities must conduct at least one of the
following three core banking functions: receiving deposits; paying
checks; or lending money. The name of a proposed bank must include the
word ``national.'' In determining whether to approve an application to
establish a national bank, the OCC verifies that the proposed national
bank has complied with the following requirements of the National Bank
Act. A national bank shall:
(i) Draft and file articles of association with the OCC;
(ii) Draft and file an organization certificate containing specified
information with the OCC;
(iii) Ensure that all capital stock is paid in; and
(iv) Have at least five elected directors.
(2) Community Reinvestment Act. Twelve CFR part 25 requires the OCC
to take into account a proposed insured national bank's description of
how it will meet its CRA objectives.
(f) Policy--(1) General. The marketplace is normally the best
regulator of economic activity, and competition within the marketplace
promotes efficiency and better customer service. Accordingly, it is the
OCC's policy to approve proposals to establish national banks, including
minority-owned institutions, that have a reasonable chance of success
and that will be operated in a safe and sound manner. It is not the
OCC's policy to ensure that a proposal to establish a national bank is
without risk to the organizers or to protect existing institutions from
healthy competition from a new national bank.
(2) Policy considerations. (i) In evaluating an application to
establish a national bank, the OCC considers whether the proposed bank:
(A) Has organizers who are familiar with national banking laws and
regulations;
(B) Has competent management, including a board of directors, with
ability and experience relevant to the types of services to be provided;
(C) Has capital that is sufficient to support the projected volume
and type of business;
(D) Can reasonably be expected to achieve and maintain
profitability; and
(E) Will be operated in a safe and sound manner.
(ii) The OCC may also consider additional factors listed in section
6 of the Federal Deposit Insurance Act, 12 U.S.C. 1816, including the
risk to the Federal deposit insurance fund, and whether the proposed
bank's corporate powers are consistent with the purposes of the Federal
Deposit Insurance Act and the National Bank Act.
(3) OCC evaluation. The OCC evaluates a proposed national bank's
organizing group and its business plan or operating plan together. The
OCC's judgment concerning one may affect the evaluation of the other. An
organizing group and its business plan or operating plan must be
stronger in markets where economic conditions are marginal or
competition is intense.
(g) Organizing group--(1) General. Strong organizing groups
generally include diverse business and financial interests and community
involvement. An organizing group must have the experience, competence,
willingness, and ability to be active in directing the proposed national
bank's affairs in a safe and sound manner. The bank's initial board of
directors generally is comprised of many, if not all, of the organizers.
The business plan or operating plan and other information supplied in
the application must demonstrate an organizing group's collective
ability to establish and operate a successful bank in the economic and
competitive conditions of the market to be served. Each organizer should
be
[[Page 132]]
knowledgeable about the business plan or business plan or operating
plan. A poor business plan or operating plan reflects adversely on the
organizing group's ability, and the OCC generally denies applications
with poor business plans or operating plans.
(2) Management selection. The initial board of directors must select
competent senior executive officers before the OCC grants final
approval. Early selection of executive officers, especially the chief
executive officer, contributes favorably to the preparation and review
of a business plan or operating plan that is accurate, complete, and
appropriate for the type of bank proposed and its market, and reflects
favorably upon an application. As a condition of the charter approval,
the OCC retains the right to object to and preclude the hiring of any
officer, or the appointment or election of any director, for a two-year
period from the date the bank commences business.
(3) Financial resources. (i) Each organizer must have a history of
responsibility, personal honesty, and integrity. Personal wealth is not
a prerequisite to become an organizer or director of a national bank.
However, directors' stock purchases, individually and in the aggregate,
should reflect a financial commitment to the success of the national
bank that is reasonable in relation to their individual and collective
financial strength. A director should not have to depend on bank
dividends, fees, or other compensation to satisfy financial obligations.
(ii) Because directors are often the primary source of additional
capital for a bank not affiliated with a holding company, it is
desirable that an organizer who is also proposed as a director of the
national bank be able to supply or have a realistic plan to enable the
bank to obtain capital when needed.
(iii) Any financial or other business arrangement, direct or
indirect, between the organizing group or other insider and the proposed
national bank must be on nonpreferential terms.
(4) Organizational expenses. (i) Organizers are expected to
contribute time and expertise to the organization of the bank.
Organizers should not bill excessive charges to the bank for
professional and consulting services or unduly rely upon these fees as a
source of income.
(ii) A proposed national bank shall not pay any fee that is
contingent upon an OCC decision. Such action generally is grounds for
denial of the application or withdrawal of preliminary approval.
Organizational expenses for denied applications are the sole
responsibility of the organizing group.
(5) Sponsor's experience and support. A sponsor must be financially
able to support the new bank's operations and to provide or locate
capital when needed. The OCC primarily considers the financial and
managerial resources of the sponsor and the sponsor's record of
performance, rather than the financial and managerial resources of the
organizing group, if an organizing group is sponsored by:
(i) An existing holding company;
(ii) Individuals currently affiliated with other depository
institutions; or
(iii) Individuals who, in the OCC's view, are otherwise collectively
experienced in banking and have demonstrated the ability to work
together effectively.
(h) Business plan or Operating plan--(1) General. (i) Organizers of
a proposed national bank shall submit a business plan or operating plan
that adequately addresses the statutory and policy considerations set
forth in paragraphs (e) and (f)(2) of this section. The plan must
reflect sound banking principles and demonstrate realistic assessments
of risk in light of economic and competitive conditions in the market to
be served.
(ii) The OCC may offset deficiencies in one factor by strengths in
one or more other factors. However, deficiencies in some factors, such
as unrealistic earnings prospects, may have a negative influence on the
evaluation of other factors, such as capital adequacy, or may be serious
enough by themselves to result in denial. The OCC considers inadequacies
in a business plan or operating plan to reflect negatively on the
organizing group's ability to operate a successful bank.
(2) Earnings prospects. The organizing group shall submit pro forma
balance sheets and income statements as part of the business plan or
operating plan. The OCC reviews all projections for
[[Page 133]]
reasonableness of assumptions and consistency with the business plan or
operating plan.
(3) Management. (i) The organizing group shall include in the
business plan or operating plan information sufficient to permit the OCC
to evaluate the overall management ability of the organizing group. If
the organizing group has limited banking experience or community
involvement, the senior executive officers must be able to compensate
for such deficiencies.
(ii) The organizing group may not hire an officer or elect or
appoint a director if the OCC objects to that person at any time prior
to the date the bank commences business.
(4) Capital. A proposed bank must have sufficient initial capital,
net of any organizational expenses that will be charged to the bank's
capital after it begins operations, to support the bank's projected
volume and type of business.
(5) Community service. (i) The business plan or operating plan must
indicate the organizing group's knowledge of and plans for serving the
community. The organizing group shall evaluate the banking needs of the
community, including its consumer, business, nonprofit, and government
sectors. The business plan or operating plan must demonstrate how the
proposed bank responds to those needs consistent with the safe and sound
operation of the bank. The provisions of this paragraph may not apply to
an application to organize a bank for a special purpose.
(ii) As part of its business plan or operating plan, the organizing
group shall submit a statement that demonstrates its plans to achieve
CRA objectives.
(iii) Because community support is important to the long-term
success of a bank, the organizing group shall include plans for
attracting and maintaining community support.
(6) Safety and soundness. The business plan or operating plan must
demonstrate that the organizing group (and the sponsoring company, if
any), is aware of, and understands, national banking laws and
regulations, and safe and sound banking operations and practices. The
OCC will deny an application that does not meet these safety and
soundness requirements.
(7) Fiduciary services. The business plan or operating plan must
indicate if the proposed bank intends to offer fiduciary services. The
information required by Sec. 5.26 shall be filed with the charter
application. A separate application is not required.
(i) Procedures--(1) Prefiling meeting. The OCC normally requires a
prefiling meeting with the organizers of a proposed national bank before
the organizers file an application. Organizers should be familiar with
the OCC's chartering policy and procedural requirements in the Manual
before the prefiling meeting. The prefiling meeting normally is held in
the district office where the application will be filed but may be held
at another location at the request of the applicant.
(2) Business plan or operating plan. An organizing group shall file
a business plan or operating plan that addresses the subjects discussed
in paragraph (h) of this section.
(3) Contact person. The organizing group shall designate a contact
person to represent the organizing group in all contacts with the OCC.
The contact person shall be an organizer and proposed director of the
new bank, except a representative of the sponsor or sponsors may serve
as contact person if an application is sponsored by an existing holding
company, individuals currently affiliated with other depository
institutions, or individuals who, in the OCC's view, are otherwise
collectively experienced in banking and have demonstrated the ability to
work together effectively.
(4) Decision notification. The OCC notifies the spokesperson and
other interested persons in writing of its decision on an application.
(5) Activities. (i) Before the OCC grants final approval, a proposed
national bank must be established as a legal entity. A national bank
becomes a legal entity after it has filed its organization certificate
and articles of association with the OCC as required by law. A proposed
national bank may offer and sell securities prior to OCC preliminary
approval of the proposed national bank's charter application, provided
that the proposed national
[[Page 134]]
bank has filed articles of association, an organization certificate, and
a completed charter application and the bank complies with the OCC's
securities offering regulations, 12 CFR part 16.
(ii)In addition, the organizing group shall elect a board of
directors. The proposed bank may not conduct the business of banking
until the OCC grants final approval.
(iii) For all capital obtained through a public offering a proposed
national bank shall use an offering circular that complies with the
OCC's securities offering regulations, 12 CFR part 16.
(iv) A national bank in organization shall raise its capital before
it commences business. Preliminary approval expires if a national bank
in organization does not raise the required capital within 12 months
from the date the OCC grants preliminary approval. Approval expires if
the national bank does not commence business within 18 months from the
date the OCC grants preliminary approval.
(j) Expedited review. An application to establish a full-service
national bank that is sponsored by a bank holding company whose lead
depository institution is an eligible bank or eligible depository
institution is deemed preliminarily approved by the OCC as of the 15th
day after the close of the public comment period or the 45th day after
the filing is received by the OCC, whichever is later, unless the OCC:
(1) Notifies the applicant prior to that date that the filing is not
eligible for expedited review, or the expedited review process is
extended, under Sec. 5.13(a)(2); or
(2) Notifies the applicant prior to that date that the OCC has
determined that the proposed bank will offer banking services that are
materially different than those offered by the lead depository
institution.
(k) National bankers' banks--(1) Activities and customers. In
addition to the other requirements of this section, when an organizing
group seeks to organize a national bankers' bank, the organizing group
shall list in the application the anticipated activities and customers
or clients of the proposed national bankers' bank.
(2) Waiver of requirements. At the organizing group's request, the
OCC may waive requirements that are applicable to national banks in
general if those requirements are inappropriate for a national bankers'
bank and would impede its ability to provide desired services to its
market. An applicant must submit a request for a waiver with the
application and must support the request with adequate justification and
legal analysis. A national bankers' bank that is already in operation
may also request a waiver. The OCC cannot waive statutory provisions
that specifically apply to national bankers' banks pursuant to 12 U.S.C.
27(b)(1).
(3) Investments. A national bank may invest up to ten percent of its
capital and surplus in a bankers' bank and may own five percent or less
of any class of a bankers' bank's voting securities.
(l) Special purpose banks. An applicant for a national bank charter
that will limit its activities to fiduciary activities, credit card
operations, or another special purpose shall adhere to established
charter procedures with modifications appropriate for the circumstances
as determined by the OCC. An applicant for a national bank charter that
will have a community development focus shall also adhere to established
charter procedures with modifications appropriate for the circumstances
as determined by the OCC. In addition to the other requirements in this
section, a bank limited to fiduciary activities, credit card operations,
or another special purpose may not conduct that business until the OCC
grants final approval for the bank to commence operations. A national
bank that seeks to invest in a bank with a community development focus
must comply with applicable requirements of 12 CFR part 24.
[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 70129, Dec. 17, 2003;
69 FR 50297, Aug. 16, 2004; 73 FR 22236, Apr. 24, 2008]
Sec. 5.24 Conversion.
(a) Authority. 12 U.S.C. 35, 93a, 214a, 214b, 214c, and 2903.
(b) Licensing requirements. A state bank (including a ``state bank''
as defined in 12 U.S.C. 214(a)) or a Federal
[[Page 135]]
savings association shall submit an application and obtain prior OCC
approval to convert to a national bank charter. A national bank shall
give notice to the OCC before converting to a state bank (including a
``state bank'' as defined in 12 U.S.C. 214(a)) or Federal savings
association.
(c) Scope. This section describes procedures and standards governing
OCC review and approval of an application by a state bank or Federal
savings association to convert to a national bank charter. This section
also describes notice procedures for a national bank seeking to convert
to a state bank or Federal savings association.
(d) Conversion of a state bank or Federal savings association to a
national bank--(1) Policy. Consistent with the OCC's chartering policy,
it is OCC policy to allow conversion to a national bank charter by
another financial institution that can operate safely and soundly as a
national bank in compliance with applicable laws, regulations, and
policies. The OCC may deny an application by any state bank (including a
``state bank'' as defined in 12 U.S.C. 214(a)) and any Federal savings
association to convert to a national bank charter on the basis of the
standards for denial set forth in Sec. 5.13(b), or when conversion
would permit the applicant to escape supervisory action by its current
regulator.
(2) Procedures. (i) Prefiling communications. The applicant should
consult with the appropriate district office prior to filing if it
anticipates that its application will raise unusual or complex issues.
If a prefiling meeting is appropriate, it will normally be held in the
district office where the application will be filed, but may be held at
another location at the request of the applicant.
(ii) A state bank (including a state bank as defined in 12 U.S.C.
214(a)) or Federal savings association shall submit its application to
convert to a national bank to the appropriate district office. The
application must:
(A) Be signed by the president or other duly authorized officer;
(B) Identify each branch that the resulting bank expects to operate
after conversion;
(C) Include the institution's most recent audited financial
statements (if any);
(D) Include the latest report of condition and report of income (the
most recent daily statement of condition will suffice if the institution
does not file these reports);
(E) Unless otherwise advised by the OCC in a prefiling
communication, include an opinion of counsel that, in the case of a
state bank, the conversion is not in contravention of applicable state
law, or in the case of a Federal savings association, the conversion is
not in contravention of applicable Federal law;
(F) State whether the institution wishes to exercise fiduciary
powers after the conversion;
(G) Identify all subsidiaries that will be retained following the
conversion, and provide the information and analysis of the
subsidiaries' activities that would be required if the converting bank
or savings association were a national bank establishing each subsidiary
pursuant to Sec. Sec. 5.34 or 5.39; and
(H) Identify any nonconforming assets (including nonconforming
subsidiaries) and nonconforming activities that the institution engages
in, and describe the plans to retain or divest those assets.
(iii) The OCC may permit a national bank to retain such
nonconforming assets of a state bank, subject to conditions and an OCC
determination of the carrying value of the retained assets, pursuant to
12 U.S.C. 35.
(iv) Approval for an institution to convert to a national bank
expires if the conversion has not occurred within six months of the
OCC's preliminary approval of the application.
(v) When the OCC determines that the applicant has satisfied all
statutory and regulatory requirements, including those set forth in 12
U.S.C. 35, and any other conditions, the OCC issues a charter
certificate. The certificate provides that the institution is authorized
to begin conducting business as a national bank as of a specified date.
(3) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to this section. However, if the OCC
concludes that an application
[[Page 136]]
presents significant and novel policy, supervisory, or legal issues, the
OCC may determine that any or all parts of Sec. Sec. 5.8, 5.10, and
5.11 apply.
(4) Expedited review. An application by an eligible depository
institution to convert to a national bank charter is deemed approved by
the OCC as of the 30th day after the filing is received by the OCC,
unless the OCC notifies the applicant prior to that date that the filing
is not eligible for expedited review under Sec. 5.13(a)(2).
(e) Conversion of a national bank to a state bank--(1) Procedure. A
national bank may convert to a state bank, in accordance with 12 U.S.C.
214c, without prior OCC approval. Termination of the national bank's
status as a national bank occurs upon the bank's completion of the
requirements of 12 U.S.C. 214a, and upon the appropriate district
office's receipt of the bank's national bank charter (or copy) in
connection with the consummation of the transaction.
(2) Notice of intent. A national bank that desires to convert to a
state bank shall submit to the appropriate district office a notice of
its intent to convert. The national bank shall file this notice when it
first submits a request to convert to the appropriate state authorities.
The appropriate district office then provides instructions to the
national bank for terminating its status as a national bank.
(3) Exceptions to the rules of general applicability. Sections 5.5
through 5.8, and 5.10 through 5.13, do not apply to the conversion of a
national bank to a state bank.
(f) Conversion of a national bank to a Federal savings association.
A national bank may convert to a Federal savings association without
prior OCC approval. The requirements and procedures set forth in
paragraph (e) of this section and 12 U.S.C. 214a and 12 U.S.C. 214c
apply to a conversion to a Federal savings association, except as
follows:
(1) In paragraph (e) of this section references to ``appropriate
state authorities'' mean ``appropriate Federal authorities''; and
(2) References in 12 U.S.C. 214c to the ``law of the State in which
the national banking association is located'' and ``any State
authority'' mean ``laws and regulations governing Federal savings
associations'' and ``Office of Thrift Supervision,'' respectively.
[61 FR 60363, Nov. 27, 1996, as amended at 65 FR 12910, Mar. 10, 2000]
Sec. 5.26 Fiduciary powers.
(a) Authority. 12 U.S.C. 92a.
(b) Licensing requirements. A national bank must submit an
application and obtain prior approval from, or in certain circumstances
file a notice with, the OCC in order to exercise fiduciary powers. No
approval or notice is required in the following circumstances:
(1) Where two or more national banks consolidate or merge, and any
of the banks has, prior to the consolidation or merger, received OCC
approval to exercise fiduciary powers and that approval is in force at
the time of the consolidation or merger, the resulting bank may exercise
fiduciary powers in the same manner and to the same extent as the
national bank to which approval was originally granted; and
(2) Where a national bank with prior OCC approval to exercise
fiduciary powers is the resulting bank in a merger or consolidation with
a state bank.
(c) Scope. This section sets forth the procedures governing OCC
review and approval of an application, and in certain cases the filing
of a notice, by a national bank to exercise fiduciary powers. A national
bank's fiduciary activities are subject to the provisions of 12 CFR part
9.
(d) Policy. The exercise of fiduciary powers is primarily a
management decision of the national bank. The OCC generally permits a
national bank to exercise fiduciary powers if the bank is operating in a
satisfactory manner, the proposed activities comply with applicable
statutes and regulations, and the bank retains qualified fiduciary
management.
(e) Procedure--(1) General. The following institutions must obtain
approval from the OCC in order to offer fiduciary services to the
public:
(i) A national bank without fiduciary powers;
(ii) A national bank without fiduciary powers that desires to
exercise fiduciary powers after merging with a state bank or savings
association with fiduciary powers; and
[[Page 137]]
(iii) A national bank that results from the conversion of a state
bank or a state or Federal savings association that was exercising
fiduciary powers prior to the conversion.
(2) Application. (i) Except as provided in paragraph (e)(2)(ii) of
this section, a national bank that desires to exercise fiduciary powers
shall submit to the OCC an application requesting approval. The
application must contain:
(A) A statement requesting full or limited powers (specifying which
powers);
(B) A statement that the capital and surplus of the national bank is
not less than the capital and surplus required by state law of state
banks, trust companies, and other corporations exercising comparable
fiduciary powers;
(C) Sufficient biographical information on proposed trust management
personnel to enable the OCC to assess their qualifications;
(D) A description of the locations where the bank will conduct
fiduciary activities; and
(E) If requested by the OCC, an opinion of counsel that the proposed
activities do not violate applicable Federal or State law, including
citations to applicable law.
(ii) If approval to exercise fiduciary powers is desired in
connection with any other transaction subject to an application under
this part, the applicant covered under paragraph (e)(1)(ii) or
(e)(1)(iii) of this section may include a request for approval of
fiduciary powers, including the information required by paragraph
(e)(2)(i) of this section, as part of its other application. The OCC
does not require a separate application requesting approval to exercise
fiduciary powers under these circumstances.
(3) Expedited review. An application by an eligible bank to exercise
fiduciary powers is deemed approved by the OCC as of the 30th day after
the application is received by the OCC, unless the OCC notifies the bank
prior to that date that the filing is not eligible for expedited review
under Sec. 5.13(a)(2).
(4) Permit. Approval of an application under this section
constitutes a permit under 12 U.S.C. 92a to conduct the fiduciary powers
requested in the application.
(5) Notice of fiduciary activities in additional states. No further
application under this section is required when a national bank with
existing OCC approval to exercise fiduciary powers plans to engage in
any of the activities specified in Sec. 9.7(d) of this chapter or to
conduct activities ancillary to its fiduciary business, in a state in
addition to the state described in the application for fiduciary powers
that the OCC has approved. Instead, unless the bank provides notice
through other means (such as a merger application), the bank shall
provide written notice to the OCC no later than ten days after it begins
to engage in any of the activities specified in Sec. 9.7(d) of this
chapter in the new state. The written notice must identify the new state
or states involved, identify the fiduciary activities to be conducted,
and describe the extent to which the activities differ materially from
the fiduciary activities that the bank was previously authorized to
conduct. No notice is required if the bank is conducting only activities
ancillary to its fiduciary business through a trust representative
office or otherwise.
(6) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to this section. However, if the OCC
concludes that an application presents significant and novel policy,
supervisory, or legal issues, the OCC may determine that any or all
parts of Sec. Sec. 5.8, 5.10, and 5.11 apply.
(7) Expiration of approval. Approval expires if a national bank does
not commence fiduciary activities within 18 months from the date of
approval.
[61 FR 60363, Nov. 27, 1996, as amended at 66 FR 34797, July 2, 2001; 73
FR 22237, Apr. 24, 2008]
Subpart C_Expansion of Activities
Sec. 5.30 Establishment, acquisition, and relocation of a branch.
(a) Authority. 12 U.S.C. 1-42, and 2901-2907.
(b) Licensing requirements. A national bank shall submit an
application and obtain prior OCC approval in order to establish or
relocate a branch.
(c) Scope. This section describes the procedures and standards
governing OCC review and approval of a national
[[Page 138]]
bank's application to establish a new branch or to relocate a branch.
The standards of this section and, as applicable, 12 U.S.C. 36(b), but
not the procedures set forth in this section, apply to a branch
established as a result of a business combination approved under Sec.
5.33. A branch established through a business combination is subject
only to the procedures set forth in Sec. 5.33.
(d) Definitions--(1) Branch includes any branch bank, branch office,
branch agency, additional office, or any branch place of business
established by a national bank in the United States or its territories
at which deposits are received, checks paid, or money lent. A branch
does not include an automated teller machine (ATM) or a remote service
unit.
(i) A branch established by a national bank includes a mobile
facility, temporary facility, intermittent facility, drop box or a
seasonal agency, as described in 12 U.S.C. 36(c).
(ii) A facility otherwise described in this paragraph (d)(1) is not
a branch if:
(A) The bank establishing the facility does not permit members of
the public to have physical access to the facility for purposes of
making deposits, paying checks, or borrowing money (e.g., an office
established by the bank that receives deposits only through the mail);
or
(B) It is located at the site of, or is an extension of, an approved
main or branch office of the national bank. The OCC determines whether a
facility is an extension of an existing main or branch office on a case-
by-case basis.
(2) Home state means the state in which the national bank's main
office is located.
(3) Intermittent branch means a branch that is operated for one or
more limited periods of time to provide branch banking services at a
specified recurring event, on the grounds or premises where the event is
held or at a fixed site adjacent to the grounds or premises where the
event is held, and exclusively during the occurrence of the event.
Examples of an intermittent branch include the operation of a branch on
the campus of, or at a fixed site adjacent to the campus of, a specific
college during school registration periods; or the operation of a branch
during a State fair on State fairgrounds or at a fixed site adjacent to
the fairgrounds.
(4) Messenger service has the meaning set forth in 12 CFR 7.1012.
(5) Mobile branch is a branch, other than a messenger service
branch, that does not have a single, permanent site, and includes a
vehicle that travels to various public locations to enable customers to
conduct their banking business. A mobile branch may provide services at
various regularly scheduled locations or it may be open at irregular
times and locations such as at county fairs, sporting events, or school
registration periods. A branch license is needed for each mobile unit.
(6) Temporary branch means a branch that is located at a fixed site
and which, from the time of its opening, is scheduled to, and will,
permanently close no later than a certain date (not longer than one year
after the branch is first opened) specified in the branch application
and the public notice.
(e) Policy. In determining whether to approve an application to
establish or relocate a branch, the OCC is guided by the following
principles:
(1) Maintaining a sound banking system;
(2) Encouraging a national bank to help meet the credit needs of its
entire community;
(3) Relying on the marketplace as generally the best regulator of
economic activity; and
(4) Encouraging healthy competition to promote efficiency and better
service to customers.
(f) Procedures--(1) General. Except as provided in paragraph (f)(2)
of this section, each national bank proposing to establish a branch
shall submit to the appropriate district office a separate application
for each proposed branch.
(2) Messenger services. A national bank may request approval,
through a single application, for multiple messenger services to serve
the same general geographic area. (See 12 CFR 7.1012). Unless otherwise
required by law, the bank need not list the specific locations to be
served.
(3) Jointly established branches. If a national bank proposes to
establish a branch jointly with one or more national banks or depository
institutions,
[[Page 139]]
only one of the national banks must submit a branch application. The
national bank submitting the application may act as agent for all
national banks in the group of depository institutions proposing to
share the branch. The application must include the name and main office
address of each national bank in the group.
(4) Intermittent branches. Prior to operating an intermittent
branch, a national bank shall file a branch application and publish
notice in accordance with Sec. 5.8, both of which shall identify the
event at which the branch will be operated; designate a location for
operation of the branch which shall be on the grounds or premises at
which the event is held or on a fixed site adjacent to those grounds or
premises; and specify the approximate time period during which the event
will be held and during which the branch will operate, including whether
operation of the branch will be on an annual or otherwise recurring
basis. If the branch is approved, then the bank need not obtain approval
each time it seeks to operate the branch in accordance with the original
application and approval.
(5) Authorization. The OCC authorizes operation of the branch when
all requirements and conditions for opening are satisfied.
(6) Expedited review. An application submitted by an eligible bank
to establish or relocate a branch is deemed approved by the OCC as of
the 15th day after the close of the applicable public comment period, or
the 45th day after the filing is received by the OCC, whichever is
later, unless the OCC notifies the bank prior to that date that the
filing is not eligible for expedited review, or the expedited review
process is extended, under Sec. 5.13(a)(2). An application to establish
or relocate more than one branch is deemed approved by the OCC as of the
15th day after the close of the last public comment period.
(g) Interstate branches. A national bank that seeks to establish and
operate a de novo branch in any state other than the bank's home state
or a state in which the bank already has a branch shall satisfy the
standards and requirements of 12 U.S.C. 36(g).
(h) Exceptions to rules of general applicability. (1) A national
bank filing an application for a mobile branch or messenger service
branch shall publish a public notice, as described in Sec. 5.8, in the
communities in which the bank proposes to engage in business.
(2) The comment period on an application to engage in a short-
distance branch relocation is 15 days.
(3) The OCC may waive or reduce the public notice and comment
period, as appropriate, with respect to an application to establish a
branch to restore banking services to a community affected by a disaster
or to temporarily replace banking facilities where, because of an
emergency, the bank cannot provide services or must curtail banking
services.
(4) The OCC may waive or reduce the public notice and comment
period, as appropriate, for an application by a national bank with a CRA
rating of Satisfactory or better to establish a temporary branch which,
if it were established by a state bank to operate in the manner
proposed, would be permissible under state law without state approval.
(i) Expiration of approval. Approval expires if a branch has not
commenced business within 18 months after the date of approval.
(j) Branch closings. A national bank shall comply with the
requirements of 12 U.S.C. 1831r-1 with respect to procedures for branch
closings.
[61 FR 60363, Nov. 27, 1996, as amended at 73 FR 22237, Apr. 24, 2008]
Sec. 5.32 Expedited procedures for certain reorganizations.
(a) Authority. 12 U.S.C. 93a and 215a-2.
(b) Scope. This section prescribes the procedures for OCC review and
approval of a national bank's reorganization to become a subsidiary of a
bank holding company or a company that will, upon consummation of such
reorganization, become a bank holding company. For purposes of this
section, a ``bank holding company'' means any company that owns or
controls a national bank, or will own or control one as a result of the
reorganization.
(c) Licensing requirements. A national bank shall submit an
application to, and obtain approval from, the OCC
[[Page 140]]
prior to participating in a reorganization described in paragraph (b) of
this section.
(d) Procedures--(1) General. An application filed in accordance with
this section shall be deemed approved on the 30th day after the OCC
receives the application, unless the OCC notifies the bank otherwise.
Approval is subject to the condition that the bank provide the OCC with
60 days' prior notice of any significant deviation from the bank's
business plan or any significant deviation from the proposed changes to
the bank's business plan described in the bank's plan of reorganization.
(2) Reorganization plan. The application must include a
reorganization plan that:
(i) Specifies the manner in which the reorganization shall be
carried out;
(ii) Is approved by a majority of the entire board of directors of
the national bank;
(iii) Specifies:
(A) The amount and type of consideration that the bank holding
company will provide to the shareholders of the reorganizing bank for
their shares of stock of the bank;
(B) The date as of which the rights of each shareholder to
participate in that exchange will be determined; and
(C) The manner in which the exchange will be carried out;
(iv) Is submitted to the shareholders of the reorganizing bank at a
meeting to be held at the call of the directors in accordance with the
procedures prescribed in connection with a merger of a national bank
under section 3 of the National Bank Consolidation and Merger Act, 12
U.S.C. 215a(a)(2); and
(v) Describes any changes to the bank's business plan resulting from
the reorganization.
(3) Financial and managerial resources and future prospects. In
reviewing an application under this section, the OCC will consider the
impact of the proposed affiliation on the financial and managerial
resources and future prospects of the national bank.
(e) Rights of dissenting shareholders. Any shareholder of a bank who
has voted against an approved reorganization at the meeting referred to
in paragraph (d)(2)(iv) of this section, or who has given notice of
dissent in writing to the presiding officer at or prior to that meeting,
is entitled to receive the value of his or her shares by providing a
written request to the bank within 30 days after the consummation of the
reorganization, as provided by section 3 of the National Bank
Consolidation and Merger Act, 12 U.S.C. 215a(b) and (c), for the merger
of a national bank.
(f) Approval under the Bank Holding Company Act. This section does
not affect the applicability of the Bank Holding Company Act of 1956.
Applicants shall indicate in their application the status of any
application required to be filed with the Board of Governors of the
Federal Reserve System.
(g) Expiration of approval. Approval expires if a national bank has
not completed the reorganization within one year of the date of
approval.
(h) Adequacy of disclosure. (1) An applicant shall inform
shareholders of all material aspects of a reorganization and comply with
applicable requirements of the Federal securities laws, including the
OCC's securities regulations at 12 CFR part 11.
(2) Any applicant not subject to the registration provisions of the
Securities Exchange Act of 1934 shall submit the proxy materials or
information statements it uses in connection with the reorganization to
the appropriate district office no later than when the materials are
sent to the shareholders.
[68 FR 70129, Dec. 17, 2003]
Sec. 5.33 Business combinations.
(a) Authority. 12 U.S.C. 24(Seventh), 93a, 181, 214a, 214b, 215,
215a, 215a-1, 215a-3, 215c, 1815(d)(3), 1828(c), 1831u, and 2903.
(b) Scope. This section sets forth the provisions governing business
combinations and the standards for:
(1) OCC review and approval of an application for a business
combination between a national bank and another depository institution
resulting in a national bank or between a national bank and one of its
nonbank affiliates; and
(2) Requirements of notices and other procedures for national banks
involved in other combinations with depository institutions.
(c) Licensing requirements. A national bank shall submit an
application and
[[Page 141]]
obtain prior OCC approval for a business combination between the
national bank and another depository institution when the resulting
institution is a national bank. A national bank shall give notice to the
OCC prior to engaging in a combination where the resulting institution
will not be a national bank. A national bank shall submit an application
and obtain prior OCC approval for any merger between the national bank
and one or more of its nonbank affiliates.
(d) Definitions--For purposes of this Sec. 5.33:
(1) Bank means any national bank or any state bank.
(2) Business combination means any merger or consolidation between a
national bank and one or more depository institutions in which the
resulting institution is a national bank, the acquisition by a national
bank of all, or substantially all, of the assets of another depository
institution, the assumption by a national bank of deposit liabilities of
another depository institution, or a merger between a national bank and
one or more of its nonbank affiliates.
(3) Business reorganization means either:
(i) A business combination between eligible banks, or between an
eligible bank and an eligible depository institution, that are
controlled by the same holding company or that will be controlled by the
same holding company prior to the combination; or
(ii) A business combination between an eligible bank and an interim
bank chartered in a transaction in which a person or group of persons
exchanges its shares of the eligible bank for shares of a newly formed
holding company and receives after the transaction substantially the
same proportional share interest in the holding company as it held in
the eligible bank (except for changes in interests resulting from the
exercise of dissenters' rights), and the reorganization involves no
other transactions involving the bank.
(4) Company means a corporation, limited liability company,
partnership, business trust, association, or similar organization.
(5) For business combinations under Sec. 5.33(g)(4) and (5), a
company or shareholder is deemed to control another company if:
(i) Such company or shareholder, directly or indirectly, or acting
through one or more other persons owns, controls, or has power to vote
25 percent or more of any class of voting securities of the other
company, or
(ii) Such company or shareholder controls in any manner the election
of a majority of the directors or trustees of the other company. No
company shall be deemed to own or control another company by virtue of
its ownership or control of shares in a fiduciary capacity.
(6) Home state means, with respect to a national bank, the state in
which the main office of the bank is located and, with respect to a
state bank, the state by which the bank is chartered.
(7) Interim bank means a national bank that does not operate
independently but exists solely as a vehicle to accomplish a business
combination.
(8) Nonbank affiliate of a national bank means any company (other
than a bank or Federal savings association) that controls, is controlled
by, or is under common control with the national bank.
(e) Policy. (1) Factors. (i) Bank Merger Act. When the OCC evaluates
an application for a business combination under the Bank Merger Act, the
OCC considers the following factors:
(A) Competition. (1) The OCC considers the effect of a proposed
business combination on competition. The applicant shall provide a
competitive analysis of the transaction, including a definition of the
relevant geographic market or markets. An applicant may refer to the
Manual for procedures to expedite its competitive analysis.
(2) The OCC will deny an application for a business combination if
the combination would result in a monopoly or would be in furtherance of
any combination or conspiracy to monopolize or attempt to monopolize the
business of banking in any part of the United States. The OCC also will
deny any proposed business combination whose effect in any section of
the United States may be substantially to lessen competition, or tend to
create a monopoly, or which in any other manner would be in restraint of
trade, unless
[[Page 142]]
the probable effects of the transaction in meeting the convenience and
needs of the community clearly outweigh the anticompetitive effects of
the transaction. For purposes of weighing against anticompetitive
effects, a business combination may have favorable effects in meeting
the convenience and needs of the community if the depository institution
being acquired has limited long-term prospects, or if the resulting
national bank will provide significantly improved, additional, or less
costly services to the community.
(B) Financial and managerial resources and future prospects. The OCC
considers the financial and managerial resources and future prospects of
the existing or proposed institutions.
(C) Convenience and needs of community. The OCC considers the
probable effects of the business combination on the convenience and
needs of the community served. The applicant shall describe these
effects in its application, including any planned office closings or
reductions in services following the business combination and the likely
impact on the community. The OCC also considers additional relevant
factors, including the resulting national bank's ability and plans to
provide expanded or less costly services to the community.
(ii) Community Reinvestment Act. When the OCC evaluates an
application for a business combination under the Community Reinvestment
Act, the OCC considers the performance of the applicant and the other
depository institutions involved in the business combination in helping
to meet the credit needs of the relevant communities, including low- and
moderate-income neighborhoods, consistent with safe and sound banking
practices.
(iii) Money laundering. The OCC considers the effectiveness of any
insured depository institution involved in the business combination in
combating money laundering activities, including in overseas branches.
(2) Acquisition and retention of branches. An applicant shall
disclose the location of any branch it will acquire and retain in a
business combination. The OCC considers the acquisition and retention of
a branch under the standards set out in Sec. 5.30, but it does not
require a separate application under Sec. 5.30.
(3) Subsidiaries. (i) An applicant must identify any subsidiary to
be acquired in a business combination and state the activities of each
subsidiary. The OCC does not require a separate application under Sec.
5.34 or a separate notice under Sec. 5.39.
(ii) An applicant proposing to acquire, through a business
combination, a subsidiary of any entity other than a national bank must
provide the same information and analysis of the subsidiary's activities
that would be required if the applicant were establishing the subsidiary
pursuant to Sec. Sec. 5.34 or 5.39.
(4) Interim bank--(i) Application. An applicant for a business
combination that plans to use an interim bank to accomplish the
transaction shall file an application to organize an interim bank as
part of the application for the related business combination.
(ii) Conditional approval. The OCC grants conditional approval to
form an interim bank when it acknowledges receipt of the application for
the related business combination.
(iii) Corporate status. An interim bank becomes a legal entity and
may enter into legally valid agreements when it has filed, and the OCC
has accepted, the interim bank's duly executed articles of association
and organization certificate. OCC acceptance occurs:
(A) On the date the OCC advises the interim bank that its articles
of association and organization certificate are acceptable; or
(B) On the date the interim bank files articles of association and
an organization certificate that conform to the form for those documents
provided by the OCC in the Manual.
(iv) Other corporate procedures. An applicant should consult the
Manual to determine what other information is necessary to complete the
chartering of the interim bank as a national bank.
(5) Nonconforming assets. An applicant shall identify any
nonconforming activities and assets, including nonconforming
subsidiaries, of other institutions involved in the business
combination, that will not be disposed of or discontinued prior to
consummation of
[[Page 143]]
the transaction. The OCC generally requires a national bank to divest or
conform nonconforming assets, or discontinue nonconforming activities,
within a reasonable time following the business combination.
(6) Fiduciary powers. An applicant shall state whether the resulting
bank intends to exercise fiduciary powers pursuant to Sec. 5.26(b) (1)
or (2).
(7) Expiration of approval. Approval of a business combination, and
conditional approval to form an interim bank charter, if applicable,
expires if the business combination is not consummated within one year
after the date of OCC approval.
(8) Adequacy of disclosure. (i) An applicant shall inform
shareholders of all material aspects of a business combination and shall
comply with any applicable requirements of the Federal securities laws
and securities regulations of the OCC. Accordingly, an applicant shall
ensure that all proxy and information statements prepared in connection
with a business combination do not contain any untrue or misleading
statement of a material fact, or omit to state a material fact necessary
in order to make the statements made, in the light of the circumstances
under which they were made, not misleading.
(ii) A national bank applicant with one or more classes of
securities subject to the registration provisions of section 12 (b) or
(g) of the Securities Exchange Act of 1934, 15 U.S.C. 78l(b) or 78l(g),
shall file preliminary proxy material or information statements for
review with the Director, Securities and Corporate Practices Division,
OCC, Washington, DC 20219. Any other applicant shall submit the proxy
materials or information statements it uses in connection with the
combination to the appropriate district office no later than when the
materials are sent to the shareholders.
(f) Exceptions to rules of general applicability--(1) National bank
applicant. Section 5.8 (a) through (c) does not apply to a national bank
applicant that is subject to specific statutory notice requirements for
a business combination. A national bank applicant shall follow, as
applicable, the public notice requirements contained in 12 U.S.C.
1828(c)(3) (business combinations), 12 U.S.C. 215(a) (consolidation
under a national bank charter), 12 U.S.C. 215a(a)(2) (merger under a
national bank charter), paragraph (g)(2) of this section (merger or
consolidation with a Federal savings association resulting in a national
bank), paragraph (g)(4) of this section (merger with a nonbank affiliate
under a national bank charter), and paragraph (g)(5) of this section
(merger with nonbank affiliate not under national bank charter).
Sections 5.10 and 5.11 do not apply to mergers of a national bank with
its nonbank affiliate. However, if the OCC concludes that an application
presents significant and novel policy, supervisory, or legal issues, the
OCC may determine that some or all provisions in Sec. Sec. 5.10 and
5.11 apply.
(2) Interim bank. Sections 5.8, 5.10, and 5.11 do not apply to an
application to organize an interim bank. However, if the OCC concludes
that an application presents significant and novel policy, supervisory,
or legal issues, the OCC may determine that any or all parts of
Sec. Sec. 5.8, 5.10, and 5.11 apply. The OCC treats an application to
organize an interim bank as part of the related application to engage in
a business combination and does not require a separate public notice and
public comment process.
(3) State bank or Federal savings association as resulting
institution. Sections 5.2 and 5.5 through 5.13 do not apply to
transactions covered by paragraph (g)(3) of this section.
(g) Provisions governing consolidations and mergers with different
types of entities. (1) Consolidations and mergers under 12 U.S.C. 215 or
215a of a national bank with other national banks and State banks as
defined in 12 U.S.C. 215b(1) resulting in a national bank.A national
bank entering into a consolidation or merger authorized pursuant to 12
U.S.C. 215 or 215a, respectively, is subject to the approval procedures
and requirements with respect to treatment of dissenting shareholders
set forth in those provisions.
(2) Consolidations and mergers with Federal savings associations
under 12 U.S.C. 215c resulting in a national bank. (i) With the approval
of the OCC, any national bank and any Federal savings
[[Page 144]]
association may consolidate or merge with a national bank as the
resulting institution by complying with the following procedures:
(A) A national bank entering into the consolidation or merger shall
follow the procedures of 12 U.S.C. 215 or 215a, respectively, as if the
Federal savings association were a state or national bank.
(B) A Federal savings association entering into the consolidation or
merger also shall follow the procedures of 12 U.S.C. 215 or 215a,
respectively, as if the Federal savings association were a state bank or
national bank, except where the laws or regulations governing Federal
savings associations specifically provide otherwise.
(ii) The OCC may conduct an appraisal or reappraisal of dissenters'
shares of stock in a national bank involved in a consolidation with a
Federal savings association if all parties agree that the determination
is final and binding on each party.
(3) Consolidation or merger of a national bank resulting in a State
bank as defined in 12 U.S.C. 214(a) under 12 U.S.C. 214a or a Federal
savings association under 12 U.S.C. 215c--(i) Policy. Prior OCC approval
is not required for the merger or consolidation of a national bank with
a state bank or Federal savings association when the resulting
institution will be a state bank or Federal savings association.
Termination of a national bank's status as a national banking
association is automatic upon completion of the requirements of 12
U.S.C. 214a, in accordance with 12 U.S.C. 214b, in the case of a merger
or consolidation when the resulting institution is a state bank, or
paragraph (g)(3)(iii) of this section, in the case of a merger or
consolidation when the resulting institution is a Federal savings
association, and consummation of the transaction.
(ii) Procedures. A national bank desiring to merge or consolidate
with a state bank or a Federal savings association when the resulting
institution will be a state bank or Federal savings association shall
submit a notice to the appropriate district office advising of its
intention. The national bank shall submit this notice at the time the
application to merge or consolidate is filed with the responsible agency
under the Bank Merger Act, 12 U.S.C. 1828(c). The OCC then provides
instructions to the national bank for terminating its status as a
national bank, including requiring the bank to provide the appropriate
district office with the bank's charter (or a copy) in connection with
the consummation of the transaction.
(iii) Special procedures for merger or consolidation into a Federal
savings association. (A) With the exception of the procedures in
paragraph (g)(3)(iii)(B) of this section, a national bank entering into
a merger or consolidation with a Federal savings association when the
resulting institution will be a Federal savings association shall comply
with the requirements of 12 U.S.C. 214a and 12 U.S.C. 214c as if the
Federal savings association were a state bank. However, for these
purposes the references in 12 U.S.C. 214c to ``law of the State in which
such national banking association is located'' and ``any State
authority'' mean ``laws and regulations governing Federal savings
associations'' and ``Office of Thrift Supervision,'' respectively.
(B) National bank shareholders who dissent from a plan to merge or
consolidate may receive in cash the value of their national bank shares
if they comply with the requirements of 12 U.S.C. 214a as if the Federal
savings association were a state bank. The OCC conducts an appraisal or
reappraisal of the value of the national bank shares held by dissenting
shareholders only if all parties agree that the determination will be
final and binding. The parties shall also agree on how the total
expenses of the OCC in making the appraisal will be divided among the
parties and paid to the OCC. The plan of merger or consolidation must
provide, consistent with the requirements of the Office of Thrift
Supervision, the manner of disposing of the shares of the resulting
Federal savings association not taken by the dissenting shareholders of
the national bank.
(4) Mergers of a national bank with its nonbank affiliates under 12
U.S.C. 215a-3 resulting in a national bank. (i) With the approval of the
OCC, a national bank may merge with one or more of its nonbank
affiliates, with the national bank as the resulting institution, in
[[Page 145]]
accordance with the provisions of this paragraph, provided that the law
of the state or other jurisdiction under which the nonbank affiliate is
organized allows the nonbank affiliate to engage in such mergers. The
transaction is also subject to approval by the FDIC under the Bank
Merger Act, 12 U.S.C. 1828(c). In determining whether to approve the
merger, the OCC shall consider the purpose of the transaction, its
impact on the safety and soundness of the bank, and any effect on the
bank's customers, and may deny the merger if it would have a negative
effect in any such respect.
(ii) A national bank entering into the merger shall follow the
procedures of 12 U.S.C. 215a as if the nonbank affiliate were a state
bank, except as otherwise provided herein.
(iii) A nonbank affiliate entering into the merger shall follow the
procedures for such mergers set out in the law of the state or other
jurisdiction under which the nonbank affiliate is organized.
(iv) The rights of dissenting shareholders and appraisal of
dissenters' shares of stock in the nonbank affiliate entering into the
merger shall be determined in the manner prescribed by the law of the
state or other jurisdiction under which the nonbank affiliate is
organized.
(v) The corporate existence of each institution participating in the
merger shall be continued in the resulting national bank, and all the
rights, franchises, property, appointments, liabilities, and other
interests of the participating institutions shall be transferred to the
resulting national bank, as set forth in 12 U.S.C. 215a(a), (e), and (f)
in the same manner and to the same extent as in a merger between a
national bank and a state bank under 12 U.S.C. 215a(a), as if the
nonbank affiliate were a state bank.
(5) Mergers of an uninsured national bank with its nonbank
affiliates under 12 U.S.C. 215a-3 resulting in a nonbank affiliate. (i)
With the approval of the OCC, a national bank that is not an insured
bank as defined in 12 U.S.C. 1813(h) may merge with one or more of its
nonbank affiliates, with the nonbank affiliate as the resulting entity,
in accordance with the provisions of this paragraph, provided that the
law of the state or other jurisdiction under which the nonbank affiliate
is organized allows the nonbank affiliate to engage in such mergers. In
determining whether to approve the merger, the OCC shall consider the
purpose of the transaction, its impact on the safety and soundness of
the bank, and any effect on the bank's customers, and may deny the
merger if it would have a negative effect in any such respect.
(ii) A national bank entering into the merger shall follow the
procedures of 12 U.S.C. 214a, as if the nonbank affiliate were a state
bank, except as otherwise provided in this section.
(iii) A nonbank affiliate entering into the merger shall follow the
procedures for such mergers set out in the law of the state or other
jurisdiction under which the nonbank affiliate is organized.
(iv) (A) National bank shareholders who dissent from an approved
plan to merge may receive in cash the value of their national bank
shares if they comply with the requirements of 12 U.S.C. 214a as if the
nonbank affiliate were a state bank. The OCC may conduct an appraisal or
reappraisal of dissenters' shares of stock in a national bank involved
in the merger if all parties agree that the determination is final and
binding on each party and agree on how the total expenses of the OCC in
making the appraisal will be divided among the parties and paid to the
OCC.
(B) The rights of dissenting shareholders and appraisal of
dissenters' shares of stock in the nonbank affiliate involved in the
merger shall be determined in the manner prescribed by the law of the
state or other jurisdiction under which the nonbank affiliate is
organized.
(v) The corporate existence of each entity participating in the
merger shall be continued in the resulting nonbank affiliate, and all
the rights, franchises, property, appointments, liabilities, and other
interests of the participating national bank shall be transferred to the
resulting nonbank affiliate as set forth in 12 U.S.C. 214b, in the same
manner and to the same extent as in a merger between a national bank and
a state bank under 12 U.S.C. 214a,
[[Page 146]]
as if the nonbank affiliate were a state bank.
(h) Interstate combinations under 12 U.S.C. 1831u. A business
combination between insured banks with different home States under the
authority of 12 U.S.C. 1831u must satisfy the standards and requirements
and comply with the procedures of 12 U.S.C. 1831u and either 12 U.S.C.
215, 215a, and 215a-1, as applicable, if the resulting bank is a
national bank, or 12 U.S.C. 214a, 214b, and 214c if the resulting bank
is a State bank. For purposes of 12 U.S.C. 1831u, the acquisition of a
branch without the acquisition of all or substantially all of the assets
of a bank is treated as the acquisition of a bank whose home State is
the State in which the branch is located.
(i) Expedited review for business reorganizations and streamlined
applications. A filing that qualifies as a business reorganization as
defined in paragraph (d)(2) of this section, or a filing that qualifies
as a streamlined application as described in paragraph (j) of this
section, is deemed approved by the OCC as of the 45th day after the
application is received by the OCC, or the 15th day after the close of
the comment period, whichever is later, unless the OCC notifies the
applicant that the filing is not eligible for expedited review, or the
expedited review process is extended, under Sec. 5.13(a)(2). An
application under this paragraph must contain all necessary information
for the OCC to determine if it qualifies as a business reorganization or
streamlined application.
(j) Streamlined applications. (1) An applicant may qualify for a
streamlined business combination application in the following
situations:
(i) At least one party to the transaction is an eligible bank, and
all other parties to the transaction are eligible banks or eligible
depository institutions, the resulting national bank will be well
capitalized immediately following consummation of the transaction, and
the total assets of the target institution are no more than 50 percent
of the total assets of the acquiring bank, as reported in each
institution's Consolidated Report of Condition and Income filed for the
quarter immediately preceding the filing of the application;
(ii) The acquiring bank is an eligible bank, the target bank is not
an eligible bank or an eligible depository institution, the resulting
national bank will be well capitalized immediately following
consummation of the transaction, and the applicants in a prefiling
communication request and obtain approval from the appropriate district
office to use the streamlined application;
(iii) The acquiring bank is an eligible bank, the target bank is not
an eligible bank or an eligible depository institution, the resulting
bank will be well capitalized immediately following consummation of the
transaction, and the total assets acquired do not exceed 10 percent of
the total assets of the acquiring national bank, as reported in each
institution's Consolidated Report of Condition and Income filed for the
quarter immediately preceding the filing of the application; or
(iv) In the case of a transaction under paragraph (g)(4) of this
section, the acquiring bank is an eligible bank, the resulting national
bank will be well capitalized immediately following consummation of the
transaction, the applicants in a prefiling communication request and
obtain approval from the appropriate district office to use the
streamlined application, and the total assets acquired do not exceed 10
percent of the total assets of the acquiring national bank, as reported
in the bank's Consolidated Report of Condition and Income filed for the
quarter immediately preceding the filing of the application.
(2) When a business combination qualifies for a streamlined
application, the applicant should consult the Manual to determine the
abbreviated application information required by the OCC. The OCC
encourages prefiling communications between the applicants and the
appropriate district office before filing under paragraph (j) of this
section.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 65
FR 12911, Mar. 10, 2000; 68 FR 70129, Dec. 17, 2003; 73 FR 22237, Apr.
24, 2008]
[[Page 147]]
Sec. 5.34 Operating subsidiaries.
(a) Authority. 12 U.S.C. 24 (Seventh), 24a, 93a, 3101 et seq.
(b) Licensing requirements. A national bank must file a notice or
application as prescribed in this section to acquire or establish an
operating subsidiary, or to commence a new activity in an existing
operating subsidiary.
(c) Scope. This section sets forth authorized activities and
application or notice procedures for national banks engaging in
activities through an operating subsidiary. The procedures in this
section do not apply to financial subsidiaries authorized under Sec.
5.39. Unless provided otherwise, this section applies to a Federal
branch or agency that acquires, establishes, or maintains any subsidiary
that a national bank is authorized to acquire or establish under this
section in the same manner and to the same extent as if the Federal
branch or agency were a national bank, except that the ownership
interest required in paragraphs (e)(2) and (e)(5)(i)(B) of this section
shall apply to the parent foreign bank of the Federal branch or agency
and not to the Federal branch or agency.
(d) Definitions. For purposes of this Sec. 5.34:
(1) Authorized product means a product that would be defined as
insurance under section 302(c) of the Gramm-Leach-Bliley Act (Public Law
106-102, 113 Stat. 1338, 1407) (GLBA) (15 U.S.C. 6712) that, as of
January 1, 1999, the OCC had determined in writing that national banks
may provide as principal or national banks were in fact lawfully
providing the product as principal, and as of that date no court of
relevant jurisdiction had, by final judgment, overturned a determination
by the OCC that national banks may provide the product as principal. An
authorized product does not include title insurance, or an annuity
contract the income of which is subject to treatment under section 72 of
the Internal Revenue Code of 1986 (26 U.S.C. 72).
(2) Well capitalized means the capital level described in 12 CFR
6.4(b)(1) or, in the case of a Federal branch or agency, the capital
level described in 12 CFR 4.7(b)(1)(iii).
(3) Well managed means, unless otherwise determined in writing by
the OCC:
(i) In the case of a national bank:
(A) The national bank has received a composite rating of 1 or 2
under the Uniform Financial Institutions Rating System in connection
with its most recent examination; or
(B) In the case of any national bank that has not been examined, the
existence and use of managerial resources that the OCC determines are
satisfactory.
(ii) In the case of a Federal branch or agency:
(A) The Federal branch or agency has received a composite ROCA
supervisory rating (which rates risk management, operational controls,
compliance, and asset quality) of 1 or 2 at its most recent examination;
or
(B) In the case of a Federal branch or agency that has not been
examined, the existence and use of managerial resources that the OCC
determines are satisfactory.
(e) Standards and requirements--(1) Authorized activities. A
national bank may conduct in an operating subsidiary activities that are
permissible for a national bank to engage in directly either as part of,
or incidental to, the business of banking, as determined by the OCC, or
otherwise under other statutory authority, including:
(i) Providing authorized products as principal; and
(ii) Providing title insurance as principal if the national bank or
subsidiary thereof was actively and lawfully underwriting title
insurance before November 12, 1999, and no affiliate of the national
bank (other than a subsidiary) provides insurance as principal. A
subsidiary may not provide title insurance as principal if the state had
in effect before November 12, 1999, a law which prohibits any person
from underwriting title insurance with respect to real property in that
state.
(2) Qualifying subsidiaries. (i) An operating subsidiary in which a
national bank may invest includes a corporation, limited liability
company, limited partnership, or similar entity if:
(A) The bank has the ability to control the management and
operations of the subsidiary;
[[Page 148]]
(B) The parent bank owns and controls more than 50 percent of the
voting (or similar type of controlling) interest of the operating
subsidiary, or the parent bank otherwise controls the operating
subsidiary and no other party controls more than 50 percent of the
voting (or similar type of controlling) interest of the operating
subsidiary; and
(C) The operating subsidiary is consolidated with the bank under
Generally Accepted Accounting Principles (GAAP).
(ii) However, the following subsidiaries are not operating
subsidiaries subject to this section:
(A) A subsidiary in which the bank's investment is made pursuant to
specific authorization in a statute or OCC regulation (e.g., a bank
service company under 12 U.S.C. 1861 et seq. or a financial subsidiary
under section 5136A of the Revised Statutes (12 U.S.C. 24a)); and
(B) A subsidiary in which the bank has acquired, in good faith,
shares through foreclosure on collateral, by way of compromise of a
doubtful claim, or to avoid a loss in connection with a debt previously
contracted.
(3) Examination and supervision. An operating subsidiary conducts
activities authorized under this section pursuant to the same
authorization, terms and conditions that apply to the conduct of such
activities by its parent national bank. If, upon examination, the OCC
determines that the operating subsidiary is operating in violation of
law, regulation, or written condition, or in an unsafe or unsound manner
or otherwise threatens the safety or soundness of the bank, the OCC will
direct the bank or operating subsidiary to take appropriate remedial
action, which may include requiring the bank to divest or liquidate the
operating subsidiary, or discontinue specified activities. OCC authority
under this paragraph is subject to the limitations and requirements of
section 45 of the Federal Deposit Insurance Act (12 U.S.C. 1831v) and
section 115 of the Gramm-Leach-Bliley Act (12 U.S.C. 1820a).
(4) Consolidation of figures--(i) National banks. Pertinent book
figures of the parent national bank and its operating subsidiary shall
be combined for the purpose of applying statutory or regulatory
limitations when combination is needed to effect the intent of the
statute or regulation, e.g., for purposes of 12 U.S.C. 56, 60, 84, and
371d.
(ii) Federal branch or agencies. Transactions conducted by all of a
foreign bank's Federal branches and agencies and State branches and
agencies, and their operating subsidiaries, shall be combined for the
purpose of applying any limitation or restriction as provided in 12 CFR
28.14.
(5) Procedures--(i) Notice required. (A) Except for operating
subsidiaries subject to the application procedures set forth in
paragraph (e)(5)(ii) of this section or exempt from notice or
application procedures under paragraph (e)(5)(vi) of this section, a
national bank that is ``well capitalized'' and ``well managed'' may
establish or acquire an operating subsidiary, or perform a new activity
in an existing operating subsidiary, by providing the appropriate
district office written notice within 10 days after acquiring or
establishing the subsidiary, or commencing the new activity, if:
(1) The activity is listed in paragraph (e)(5)(v) of this section;
(2) The entity is a corporation, limited liability company, or
limited partnership; and
(3) The bank:
(i) Has the ability to control the management and operations of the
subsidiary by holding voting interests sufficient to select the number
of directors needed to control the subsidiary's board and to select and
terminate senior management (or, in the case of a limited partnership,
has the ability to control the management and operations of the
subsidiary by controlling the selection and termination of senior
management);
(ii) Holds more than 50 percent of the voting, or equivalent,
interests in the subsidiary, and, in the case of a limited partnership,
the bank or an operating subsidiary thereof is the sole general partner
of the limited partnership, provided that under the partnership
agreement, limited partners have no authority to bind the partnership by
virtue solely of their status as limited partners; and
[[Page 149]]
(iii) Is required to consolidate its financial statements with those
of the subsidiary under Generally Accepted Accounting Principles.
(B) The written notice must include a complete description of the
bank's investment in the subsidiary and of the activity conducted and a
representation and undertaking that the activity will be conducted in
accordance with OCC policies contained in guidance issued by the OCC
regarding the activity. To the extent that the notice relates to the
initial affiliation of the bank with a company engaged in insurance
activities, the bank should describe the type of insurance activity in
which the company is engaged and has present plans to conduct. The bank
also must list for each State the lines of business for which the
company holds, or will hold, an insurance license, indicating the State
where the company holds a resident license or charter, as applicable.
Any bank receiving approval under this paragraph is deemed to have
agreed that the subsidiary will conduct the activity in a manner
consistent with published OCC guidance.
(ii) Application required. (A) Except where the operating subsidiary
is exempt from notice or application requirements under paragraph
(e)(5)(vi) of this section, or subject to the notice procedures in
paragraph (e)(5)(i), a national bank must first submit an application
to, and receive approval from, the OCC with respect to the establishment
or acquisition of an operating subsidiary, or the performance of a new
activity in an existing operating subsidiary.
(B) The application must explain, as appropriate, how the bank
``controls'' the enterprise, describing in full detail structural
arrangements where control is based on factors other than bank ownership
of more than 50 percent of the voting interest of the subsidiary and the
ability to control the management and operations of the subsidiary by
holding voting interests sufficient to select the number of directors
needed to control the subsidiary's board and to select and terminate
senior management. In the case of a limited partnership that does not
qualify for the notice procedures set forth in paragraph (e)(5)(i), the
bank should provide a statement explaining why it is not eligible. The
application also must include a complete description of the bank's
investment in the subsidiary, the proposed activities of the subsidiary,
the organizational structure and management of the subsidiary, the
relations between the bank and the subsidiary, and other information
necessary to adequately describe the proposal. To the extent that the
application relates to the initial affiliation of the bank with a
company engaged in insurance activities, the bank should describe the
type of insurance activity in which the company is engaged and has
present plans to conduct. The bank must also list for each State the
lines of business for which the company holds, or will hold, an
insurance license, indicating the State where the company holds a
resident license or charter, as applicable. The application must state
whether the operating subsidiary will conduct any activity at a location
other than the main office or a previously approved branch of the bank.
The OCC may require an applicant to submit a legal analysis if the
proposal is novel, unusually complex, or raises substantial unresolved
legal issues. In these cases, the OCC encourages applicants to have a
pre-filing meeting with the OCC. Any bank receiving approval under this
paragraph is deemed to have agreed that the subsidiary will conduct the
activity in a manner consistent with published OCC guidance.
(iii) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to this section. However, if the OCC
concludes that an application presents significant and novel policy,
supervisory, or legal issues, the OCC may determine that some or all
provisions in Sec. Sec. 5.8, 5.10, and 5.11 apply.
(iv) OCC review and approval. The OCC reviews a national bank's
application to determine whether the proposed activities are legally
permissible and to ensure that the proposal is consistent with safe and
sound banking practices and OCC policy and does not endanger the safety
or soundness of the parent national bank. As part of this
[[Page 150]]
process, the OCC may request additional information and analysis from
the applicant.
(v) Activities eligible for notice. The following activities qualify
for the notice procedures, provided the activity is conducted pursuant
to the same terms and conditions as would be applicable if the activity
were conducted directly by a national bank:
(A) Holding and managing assets acquired by the parent bank,
including investment assets and property acquired by the bank through
foreclosure or otherwise in good faith to compromise a doubtful claim,
or in the ordinary course of collecting a debt previously contracted;
(B) Providing services to or for the bank or its affiliates,
including accounting, auditing, appraising, advertising and public
relations, and financial advice and consulting;
(C) Making loans or other extensions of credit, and selling money
orders, savings bonds, and travelers checks;
(D) Purchasing, selling, servicing, or warehousing loans or other
extensions of credit, or interests therein;
(E) Providing courier services between financial institutions;
(F) Providing management consulting, operational advice, and
services for other financial institutions;
(G) Providing check guaranty, verification and payment services;
(H) Providing data processing, data warehousing and data
transmission products, services, and related activities and facilities,
including associated equipment and technology, for the bank or its
affiliates;
(I) Acting as investment adviser (including an adviser with
investment discretion) or financial adviser or counselor to governmental
entities or instrumentalities, businesses, or individuals, including
advising registered investment companies and mortgage or real estate
investment trusts, furnishing economic forecasts or other economic
information, providing investment advice related to futures and options
on futures, and providing consumer financial counseling;
(J) Providing tax planning and preparation services;
(K) Providing financial and transactional advice and assistance,
including advice and assistance for customers in structuring, arranging,
and executing mergers and acquisitions, divestitures, joint ventures,
leveraged buyouts, swaps, foreign exchange, derivative transactions,
coin and bullion, and capital restructurings;
(L) Underwriting and reinsuring credit related insurance to the
extent permitted under section 302 of the GLBA (15 U.S.C. 6712);
(M) Leasing of personal property and acting as an agent or adviser
in leases for others;
(N) Providing securities brokerage or acting as a futures commission
merchant, and providing related credit and other related services;
(O) Underwriting and dealing, including making a market, in bank
permissible securities and purchasing and selling as principal, asset
backed obligations;
(P) Acting as an insurance agent or broker, including title
insurance to the extent permitted under section 303 of the GLBA (15
U.S.C. 6713);
(Q) Reinsuring mortgage insurance on loans originated, purchased, or
serviced by the bank, its subsidiaries, or its affiliates, provided that
if the subsidiary enters into a quota share agreement, the subsidiary
assumes less than 50 percent of the aggregate insured risk covered by
the quota share agreement. A ``quota share agreement'' is an agreement
under which the reinsurer is liable to the primary insurance underwriter
for an agreed upon percentage of every claim arising out of the covered
book of business ceded by the primary insurance underwriter to the
reinsurer;
(R) Acting as a finder pursuant to 12 CFR 7.1002 to the extent
permitted by published OCC precedent; \1\
---------------------------------------------------------------------------
\1\ See, e.g., the OCC's monthly publication ``Interpretations and
Actions.'' Beginning with the May 1996 issue, the OCC's Web site
provides access to electronic versions of ``Interpretations and
Actions'' (www.occ.treas.gov).
---------------------------------------------------------------------------
(S) Offering correspondent services to the extent permitted by
published OCC precedent;
(T) Acting as agent or broker in the sale of fixed or variable
annuities;
(U) Offering debt cancellation or debt suspension agreements;
[[Page 151]]
(V) Providing real estate settlement, closing, escrow, and related
services; and real estate appraisal services for the subsidiary, parent
bank, or other financial institutions;
(W) Acting as a transfer or fiscal agent;
(X) Acting as a digital certification authority to the extent
permitted by published OCC precedent, subject to the terms and
conditions contained in that precedent;
(Y) Providing or selling public transportation tickets, event and
attraction tickets, gift certificates, prepaid phone cards, promotional
and advertising material, postage stamps, and Electronic Benefits
Transfer (EBT) script, and similar media, to the extent permitted by
published OCC precedent, subject to the terms and conditions contained
in that precedent;
(Z) Providing data processing, and data transmission services,
facilities (including equipment, technology, and personnel), databases,
advice and access to such services, facilities, databases and advice,
for the parent bank and for others, pursuant to 12 CFR 7.5006 to the
extent permitted by published OCC precedent;
(AA) Providing bill presentment, billing, collection, and claims-
processing services;
(BB) Providing safekeeping for personal information or valuable
confidential trade or business information, such as encryption keys, to
the extent permitted by published OCC precedent;
(CC) Providing payroll processing;
(DD) Providing branch management services;
(EE) Providing merchant processing services except when the activity
involves the use of third parties to solicit or underwrite merchants;
and
(FF) Performing administrative tasks involved in benefits
administration.
(vi) No application or notice required. A national bank may acquire
or establish an operating subsidiary, or engage in the performance of a
new activity in an existing operating subsidiary, without filing an
application or providing notice to the OCC, if the bank is well managed
and adequately capitalized or well capitalized and the:
(A) Activities of the new subsidiary are limited to those activities
previously reported by the bank in connection with the establishment or
acquisition of a prior operating subsidiary;
(B) Activities in which the new subsidiary will engage continue to
be legally permissible for the subsidiary;
(C) Activities of the new subsidiary will be conducted in accordance
with any conditions imposed by the OCC in approving the conduct of these
activities for any prior operating subsidiary of the bank;
(D) The standards set forth in paragraphs (e)(5)(i)(A)(2) and (3) of
this section are satisfied.
(vii) Fiduciary powers. If an operating subsidiary proposes to
exercise investment discretion on behalf of customers or provide
investment advice for a fee, the national bank must have prior OCC
approval to exercise fiduciary powers pursuant to Sec. 5.26.
(6) Grandfathered operating subsidiaries. Notwithstanding the
requirements for a qualifying operating subsidiary in Sec. 5.34(e)(2)
and unless otherwise notified by the OCC with respect to a particular
operating subsidiary, an entity that a national bank lawfully acquired
or established as an operating subsidiary before April 24, 2008 may
continue to operate as a national bank operating subsidiary under this
section, provided that the bank and the operating subsidiary were, and
continue to be, conducting authorized activities in compliance with the
standards and requirements applicable when the bank established or
acquired the operating subsidiary.
(7) Annual Report on Operating Subsidiaries--(i) Filing requirement.
Each national bank shall prepare and file with the OCC an Annual Report
on Operating Subsidiaries containing the information set forth in
paragraph (e)(6)(ii) of this section for each of its operating
subsidiaries that:
(A) Is not functionally regulated within the meaning of section
5(c)(5) of the Bank Holding Company Act of 1956, as amended (12 U.S.C.
1844(c)(5)); and
(B) Does business directly with consumers in the United States. For
purposes of paragraph (e)(6) of this section,
[[Page 152]]
an operating subsidiary, or any subsidiary thereof, does business
directly with consumers if, in the ordinary course of its business, it
provides products or services to individuals to be used primarily for
personal, family, or household purposes.
(ii) Information required. The Annual Report on Operating
Subsidiaries must contain the following information for each covered
operating subsidiary listed:
(A) The name and charter number of the parent national bank;
(B) The name (include any ``dba'' (doing business as), abbreviated
names, or trade names used to identify the operating subsidiary when it
does business directly with consumers), mailing address (include the
street address or post office box, city, state, and zip code), e-mail
address (if any), and telephone number of the operating subsidiary;
(C) The principal place of business of the operating subsidiary, if
different from the address provided pursuant to paragraph (e)(6)(ii)(B)
of this section; and
(D) The lines of business in which the operating subsidiary is doing
business directly with consumers by designating the appropriate code
contained in appendix B (NAICS Activity Codes for Commonly Reported
Activities) to the Instructions for Preparation of Report of Changes in
Organizational Structure, Form FR Y-10, a copy of which is set forth on
the OCC's Web site at http://www.occ.gov. If the operating subsidiary is
engaged in an activity not set forth in this list, a national bank shall
report the code 0000 and provide a brief description of the activity.
(iii) Filing time frames and availability of information. Each
national bank's Annual Report on Operating Subsidiaries shall contain
information current as of December 31st for the year prior to the year
the report is filed. The national bank shall submit its first Annual
Report on Operating Subsidiaries (for information as of December 31,
2004) to the OCC on or before January 31, 2005, and on or before January
31st each year thereafter. The national bank may submit the Annual
Report on Operating Subsidiaries electronically or in another format
prescribed by the OCC. The OCC will make available to the public the
information contained in the Annual Report on Operating Subsidiaries on
its Web site at http://www.occ.gov.
[65 FR 12911, Mar. 10, 2000, as amended at 66 FR 49097, Sept. 26, 2001;
66 FR 62914, Dec. 4, 2001; 68 FR 70131, Dec. 17, 2003; 69 FR 64481, Nov.
5, 2004; 73 FR 22238, Apr. 24, 2008]
Sec. 5.35 Bank service companies.
(a) Authority. 12 U.S.C. 93a and 1861-1867.
(b) Licensing requirements. Except where otherwise provided, a
national bank shall submit a notice and obtain prior OCC approval to
invest in the equity of a bank service company or to perform new
activities in an existing bank service company.
(c) Scope. This section describes the procedures and requirements
regarding OCC review and approval of a notice to invest in a bank
service company.
(d) Definitions--(1) Bank service company means a corporation or
limited liability company organized to provide services authorized by
the Bank Service Company Act, 12 U.S.C. 1861 et seq., all of whose
capital stock is owned by one or more insured depository institutions in
the case of a corporation, or all of the members of which are one or
more insured depository institutions in the case of a limited liability
company.
(2) Limited liability company means any non-corporate company,
partnership, trust, or similar business entity organized under the law
of a State (as defined in section 3 of the Federal Deposit Insurance
Act) which provides that a member or manager of such company is not
personally liable for a debt, obligation, or liability of the company
solely by reason of being, or acting as, a member or manager of such
company.
(3) Depository institution for purposes of this section, means,
except when such term appears in connection with the term `insured
depository institution' an insured bank, a financial institution subject
to examination by the Office of Thrift Supervision, or the National
Credit Union Administration Board, or a financial institution whose
accounts or deposits are insured or guaranteed under state law and
eligible to be insured by the Federal Deposit
[[Page 153]]
Insurance Corporation or the National Credit Union Administration Board.
(4) Insured depository institution, for purposes of this section,
has the same meaning as in section 3 of the Federal Deposit Insurance
Act.
(5) Invest includes making any advance of funds to a bank service
company, whether by the purchase of stock, the making of a loan, or
otherwise, except a payment for rent earned, goods sold and delivered,
or services rendered before the payment was made.
(6) Principal investor means the insured depository institution that
has the largest amount invested in the equity of a bank service company.
In any case where two or more insured depository institution have equal
amounts invested, the bank service company shall designate one of the
insured depository institutions as its principal investor.
(e) Standards and requirements. A national bank may invest in a bank
service company that conducts activities described in paragraphs (f)(3)
and (f)(4) of this section, and activities (other than taking deposits)
permissible for the national bank and other state and national bank
shareholders or members in the bank service company.
(f) Procedures--(1) OCC notice and approval required. Except as
provided in paragraphs (f)(2) and (f)(4) of this section, a national
bank that intends to make an investment in a bank service company, or to
perform new activities in an existing bank service company, must submit
a notice to and receive prior approval from the OCC. The OCC approves or
denies a proposed investment within 60 days after the filing is received
by the OCC, unless the OCC notifies the bank prior to that date that the
filing presents a significant supervisory or compliance concern, or
raises a significant legal or policy issue. The notice must include the
information required by paragraph (g) of this section.
(2) Notice process only for certain activities. A national bank that
is ``well capitalized'' and ``well managed'' as defined in Sec. 5.34(d)
may invest in a bank service company, or perform a new activity in an
existing bank service company, by providing the appropriate district
office written notice within 10 days after the investment, if the bank
service company engages only in the activities listed in Sec.
5.34(e)(5)(v). No prior OCC approval is required. The written notice
must include a complete description of the bank's investment in the bank
service company and of the activity conducted and a representation and
undertaking that the activity will be conducted in accordance with OCC
guidance. To the extent the notice relates to the initial affiliation of
the bank with a company engaged in insurance activities, the bank should
describe the type of insurance activity that the company is engaged in
and has present plans to conduct. The bank must also list for each state
the lines of business for which the company holds, or will hold, an
insurance license, indicating the state where the company holds a
resident license or charter, as applicable. Any bank receiving approval
under this paragraph is deemed to have agreed that the bank service
company will conduct the activity in a manner consistent with the
published OCC guidance.
(3) Investments requiring no approval. A national bank does not need
OCC approval to invest in a bank service company, or to perform a new
activity in an existing bank service company, if the bank service
company will provide the following services only for depository
institutions: check and deposit posting and sorting; computation and
posting of interest and other credits and charges; preparation and
mailing of checks, statements, notices, and similar items; or any other
clerical, bookkeeping, accounting, statistical, or similar function.
(4) Federal Reserve approval. A national bank also may, with the
approval of the Board of Governors of the Federal Reserve System
(Federal Reserve Board), invest in the equity of a bank service company
that provides any other service (except deposit taking) that the Federal
Reserve Board has determined, by regulation, to be permissible for a
bank holding company under 12 U.S.C. 1843(c)(8).
(5) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to a request for approval to invest in a
bank service corporation. However, if the OCC concludes that an
[[Page 154]]
application presents significant and novel policy, supervisory, or legal
issues, the OCC may determine that any or all parts of Sec. Sec. 5.8,
5.10, and 5.11 apply.
(g) Required information. A notice required under paragraph (f)(1),
of this section must contain the following:
(1) The name and location of the bank service company;
(2) A complete description of the activities the bank service
company will conduct. To the extent the notice relates to the initial
affiliation of the bank with a company engaged in insurance activities,
the bank should describe the type of insurance activity that the company
is engaged in and has present plans to conduct. The bank must also list
for each state the lines of business for which the company holds, or
will hold, an insurance license, indicating the state where the company
holds a resident license or charter, as applicable;
(3) Information demonstrating that the bank will comply with the
investment limitations of paragraph (i) of this section; and
(4) Information demonstrating that the bank service company will
perform only those services that each insured depository institution
shareholder or member is authorized to perform under applicable Federal
or State law and will perform such services only at locations in a State
in which each such shareholder or member is authorized to perform such
services unless performing services that are authorized by the Federal
Reserve Board under the authority of 12 U.S.C. 1865(b).
(h) Examination and supervision. Each bank service company in which
a national bank is the principal investor is subject to examination and
supervision by the OCC in the same manner and to the same extent as that
national bank. OCC authority under this paragraph is subject to the
limitations and requirements of section 45 of the Federal Deposit
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
(i) Investment limitations. A bank may not invest more than ten
percent of its capital and surplus in a bank service company. In
addition, the bank's total investments in all bank service companies may
not exceed five percent of the bank's total assets.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999; 65
FR 12913, Mar. 10, 2000; 73 FR 22239, Apr. 24, 2008]
Sec. 5.36 Other equity investments.
(a) Authority. 12 U.S.C. 1 et seq., 24(Seventh), and 93a.
(b) Scope. National banks are permitted to make various types of
equity investments pursuant to 12 U.S.C. 24(Seventh) and other statutes.
These investments are in addition to those subject to Sec. Sec. 5.34,
5.35, and 5.37. This section describes the procedure governing the
filing of the application or notice that the OCC requires in connection
with certain of these investments. Other permissible equity investments
may be reviewed on a case-by-case basis by the OCC.
(c) Definitions. For purposes of this Sec. 5.36:
(1) Enterprise means any corporation, limited liability company,
partnership, trust, or similar business entity.
(2) Well capitalized means the capital level described in 12 CFR
6.4(b)(1).
(3) Well managed has the meaning set forth in Sec. 5.34(d)(3).
(d) Procedure. (1) A national bank must provide the appropriate
district office with written notice within ten days after making an
equity investment in the following:
(i) An agricultural credit corporation;
(ii) A savings association eligible to be acquired under section 13
of the Federal Deposit Insurance Act (12 U.S.C. 1823); and
(iii) Any other equity investment that may be authorized by statute
after February 12, 1990, if not covered by other applicable OCC
regulation.
(2) The written notice required by paragraph (c)(1) of this section
must include a description, and the amount, of the bank's investment.
(3) The OCC reserves the right to require additional information as
necessary.
(e) Non-controlling investments; notice procedure. Unless the
procedures governing a national bank's non-controlling investment are
prescribed by OCC rules implementing a separate legal authorization of
the investment and
[[Page 155]]
except as provided in paragraphs (f) and (g) of this section, a national
bank may make a non-controlling investment, directly or through its
operating subsidiary, in an enterprise that engages in the activities
described in paragraph (e)(2) of this section by filing a written
notice. The bank must file this written notice with the appropriate
district office no later than 10 days after making the investment. The
written notice must:
(1) Describe the structure of the investment and the activity or
activities conducted by the enterprise in which the bank is investing.
To the extent the notice relates to the initial affiliation of the bank
with a company engaged in insurance activities, the bank should describe
the type of insurance activity that the company is engaged in and has
present plans to conduct. The bank must also list for each state the
lines of business for which the company holds, or will hold, an
insurance license, indicating the state where the company holds a
resident license or charter, as applicable;
(2) State which paragraphs of Sec. 5.34(e)(5)(v) describe the
activity or activities, or state that, and describe how, the activity is
substantively the same as that contained in published OCC precedent
approving a non-controlling investment by a national bank or its
operating subsidiary, state that the activity will be conducted in
accordance with the same terms and conditions applicable to the activity
covered by the precedent, and provide the citation to the applicable
precedent;
(3) Certify that the bank is well managed and well capitalized at
the time of the investment;
(4) Describe how the bank has the ability to prevent the enterprise
from engaging in activities that are not set forth in Sec.
5.34(e)(5)(v) or not contained in published OCC precedent approving a
non-controlling investment by a national bank or its operating
subsidiary, or how the bank otherwise has the ability to withdraw its
investment;
(5) Describe how the investment is convenient and useful to the bank
in carrying out its business and not a mere passive investment unrelated
to the bank's banking business;
(6) Certify that the bank's loss exposure is limited as a legal
matter and that the bank does not have unlimited liability for the
obligations of the enterprise; and
(7) Certify that the enterprise in which the bank is investing
agrees to be subject to OCC supervision and examination, subject to the
limitations and requirements of section 45 of the Federal Deposit
Insurance Act (12 U.S.C. 1831v) and section 115 of the Gramm-Leach-
Bliley Act (12 U.S.C. 1820a).
(f) Non-controlling investment; application procedure. Unless the
procedures governing a national bank's non-controlling investment are
prescribed by OCC rules implementing a separate legal authorization of
the investment, a national bank must file an application and obtain
prior approval before making or acquiring, either directly or through an
operating subsidiary, a non-controlling investment in an enterprise if
the non-controlling investment does not qualify for the notice procedure
set forth in paragraph (e) of this section because the bank is unable to
make the representation required by paragraph (e)(2) or the
certification required by paragraph (e)(3) of this section. The
application must include the information required in paragraphs (e)(1)
and (e)(4) through (e)(7) of this section and (e)(2) or (e)(3), as
appropriate. If the bank is unable to make the representation set forth
in paragraph (e)(2) of this section, the bank's application must explain
why the activity in which the enterprise engages is a permissible
activity for a national bank and why the applicant should be permitted
to hold a non-controlling investment in an enterprise engaged in that
activity. A bank may not make a non-controlling investment if it is
unable to make the representations and certifications specified in
paragraphs (e)(1) and (e)(4) through (e)(7) of this section.
(g) Non-controlling investments in entities holding assets in
satisfaction of debts previously contracted. Certain non-controlling
investments may be eligible for expedited treatment where the
[[Page 156]]
bank's investment is in an entity holding assets in satisfaction of
debts previously contracted or the bank acquires shares of a company in
satisfaction of debts previously contracted.
(1) Notice required. A national bank that is well capitalized and
well managed may acquire a non-controlling investment, directly or
through its operating subsidiary, in an enterprise that engages in the
activities of holding and managing assets acquired by the parent bank
through foreclosure or otherwise in good faith to compromise a doubtful
claim, or in the ordinary course of collecting a debt previously
contracted, by filing a written notice in accordance with this paragraph
(g)(i). The activities of the enterprise must be conducted pursuant to
the same terms and conditions as would be applicable if the activity
were conducted directly by a national bank. The bank must file the
written notice with the appropriate district office no later than 10
days after making the non-controlling investment. This notice must
include a complete description of the bank's investment in the
enterprise and the activities conducted, a description of how the bank
plans to divest the non-controlling investment or the underlying assets
within applicable statutory time frames, and a representation and
undertaking that the bank will conduct the activities in accordance with
OCC policies contained in guidance issued by the OCC regarding the
activities. Any national bank receiving approval under this paragraph
(g)(i) is deemed to have agreed that the enterprise will conduct the
activity in a manner consistent with published OCC guidance.
(2) No notice or application required. A national bank is not
required to file a notice or application under this Sec. 5.36 if it
acquires a non-controlling investment in shares of a company through
foreclosure or otherwise in good faith to compromise a doubtful claim,
or in the ordinary course of collecting a debt previously contracted.
(h) Non-controlling investments by Federal branches. A Federal
branch that satisfies the well capitalized and well managed standards in
12 CFR 4.7(b)(1)(iii) and Sec. 5.34(d)(3)(ii) may make a non-
controlling investment in accordance with paragraph (e) of this section
in the same manner and subject to the same conditions and requirements
as a national bank, and subject to any additional requirements that may
apply under 12 CFR 28.10(c).
(i) Exceptions to rules of general applicability. Sections 5.8, 5.9,
5.10, and 5.11 of this part do not apply to filings for other equity
investments.
[61 FR 60363, Nov. 27, 1996, as amended at 65 FR 12913, Mar. 10, 2000;
65 FR 41560, July 6, 2000; 68 FR 70698, Dec. 19, 2003; 73 FR 22239, Apr.
24, 2008]
Sec. 5.37 Investment in bank premises.
(a) Authority. 12 U.S.C. 29, 93a, and 371d.
(b) Scope. This section sets forth the procedures governing OCC
review and approval of applications by national banks to invest in bank
premises or in certain bank premises related investments, loans, or
indebtedness, as described in paragraph (d)(1)(i) of this section.
(c) Definition--Bank premises for purposes of this section includes
the following:
(1) Premises that are owned and occupied (or to be occupied, if
under construction) by the bank, its branches, or its consolidated
subsidiaries;
(2) Capitalized leases and leasehold improvements, vaults, and fixed
machinery and equipment;
(3) Remodeling costs to existing premises;
(4) Real estate acquired and intended, in good faith, for use in
future expansion; or
(5) Parking facilities that are used by customers or employees of
the bank, its branches, and its consolidated subsidiaries.
(d) Procedure--(1) Application. (i) A national bank shall submit an
application to the appropriate supervisory office to invest in bank
premises, or in the stock, bonds, debentures, or other such obligations
of any corporation holding the premises of the bank, or to make loans to
or upon the security of the stock of such corporation, if the aggregate
of all such investments and loans, together with the indebtedness
incurred by any such corporation that is an affiliate of the bank, as
defined in
[[Page 157]]
12 U.S.C. 221a, will exceed the amount of the capital stock of the bank.
(ii) The application must include:
(A) A description of the bank's present investment in bank premises;
(B) The investment in bank premises that the bank intends to make,
and the business reason for making the investment; and
(C) The amount by which the bank's aggregate investment will exceed
the amount of the bank's capital stock.
(2) Approval. An application for national bank investment in bank
premises or in certain bank premises' related investments, loans or
indebtedness, as described in paragraph (d)(1)(i) of this section, is
deemed approved as of the 30th day after the filing is received by the
OCC, unless the OCC notifies the bank prior to that date that the filing
presents a significant supervisory, or compliance concern, or raises a
significant legal or policy issue. An approval for a specified amount
under this section remains valid up to that amount until the OCC
notifies the bank otherwise.
(3) Notice process. Notwithstanding paragraph (d)(1)(i) of this
section, a bank that is rated 1 or 2 under the Uniform Financial
Institutions Rating System (CAMELS) may make an aggregate investment in
bank premises up to 150 percent of the bank's capital and surplus
without the OCC's prior approval, provided that the bank is well
capitalized as defined in 12 CFR part 6 and will continue to be well
capitalized after the investment or loan is made. However, the bank
shall notify the appropriate supervisory office in writing of the
investment within 30 days after the investment or loan is made. The
written notice must include a description of the bank's investment.
(4) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to this section. However, if the OCC
concludes that an application presents significant and novel policy,
supervisory, or legal issues, the OCC may determine that any or all
parts of Sec. Sec. 5.8, 5.10, and 5.11 apply.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]
Sec. 5.39 Financial subsidiaries.
(a) Authority. 12 U.S.C. 93a and section 121 of Public Law 106-102,
113 Stat. 1338, 1373.
(b) Approval requirements. A national bank must file a notice as
prescribed in this section prior to acquiring a financial subsidiary or
engaging in activities authorized pursuant to section 5136A(a)(2)(A)(i)
of the Revised Statutes (12 U.S.C. 24a) through a financial subsidiary.
When a financial subsidiary proposes to conduct a new activity permitted
under Sec. 5.34, the bank shall follow the procedures in Sec.
5.34(e)(5) instead of paragraph (i) of this section.
(c) Scope. This section sets forth authorized activities, approval
procedures, and, where applicable, conditions for national banks
engaging in activities through a financial subsidiary.
(d) Definitions. For purposes of this Sec. 5.39:
(1) Affiliate has the meaning set forth in section 2 of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841), except that the term
``affiliate'' for purposes of paragraph (h)(5) of this section shall
have the meaning set forth in sections 23A or 23B of the Federal Reserve
Act (12 U.S.C. 371c and 371c-1), as implemented by Regulation W, 12 CFR
part 223, as applicable.
(2) Appropriate Federal banking agency has the meaning set forth in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(3) Company has the meaning set forth in section 2 of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841), and includes a limited
liability company (LLC).
(4) Control has the meaning set forth in section 2 of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841).
(5) Eligible debt means unsecured long-term debt that is:
(i) Not supported by any form of credit enhancement, including a
guaranty or standby letter of credit; and
(ii) Not held in whole or in any significant part by any affiliate,
officer, director, principal shareholder, or employee of the bank or any
other person acting on behalf of or with funds from the bank or an
affiliate of the bank.
(6) Financial subsidiary means any company that is controlled by one
or
[[Page 158]]
more insured depository institutions, other than a subsidiary that:
(i) Engages solely in activities that national banks may engage in
directly and that are conducted subject to the same terms and conditions
that govern the conduct of these activities by national banks; or
(ii) A national bank is specifically authorized to control by the
express terms of a Federal statute (other than section 5136A of the
Revised Statutes), and not by implication or interpretation, such as by
section 25 of the Federal Reserve Act (12 U.S.C. 601-604a), section 25A
of the Federal Reserve Act (12 U.S.C. 611-631), or the Bank Service
Company Act (12 U.S.C. 1861 et seq.)
(7) Insured depository institution has the meaning set forth in
section 3 of the Federal Deposit Insurance Act (12 U.S.C. 1813).
(8) Long term debt means any debt obligation with an initial
maturity of 360 days or more.
(9) Subsidiary has the meaning set forth in section 2 of the Bank
Holding Company Act of 1956 (12 U.S.C. 1841).
(10) Tangible equity has the meaning set forth in 12 CFR 6.2(g).
(11) Well capitalized with respect to a depository institution means
the capital level designated as ``well capitalized'' by the
institution's appropriate Federal banking agency pursuant to section 38
of the Federal Deposit Insurance Act (12 U.S.C. 1831o).
(12) Well managed means:
(i) Unless otherwise determined in writing by the appropriate
Federal banking agency, the institution has received a composite rating
of 1 or 2 under the Uniform Financial Institutions Rating System (or an
equivalent rating under an equivalent rating system) in connection with
the most recent examination or subsequent review of the depository
institution and, at least a rating of 2 for management, if such a rating
is given; or
(ii) In the case of any depository institution that has not been
examined by its appropriate Federal banking agency, the existence and
use of managerial resources that the appropriate Federal banking agency
determines are satisfactory.
(e) Authorized activities. A financial subsidiary may engage only in
the following activities:
(1) Activities that are financial in nature and activities
incidental to a financial activity, authorized pursuant to
5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a) (to the extent
not otherwise permitted under paragraph (e)(2) of this section),
including:
(i) Lending, exchanging, transferring, investing for others, or
safeguarding money or securities;
(ii) Engaging as agent or broker in any state for purposes of
insuring, guaranteeing, or indemnifying against loss, harm, damage,
illness, disability, death, defects in title, or providing annuities as
agent or broker;
(iii) Providing financial, investment, or economic advisory
services, including advising an investment company as defined in section
3 of the Investment Company Act (15 U.S.C. 80a-3);
(iv) Issuing or selling instruments representing interests in pools
of assets permissible for a bank to hold directly;
(v) Underwriting, dealing in, or making a market in securities;
(vi) Engaging in any activity that the Board of Governors of the
Federal Reserve System has determined, by order or regulation in effect
on November 12, 1999, to be so closely related to banking or managing or
controlling banks as to be a proper incident thereto (subject to the
same terms and conditions contained in the order or regulation, unless
the order or regulation is modified by the Board of Governors of the
Federal Reserve System);
(vii) Engaging, in the United States, in any activity that a bank
holding company may engage in outside the United States and the Board of
Governors of the Federal Reserve System has determined, under
regulations prescribed or interpretations issued pursuant to section
4(c)(13) of the Bank Holding Company Act of 1956 (12 U.S.C. 1843(c)(13))
as in effect on November 11, 1999, to be usual in connection with the
transaction of banking or other financial operations abroad; and
(viii) Activities that the Secretary of the Treasury in consultation
with the Board of Governors of the Federal Reserve System, as provided
in section
[[Page 159]]
5136A of the Revised Statutes, determines to be financial in nature or
incidental to a financial activity; and
(2) Activities that may be conducted by an operating subsidiary
pursuant to Sec. 5.34.
(f) Impermissible activities. A financial subsidiary may not engage
as principal in the following activities:
(1) Insuring, guaranteeing, or indemnifying against loss, harm,
damage, illness, disability or death, or defects in title (except to the
extent permitted under sections 302 or 303(c) of the Gramm-Leach-Bliley
Act (GLBA)), 113 Stat. 1407-1409, (15 U.S.C. 6712 or 15 U.S.C. 6713) or
providing or issuing annuities the income of which is subject to tax
treatment under section 72 of the Internal Revenue Code (26 U.S.C. 72);
(2) Real estate development or real estate investment, unless
otherwise expressly authorized by law; and
(3) Activities authorized for bank holding companies by section
4(k)(4)(H) or (I) (12 U.S.C. 1843) of the Bank Holding Company Act,
except activities authorized under section 4(k)(4)(H) that may be
permitted in accordance with section 122 of the GLBA, 113 Stat. 1381.
(g) Qualifications. A national bank may, directly or indirectly,
control a financial subsidiary or hold an interest in a financial
subsidiary only if:
(1) The national bank and each depository institution affiliate of
the national bank are well capitalized and well managed;
(2) The aggregate consolidated total assets of all financial
subsidiaries of the national bank do not exceed the lesser of 45 percent
of the consolidated total assets of the parent bank or $50 billion (or
such greater amount as is determined according to an indexing mechanism
jointly established by regulation by the Secretary of the Treasury and
the Board of Governors of the Federal Reserve System); and
(3) If 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, the bank has at least one issue of outstanding
eligible debt that is currently rated in one of the three highest
investment grade rating categories by a nationally recognized
statistical rating organization. If the national bank is one of the
second 50 largest insured banks, it may either satisfy this requirement
or satisfy alternative criteria the Secretary of the Treasury and the
Board of Governors of the Federal Reserve System establish jointly by
regulation. This paragraph (g)(3) does not apply if the financial
subsidiary is engaged solely in activities in an agency capacity.
(h) Safeguards. The following safeguards apply to a national bank
that establishes or maintains a financial subsidiary:
(1) For purposes of determining regulatory capital:
(i) The national bank must deduct the aggregate amount of its
outstanding equity investment, including retained earnings, in its
financial subsidiaries from its total assets and tangible equity and
deduct such investment from its total risk-based capital (this deduction
shall be made equally from Tier 1 and Tier 2 capital); and
(ii) The national bank may not consolidate the assets and
liabilities of a financial subsidiary with those of the bank;
(2) Any published financial statement of the national bank shall, in
addition to providing information prepared in accordance with generally
accepted accounting principles, separately present financial information
for the bank in the manner provided in paragraph (h)(1) of this section;
(3) The national bank must have reasonable policies and procedures
to preserve the separate corporate identity and limited liability of the
bank and the financial subsidiaries of the bank;
(4) The national bank must have procedures for identifying and
managing financial and operational risks within the bank and the
financial subsidiary that adequately protect the national bank from such
risks;
(5) Except for a subsidiary of a bank that is considered a financial
subsidiary under paragraph (a)(6) of this section solely because the
subsidiary engages in the sale of insurance as agent or broker in a
manner that is not permitted for national banks, sections 23A and 23B of
the Federal Reserve Act (12 U.S.C. 371c and 371c-1), as implemented by
Regulation W, 12 CFR part
[[Page 160]]
223, apply to transactions involving a financial subsidiary in the
following manner:
(i) A financial subsidiary shall be deemed to be an affiliate of the
bank and shall not be deemed to be a subsidiary of the bank;
(ii) The restrictions contained in section 23A(a)(1)(A) of the
Federal Reserve Act shall not apply with respect to covered transactions
between a bank and any individual financial subsidiary of the bank;
(iii) A bank's purchase of or investment in a security issued by a
financial subsidiary of the bank must be valued at the greater of:
(A) The total amount of consideration given (including liabilities
assumed) by the bank, reduced to reflect amortization of the security to
the extent consistent with GAAP, or
(B) The carrying value of the security (adjusted so as not to
reflect the bank's pro rata portion of any earnings retained or losses
incurred by the financial subsidiary after the bank's acquisition of the
security).
(iv) Any purchase of, or investment in, the securities of a
financial subsidiary of a bank by an affiliate of the bank will be
considered to be a purchase of or investment in such securities by the
bank;
(v) Any extension of credit to a financial subsidiary of a bank by
an affiliate of the bank is treated as an extension of credit by the
bank to the financial subsidiary if the extension of credit is treated
as capital of the financial subsidiary under any Federal or State law,
regulation, or interpretation applicable to the subsidiary; and
(vi) Any other extension of credit by an affiliate of a bank to a
financial subsidiary of the bank may be considered an extension of
credit by the bank to the financial subsidiary if the Board of Governors
of the Federal Reserve System determines that such treatment is
necessary or appropriate to prevent evasions of the Federal Reserve Act
and the GLBA.
(6) A financial subsidiary shall be deemed a subsidiary of a bank
holding company and not a subsidiary of the bank for purposes of the
anti-tying prohibitions set forth in 12 U.S.C. 1971 et seq.
(i) Procedures to engage in activities through a financial
subsidiary. A national bank that intends, directly or indirectly, to
acquire control of, or hold an interest in, a financial subsidiary, or
to commence a new activity in an existing financial subsidiary, must
obtain OCC approval through the procedures set forth in paragraph (i)(1)
or (i)(2) of this section.
(1) Certification with subsequent notice. (i) At any time, a
national bank may file a ``Financial Subsidiary Certification'' with the
appropriate district office listing the bank's depository institution
affiliates and certifying that the bank and each of those affiliates is
well capitalized and well managed.
(ii) Thereafter, at such time as the bank seeks OCC approval to
acquire control of, or hold an interest in, a new financial subsidiary,
or commence a new activity authorized under section 5136A(a)(2)(A)(i) of
the Revised Statutes (12 U.S.C. 24a) in an existing subsidiary, the bank
may file a written notice with the appropriate district office at the
time of acquiring control of, or holding an interest in, a financial
subsidiary, or commencing such activity in an existing subsidiary. The
written notice must be labeled ``Financial Subsidiary Notice'' and must:
(A) State that the bank's Certification remains valid;
(B) Describe the activity or activities conducted by the financial
subsidiary. To the extent the notice relates to the initial affiliation
of the bank with a company engaged in insurance activities, the bank
should describe the type of insurance activity that the company is
engaged in and has present plans to conduct. The bank must also list for
each state the lines of business for which the company holds, or will
hold, an insurance license, indicating the state where the company holds
a resident license or charter, as applicable;
(C) Cite the specific authority permitting the activity to be
conducted by the financial subsidiary. (Where the authority relied on is
an agency order or interpretation under section 4(c)(8) or 4(c)(13),
respectively, of the Bank Holding Company Act of 1956, a copy of the
order or interpretation should be attached);
[[Page 161]]
(D) Certify that the bank will be well capitalized after making
adjustments required by paragraph (h)(1) of this section;
(E) Demonstrate the aggregate consolidated total assets of all
financial subsidiaries of the national bank do not exceed the lesser of
45 percent of the bank's consolidated total assets or $50 billion (or
the increased level established by the indexing mechanism); and
(F) If applicable, certify that the bank meets the eligible debt
requirement in paragraph (g)(3) of this section.
(2) Combined certification and notice. A national bank may file a
combined certification and notice with the appropriate district office
at least five business days prior to acquiring control of, or holding an
interest in, a financial subsidiary, or commencing a new activity
authorized pursuant to section 5136A(a)(2)(A)(i) of the Revised Statutes
in an existing subsidiary. The written notice must be labeled
``Financial Subsidiary Certification and Notice'' and must:
(i) List the bank's depository institution affiliates and certify
that the bank and each depository institution affiliate of the bank is
well capitalized and well managed;
(ii) Describe the activity or activities to be conducted in the
financial subsidiary. To the extent the notice relates to the initial
affiliation of the bank with a company engaged in insurance activities,
the bank should describe the type of insurance activity that the company
is engaged in and has present plans to conduct. The bank must also list
for each state the lines of business for which the company holds, or
will hold, an insurance license, indicating the state where the company
holds a resident license or charter, as applicable;
(iii) Cite the specific authority permitting the activity to be
conducted by the financial subsidiary. (Where the authority relied on is
an agency order or interpretation under section 4(c)(8) or 4(c)(13),
respectively, of the Bank Holding Company Act of 1956, a copy of the
order or interpretation should be attached);
(iv) Certify that the bank will remain well capitalized after making
the adjustments required by paragraph (h)(1) of this section;
(v) Demonstrate the aggregate consolidated total assets of all
financial subsidiaries of the national bank do not exceed the lesser of
45% of the bank's consolidated total assets or $50 billion (or the
increased level established by the indexing mechanism); and
(vi) If applicable, certify that the bank meets the eligible debt
requirement in paragraph (g)(3) of this section.
(3) Exceptions to rules of general applicability. Sections 5.8,
5.10, 5.11, and 5.13 do not apply to activities authorized under this
section.
(4) Community Reinvestment Act (CRA). A national bank may not apply
under this paragraph (i) to commence a new activity authorized under
section 5136A(a)(2)(A)(i) of the Revised Statutes (12 U.S.C. 24a), or
directly or indirectly acquire control of a company engaged in any such
activity, if the bank or any of its insured depository institution
affiliates received a CRA rating of less than ``satisfactory record of
meeting community credit needs'' on its most recent CRA examination
prior to when the bank would file a notice under this section.
(j) Failure to continue to meet certain qualification requirements--
(1) Qualifications and safeguards. A national bank, or, as applicable,
its affiliated depository institutions, must continue to satisfy the
qualification requirements set forth in paragraphs (g)(1) and (2) of
this section and the safeguards in paragraphs (h)(1), (2), (3) and (4)
of this section following its acquisition of control of, or an interest
in, a financial subsidiary. A national bank that fails to continue to
satisfy these requirements will be subject to the following procedures
and requirements:
(i) The OCC shall give notice to the national bank and, in the case
of an affiliated depository institution to that depository institution's
appropriate Federal banking agency, promptly upon determining that the
national bank, or, as applicable, its affiliated depository institution,
does not continue to meet the requirements in paragraph (g)(1) or (2) of
this section or the safeguards in paragraph (h)(1), (2), (3), or (4) of
this section. The bank
[[Page 162]]
shall be deemed to have received such notice three business days after
mailing of the letter by the OCC;
(ii) Not later than 45 days after receipt of the notice under
paragraph (j)(1)(i) of this section, or any additional time as the OCC
may permit, the national bank shall execute an agreement with the OCC to
comply with the requirements in paragraphs (g)(1) and (2) and (h)(1),
(2), (3), and (4) of this section;
(iii) The OCC may impose limitations on the conduct or activities of
the national bank or any subsidiary of the national bank as the OCC
determines appropriate under the circumstances and consistent with the
purposes of section 5136A of the Revised Statutes; and
(iv) The OCC may require a national bank to divest control of a
financial subsidiary if the national bank does not correct the
conditions giving rise to the notice within 180 days after receipt of
the notice provided under paragraph (j)(1)(i) of this section.
(2) Eligible debt rating requirement. A national bank that does not
continue to meet the qualification requirement set forth in paragraph
(g)(3) 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) 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.
(k) Examination and supervision. A financial subsidiary is subject
to examination and supervision by the OCC, subject to the limitations
and requirements of section 45 of the Federal Deposit Insurance Act (12
U.S.C. 1831v) and section 115 of the GLBA (12 U.S.C. 1820a).
[65 FR 12914, Mar. 10, 2000, as amended at 73 FR 22240, Apr. 24, 2008]
Subpart D_Other Changes in Activities and Operations
Sec. 5.40 Change in location of main office.
(a) Authority 12 U.S.C. 30, 93a, and 2901 through 2907.
(b) Licensing requirements. A national bank shall give prior notice
to the OCC to relocate its main office within city, town, or village
limits to an authorized branch location. A national bank shall submit an
application and obtain prior OCC approval to relocate its main office to
any other location in the city, town, or village, or within 30 miles of
the limits of the city, town, or village in which the main office of the
bank is located.
(c) Scope. This section describes OCC procedures and approval
standards for an application or a notice by a national bank to change
the location of its main office.
(d) Procedure--(1) Main office relocation to an authorized branch
location within city, town, or village limits. A national bank may
change the location of its main office to an authorized branch location
(approved or existing branch site) within the limits of the same city,
town, or village. The national bank shall submit a notice to the
appropriate district office before the relocation. The notice must
include the new address of the main office and the effective date of the
relocation.
(2) To any other location. To relocate its main office to any other
location, a national bank shall file an application to relocate with the
appropriate district office. If relocating the main office outside the
limits of its city, town, or village, a national bank shall also:
(i) Obtain the approval of shareholders owning two-thirds of the
voting stock of the bank; and
(ii) Amend its articles of association.
(3) Establishment of a branch at site of former main office. A
national bank desiring to establish a branch at its former main office
location shall obtain OCC approval pursuant to the standards of Sec.
5.30.
(4) Expedited review. A main office relocation application submitted
by an eligible bank under paragraph (d)(2) of this section is deemed
approved by the OCC as of the 15th day after the close
[[Page 163]]
of the public comment period or the 45th day after the filing is
received by the OCC, whichever is later, unless the OCC notifies the
bank prior to that time that the filing is not eligible for expedited
review, or the expedited review period is extended, under Sec.
5.13(a)(2).
(5) Exceptions to rules of general applicability. (i) Sections 5.8,
5.9, 5.10, and 5.11 do not apply to a main office relocation to an
authorized branch location within the limits of the city, town, or
village as described in paragraph (d)(1) of this section. However, if
the OCC concludes that the notice under paragraph (d)(1) of this section
presents a significant and novel policy, supervisory, or legal issue,
the OCC may determine that any or all parts of Sec. Sec. 5.8, 5.9,
5.10, and 5.11 apply.
(ii) The comment period on any application filed under paragraph
(d)(2) of this section to engage in a short-distance relocation of a
main office is 15 days.
(e) Expiration of approval. Approval expires if the national bank
has not opened its main office at the relocated site within 18 months of
the date of approval.
Sec. 5.42 Corporate title.
(a) Authority. 12 U.S.C. 21a, 30, and 93a.
(b) Scope. This section describes the method by which a national
bank may change its corporate title.
(c) Standards. A national bank may change its corporate title
provided that the new title includes the word ``national'' and complies
with other applicable Federal laws, including 18 U.S.C. 709, regarding
false advertising and the misuse of names to indicate a Federal agency,
and any applicable OCC guidance.
(d) Procedures--(1) Notice process. A national bank shall promptly
notify the appropriate district office if it changes its corporate
title. The notice must contain the old and new titles and the effective
date of the change.
(2) Amendment to articles of association. A national bank whose
corporate title is specified in its articles of association shall amend
its articles, in accordance with the procedures of 12 U.S.C. 21a, to
change its title.
(3) Exceptions to rules of general applicability. Sections 5.8, 5.9,
5.10, 5.11, and 5.13(a) do not apply to a national bank's change of
corporate title. However, if the OCC concludes that the application
presents a significant and novel policy, supervisory, or legal issue,
the OCC may determine that any or all parts of Sec. Sec. 5.8, 5.9,
5.10, 5.11, and 5.13(a) apply.
Sec. 5.46 Changes in permanent capital.
(a) Authority. 12 U.S.C. 21a, 51, 51a, 51b, 51b-1, 52, 56, 57, 59,
60, and 93a.
(b) Licensing requirements. A national bank shall submit an
application and obtain OCC approval to decrease its permanent capital.
Generally, a national bank need only submit a notice to increase its
permanent capital, although, in certain circumstances, a national bank
shall be required to submit an application and obtain OCC approval.
(c) Scope. This section describes procedures and standards relating
to a transaction resulting in a change in a national bank's permanent
capital.
(d) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to changes in a national bank's permanent
capital.
(e) Definitions. For the purposes of this section the following
definitions apply:
(1) Capital plan means a plan describing the manner and schedule by
which a national bank will attain specified capital levels or ratios,
including a plan to achieve minimum capital ratios filed with the
appropriate district office under 12 CFR 3.7 and a capital restoration
plan filed with the OCC under 12 U.S.C. 1831o and 12 CFR 6.5.
(2) Capital stock means the total amount of common stock and
preferred stock.
(3) Capital surplus means the total of:
(i) The amount paid in on capital stock in excess of the par or
stated value;
(ii) Direct capital contributions representing the amounts paid in
to the national bank other than for capital stock;
(iii) The amount transferred from undivided profits; and
[[Page 164]]
(iv) The amount transferred from undivided profits reflecting stock
dividends.
(4) Permanent capital means the sum of capital stock and capital
surplus.
(f) Policy. In determining whether to approve a proposed change to a
national bank's permanent capital, the OCC considers whether the change
is:
(1) Consistent with law, regulation, and OCC policy thereunder;
(2) Provides an adequate capital structure; and
(3) If appropriate, complies with the bank's capital plan.
(g) Increases in permanent capital--(1) Prior approval--(i)
Criteria. A national bank need not obtain prior OCC approval to increase
its permanent capital unless the bank is:
(A) Required to receive OCC approval pursuant to letter, order,
directive, written agreement or otherwise;
(B) Selling common or preferred stock for consideration other than
cash; or
(C) Receiving a material noncash contribution to capital surplus.
(ii) Application and notice. A national bank that proposes to
increase its permanent capital and that must receive OCC approval under
paragraph (g)(1)(i) of this section shall file an application under
paragraph (i)(1) of this section and a notice under paragraph (i)(3) of
this section. A national bank not required to obtain prior approval
under paragraph (g)(1)(i) of this section for an increase in capital
shall file only the notice under paragraph (i)(3) of this section.
(2) Preferred stock. Notwithstanding paragraph (g)(1)(i) of this
section, in the case of a sale of preferred stock, the national bank
shall also submit provisions in the articles of association concerning
preferred stock dividends, voting and conversion rights, retirement of
the stock, and rights to exercise control over management to the
appropriate district office prior to the sale of the preferred stock.
The provisions will be deemed approved by the OCC within 15 days of its
receipt, unless the OCC notifies the applicant otherwise, including a
statement of the reason for the delay.
(h) Decreases in permanent capital. A national bank shall submit an
application and obtain prior approval under paragraph (i)(1) or (i)(2)
of this section for any reduction of its permanent capital.
(i) Procedures--(1) Prior approval. A national bank proposing to
make a change in its permanent capital that requires prior OCC approval
under paragraphs (g) or (h) of this section shall submit an application
to the appropriate district office. The application must:
(i) Describe the type and amount of the proposed change in permanent
capital and explain the reason for the change;
(ii) In the case of a reduction in capital, provide a schedule
detailing the present and proposed capital structure;
(iii) In the case of a material noncash contribution to capital,
provide a description of the method of valuing the contribution; and
(iv) State if the bank is subject to a capital plan with the OCC and
how the proposed change would conform to a capital plan or if a capital
plan is otherwise required in connection with the proposed change in
permanent capital.
(2) Expedited review. An eligible bank's application is deemed
approved by the OCC 15 days after the date the OCC receives the
application described in paragraph (i)(1) of this section, unless the
OCC notifies the bank prior to that date that the application is not
eligible for expedited review under Sec. 5.13(a)(2). A bank seeking to
decrease its capital may request OCC approval for up to four consecutive
quarters. An eligible bank may decrease its capital pursuant to such a
plan only if the bank maintains its eligible bank status before and
after each decrease in its capital.
(3) Notice. After a bank completes an increase in capital it shall
submit a notice to the appropriate district office. The proposed change
is deemed approved by the OCC and certified seven days after the date on
which the OCC receives the notice. The notice must be acknowledged
before a notary public by the bank's president, vice president, or
cashier and contain:
(i) A description of the transaction, unless already provided
pursuant to paragraph (i)(1) of this section;
[[Page 165]]
(ii) The amount, including the par value of the stock, and effective
date of the increase;
(iii) A certification that the funds have been paid in, if
applicable;
(iv) A certified copy of the amendment to the articles of
association, if required; and
(v) A statement that the bank has complied with all laws,
regulations and conditions imposed by the OCC.
(4) Notice process. A national bank that decreases its capital in
accordance with paragraphs (i)(1) or (i)(2) of this section shall notify
the appropriate district office following the completion of the
transaction.
(5) Expiration of approval. Approval expires if a national bank has
not completed its change in permanent capital within one year of the
date of approval.
(j) Offers and sales of stock. A national bank shall comply with the
Securities Offering Disclosure Rules in 12 CFR part 16 for offers and
sales of common and preferred stock.
(k) Shareholder approval. A national bank shall obtain the necessary
shareholder approval required by statute for any change in its permanent
capital.
[61 FR 60363, Nov. 27, 1996, as amended at 73 FR 22240, Apr. 24, 2008]
Sec. 5.47 Subordinated debt as capital.
(a) Authority. 12 U.S.C. 93a.
(b) Licensing requirements. A national bank does not need prior OCC
approval to issue subordinated debt, or to prepay subordinated debt
(including payment pursuant to an acceleration clause or redemption
prior to maturity) provided the bank remains an eligible bank after the
transaction, unless the OCC has previously notified the bank that prior
approval is required, or unless prior approval is required by law. No
prior approval is required for the bank to count the subordinated debt
as Tier 2 or Tier 3 capital. However, a bank issuing subordinated debt
shall notify the OCC after issuance if the debt is to be counted as Tier
2 or Tier 3 capital.
(c) Scope. This section sets forth the procedures for OCC review and
approval of an application to issue or prepay subordinated debt.
(d) Definitions--(1) Capital plan means a plan describing the means
and schedule by which a national bank will attain specified capital
levels or ratios, including a plan to achieve minimum capital ratios
filed with the appropriate district office under 12 CFR 3.7 and a
capital restoration plan filed with the OCC under 12 U.S.C. 1831o and 12
CFR 6.5.
(2) Tier 2 capital has the same meaning as set forth in 12 CFR
3.2(d).
(3) Tier 3 capital has the same meaning as set forth in 12 CFR part
3, appendix B, section 2(d).
(e) Qualification as regulatory capital. (1) A national bank's
subordinated debt qualifies as Tier 2 capital if the subordinated debt
meets the requirements in 12 CFR part 3, appendix A, section 2(b)(4),
and complies with the ``OCC Guidelines for Subordinated Debt'' in the
Manual.
(2) A national bank's subordinated debt qualifies as Tier 3 capital
if the subordinated debt meets the requirements in 12 CFR part 3,
section 2(d) of appendix B.
(3) If the OCC notifies a national bank that it must obtain OCC
approval before issuing subordinated debt, the subordinated debt will
not qualify as Tier 2 or Tier 3 capital until the bank obtains OCC
approval for its inclusion in capital.
(f) Prior approval procedure--(1) Application. A national bank
required to obtain OCC approval before issuing or prepaying subordinated
debt shall submit an application to the appropriate district office. The
application must include:
(i) A description of the terms and amount of the proposed issuance
or prepayment;
(ii) A statement of whether the bank is subject to a capital plan or
required to file a capital plan with the OCC and, if so, how the
proposed change conforms to the capital plan;
(iii) A copy of the proposed subordinated note format and note
agreement; and
(iv) A statement of whether the subordinated debt issue complies
with all laws, regulations, and the ``OCC Guidelines for Subordinated
Debt'' in the Manual.
(2) Approval--(i) General. The application is deemed approved by the
OCC as
[[Page 166]]
of the 30th day after the filing is received by the OCC, unless the OCC
notifies the bank prior to that date that the filing presents a
significant supervisory, or compliance concern, or raises a significant
legal or policy issue.
(ii) Tier 2 and Tier 3 capital. When the OCC notifies the bank that
the OCC approves the bank's application to issue or prepay the
subordinated debt, it also notifies the bank whether the subordinated
debt qualifies as Tier 2 or Tier 3 capital.
(iii) Expiration of approval. Approval expires if a national bank
does not complete the sale of the subordinated debt within one year of
approval.
(g) Notice procedure. If a national bank is not required to obtain
approval before issuing subordinated debt, the bank shall notify the
appropriate district office in writing within ten days after issuing
subordinated debt that is to be counted as Tier 2 or Tier 3 capital. The
notice must include:
(1) The terms of the issuance;
(2) The amount and date of receipt of funds;
(3) A copy of the final subordinated note format and note agreement;
and
(4) A statement that the issue complies with all laws, regulations,
and the ``OCC Guidelines for Subordinated Debt Instruments'' in the
Manual.
(h) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to the issuance of subordinated debt.
(i) Issuance of subordinated debt. A national bank shall comply with
the Securities Offering Disclosure Rules in 12 CFR part 16 when issuing
subordinated debt even if the bank is not required to obtain prior
approval to issue subordinated debt.
Sec. 5.48 Voluntary liquidation.
(a) Authority. 12 U.S.C. 93a, 181, and 182.
(b) Licensing requirements. A national bank considering going into
voluntary liquidation shall notify the OCC. The bank shall also file a
notice with the OCC once a liquidation plan is definite.
(c) Exceptions to rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to a voluntary liquidation. However, if the
OCC concludes that the notice presents significant and novel policy,
supervisory or legal issues, the OCC may determine that any or all parts
of Sec. Sec. 5.8, 5.10, and 5.11 apply.
(d) Standards. A national bank may liquidate in accordance with the
terms of 12 U.S.C. 181 and 182.
(e) Procedure--(1) Notice of voluntary liquidation. When the
shareholders of a solvent national bank have voted to voluntarily
liquidate, the bank shall file a notice with the appropriate district
office and publish public notice in accordance with 12 U.S.C. 182.
(2) Report of condition. The liquidating bank shall submit reports
of the condition of its commercial, trust, and other departments to the
appropriate district office by filing the quarterly Consolidated Reports
of Condition and Income (Call Reports).
(3) Report of progress. The liquidating agent or committee shall
submit a ``Report of Progress of Liquidation'' annually to the
appropriate district office until the liquidation is complete.
(f) Expedited liquidations in connection with acquisitions--(1)
General. When an acquiring depository institution in a business
combination purchases all the assets, and assumes all the liabilities,
including contingent liabilities, of a target national bank, the
acquiring depository institution may dissolve the target national bank
immediately after the combination. However, if any liabilities will
remain in the target national bank, then the standard liquidation
procedures apply.
(2) Procedure. After its shareholders have voted to liquidate and
the national bank has notified the appropriate district office of its
plans, the bank may surrender its charter and dissolve immediately, if:
(i) The acquiring depository institution certifies to the OCC that
it has purchased all the assets and assumed all the liabilities,
including contingent liabilities, of the national bank in liquidation;
and
(ii) The acquiring depository institution and the national bank in
liquidation have published notice that the bank will dissolve after the
purchase and assumption to the acquiror. This is included in the notice
and publication
[[Page 167]]
for the purchase and assumption required under the Bank Merger Act, 12
U.S.C. 1828(c).
(g) National bank as acquiror. If another national bank plans to
acquire a national bank in liquidation through merger or through the
purchase of the assets and the assumption of the liabilities of the bank
in liquidation, the acquiring bank shall comply with the Bank Merger
Act, 12 U.S.C. 1828(c), and Sec. 5.33.
Sec. 5.50 Change in bank control; reporting of stock loans.
(a) Authority. 12 U.S.C. 93a, 1817(j), and 12 U.S.C. 1831aa.
(b) Licensing requirements. Any person seeking to acquire control of
a national bank shall provide 60 days prior written notice of a change
in control to the OCC, except where otherwise provided in this section.
(c) Scope--(1) General. This section describes the procedures and
standards governing OCC review of notices for a change in control of a
national bank and reports of stock loans.
(2) Exempt transactions. The following transactions are not subject
to the requirements of this section:
(i) The acquisition of additional shares of a national bank by a
person who:
(A) Has, continuously since March 9, 1979, (or since that
institution commenced business, if later) held power to vote 25 percent
or more of the voting securities of that bank; or
(B) Under paragraph (f)(2)(ii) of this section, would be presumed to
have controlled that bank continuously since March 9, 1979, if the
transaction will not result in that person's direct or indirect
ownership or power to vote 25 percent or more of any class of voting
securities of the national bank; or, in other cases, where the OCC
determines that the person has controlled the bank continuously since
March 9, 1979;
(ii) Unless the OCC otherwise provides in writing, the acquisition
of additional shares of a national bank by a person who has lawfully
acquired and maintained continuous control of the bank under paragraph
(f) of this section after complying with the procedures and filing the
notice required by this section;
(iii) A transaction subject to approval under section 3 of the Bank
Holding Company Act, 12 U.S.C. 1842, section 18 of Federal Deposit
Insurance Act, 12 U.S.C. 1828, or section 10 of the Home Owners' Loan
Act, 12 U.S.C. 1467a;
(iv) Any transaction described in section 2(a)(5) or 3(a) (A) or (B)
of the Bank Holding Company Act, 12 U.S.C. 1841(a)(5) and 1842(a) (A)
and (B), by a person described in those provisions;
(v) A customary one-time proxy solicitation or receipt of pro rata
stock dividends; and
(vi) The acquisition of shares of a foreign bank that has a
Federally licensed branch in the United States. This exemption does not
extend to the reports and information required under paragraph (h) of
this section.
(3) Prior notice exemption. The following transactions are not
subject to the prior notice requirements of this section but are
otherwise subject to this section, including filing a notice and paying
the appropriate filing fee, within 90 calendar days after the
transaction occurs:
(i) The acquisition of control as a result of acquisition of voting
shares of a national bank through testate or intestate succession;
(ii) The acquisition of control as a result of acquisition of voting
shares of a national bank as a bona fide gift;
(iii) The acquisition of voting shares of a national bank resulting
from a redemption of voting securities;
(iv) The acquisition of control of a national bank as a result of
actions by third parties (including the sale of securities) that are not
within the control of the acquiror; and
(v) The acquisition of control as a result of the acquisition of
voting shares of a national bank in satisfaction of a debt previously
contracted in good faith.
(A) ``Good faith'' means that a person must either make or acquire a
loan secured by voting securities of a national bank in advance of any
known default. A person who purchases a previously defaulted loan
secured by voting securities of a national bank may not rely on this
paragraph (c)(3)(v) to foreclose
[[Page 168]]
on that loan, seize or purchase the underlying collateral, and acquire
control of the national bank without complying with the prior notice
requirements of this section.
(B) To ensure compliance with this section, the acquiror of a
defaulted loan secured by a controlling amount of a national bank's
voting securities shall file a notice prior to the time the loan is
acquired unless the acquiror can demonstrate to the satisfaction of the
OCC that the voting securities are not the anticipated source of
repayment for the loan.
(d) Definitions. As used in this section:
(1) Acquisition includes a purchase, assignment, transfer, or pledge
of voting securities, or an increase in percentage ownership of a
national bank resulting from a redemption of voting securities.
(2) Acting in concert means:
(i) Knowing participation in a joint activity or parallel action
towards a common goal of acquiring control whether or not pursuant to an
express agreement; or
(ii) A combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any contract,
understanding, relationship, agreement, or other arrangement, whether
written or otherwise.
(3) Control means the power, directly or indirectly, to direct the
management or policies of a national bank or to vote 25 percent or more
of any class of voting securities of a national bank.
(4) Immediate family includes a person's spouse, father, mother,
stepfather, stepmother, brother, sister, stepbrother, stepsister,
children, stepchildren, grandparent, grandchildren, father-in-law,
mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-
law, and the spouse of any of the forgoing.
(5) Notice means a filing by a person in accordance with paragraph
(f) of this section.
(6) Person means an individual or a corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship,
unincorporated organization, or any other form of entity, and includes
voting trusts and voting agreements and any group of persons acting in
concert.
(7) Voting securities means:
(i) Shares of common or preferred stock, or similar interests, if
the shares or interests, by statute, charter, or in any manner, allow
the holder to vote for or select directors (or persons exercising
similar functions) of the issuing national bank, or to vote on or to
direct the conduct of the operations or other significant policies of
the issuing national bank. However, preferred stock or similar interests
are not voting securities if:
(A) Any voting rights associated with the shares or interests are
limited solely to voting rights customarily provided by statute
regarding matters that would significantly affect the rights or
preference of the security or other interest. This includes the issuance
of additional amounts of classes of senior securities, the modification
of the terms of the security or interest, the dissolution of the issuing
national bank, or the payment of dividends by the issuing national bank
when preferred dividends are in arrears;
(B) The shares or interests are a passive investment or financing
device and do not otherwise provide the holder with control over the
issuing national bank; and
(C) The shares or interests do not allow the holder by statute,
charter, or in any manner, to select or to vote for the selection of
directors (or persons exercising similar functions) of the issuing
national bank.
(ii) Securities, other instruments, or similar interests that are
immediately convertible, at the option of the owner or holder thereof,
into voting securities.
(e) Policy--(1) General. The OCC seeks to enhance and maintain
public confidence in the banking system by preventing a change in
control of a national bank that could have serious adverse effects on a
bank's financial stability or management resources, the interests of the
bank's customers, the Federal deposit insurance fund, or competition.
[[Page 169]]
(2) Acquisitions subject to the Bank Holding Company Act. (i) If
corporations, partnerships, certain trusts, associations, and similar
organizations, that are not already bank holding companies, are not
required to secure prior Federal Reserve Board approval to acquire
control of a bank under section 3 of the Bank Holding Company Act, 12
U.S.C. 1842, they are subject to the notice requirements of this
section.
(ii) Certain transactions, including foreclosures by depository
institutions and other institutional lenders, fiduciary acquisitions by
depository institutions, and increases of majority holdings by bank
holding companies, are described in sections 2(a)(5)(D) and 3(a) (A) and
(B) of the Bank Holding Company Act, 12 U.S.C. 1841(a)(5)(D) and 12
U.S.C. 1842(a) (A) and (B), but do not require the Federal Reserve
Board's prior approval. For purposes of this section, they are
considered subject to section 3 of the Bank Holding Company Act, 12
U.S.C 1842, and do not require either a prior or subsequent notice to
the OCC under this section.
(3) Assessing financial condition. In assessing the financial
condition of the acquiring person, the OCC weighs any debt servicing
requirements in light of the acquiring person's overall financial
strength; the institution's earnings performance, asset condition,
capital adequacy, and future prospects; and the likelihood of the
acquiring party making unreasonable demands on the resources of the
institution.
(f) Procedures--(1) Exceptions to rules of general applicability.
Sections 5.8(a), 5.9, 5.10, 5.11, and 5.13(a) through (f) do not apply
to filings under this section.
(2) Who must file. (i) Any person seeking to acquire the power,
directly or indirectly, to direct the management or policies, or to vote
25 percent or more of a class of voting securities of a national bank,
shall file a notice with the OCC 60 days prior to the proposed
acquisition, unless the acquisition is exempt under paragraph (c)(2) of
this section.
(ii) The OCC presumes, unless rebutted, that a person is acting in
concert with his or her immediate family.
(iii) The OCC presumes, unless rebutted, that an acquisition or
other disposition of voting securities through which any person proposes
to acquire ownership of, or the power to vote, ten percent or more of a
class of voting securities of a national bank is an acquisition by a
person of the power to direct the bank's management or policies if:
(A) The securities to be acquired or voted are subject to the
registration requirements of section 12 of the Securities Exchange Act
of 1934, 15 U.S.C. 78l; or
(B) Immediately after the transaction no other person will own or
have the power to vote a greater proportion of that class of voting
securities.
(iv) Other transactions resulting in a person's control of less than
25 percent of a class of voting securities of a national bank are not
deemed by the OCC to result in control for purposes of this section.
(v) If two or more persons, not acting in concert, each propose to
acquire simultaneously equal percentages of ten percent or more of a
class of a national bank's voting securities, and either the
acquisitions are of a class of securities subject to the registration
requirements of section 12 of the Securities Exchange Act of 1934, 15
U.S.C. 78l, or immediately after the transaction no other shareholder of
the national bank would own or have the power to vote a greater
percentage of the class, each of the acquiring persons shall either file
a notice or rebut the presumption of control.
(vi) An acquiring person may seek to rebut the presumption
established in paragraph (f)(2)(ii) and (iii) of this section by
presenting relevant information in writing to the appropriate district
office. The OCC shall respond in writing to any person that seeks to
rebut the presumption of control. No rebuttal filing is effective unless
the OCC indicates in writing that the information submitted has been
found to be sufficient to rebut the presumption of control.
(3) Filings. (i) The OCC does not accept a notice of a change in
control unless it is technically complete, i.e., the information
provided is responsive to every item listed in the notice form and is
accompanied by the appropriate fee.
[[Page 170]]
(A) The notice must contain personal and biographical information,
detailed financial information, information regarding the future
prospects of the institution, details of the proposed change in control,
information on any structural or managerial changes contemplated for the
institution, and other relevant information required by the OCC. The OCC
may waive any of the informational requirements of the notice if the OCC
determines that it is in the public interest.
(B) When the acquiring person is an individual, or group of
individuals acting in concert, the requirement to provide personal
financial data may be satisfied with a current statement of assets and
liabilities and an income summary, together with a statement of any
material changes since the date of the statement or summary. However,
the OCC may require additional information, if appropriate.
(ii) The OCC has 60 days from the date it declares the notice to be
technically complete to review the notice.
(A) When the OCC declares a notice technically complete, the
appropriate district office sends a letter of acknowledgment to the
applicant indicating the technically complete date.
(B) As set forth in paragraph (g) of this section, the applicant
shall publish an announcement within 10 days of filing the notice with
the OCC. The publication of the announcement triggers a 20-day public
comment period. The OCC may waive or shorten the public comment period
if an emergency exists. The OCC also may shorten the comment period for
other good cause. The OCC may act on a proposed change in control prior
to the expiration of the public comment period if the OCC makes a
written determination that an emergency exists.
(C) An applicant shall notify the OCC immediately of any material
changes in a notice submitted to the OCC, including changes in financial
or other conditions, that may affect the OCC's decision on the filing.
(iii) Within the 60-day period, the OCC may inform the applicant
that the acquisition has been disapproved, has not been disapproved, or
that the OCC will extend the 60-day review period. The applicant may
request a hearing by the OCC within 10 days of receipt of a disapproval
(see 12 CFR part 19, subpart H, for hearing initiation procedures).
Following final agency action under 12 CFR part 19, further review by
the courts is available.
(4) Conditional actions. The OCC may impose conditions on its action
not to disapprove a notice to assure satisfaction of the relevant
statutory criteria for non-objection to a notice.
(5) Disapproval of notice. The OCC may disapprove a notice if it
finds that any of the following factors exist:
(i) The proposed acquisition of control would result in a monopoly
or would be in furtherance of any combination or conspiracy to
monopolize or to attempt to monopolize the business of banking in any
part of the United States;
(ii) The effect of the proposed acquisition of control in any
section of the country may be substantially to lessen competition or to
tend to create a monopoly or the proposed acquisition of control would
in any other manner be in restraint of trade, and the anticompetitive
effects of the proposed acquisition of control are not clearly
outweighed in the public interest by the probable effect of the
transaction in meeting the convenience and needs of the community to be
served;
(iii) Either the financial condition of any acquiring person or the
future prospects of the institution is such as might jeopardize the
financial stability of the bank or prejudice the interests of the
depositors of the bank;
(iv) The competence, experience, or integrity of any acquiring
person, or of any of the proposed management personnel, indicates that
it would not be in the interest of the depositors of the bank, or in the
interest of the public, to permit that person to control the bank;
(v) An acquiring person neglects, fails, or refuses to furnish the
OCC all the information it requires; or
(vi) The OCC determines that the proposed transaction would result
in an adverse effect on the Bank Insurance Fund or the Savings
Association Insurance Fund.
(6) Disapproval notification. If the OCC disapproves a notice, it
mails a written notification to the proposed acquiring
[[Page 171]]
person within three days after the decision containing a statement of
the basis for disapproval.
(g) Disclosure--(1) Announcement. The applicant shall publish an
announcement in a newspaper of general circulation in the community
where the affected national bank is located within ten days of filing.
The OCC may authorize a delayed announcement if an immediate
announcement would not be in the public interest.
(i) In addition to the information required by Sec. 5.8(b), the
announcement must include the name of the national bank named in the
notice and the comment period (i.e., 20 days from the date of the
announcement). The announcement also must state that the public portion
of the notice is available upon request.
(ii) Notwithstanding any other provisions of this paragraph (g), if
the OCC determines in writing that an emergency exists and that the
announcement requirements of this paragraph (g) would seriously threaten
the safety and soundness of the national bank to be acquired, including
situations where the OCC must act immediately in order to prevent the
probable failure of a national bank, the OCC may waive or shorten the
publication requirement.
(2) Release of information. (i) Upon the request of any person, the
OCC releases the information provided in the public portion of the
notice and makes it available for public inspection and copying as soon
as possible after a notice has been filed. In certain circumstances the
OCC may determine that the release of the information would not be in
the public interest. In addition, the OCC makes a public announcement of
a technically complete notice, the disposition of the notice, and the
consummation date of the transaction, if applicable, in the OCC's
``Weekly Bulletin.''
(ii) The OCC handles requests for the non-public portion of the
notice as requests under the Freedom of Information Act, 5 U.S.C. 552,
and other applicable law.
(h) Reporting requirement. After the consummation of the change in
control, the national bank shall notify the OCC in writing of any
changes or replacements of its chief executive officer or of any
director occurring during the 12-month period beginning on the date of
consummation. This notice must be filed within 10 days of such change or
replacement and must include a statement of the past and current
business and professional affiliations of the new chief executive
officers or directors.
(i) Reporting of stock loans--(1) Requirements. (i) Any foreign
bank, or any affiliate thereof, shall file a consolidated report with
the appropriate district office of the national bank if the foreign bank
or any affiliate thereof, has credit outstanding to any person or group
of persons that, in the aggregate, is secured, directly or indirectly,
by 25 percent or more of any class of voting securities of the same
national bank.
(ii) The foreign bank, or any affiliate thereof, shall also file a
copy of the report with its appropriate district office if that office
is different from the national bank's appropriate district office. If
the foreign bank, or any affiliate thereof, is not supervised by the
OCC, it shall file a copy of the report filed with the OCC with its
appropriate Federal banking agency.
(iii) Any shares of the national bank held by the foreign bank, or
any affiliate thereof, as principal must be included in the calculation
of the number of shares in which the foreign bank or any affiliate
thereof has a security interest for purposes of paragraph (h)(1)(i) of
this section.
(2) Definitions. For purposes of this paragraph (h):
(i) Foreign bank and affiliate have the same meanings as in section
1 of the International Banking Act of 1978, 12 U.S.C. 3101.
(ii) Credit outstanding includes any loan or extension of credit;
the issuance of a guarantee, acceptance, or letter of credit, including
an endorsement or standby letter of credit; and any other type of
transaction that extends credit or financing to a person or group of
persons.
(iii) Group of persons includes any number of persons that a foreign
bank, or an affiliate thereof, has reason to believe:
[[Page 172]]
(A) Are acting together, in concert, or with one another to acquire
or control shares of the same insured national bank, including an
acquisition of shares of the same national bank at approximately the
same time under substantially the same terms; or
(B) Have made, or propose to make, a joint filing under 15 U.S.C.
78m regarding ownership of the shares of the same depository
institution.
(3) Exceptions. Compliance with paragraph (h)(1) of this section is
not required if:
(i) The person or group of persons referred to in paragraph (h)(1)
of this section has disclosed the amount borrowed and the security
interest therein to the appropriate district office in connection with a
notice filed under this section or any other application filed with the
appropriate district office as a substitute for a notice under this
section, such as for a national bank charter; or
(ii) The transaction involves a person or group of persons that has
been the owner or owners of record of the stock for a period of one year
or more or, if the transaction involves stock issued by a newly
chartered bank, before the bank's opening.
(4) Report requirements. (i) The consolidated report must indicate
the number and percentage of shares securing each applicable extension
of credit, the identity of the borrower, and the number of shares held
as principal by the foreign bank and any affiliate thereof.
(ii) The foreign bank and all affiliates thereof shall file the
consolidated report in writing within 30 days of the date on which the
foreign bank or affiliate thereof first believes that the security for
any outstanding credit consists of 25 percent or more of any class of
voting securities of a national bank.
(5) Other reporting requirements. A foreign bank or any affiliate
thereof, supervised by the OCC and required to report credit outstanding
secured by the shares of a depository institution to another Federal
banking agency also shall file a copy of the report with its appropriate
district office.
[61 FR 60363, Nov. 27, 1996, as amended at 73 FR 22240, Apr. 24, 2008
Sec. 5.51 Changes in directors and senior executive officers.
(a) Authority. 12 U.S.C. 1831i.
(b) Scope. This section describes the circumstances when a national
bank must notify the OCC of a change in its directors and senior
executive officers, and the OCC's authority to disapprove those notices.
(c) Definitions--(1) Director means a person who serves on the board
of directors of a national bank except:
(i) A director of a foreign bank that operates a Federal branch; and
(ii) An advisory director who does not have the authority to vote on
matters before the board of directors and provides solely general policy
advice to the board of directors.
(2) National bank, as defined in Sec. 5.3(j), includes a Federal
branch for purposes of this section only.
(3) Senior executive officer means the chief executive officer,
chief operating officer, chief financial officer, chief lending officer,
chief investment officer, and any other individual the OCC identifies to
the national bank who exercises significant influence over, or
participates in, major policy making decisions of the bank without
regard to title, salary, or compensation. The term also includes
employees of entities retained by a national bank to perform such
functions in lieu of directly hiring the individuals, and, with respect
to a Federal branch operated by a foreign bank, the individual
functioning as the chief managing official of the Federal branch.
(4) Technically complete notice means a notice that provides all the
information requested in paragraph (e)(2) of this section, including
complete explanations where material issues arise regarding the
competence, experience, character, or integrity of proposed directors or
senior executive officers, and any additional information that the OCC
may request following a determination that the original submission of
the notice was not technically complete.
(5) Technically complete notice date means the date on which the OCC
has received a technically complete notice.
(6) Troubled condition means a national bank that:
[[Page 173]]
(i) Has a composite rating of 4 or 5 under the Uniform Financial
Institutions Rating System (CAMELS);
(ii) Is subject to a cease and desist order, a consent order, or a
formal written agreement, unless otherwise informed in writing by the
OCC; or
(iii) Is informed in writing by the OCC that as a result of an
examination it has been designated in ``troubled condition'' for
purposes of this section.
(d) Prior notice. A national bank shall provide written notice to
the OCC at least 90 days before adding or replacing any member of its
board of directors, employing any person as a senior executive officer
of the national bank, or changing the responsibilities of any senior
executive officer so that the person would assume a different executive
officer position, if:
(1) The national bank is not in compliance with minimum capital
requirements applicable to such institution, as prescribed in 12 CFR
part 3, or is otherwise in troubled condition; or
(2) The OCC determines, in connection with the review by the agency
of the plan required under section 38 of the Federal Deposit Insurance
Act, 12 USC 1831o, or otherwise, that such prior notice is appropriate.
(e) Procedures--(1) Filing notice. A national bank shall file a
notice with its appropriate supervisory office. When a national bank
files a notice, the individual to whom the filing pertains shall attest
to the validity of the information pertaining to that individual. The
90-day review period begins on the technically complete notice date.
(2) Content of notice. A notice must contain the identity, personal
history, business background, and experience of each person whose
designation as a director or senior executive officer is subject to this
section. The notice must include:
(i) A description of his or her material business activities and
affiliations during the five years preceding the date of the notice;
(ii) A description of any material pending legal or administrative
proceedings to which he or she is a party;
(iii) Any criminal indictment or conviction by a state or Federal
court; and
(iv) Legible fingerprints of the person, except that fingerprints
are not required for any person who, within the three years immediately
preceding the date of the present notice, has been subject to a notice
filed with the OCC pursuant to section 32 of the FDIA, 12 U.S.C. 1831i,
or this section and has previously submitted fingerprints.
(3) Requests for additional information. Following receipt of a
technically complete notice, the OCC may request additional information,
in writing where feasible, and may specify a time period during which
the information must be provided.
(4) Notice of disapproval. The OCC may disapprove an individual
proposed as a member of the board of directors or as a senior executive
officer if the OCC determines on the basis of the individual's
competence, experience, character, or integrity that it would not be in
the best interests of the depositors of the national bank or the public
to permit the individual to be employed by, or associated with, the
national bank. The OCC sends a notice of disapproval to both the
national bank and the disapproved individual stating the basis for
disapproval.
(5) Notice of intent not to disapprove. An individual proposed as a
member of the board of directors or as a senior executive officer may
begin service before the expiration of the review period if the OCC
notifies the national bank that the OCC does not disapprove the proposed
director or senior executive officer.
(6) Waiver of prior notice. (i) A national bank may send a letter to
the appropriate supervisory office requesting a waiver of the prior
notice requirement. The OCC may waive the prior notice requirement but
not the filing required under this section. The OCC may grant a waiver
if it finds that delay could harm the national bank or the public
interest, or that other extraordinary circumstances justify waiving the
prior notice requirement. The length of any waiver depends on the
circumstances in each case. If the OCC grants a waiver, the national
bank shall file the required notice within the time period specified in
the waiver, and the proposed individual may assume the position on an
interim basis until the individual and the national bank receive a
notice of disapproval or, if an
[[Page 174]]
appeal has been filed, until a notice of disapproval has been upheld on
appeal as set forth in paragraph (f) of this section. If the required
notice is not filed within the time period specified in the waiver, the
proposed individual shall resign his or her position. Thereafter, the
individual may assume the position on a permanent basis only after the
national bank receives a notice of intent not to disapprove, after the
review period elapses, or after a notice of disapproval has been
overturned on appeal as set forth in paragraph (f) of this section. A
waiver does not affect the OCC's authority to issue a notice of
disapproval within 30 days of the expiration of such waiver.
(ii) In the case of the election at a meeting of the shareholders of
a new director not proposed by management, a waiver is granted
automatically and the elected individual may begin service as a
director. However, under these circumstances, the national bank shall
file the required notice with the appropriate supervisory office as soon
as practical, but not later than seven days from the date the individual
is notified of the election. The individual's continued service is
subject to the conditions specified in paragraph (e)(6)(i) of this
section.
(7) Commencement of service. An individual proposed as a member of
the board of directors or as a senior executive officer may assume the
office following the end of the review period, which begins on the
technically complete notice date, unless:
(i) The OCC issues a notice of disapproval during the review period;
or
(ii) The national bank does not provide additional information
within the time period required by the OCC pursuant to paragraph (e)(3)
of this section and the OCC deems the notice to be abandoned pursuant to
Sec. 5.13(c).
(8) Exceptions to rules of general applicability. Sections 5.8,
5.10, 5.11, and 5.13 (a) through (f) do not apply to a notice for a
change in directors and senior executive officers.
(f) Appeal--(1) If the national bank, the proposed individual, or
both, disagree with a disapproval, they may seek review by appealing the
disapproval to the Comptroller, or an authorized delegate, within 15
days of the receipt of the notice of disapproval. The national bank or
the individual may appeal on the grounds that the reasons for
disapproval are contrary to fact or insufficient to justify disapproval.
The appellant shall submit all documents and written arguments that the
appellant wishes to be considered in support of the appeal.
(2) The Comptroller, or an authorized delegate, may designate an
appellate official who was not previously involved in the decision
leading to the appeal at issue. The Comptroller, an authorized delegate,
or the appellate official considers all information submitted with the
original notice, the material before the OCC official who made the
initial decision, and any information submitted by the appellant at the
time of the appeal.
(3) The Comptroller, an authorized delegate, or the appellate
official shall independently determine whether the reasons given for the
disapproval are contrary to fact or insufficient to justify the
disapproval. If either is determined to be the case, the Comptroller, an
authorized delegate, or the appellate official may reverse the
disapproval.
(4) Upon completion of the review, the Comptroller, an authorized
delegate, or the appellate official shall notify the appellant in
writing of the decision. If the original decision is reversed, the
individual may assume the position in the bank for which he or she was
proposed.
[61 FR 60363, Nov. 27, 1996, as amended at 64 FR 60098, Nov. 4, 1999]
Sec. 5.52 Change of address.
(a) Authority. 12 U.S.C. 93a, 161, and 481.
(b) Scope. This section describes the obligation of a national bank
to notify the OCC of any change in its address. However, no notice is
required if the change in address results from a transaction approved
under this part.
(c) Notice process. Any national bank with a change in the address
of its main office or in its post office box shall send a written notice
to the appropriate district office.
(d) Exceptions to rules of general applicability. Sections 5.8, 5.9,
5.10, 5.11, and
[[Page 175]]
5.13 do not apply to changes in a national bank's address.
Sec. 5.53 Change in asset composition.
(a) Authority. 12 U.S.C. 93a, 1818.
(b) Scope. This section requires a national bank to obtain the
approval of the OCC before changing the composition of all, or
substantially all, of its assets through sales or other dispositions,
or, having sold or disposed of all, or substantially all, of its assets,
through subsequent purchases or other acquisitions or other expansions
of its operations. This section does not apply to a change in
composition of all, or substantially all, of a bank's assets that the
bank undertakes in response to direction from the OCC (e.g., in an
enforcement action pursuant to 12 U.S.C. 1818) or as part of a voluntary
liquidation pursuant to 12 U.S.C. 181 and 182 and 12 CFR 5.48, if the
liquidating bank has stipulated in its notice of liquidation to the OCC
that its liquidation will be completed, the bank dissolved and its
charter returned to the OCC within one year of the date it filed this
notice, unless the OCC extends the time period. This section does not
apply to changes in asset composition that occur as a result of a bank's
ordinary and ongoing business of originating and securitizing loans.
(c) Approval requirement. (1) A national bank must file an
application and obtain the prior written approval of the OCC before
changing the composition of all, or substantially all, of its assets (i)
through sales or other dispositions, or, (ii) having sold or disposed of
all or substantially all of its assets, through subsequent purchases or
other acquisitions or other expansions of its operations.
(2) In determining whether to approve an application under paragraph
(c)(1) of this section, the OCC will consider the purpose of the
transaction, its impact on the safety and soundness of the bank, and any
effect on the bank's customers. The OCC may deny the application if the
transaction would have a negative effect in any of these respects. The
OCC's review of any change in asset composition through purchase or
other acquisition or other expansions of its operations under paragraph
(c)(1)(ii) of this section will include, in addition to the foregoing
factors, the factors governing the organization of a bank under Sec.
5.20.
(d) Exceptions to Rules of General Applicability. Sections 5.8,
5.10, and 5.11 do not apply with respect to applications filed pursuant
to this section. However, if the OCC concludes that an application
presents significant or novel policy, supervisory, or legal issues, the
OCC may determine that some or all of the provisions of Sec. Sec. 5.8,
5.10, and 5.11 apply.
[69 FR 50297, Aug. 16, 2004]
Subpart E_Payment of Dividends
Sec. 5.60 Authority, scope, and exceptions to rules of general applicability.
(a) Authority. 12 U.S.C. 56, 60, and 93a.
(b) Scope. Except as otherwise provided, the restrictions in this
subpart apply to the declaration and payment of all dividends by a
national bank, including dividends paid in property. However, the
provisions contained in Sec. 5.64 do not apply to dividends paid in
stock of the bank.
(c) Exceptions to the rules of general applicability. Sections 5.8,
5.10, and 5.11 do not apply to this subpart.
Sec. 5.61 Definitions.
For the purposes of subpart E, the following definitions apply:
(a) Capital stock, capital surplus, and permanent capital have the
same meaning as set forth in Sec. 5.46.
(b) Retained net income means the net income of a specified period
less the total amount of all dividends declared in that period.
Sec. 5.62 Date of declaration of dividend.
A national bank shall use the date a dividend is declared for the
purposes of determining compliance with this subpart.
Sec. 5.63 Capital limitation under 12 U.S.C. 56.
(a) General limitation. Except as provided by 12 U.S.C. 59 and Sec.
5.46, a national bank may not withdraw, or permit to be withdrawn,
either in the form of a dividend or otherwise, any portion
[[Page 176]]
of its permanent capital. Further, a national bank may not declare a
dividend in excess of undivided profits.
(b) Preferred stock. The provisions of 12 U.S.C. 56 do not apply to
dividends on preferred stock. However, if the undivided profits of the
national bank are not sufficient to cover a proposed dividend on
preferred stock, the proposed dividend constitutes a reduction in
capital subject to 12 U.S.C. 59 and Sec. 5.46.
Sec. 5.64 Earnings limitation under 12 U.S.C. 60.
(a) Definitions. As used in this section, the term ``current year''
means the calendar year in which a national bank declared, or proposes
to declare, a dividend. The term ``current year minus one'' means the
year immediately preceding the current year. The term ``current year
minus two'' means the year that is two years prior to the current year.
The term ``current year minus three'' means the year that is three years
prior to the current year. The term ``current year minus four'' means
the year that is four years prior to the current year.
(b) Dividends from undivided profits. Subject to 12 U.S.C. 56 and
this subpart, the directors of a national bank may declare and pay
dividends of so much of the undivided profits as they judge to be
expedient.
(c) Earnings limitations under 12 U.S.C. 60--(1) General rule. For
purposes of 12 U.S.C. 60, unless approved by the OCC in accordance with
paragraph (c)(3) of this section, a national bank may not declare a
dividend if the total amount of all dividends (common and preferred),
including the proposed dividend, declared by the national bank in any
current year exceeds the total of the national bank's net income for the
current year to date, combined with its retained net income of current
year minus one and current year minus two, less the sum of any transfers
required by the OCC and any transfers required to be made to a fund for
the retirement of any preferred stock.
(2) Excess dividends in prior periods. (i) If in current year minus
one or current year minus two the bank declared dividends in excess of
that year's net income, the excess shall not reduce retained net income
for the three-year period specified in paragraph (c)(1) of this section,
provided that the amount of excess dividends can be offset by retained
net income in current year minus three or current year minus four. If
the bank declared dividends in excess of net income in current year
minus one, the excess is offset by retained net income in current year
minus three and then by retained net income in current year minus two.
If the bank declared dividends in excess of net income in current year
minus two, the excess is first offset by retained net income in current
year minus four and then by retained net income in current year minus
three.
(ii) If the bank's retained net income in current year minus three
and current year minus four was insufficient to offset the full amount
of the excess dividends declared, as calculated in accordance with
paragraph (c)(2)(i) of this section, then the amount that is not offset
will reduce the retained net income available to pay dividends in the
current year.
(iii) The calculation in paragraph (c)(2) of this section shall
apply only to retained net loss that results from dividends declared in
excess of a single year's net income and does not apply to other types
of current earnings deficits.
(3) Prior approval required. A national bank may declare a dividend
in excess of the amount described in paragraph (c) of this section,
provided that the dividend is approved by the OCC. A national bank shall
submit a request for prior approval of a dividend under 12 U.S.C. 60 to
the appropriate district office.
(d) Surplus surplus. Any amount in capital surplus in excess of
capital stock (referred to as ``surplus surplus'') may be transferred to
undivided profits and available as dividends, provided:
(1) The bank can demonstrate that the amount came from earnings in
prior periods, excluding the effect of any stock dividend; and
(2) The board of directors of the bank approves the transfer of the
amount from capital surplus to undivided profits.
[73 FR 22241, Apr. 24, 2008]
[[Page 177]]
Sec. 5.65 Restrictions on undercapitalized institutions.
Notwithstanding any other provision in this subpart, a national bank
may not declare or pay any dividend if, after making the dividend, the
national bank would be ``undercapitalized'' as defined in 12 CFR part 6.
Sec. 5.66 Dividends payable in property other than cash.
In addition to cash dividends, directors of a national bank may
declare dividends payable in property, with the approval of the OCC.
Even though the property distributed has been previously charged down or
written off entirely, the dividend is equivalent to a cash dividend in
an amount equal to the actual current value of the property. Before the
dividend is declared, the bank should show the excess of the actual
value over book value on the books of the national bank as a recovery,
and the dividend should then be declared in the amount of the full book
value (equivalent to the actual current value) of the property being
distributed.
Sec. 5.67 Fractional shares.
To avoid complicated recordkeeping in connection with fractional
shares, a national bank issuing additional stock by stock dividend, upon
consolidation or merger, or otherwise, may adopt arrangements such as
the following to preclude the issuance of fractional shares. The bank
may:
(a) Issue scripts or warrants for trading;
(b) Make reasonable arrangements to provide those to whom fractional
shares would otherwise be issued an opportunity to realize at a fair
price upon the fraction not being issued through its sale, or the
purchase of the additional fraction required for a full share, if there
is an established and active market in the national bank's stock;
(c) Remit the cash equivalent of the fraction not being issued to
those to whom fractional shares would otherwise be issued. The cash
equivalent is based on the market value of the stock, if there is an
established and active market in the national bank's stock. In the
absence of such a market, the cash equivalent is based on a reliable and
disinterested determination as to the fair market value of the stock if
such stock is available; or
(d) Sell full shares representing all the fractions at public
auction, or to the highest bidder after having solicited and received
sealed bids from at least three licensed stock brokers. The national
bank shall distribute the proceeds of the sale pro rata to shareholders
who otherwise would be entitled to the fractional shares.
Subpart F_Federal Branches and Agencies
Sec. 5.70 Federal branches and agencies.
(a) Authority. 12 U.S.C. 93a and 3101 et seq.
(b) Scope. This subpart describes the filing requirements for
corporate activities and transactions involving Federal branches and
agencies of foreign banks. Substantive rules and policies for specific
applications are contained in 12 CFR part 28.
(c) Definitions. For purposes of this subpart:
(1) To establish a Federal branch or agency means to:
(i) Open and conduct business through an initial or additional
Federal branch or agency;
(ii) Acquire directly, through merger, consolidation, or similar
transaction with another foreign bank, the operations of a Federal
branch or agency that is open and conducting business;
(iii) Acquire a Federal branch or agency through the acquisition of
a foreign bank subsidiary that will cease to operate in the same
corporate form following the acquisition;
(iv) Convert a state branch or state agency operated by a foreign
bank, or a commercial lending company controlled by a foreign bank, into
a Federal branch or agency;
(v) Relocate a Federal branch or agency within a state or from one
state to another; or
(vi) Convert a Federal agency or a limited Federal branch into a
Federal branch.
(2) Federal branch includes a limited Federal branch unless
otherwise provided.
(d) Filing requirements--(1) General. Unless otherwise provided in
12 CFR
[[Page 178]]
part 28, a Federal branch or agency shall comply with the applicable
requirements of this part.
(2) Applications. A foreign bank shall submit an application and
obtain prior approval from the OCC before it:
(i) Establishes a Federal branch or agency; or
(ii) Exercises fiduciary powers at a Federal branch. A foreign bank
may submit an application to exercise fiduciary powers at the time of
filing an application for a Federal branch license or at any subsequent
date.
[61 FR 60363, Nov. 27, 1996, as amended at 68 FR 70698, Dec. 19, 2003]
PART 6_PROMPT CORRECTIVE ACTION--Table of Contents
Subpart A_Capital Categories
Sec.
6.1 Authority, purpose, scope, and other supervisory authority.
6.2 Definitions.
6.3 Notice of capital category.
6.4 Capital measures and capital category definitions.
6.5 Capital restoration plans.
6.6 Mandatory and discretionary supervisory actions under section 38.
Subpart B_Directives To Take Prompt Corrective Action
6.20 Scope.
6.21 Notice of intent to issue a directive.
6.22 Response to notice.
6.23 Decision and issuance of a prompt corrective action directive.
6.24 Request for modification or rescission of directive.
6.25 Enforcement of directive.
Authority: 12 U.S.C. 93a, 1831o.
Source: 57 FR 44891, Sept. 29, 1992, unless otherwise noted.
Subpart A_Capital Categories
Sec. 6.1 Authority, purpose, scope, and other supervisory authority.
(a) Authority. This part is issued by the Office of the Comptroller
of the Currency (OCC) pursuant to section 38 (section 38) of the Federal
Deposit Insurance Act (FDI Act) as added by section 131 of the Federal
Deposit Insurance Corporation Improvement Act of 1991 (Pub. L. 102-242,
105 Stat. 2236 (1991)) (12 U.S.C. 1831o).
(b) Purpose. Section 38 of the FDI Act establishes a framework of
supervisory actions for insured depository institutions that are not
adequately capitalized. The principal purpose of this subpart is to
define, for insured national banks, the capital measures and capital
levels, and for insured federal branches, comparable asset-based
measures and levels, that are used for determining the supervisory
actions authorized under section 38 of the FDI Act. This part 6 also
establishes procedures for submission and review of capital restoration
plans and for issuance and review of directives and orders pursuant to
section 38.
(c) Scope. This subpart implements the provisions of section 38 of
the FDI Act as they apply to insured national banks and insured federal
branches. Certain of these provisions also apply to officers, directors
and employees of these insured institutions. Other provisions apply to
any company that controls an insured national bank or insured federal
branch and to the affiliates of an insured national bank or insured
federal branch.
(d) Other supervisory authority. Neither section 38 nor this part in
any way limits the authority of the OCC under any other provision of law
to take supervisory actions to address unsafe or unsound practices,
deficient capital levels, violations of law, unsafe or unsound
conditions, or other practices. Action under section 38 of the FDI Act
and this part may be taken independently of, in conjunction with, or in
addition to any other enforcement action available to the OCC, including
issuance of cease and desist orders, capital directives, approval or
denial of applications or notices, assessment of civil money penalties,
or any other actions authorized by law.
(e) Disclosure of capital categories. The assignment of an insured
national bank or insured federal branch under this subpart within a
particular capital category is for purposes of implementing and applying
the provisions of section 38. Unless permitted by the OCC or otherwise
required by law, no bank may state in any advertisement or promotional
material its capital category under this subpart or that the OCC or any
other federal banking agency has
[[Page 179]]
assigned the bank to a particular capital category.
Sec. 6.2 Definitions.
For purposes of section 38 and this part, the definitions related to
capital in part 3 of this chapter shall apply. In addition, except as
modified in this section or unless the context otherwise requires, the
terms used in this subpart have the same meanings as set forth in
section 38 and section 3 of the FDI Act.
(a) Bank means all insured national banks and all insured federal
branches, except where otherwise provided in this subpart.
(b)(1) Control has the same meaning assigned to it in section 2 of
the Bank Holding Company Act (12 U.S.C. 1841), and the term controlled
shall be construed consistently with the term control.
(2) Exclusion for fiduciary ownership. No insured depository
institution or company controls another insured depository institution
or company by virtue of its ownership or control of shares in a
fiduciary capacity. Shares shall not be deemed to have been acquired in
a fiduciary capacity if the acquiring insured depository institution or
company has sole discretionary authority to exercise voting rights with
respect thereto.
(3) Exclusion for debts previously contracted. No insured depository
institution or company controls another insured depository institution
or company by virtue of its ownership or control of shares acquired in
securing or collecting a debt previously contracted in good faith, until
two years after the date of acquisition. The two-year period may be
extended at the discretion of the appropriate federal banking agency for
up to three one-year periods.
(c) Controlling person means any person having control of an insured
depository institution and any company controlled by that person.
(d) Leverage ratio means the ratio of Tier 1 capital to adjusted
total assets, as calculated in accordance with the OCC's Minimum Capital
Ratios in part 3 of this chapter.
(e) Management fee means any payment of money or provision of any
other thing of value to a company or individual for the provision of
management services or advice to the bank or related overhead expenses,
including payments related to supervisory, executive, managerial, or
policymaking functions, other than compensation to an individual in the
individual's capacity as an officer or employee of the bank.
(f) Risk-weighted assets means total risk weighted assets, as
calculated in accordance with the OCC's Minimum Capital Ratios in part 3
of this chapter.
(g) Tangible equity means the amount of Tier 1 capital elements in
the OCC's Risk-Based Capital Guidelines (appendix A to part 3 of this
chapter) plus the amount of outstanding cumulative perpetual preferred
stock (including related surplus) minus all intangible assets except
mortgage servicing assets to the extent permitted in Tier 1 capital
under section 2(c)(2) in appendix A to part 3 of this chapter.
(h) Tier 1 capital means the amount of Tier 1 capital as defined in
the OCC's Minimum Capital Ratios in part 3 of this chapter.
(i) Tier 1 risk-based capital ratio means the ratio of Tier 1
capital to risk weighted assets, as calculated in accordance with the
OCC's Minimum Capital Ratios in part 3 of this chapter.
(j) Total assets means quarterly average total assets as reported in
a bank's Consolidated Reports of Condition and Income (Call Report),
minus intangible assets as provided in the definition of tangible
equity. The OCC reserves the right to require a bank to compute and
maintain its capital ratios on the basis of actual, rather than average,
total assets when computing tangible equity.
(k) Total risk-based capital ratio means the ratio of qualifying
total capital to risk-weighted assets, as calculated in accordance with
the OCC's Minimum Capital Ratios in part 3 of this chapter.
[57 FR 44891, Sept. 29, 1992, as amended at 60 FR 39229, Aug. 1, 1995;
63 FR 42674, Aug. 10, 1998]
Sec. 6.3 Notice of capital category.
(a) Effective date of determination of capital category. A bank
shall be deemed to be within a given capital category for purposes of
section 38 of the FDI Act and this part as of the date the bank is
notified of, or is deemed to
[[Page 180]]
have notice of, its capital category pursuant to paragraph (b) of this
section.
(b) Notice of capital category. A bank shall be deemed to have been
notified of its capital levels and its capital category as of the most
recent date:
(1) A Consolidated Report of Condition and Income (Call Report) is
required to be filed with the OCC;
(2) A final report of examination is delivered to the bank; or
(3) Written notice is provided by the OCC to the bank of its capital
category for purposes of section 38 of the FDI Act and this part or that
the bank's capital category has changed as provided in paragraph (c) of
this section or Sec. 6.1 of this subpart and subpart M of part 19 of
this chapter.
(c) Adjustments to reported capital levels and capital category--(1)
Notice of adjustment by bank. A bank shall provide the OCC with written
notice that an adjustment to the bank's capital category may have
occurred no later than 15 calendar days following the date that any
material event has occurred that would cause the bank to be placed in a
lower capital category from the category assigned to the bank for
purposes of section 38 and this part on the basis of the bank's most
recent Call Report or report of examination.
(2) Determination to change capital category. After receiving notice
pursuant to paragraph (c)(1) of this section, the OCC shall determine
whether to change the capital category of the bank and shall notify the
bank of the OCC's determination.
Sec. 6.4 Capital measures and capital category definitions.
(a) Capital measures. For purposes of section 38 and this part, the
relevant capital measures shall be:
(1) The total risk-based capital ratio;
(2) The Tier 1 risk-based capital ratio;
(3) The leverage ratio.
(b) Capital categories. For purposes of the provisions of section 38
and this part, a bank shall be deemed to be:
(1) Well capitalized if the bank:
(i) Has a total risk-based capital ratio of 10.0 percent or greater;
and
(ii) Has a Tier 1 risk-based capital ratio of 6.0 percent or
greater; and
(iii) Has a leverage ratio of 5.0 percent or greater; and
(iv) Is not subject to any written agreement, order or capital
directive, or prompt corrective action directive issued by the OCC
pursuant to section 8 of the FDI Act, the International Lending
Supervision Act of 1983 (12 U.S.C. 3907), or section 38 of the FDI Act,
or any regulation thereunder, to meet and maintain a specific capital
level for any capital measure.
(2) Adequately capitalized if the bank:
(i) Has a total risk-based capital ratio of 8.0 percent or greater;
and
(ii) Has a Tier 1 risk-based capital ratio of 4.0 percent or
greater; and
(iii) Has:
(A) A leverage ratio of 4.0 percent or greater; or
(B) A leverage ratio of 3.0 percent or greater if the bank is rated
1 in the most recent examination of the bank; and
(iv) Does not meet the definition of a well capitalized bank.
(3) Undercapitalized if the bank:
(i) Has a total risk-based capital ratio that is less than 8.0
percent; or
(ii) Has a Tier 1 risk-based capital ratio that is less than 4.0
percent; or
(iii) (A) Except as provided in paragraph (b)(3)(iii) (B) of this
section, has a leverage ratio that is less than 4.0 percent; or
(B) If the bank is rated 1 in the most recent examination of the
bank, has a leverage ratio that is less than 3.0 percent.
(4) Significantly undercapitalized if the bank has:
(i) A total risk-based capital ratio that is less than 6.0 percent;
or
(ii) A Tier 1 risk-based capital ratio that is less than 3.0
percent; or
(iii) A leverage ratio that is less than 3.0 percent.
(5) Critically undercapitalized if the bank has a ratio of tangible
equity to total assets that is equal to or less than 2.0 percent.
(c) Capital categories for insured federal branches. For purposes of
the provisions of section 38 of the FDI Act and this part, an insured
federal branch shall be deemed to be:
(1) Well capitalized if the insured federal branch:
[[Page 181]]
(i) Maintains the pledge of assets required under 12 CFR 347.210;
and
(ii) Maintains the eligible assets prescribed under 12 CFR 347.211
at 108 percent or more of the preceding quarter's average book value of
the insured branch's third-party liabilities; and
(iii) Has not received written notification from:
(A) The OCC to increase its capital equivalency deposit pursuant to
Sec. 28.6(a) of this chapter, or to comply with asset maintenance
requirements pursuant to Sec. 28.9 of this chapter; or
(B) The FDIC to pledge additional assets pursuant to 12 CFR 346.19
or to maintain a higher ratio of eligible assets pursuant to 12 CFR
346.20.
(2) Adequately Capitalized if the insured federal branch:
(i) Maintains the pledge of assets prescribed under 12 CFR 346.19;
and
(ii) Maintains the eligible assets prescribed under 12 CFR 346.20 at
106 percent or more of the preceding quarter's average book value of the
insured branch's third-party liabilities; and
(iii) Does not meet the definition of a well capitalized insured
federal branch.
(3) Undercapitalized if the insured federal branch:
(i) Fails to maintain the pledge of assets required under 12 CFR
346.19; or
(ii) Fails to maintain the eligible assets prescribed under 12 CFR
346.20 at 106 percent or more of the preceding quarter's average book
value of the insured branch's third-party liabilities.
(4) Significantly undercapitalized if it fails to maintain the
eligible assets prescribed under 12 CFR 346.20 at 104 percent or more of
the preceding quarter's average book value of the insured federal
branch's third-party liabilities.
(5) Critically undercapitalized if it fails to maintain the eligible
assets prescribed under 12 CFR 346.20 at 102 percent or more of the
preceding quarter's average book value of the insured federal branch's
third-party liabilities.
(d) Reclassification based on supervisory criteria other than
capital. The OCC may reclassify a well capitalized bank as adequately
capitalized and may require an adequately capitalized or an
undercapitalized bank to comply with certain mandatory or discretionary
supervisory actions as if the bank were in the next lower capital
category (except that the OCC may not reclassify a significantly
undercapitalized bank as critically undercapitalized) (each of these
actions are hereinafter referred to generally as reclassifications) in
the following circumstances:
(1) Unsafe or unsound condition. The OCC has determined, after
notice and opportunity for hearing pursuant to subpart M of part 19 of
this chapter, that the bank is in unsafe or unsound condition; or
(2) Unsafe or unsound practice. The OCC has determined, after notice
and opportunity for hearing pursuant to subpart M of part 19 of this
chapter, that in the most recent examination of the bank, the bank
received, and has not corrected a less-than-satisfactory rating for any
of the categories of asset quality, management, earnings, or liquidity.
[57 FR 44891, Sept. 29, 1992, as amended at 68 FR 70131, Dec. 17, 2003]
Sec. 6.5 Capital restoration plans.
(a) Schedule for filing plan--(1) In general. A bank shall file a
written capital restoration plan with the OCC within 45 days of the date
that the bank receives notice or is deemed to have notice that the bank
is undercapitalized, significantly undercapitalized, or critically
undercapitalized, unless the OCC notifies the bank in writing that the
plan is to be filed within a different period. An adequately capitalized
bank that has been required pursuant to Sec. 6.4 and subpart M of part
19 of this chapter to comply with supervisory actions as if the bank
were undercapitalized is not required to submit a capital restoration
plan solely by virtue of the reclassification.
(2) Additional capital restoration plans. Notwithstanding paragraph
(a)(1) of this section, a bank that has already submitted and is
operating under a capital restoration plan approved under section 38 and
this subpart is not required to submit an additional capital restoration
plan based on a revised calculation of its capital measures or a
reclassification of the institution under Sec. 6.4 and subpart M of
part 19 of this chapter unless the OCC notifies the bank that it must
submit a new or
[[Page 182]]
revised capital plan. A bank that is notified that it must submit a new
or revised capital restoration plan shall file the plan in writing with
the OCC within 45 days of receiving such notice, unless the OCC notifies
the bank in writing that the plan must be filed within a different
period.
(b) Contents of plan. All financial data submitted in connection
with a capital restoration plan shall be prepared in accordance with the
instructions provided on the Call Report, unless the OCC instructs
otherwise. The capital restoration plan shall include all of the
information required to be filed under section 38(e)(2) of the FDI Act.
A bank that is required to submit a capital restoration plan as the
result of a reclassification of the bank, pursuant to Sec. 6.4 and
subpart M of part 19 of this chapter, shall include a description of the
steps the bank will take to correct the unsafe or unsound condition or
practice. No plan shall be accepted unless it includes any performance
guarantee described in section 38(e)(2)(C) of that Act by each company
that controls the bank.
(c) Review of capital restoration plans. Within 60 days after
receiving a capital restoration plan under this subpart, the OCC shall
provide written notice to the bank of whether the plan has been
approved. The OCC may extend the time within which notice regarding
approval of a plan shall be provided.
(d) Disapproval of capital restoration plan. If a capital
restoration plan is not approved by the OCC, the bank shall submit a
revised capital restoration plan within the time specified by the OCC.
Upon receiving notice that its capital restoration plan has not been
approved, any undercapitalized bank (as defined in Sec. 6.4) shall be
subject to all of the provisions of section 38 and this part applicable
to significantly undercapitalized institutions. These provisions shall
be applicable until such time as a new or revised capital restoration
plan submitted by the bank has been approved by the OCC.
(e) Failure to submit a capital restoration plan. A bank that is
undercapitalized (as defined in Sec. 6.4) and that fails to submit a
written capital restoration plan within the period provided in this
section shall, upon the expiration of that period, be subject to all of
the provisions of section 38 and this part applicable to significantly
undercapitalized banks.
(f) Failure to implement a capital restoration plan. Any
undercapitalized bank that fails, in any material respect, to implement
a capital restoration plan shall be subject to all of the provisions of
section 38 and this part applicable to significantly undercapitalized
banks.
(g) Amendment of capital restoration plan. A bank that has submitted
an approved capital restoration plan may, after prior written notice to
and approval by the OCC, amend the plan to reflect a change in
circumstance. Until such time as a proposed amendment has been approved,
the bank shall implement the capital restoration plan as approved prior
to the proposed amendment.
(h) Notice to FDIC. Within 45 days of the effective date of OCC
approval of a capital restoration plan, or any amendment to a capital
restoration plan, the OCC shall provide a copy of the plan or amendment
to the Federal Deposit Insurance Corporation.
(i) Performance guarantee by companies that control a bank--(1)
Limitation on liability--(i) Amount limitation. The aggregate liability
under the guarantee provided under section 38 and this subpart for all
companies that control a specific bank that is required to submit a
capital restoration plan under this subpart shall be limited to the
lesser of:
(A) An amount equal to 5.0 percent of the bank's total assets at the
time the bank was notified or deemed to have notice that the bank was
undercapitalized; or
(B) The amount necessary to restore the relevant capital measures of
the bank to the levels required for the bank to be classified as
adequately capitalized, as those capital measures and levels are defined
at the time that the bank initially fails to comply with a capital
restoration plan under this subpart.
(ii) Limit on duration. The guarantee and limit of liability under
section 38 and this subpart shall expire after the OCC notifies the bank
that it has remained adequately capitalized for each
[[Page 183]]
of four consecutive calendar quarters. The expiration or fulfillment by
a company of a guarantee of a capital restoration plan shall not limit
the liability of the company under any guarantee required or provided in
connection with any capital restoration plan filed by the same bank
after expiration of the first guarantee.
(iii) Collection on guarantee. Each company that controls a given
bank shall be jointly and severally liable for the guarantee for such
bank as required under section 38 and this subpart, and the OCC may
require payment of the full amount of that guarantee from any or all of
the companies issuing the guarantee.
(2) Failure to provide guarantee. In the event that a bank that is
controlled by any company submits a capital restoration plan that does
not contain the guarantee required under section 38(e)(2) of the FDI
Act, the bank shall, upon submission of the plan, be subject to the
provisions of section 38 and this part that are applicable to banks that
have not submitted an acceptable capital restoration plan.
(3) Failure to perform guarantee. Failure by any company that
controls a bank to perform fully its guarantee of any capital plan shall
constitute a material failure to implement the plan for purposes of
section 38(f) of the FDI Act. Upon such failure, the bank shall be
subject to the provisions of section 38 and this part that are
applicable to banks that have failed in a material respect to implement
a capital restoration plan.
(j) Enforcement of capital restoration plan. The failure of a bank
to implement, in any material respect, a capital restoration plan
required under section 38 and this section shall subject the bank to the
assessment of civil money penalties pursuant to section 8(i)(2)(A) of
the FDI Act.
Sec. 6.6 Mandatory and discretionary supervisory actions under section 38.
(a) Mandatory supervisory actions--(1) Provisions applicable to all
banks. All banks are subject to the restrictions contained in section
38(d) of the FDI Act on payment of capital distributions and management
fees.
(2) Provisions applicable to undercapitalized, significantly
undercapitalized, and critically undercapitalized banks. Immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 6.3, that the bank is undercapitalized, significantly
undercapitalized, or critically undercapitalized, the bank shall become
subject to the provisions of section 38 of the FDI Act--
(i) Restricting payment of capital distributions and management fees
(section 38(d));
(ii) Requiring that the OCC monitor the condition of the bank
(section 38(e)(1));
(iii) Requiring submission of a capital restoration plan within the
schedule established in this subpart (section 38(e)(2));
(iv) Restricting the growth of the bank's assets (section 38(e)(3));
and
(v) Requiring prior approval of certain expansion proposals (section
38(e)(4)).
(3) Additional provisions applicable to significantly
undercapitalized, and critically undercapitalized banks. In addition to
the provisions of section 38 of the FDI Act described in paragraph
(a)(2) of this section, immediately upon receiving notice or being
deemed to have notice, as provided in this subpart, that the bank is
significantly undercapitalized, or critically undercapitalized or that
the bank is subject to the provisions applicable to institutions that
are significantly undercapitalized because it has failed to submit or
implement, in any material respect, an acceptable capital restoration
plan, the bank shall become subject to the provisions of section 38 of
the FDI Act that restrict compensation paid to senior executive officers
of the institution (section 38(f)(4)).
(4) Additional provisions applicable to critically undercapitalized
banks. In addition to the provisions of section 38 of the FDI Act
described in paragraphs (a) (2) and (3) of this section, immediately
upon receiving notice or being deemed to have notice, as provided in
Sec. 6.3, that the bank is critically undercapitalized, the bank shall
become subject to the provisions of section 38 of the FDI Act--
[[Page 184]]
(i) Restricting the activities of the bank (section 38(h)(1)); and
(ii) Restricting payments on subordinated debt of the bank (section
38(h)(2)).
(b) Discretionary supervisory actions. In taking any action under
section 38 that is within the OCC's discretion to take in connection
with a bank that is deemed to be undercapitalized, significantly
undercapitalized, or critically undercapitalized, or has been
reclassified as undercapitalized or significantly undercapitalized; an
officer or director of such bank; or a company that controls such bank,
the OCC shall follow the procedures for issuing directives under subpart
B of this part and subpart N of part 19 of this chapter, unless
otherwise provided in section 38 or this part.
Subpart B_Directives To Take Prompt Corrective Action
Sec. 6.20 Scope.
The rules and procedures set forth in this subpart apply to insured
national banks, insured federal branches and senior executive officers
and directors of banks that are subject to the provisions of section 38
of the Federal Deposit Insurance Act (section 38) and subpart A of this
part.
Sec. 6.21 Notice of intent to issue a directive.
(a) Notice of intent to issue a directive--(1) In general. The OCC
shall provide an undercapitalized, significantly undercapitalized, or
critically undercapitalized bank prior written notice of the OCC's
intention to issue a directive requiring such bank or company to take
actions or to follow proscriptions described in section 38 that are
within the OCC's discretion to require or impose under section 38 of the
FDI Act, including section 38 (e)(5), (f)(2), (f)(3), or (f)(5). The
bank shall have such time to respond to a proposed directive as provided
under Sec. 6.22.
(2) Immediate issuance of final directive. If the OCC finds it
necessary in order to carry out the purposes of section 38 of the FDI
Act, the OCC may, without providing the notice prescribed in paragraph
(a)(1) of this section, issue a directive requiring a bank immediately
to take actions or to follow proscriptions described in section 38 that
are within the OCC's discretion to require or impose under section 38 of
the FDI Act, including section 38 (e)(5), (f)(2), (f)(3), or (f)(5). A
bank that is subject to such an immediately effective directive may
submit a written appeal of the directive to the OCC. Such an appeal must
be received by the OCC within 14 calendar days of the issuance of the
directive, unless the OCC permits a longer period. The OCC shall
consider any such appeal, if filed in a timely matter, within 60 days of
receiving the appeal. During such period of review, the directive shall
remain in effect unless the OCC, in its sole discretion, stays the
effectiveness of the directive.
(b) Contents of notice. A notice of intention to issue a directive
shall include:
(1) A statement of the bank's capital measures and capital levels;
(2) A description of the restrictions, prohibitions or affirmative
actions that the OCC proposes to impose or require;
(3) The proposed date when such restrictions or prohibitions would
be effective or the proposed date for completion of such affirmative
actions; and
(4) The date by which the bank subject to the directive may file
with the OCC a written response to the notice.
Sec. 6.22 Response to notice.
(a) Time for response. A bank may file a written response to a
notice of intent to issue a directive within the time period set by the
OCC. The date shall be at least 14 calendar days from the date of the
notice unless the OCC determines that a shorter period is appropriate in
light of the financial condition of the bank or other relevant
circumstances.
(b) Content of response. The response should include:
(1) An explanation why the action proposed by the OCC is not an
appropriate exercise of discretion under section 38;
(2) Any recommended modification of the proposed directive; and
(3) Any other relevant information, mitigating circumstances,
documentation, or other evidence in support of
[[Page 185]]
the position of the bank regarding the proposed directive.
(c) Failure to file response. Failure by a bank to file with the
OCC, within the specified time period, a written response to a proposed
directive shall constitute a waiver of the opportunity to respond and
shall constitute consent to the issuance of the directive.
Sec. 6.23 Decision and issuance of a prompt corrective action directive.
(a) OCC consideration of response. After considering the response,
the OCC may:
(1) Issue the directive as proposed or in modified form;
(2) Determine not to issue the directive and so notify the bank; or
(3) Seek additional information or clarification of the response
from the bank, or any other relevant source.
(b) [Reserved]
Sec. 6.24 Request for modification or rescission of directive.
Any bank that is subject to a directive under this subpart may, upon
a change in circumstances, request in writing that the OCC reconsider
the terms of the directive, and may propose that the directive be
rescinded or modified. Unless otherwise ordered by the OCC, the
directive shall continue in place while such request is pending before
the OCC.
Sec. 6.25 Enforcement of directive.
(a) Judicial remedies. Whenever a bank fails to comply with a
directive issued under section 38, the OCC may seek enforcement of the
directive in the appropriate United States district court pursuant to
section 8(i)(1) of the FDI Act.
(b) Administrative remedies. Pursuant to section 8(i)(2)(A) of the
FDI Act, the OCC may assess a civil money penalty against any bank that
violates or otherwise fails to comply with any final directive issued
under section 38 and against any institution-affiliated party who
participates in such violation or noncompliance.
(c) Other enforcement action. In addition to the actions described
in paragraphs (a) and (b) of this section, the OCC may seek enforcement
of the provisions of section 38 or this part through any other judicial
or administrative proceeding authorized by law.
PART 7_BANK ACTIVITIES AND OPERATIONS--Table of Contents
Subpart A_Bank Powers
Sec.
7.1000 National bank ownership of property.
7.1001 National bank acting as general insurance agent.
7.1002 National bank acting as finder.
7.1003 Money lent at banking offices or at other than banking offices.
7.1004 Loans originating at other than banking offices.
7.1005 Credit decisions at other than banking offices.
7.1006 Loan agreement providing for a share in profits, income, or
earnings or for stock warrants.
7.1007 Acceptances.
7.1008 Preparing income tax returns for customers or public.
7.1009 National bank holding collateral stock as nominee.
7.1010 Postal service by national bank.
7.1011 National bank acting as payroll issuer.
7.1012 Messenger service.
7.1014 Sale of money orders at nonbanking outlets.
7.1015 Receipt of stock from a small business investment company.
7.1016 Independent undertakings to pay against documents.
7.1017 National bank as guarantor or surety on indemnity bond.
7.1018 Automatic payment plan account.
7.1020 Purchase of open accounts.
7.1021 National bank participation in financial literacy programs.
Subpart B_Corporate Practices
7.2000 Corporate governance procedures.
7.2001 Notice of shareholders' meetings.
7.2002 Director or attorney as proxy.
7.2003 Annual meeting for election of directors.
7.2004 Honorary directors or advisory boards.
7.2005 Ownership of stock necessary to qualify as director.
7.2006 Cumulative voting in election of directors.
7.2007 Filling vacancies and increasing board of directors other than by
shareholder action.
7.2008 Oath of directors.
7.2009 Quorum of the board of directors; proxies not permissible.
7.2010 Directors' responsibilities.
7.2011 Compensation plans.
[[Page 186]]
7.2012 President as director; chief executive officer.
7.2013 Fidelity bonds covering officers and employees.
7.2014 Indemnification of institution-affiliated parties.
7.2015 Cashier.
7.2016 Restricting transfer of stock and record dates.
7.2017 Facsimile signatures on bank stock certificates.
7.2018 Lost stock certificates.
7.2019 Loans secured by a bank's own shares.
7.2020 Acquisition and holding of shares as treasury stock.
7.2021 Preemptive rights.
7.2022 Voting trusts.
7.2023 Reverse stock splits.
7.2024 Staggered terms for national bank directors and size of bank
board.
Subpart C_Bank Operations
7.3000 Bank hours and closings.
7.3001 Sharing space and employees.
Subpart D_Preemption
7.4000 Visitorial powers.
7.4001 Charging interest at rates permitted competing institutions;
charging interest to corporate borrowers.
7.4002 National bank charges.
7.4003 Establishment and operation of a remote service unit by a
national bank.
7.4004 Establishment and operation of a deposit production office by a
national bank.
7.4005 Combination of loan production office, deposit production office,
and remote service unit.
7.4006 Applicability of State law to national bank operating
subsidiaries.
7.4007 Deposit-taking.
7.4008 Lending.
7.4009 Applicability of state law to national bank operations.
Subpart E_Electronic Activities
7.5000 Scope.
7.5001 Electronic activities that are part of, or incidental to, the
business of banking.
7.5002 Furnishing of products and services by electronic means and
facilities.
7.5003 Composite authority to engage in electronic activities.
7.5004 Sale of excess electronic capacity and by-products.
7.5005 National bank acting as digital certification authority.
7.5006 Data processing.
7.5007 Correspondent services.
7.5008 Location of national bank conducting electronic activities.
7.5009 Location under 12 U.S.C. 85 of national banks operating
exclusively through the Internet.
7.5010 Shared electronic space.
Authority: 12 U.S.C. 1 et seq., 71, 71a, 92, 92a, 93, 93a, 481, 484,
and 1818.
Source: 61 FR 4862, Feb. 9, 1996, unless otherwise noted.
Subpart A_Bank Powers
Sec. 7.1000 National bank ownership of property.
(a) Investment in real estate necessary for the transaction of
business--(1) General. Under 12 U.S.C. 29(First), a national bank may
invest in real estate that is necessary for the transaction of its
business.
(2) Type of real estate. For purposes of 12 U.S.C. 29(First), this
real estate includes:
(i) Premises that are owned and occupied (or to be occupied, if
under construction) by the bank, its branches, or its consolidated
subsidiaries;
(ii) Real estate acquired and intended, in good faith, for use in
future expansion;
(iii) Parking facilities that are used by customers or employees of
the bank, its branches, and its consolidated subsidiaries;
(iv) Residential property for the use of bank officers or employees
who are:
(A) Located in remote areas where suitable housing at a reasonable
price is not readily available; or
(B) Temporarily assigned to a foreign country, including foreign
nationals temporarily assigned to the United States; and
(v) Property for the use of bank officers, employees, or customers,
or for the temporary lodging of such persons in areas where suitable
commercial lodging is not readily available, provided that the purchase
and operation of the property qualifies as a deductible business expense
for Federal tax purposes.
(3) Permissible means of holding. A national bank may acquire and
hold real estate under this paragraph (a) by any reasonable and prudent
means, including ownership in fee, a leasehold estate, or in an interest
in a cooperative.
[[Page 187]]
The bank may hold this real estate directly or through one or more
subsidiaries. The bank may organize a bank premises subsidiary as a
corporation, partnership, or similar entity (e.g., a limited liability
company).
(b) Fixed assets. A national bank may own fixed assets necessary for
the transaction of its business, such as fixtures, furniture, and data
processing equipment.
(c) Investment in bank premises--(1) Investment limitation;
approval. 12 U.S.C. 371d governs when OCC approval is required for
national bank investment in bank premises. A bank may seek approval from
the OCC in accordance with the procedures set forth in 12 CFR 5.37.
(2) Option to purchase. An unexercised option to purchase bank
premises or stock in a corporation holding bank premises is not an
investment in bank premises. A national bank must receive OCC approval
to exercise the option if the price of the option and the bank's other
investments in bank premises exceed the amount of the bank's capital
stock.
(d) Other real property--(1) Lease financing of public facilities. A
national bank may purchase or construct a municipal building, school
building, or other similar public facility and, as holder of legal
title, lease the facility to a municipality or other public authority
having resources sufficient to make all rental payments as they become
due. The lease agreement must provide that the lessee will become the
owner of the building or facility upon the expiration of the lease.
(2) Purchase of employee's residence. To facilitate the efficient
use of bank personnel, a national bank may purchase the residence of an
employee who has been transferred to another area in order to spare the
employee a loss in the prevailing real estate market. The bank must
arrange for early divestment of title to such property.
[61 FR 4862, Feb. 9, 1996, as amended at 61 FR 60387, Nov. 27, 1996]
Sec. 7.1001 National bank acting as general insurance agent.
Pursuant to 12 U.S.C. 92, a national bank may act as an agent for
any fire, life, or other insurance company in any place the population
of which does not exceed 5,000 inhabitants. This provision is applicable
to any office of a national bank when the office is located in a
community having a population of less than 5,000, even though the
principal office of such bank is located in a community whose population
exceeds 5,000.
Sec. 7.1002 National bank acting as finder.
(a) General. It is part of the business of banking under 12 U.S.C.
24(Seventh) for a national bank to act as a finder, bringing together
interested parties to a transaction.
(b) Permissible finder activities. A national bank that acts as a
finder may identify potential parties, make inquiries as to interest,
introduce or arrange contacts or meetings of interested parties, act as
an intermediary between interested parties, and otherwise bring parties
together for a transaction that the parties themselves negotiate and
consummate. The following list provides examples of permissible finder
activities. This list is illustrative and not exclusive; the OCC may
determine that other activities are permissible pursuant to a national
bank's authority to act as a finder.
(1) Communicating information about providers of products and
services, and proposed offering prices and terms to potential markets
for these products and services;
(2) Communicating to the seller an offer to purchase or a request
for information, including forwarding completed applications,
application fees, and requests for information to third-party providers;
(3) Arranging for third-party providers to offer reduced rates to
those customers referred by the bank;
(4) Providing administrative, clerical, and record keeping functions
related to the bank's finder activity, including retaining copies of
documents, instructing and assisting individuals in the completion of
documents, scheduling sales calls on behalf of sellers, and conducting
market research to identify potential new customers for retailers;
(5) Conveying between interested parties expressions of interest,
bids, offers,
[[Page 188]]
orders, and confirmations relating to a transaction;
(6) Conveying other types of information between potential buyers,
sellers, and other interested parties; and
(7) Establishing rules of general applicability governing the use
and operation of the finder service, including rules that:
(i) Govern the submission of bids and offers by buyers, sellers, and
other interested parties that use the finder service and the
circumstances under which the finder service will pair bids and offers
submitted by buyers, sellers, and other interested parties; and
(ii) Govern the manner in which buyers, sellers, and other
interested parties may bind themselves to the terms of a specific
transaction.
(c) Limitation. The authority to act as a finder does not enable a
national bank to engage in brokerage activities that have not been found
to be permissible for national banks.
(d) Advertisement and fee. Unless otherwise prohibited by Federal
law, a national bank may advertise the availability of, and accept a fee
for, the services provided pursuant to this section.
[67 FR 35004, May 17, 2002]
Sec. 7.1003 Money lent at banking offices or at other than banking offices.
(a) General. For purposes of what constitutes a branch within the
meaning of 12 U.S.C. 36(j) and 12 CFR 5.30, ``money'' is deemed to be
``lent'' only at the place, if any, where the borrower in-person
receives loan proceeds directly from bank funds:
(1) From the lending bank or its operating subsidiary; or
(2) At a facility that is established by the lending bank or its
operating subsidiary.
(b) Receipt of bank funds representing loan proceeds. Loan proceeds
directly from bank funds may be received by a borrower in person at a
place that is not the bank's main office and is not licensed as a branch
without violating 12 U.S.C. 36, 12 U.S.C. 81 and 12 CFR 5.30, provided
that a third party is used to deliver the funds and the place is not
established by the lending bank or its operating subsidiary. A third
party includes a person who satisfies the requirements of Sec.
7.1012(c)(2), or one who customarily delivers loan proceeds directly
from bank funds under accepted industry practice, such as an attorney or
escrow agent at a real estate closing.
Sec. 7.1004 Loans originating at other than banking offices.
(a) General. A national bank may use the services of, and compensate
persons not employed by, the bank for originating loans.
(b) Approval. An employee or agent of a national bank or of its
operating subsidiary may originate a loan at a site other than the main
office or a branch office of the bank. This action does not violate 12
U.S.C. 36 and 12 U.S.C. 81 if the loan is approved and made at the main
office or a branch office of the bank or at an office of the operating
subsidiary located on the premises of, or contiguous to, the main office
or branch office of the bank.
Sec. 7.1005 Credit decisions at other than banking offices.
A national bank and its operating subsidiary may make a credit
decision regarding a loan application at a site other than the main
office or a branch office of the bank without violating 12 U.S.C. 36 and
12 U.S.C. 81, provided that ``money'' is not deemed to be ``lent'' at
those other sites within the meaning of Sec. 7.1003.
Sec. 7.1006 Loan agreement providing for a share in profits, income, or earnings or for stock warrants.
A national bank may take as consideration for a loan a share in the
profit, income, or earnings from a business enterprise of a borrower. A
national bank also may take as consideration for a loan a stock warrant
issued by a business enterprise of a borrower, provided that the bank
does not exercise the warrant. The share or stock warrant may be taken
in addition to, or in lieu of, interest. The borrower's obligation to
repay principal, however, may not be conditioned upon the value of the
profit, income, or earnings of the business enterprise or upon the value
of the warrant received.
[[Page 189]]
Sec. 7.1007 Acceptances.
A national bank is not limited in the character of acceptances it
may make in financing credit transactions. Bankers' acceptances may be
used for such purpose, since the making of acceptances is an essential
part of banking authorized by 12 U.S.C. 24.
Sec. 7.1008 Preparing income tax returns for customers or public.
A national bank may assist its customers in preparing their tax
returns, either gratuitously or for a fee.
[68 FR 70131, Dec. 17, 2003]
Sec. 7.1009 National bank holding collateral stock as nominee.
A national bank that accepts stock as collateral for a loan may have
such stock transferred to the bank's name as nominee.
Sec. 7.1010 Postal service by national bank.
(a) General. A national bank may maintain and operate a postal
substation on banking premises and receive income from it. The services
performed by the substation are those permitted under applicable rules
of the United States Postal Service and may include meter stamping of
letters and packages, and the sale of related insurance. The bank may
advertise, develop, and extend the services of the substation for the
purpose of attracting customers to the bank.
(b) Postal regulations. A national bank operating a postal
substation shall do so in accordance with the rules and regulations of
the United States Postal Service. The national bank shall keep the books
and records of the substation separate from those of other banking
operations. Under 39 U.S.C. 404 and any regulations issued pursuant
thereto, the United States Postal Service may inspect the books and
records of the substation.
Sec. 7.1011 National bank acting as payroll issuer.
A national bank may disburse to an employee of a customer payroll
funds deposited with the bank by that customer. The bank may disburse
those funds by direct payment to the employee, by crediting an account
in the employee's name at the disbursing bank, or by forwarding funds to
another institution in which an employee maintains an account.
Sec. 7.1012 Messenger service.
(a) Definition. For purposes of this section, a ``messenger
service'' means any service, such as a courier service or armored car
service, used by a national bank and its customers to pick up from, and
deliver to, specific customers at locations such as their homes or
offices, items relating to transactions between the bank and those
customers.
(b) Pick-up and delivery of items constituting nonbranching
activities. Pursuant to 12 U.S.C. 24 (Seventh), a national bank may
establish and operate a messenger service, or use, with its customers, a
third party messenger service. The bank may use the messenger service to
transport items relevant to the bank's transactions with its customers
without regard to the branching limitations set forth in 12 U.S.C. 36,
provided the service does not engage in branching functions within the
meaning of 12 U.S.C. 36(j). In establishing or using such a facility,
the national bank may establish terms, conditions, and limitations
consistent with this section and appropriate to assure compliance with
safe and sound banking practices.
(c) Pick-up and delivery of items constituting branching functions
by a messenger service established by a third party. (1) Pursuant to 12
U.S.C. 24 (Seventh), a national bank and its customers may use a
messenger service to pick up from, and deliver to customers items that
relate to branching functions within the meaning of 12 U.S.C. 36,
provided the messenger service is established and operated by a third
party. In using such a facility, a national bank may establish terms,
conditions, and limitations, consistent with this section and
appropriate to assure compliance with safe and sound banking practices.
(2) The OCC reviews whether a messenger service is established by a
third
[[Page 190]]
party on a case-by-case basis, considering all of the circumstances.
However, a messenger service is clearly established by a third party if:
(i) A party other than the national bank owns or rents the messenger
service and its facilities and employs the persons who provide the
service;
(ii)(A) The messenger service retains the discretion to determine in
its own business judgment which customers and geographic areas it will
serve; or
(B) If the messenger service and the bank are under common ownership
or control, the messenger service actually provides its services to the
general public, including other depository institutions, and retains the
discretion to determine in its own business judgment which customers and
geographic areas it will serve;
(iii) The messenger service maintains ultimate responsibility for
scheduling, movement, and routing;
(iv) The messenger service does not operate under the name of the
bank, and the bank and the messenger service do not advertise, or
otherwise represent, that the bank itself is providing the service,
although the bank may advertise that its customers may use one or more
third party messenger services to transact business with the bank;
(v) The messenger service assumes responsibility for the items
during transit and for maintaining adequate insurance covering thefts,
employee fidelity, and other in-transit losses; and
(vi) The messenger service acts as the agent for the customer when
the items are in transit. The bank deems items intended for deposit to
be deposited when credited to the customer's account at the bank's main
office, one of its branches, or another permissible facility, such as a
back office facility that is not a branch. The bank deems items
representing withdrawals to be paid when the items are given to the
messenger service.
(3) A national bank may defray all or part of the costs incurred by
a customer in transporting items through a messenger service. Payment of
those costs may only cover expenses associated with each transaction
involving the customer and the messenger service. The national bank may
impose terms, conditions, and limitations that it deems appropriate with
respect to the payment of such costs.
(d) Pickup and delivery of items pertaining to branching activities
where the messenger service is established by the national bank. A
national bank may establish and operate a messenger service to transport
items relevant to the bank's transactions with its customers if such
transactions constitute one or more branching functions within the
meaning of 12 U.S.C. 36(j), provided the bank receives approval to
establish a branch pursuant to 12 CFR 5.30.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60098, Nov. 4, 1999]
Sec. 7.1014 Sale of money orders at nonbanking outlets.
A national bank may designate bonded agents to sell the bank's money
orders at nonbanking outlets. The responsibility of both the bank and
its agent should be defined in a written agreement setting forth the
duties of both parties and providing for remuneration of the agent. The
bank's agents need not report on sales and transmit funds from the
nonbanking outlets more frequently than at the end of the third business
day following receipt of the funds.
Sec. 7.1015 Receipt of stock from a small business investment company.
A national bank may purchase the stock of a small business
investment company (SBIC) (see 15 U.S.C. 682(b)), and may receive the
benefits of such stock ownership (e.g., stock dividends). The receipt
and retention of a dividend by a national bank from an SBIC in the form
of stock of a corporate borrower of the SBIC is not a purchase of stock
within the meaning of 12 U.S.C. 24 (Seventh).
Sec. 7.1016 Independent undertakings to pay against documents.
(a) General authority. A national bank may issue and commit to issue
letters of credit and other independent undertakings within the scope of
the applicable laws or rules of practice recognized by law. \1\ Under
such letters of credit
[[Page 191]]
and other independent undertakings, the bank's obligation to honor
depends upon the presentation of specified documents and not upon
nondocumentary conditions or resolution of questions of fact or law at
issue between the applicant and the beneficiary. A national bank may
also confirm or otherwise undertake to honor or purchase specified
documents upon their presentation under another person's independent
undertaking within the scope of such laws or rules.
---------------------------------------------------------------------------
\1\ Examples of such laws or rules of practice include: The
applicable version of Article 5 of the Uniform Commercial Code (UCC)
(1962, as amended 1990) or revised Article 5 of the UCC (as amended
1995) (available from West Publishing Co., 1/800/328-4880); the Uniform
Customs and Practice for Documentary Credits (International Chamber of
Commerce (ICC) Publication No. 600 or any applicable prior version)
(available from ICC Publishing, Inc., 212/206-1150; http://
www.iccwbo.org); the Supplements to UCP 500 & 600 for Electronic
Presentation (eUCP v. 1.0 & 1.1) (Supplements to the Uniform Customs and
Practices for Documentary Credits for Electronic Presentation)
(available from ICC Publishing, Inc., 212/206-1150; http://
www.iccwbo.org) International Standby Practices (ISP98) (ICC Publication
No. 590) (available from the Institute of International Banking Law &
Practice, 301/869-9840; http://www.iiblp.org); the United Nations
Convention on Independent Guarantees and Stand-by Letters of Credit
(adopted by the U.N. General Assembly in 1995 and signed by the U.S. in
1997) (available from the U.N. Commission on International Trade Law,
212/963-5353); and the Uniform Rules for Bank-to-Bank Reimbursements
Under Documentary Credits (ICC Publication No. 525) (available from ICC
Publishing, Inc., 212/206-1150; http://www.iccwbo.org); as any of the
foregoing may be amended from time to time.
---------------------------------------------------------------------------
(b) Safety and soundness considerations--(1) Terms. As a matter of
safe and sound banking practice, banks that issue independent
undertakings should not be exposed to undue risk. At a minimum, banks
should consider the following:
(i) The independent character of the undertaking should be apparent
from its terms (such as terms that subject it to laws or rules providing
for its independent character);
(ii) The undertaking should be limited in amount;
(iii) The undertaking should:
(A) Be limited in duration; or
(B) Permit the bank to terminate the undertaking either on a
periodic basis (consistent with the bank's ability to make any necessary
credit assessments) or at will upon either notice or payment to the
beneficiary; or
(C) Entitle the bank to cash collateral from the applicant on demand
(with a right to accelerate the applicant's obligations, as
appropriate); and
(iv) The bank either should be fully collateralized or have a post-
honor right of reimbursement from the applicant or from another issuer
of an independent undertaking. Alternatively, if the bank's undertaking
is to purchase documents of title, securities, or other valuable
documents, the bank should obtain a first priority right to realize on
the documents if the bank is not otherwise to be reimbursed.
(2) Additional considerations in special circumstances. Certain
undertakings require particular protections against credit, operational,
and market risk:
(i) In the event that the undertaking is to honor by delivery of an
item of value other than money, the bank should ensure that market
fluctuations that affect the value of the item will not cause the bank
to assume undue market risk;
(ii) In the event that the undertaking provides for automatic
renewal, the terms for renewal should be consistent with the bank's
ability to make any necessary credit assessments prior to renewal;
(iii) In the event that a bank issues an undertaking for its own
account, the underlying transaction for which it is issued must be
within the bank's authority and comply with any safety and soundness
requirements applicable to that transaction.
(3) Operational expertise. The bank should possess operational
expertise that is commensurate with the sophistication of its
independent undertaking activities.
(4) Documentation. The bank must accurately reflect the bank's
undertakings in its records, including any acceptance or deferred
payment or other absolute obligation arising out of its contingent
undertaking.
[[Page 192]]
(c) Coverage. An independent undertaking within the meaning of this
section is not subject to the provisions of Sec. 7.1017.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999; 68
FR 70131, Dec. 17, 2003; 73 FR 22241, Apr. 24, 2008]
Sec. 7.1017 National bank as guarantor or surety on indemnity bond.
(a) A national bank may lend its credit, bind itself as a surety to
indemnify another, or otherwise become a guarantor (including, pursuant
to 12 CFR 28.4, guaranteeing the deposits and other liabilities of its
Edge corporations and Agreement corporations and of its corporate
instrumentalities in foreign countries), if:
(1) The bank has a substantial interest in the performance of the
transaction involved (for example, a bank, as fiduciary, has a
sufficient interest in the faithful performance by a cofiduciary of its
duties to act as surety on the bond of such cofiduciary); or
(2) The transaction is for the benefit of a customer and the bank
obtains from the customer a segregated deposit that is sufficient in
amount to cover the bank's total potential liability. A segregated
deposit under this section includes collateral:
(i) In which the bank has perfected its security interest (for
example, if the collateral is a printed security, the bank must have
obtained physical control of the security, and, if the collateral is a
book entry security, the bank must have properly recorded its security
interest); and
(ii) That has a market value, at the close of each business day,
equal to the bank's total potential liability and is composed of:
(A) Cash;
(B) Obligations of the United States or its agencies;
(C) Obligations fully guaranteed by the United States or its
agencies as to principal and interest; or
(D) Notes, drafts, or bills of exchange or bankers' acceptances that
are eligible for rediscount or purchase by a Federal Reserve Bank; or
(iii) That has a market value, at the close of each business day,
equal to 110 percent of the bank's total potential liability and is
composed of obligations of a State or political subdivision of a State.
(b) In addition to paragraph (a) of this section, a national bank
may guarantee obligations of a customer, subsidiary or affiliate that
are financial in character, provided the amount of the bank's financial
obligation is reasonably ascertainable and otherwise consistent with
applicable law.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999; 73
FR 22241, Apr. 24, 2008]
Sec. 7.1018 Automatic payment plan account.
A national bank may, for the benefit and convenience of its savings
depositors, adopt an automatic payment plan under which a savings
account will earn dividends at the current rate paid on regular savings
accounts. The depositor, upon reaching a previously designated age,
receives his or her accumulated savings and earned interest in
installments of equal amounts over a specified period.
Sec. 7.1020 Purchase of open accounts.
(a) General. The purchase of open accounts is a part of the business
of banking and within the power of a national bank.
(b) Export transactions. A national bank may purchase open accounts
in connection with export transactions; the accounts should be protected
by insurance such as that provided by the Foreign Credit Insurance
Association and the Export-Import Bank.
Sec. 7.1021 National bank participation in financial literacy programs.
A national bank may participate in a financial literacy program on
the premises of, or at a facility used by, a school. The school premises
or facility will not be considered a branch of the bank if:
(a) The bank does not establish and operate the school premises or
facility on which the financial literacy program is conducted; and
(b) The principal purpose of the financial literacy program is
educational. For example, a program is educational if it is designed to
teach students the principles of personal economics or the benefits of
saving for the
[[Page 193]]
future, and is not designed for the purpose of profit-making.
[66 FR 34791, July 2, 2001]
Subpart B_Corporate Practices
Sec. 7.2000 Corporate governance procedures.
(a) General. A national bank proposing to engage in a corporate
governance procedure shall comply with applicable Federal banking
statutes and regulations, and safe and sound banking practices.
(b) Other sources of guidance. To the extent not inconsistent with
applicable Federal banking statutes or regulations, or bank safety and
soundness, a national bank may elect to follow the corporate governance
procedures of the law of the state in which the main office of the bank
is located, the law of the state in which the holding company of the
bank is incorporated, the Delaware General Corporation Law, Del. Code
Ann. tit. 8 (1991, as amended 1994, and as amended thereafter), or the
Model Business Corporation Act (1984, as amended 1994, and as amended
thereafter). A national bank shall designate in its bylaws the body of
law selected for its corporate governance procedures.
(c) No-objection procedures. The OCC also considers requests for its
staff's position on the ability of a national bank to engage in a
particular corporate governance procedure in accordance with the no-
objection procedures set forth in Banking Circular 205 or any
subsequently published agency procedures. \2\ Requests should
demonstrate how the proposed practice is not inconsistent with
applicable Federal statutes or regulations, and is consistent with safe
and sound banking practices.
---------------------------------------------------------------------------
\2\ Available upon request from the OCC Communications Division, 250
E Street, SW., Washington, DC 20219, (202) 874-4700.
---------------------------------------------------------------------------
Sec. 7.2001 Notice of shareholders' meetings.
A national bank must mail shareholders notice of the time, place,
and purpose of all shareholders' meetings at least 10 days prior to the
meeting by first class mail, unless the OCC determines that an emergency
circumstance exists. Where a national bank is a wholly-owned subsidiary,
the sole shareholder is permitted to waive notice of the shareholder's
meeting. The articles of association, bylaws, or law applicable to a
national bank may require a longer period of notice.
Sec. 7.2002 Director or attorney as proxy.
Any person or group of persons, except the bank's officers, clerks,
tellers, or bookkeepers, may be designated to act as proxy. The bank's
directors or attorneys may act as proxy if they are not also employed as
an officer, clerk, teller or bookkeeper of the bank.
Sec. 7.2003 Annual meeting for election of directors.
When the day fixed for the regular annual meeting of the
shareholders falls on a legal holiday in the state in which the bank is
located, the shareholders' meeting shall be held, and the directors
elected, on the next following banking day.
Sec. 7.2004 Honorary directors or advisory boards.
A national bank may appoint honorary or advisory members of a board
of directors to act in advisory capacities without voting power or power
of final decision in matters concerning the business of the bank. Any
listing of honorary or advisory directors must distinguish between them
and the bank's board of directors or indicate their advisory status.
Sec. 7.2005 Ownership of stock necessary to qualify as director.
(a) General. A national bank director must own a qualifying equity
interest in a national bank or a company that has control of a national
bank. The director must own the qualifying equity interest in his or her
own right and meet a certain minimum threshold ownership.
(b) Qualifying equity interest--(1) Minimum required equity
interest. For purposes of this section, a qualifying equity interest
includes common or preferred stock of the bank or of a company that
controls the bank that has not less than an aggregate par value of
[[Page 194]]
$1,000, an aggregate shareholders' equity of $1,000, or an aggregate
fair market value of $1,000.
(i) The value of the common or preferred stock held by a national
bank director is valued as of the date purchased or the date on which
the individual became a director, whichever value is greater.
(ii) In the case of a company that owns more than one national bank,
a director may use his or her equity interest in the controlling company
to satisfy, in whole or in part, the equity interest requirement for any
or all of the controlled national banks.
(iii) Upon request, the OCC may consider whether other interests in
a company controlling a national bank constitute an interest equivalent
to $1,000 par value of national bank stock.
(2) Joint ownership and tenancy in common. Shares held jointly or as
a tenant in common are qualifying shares held by a director in his or
her own right only to the extent of the aggregate value of the shares
which the director would be entitled to receive on dissolution of the
joint tenancy or tenancy in common.
(3) Shares in a living trust. Shares deposited by a person in a
living trust (inter vivos trust) as to which the person is a trustee and
retains an absolute power of revocation are shares owned by the person
in his or her own right.
(4) Other arrangements--(i) Shares held through retirement plans and
similar arrangements. A director may hold his or her qualifying interest
through a profit-sharing plan, individual retirement account, retirement
plan, or similar arrangement, if the director retains beneficial
ownership and legal control over the shares.
(ii) Shares held subject to buyback agreements. A director may
acquire and hold his or her qualifying interest pursuant to a stock
repurchase or buyback agreement with a transferring shareholder under
which the director purchases the qualifying shares subject to an
agreement that the transferring shareholder will repurchase the shares
when, for any reason, the director ceases to serve in that capacity. The
agreement may give the transferring shareholder a right of first refusal
to repurchase the qualifying shares if the director seeks to transfer
ownership of the shares to a third person.
(iii) Assignment of right to dividends or distributions. A director
may assign the right to receive all dividends or distributions on his or
her qualifying shares to another, including a transferring shareholder,
if the director retains beneficial ownership and legal control over the
shares.
(iv) Execution of proxy. A director may execute a revocable or
irrevocable proxy authorizing another, including a transferring
shareholder, to vote his or her qualifying shares, provided the director
retains beneficial ownership and legal control over the shares.
(c) Non-qualifying ownership. The following are not shares held by a
director in his or her own right:
(1) Shares pledged by the holder to secure a loan. However, all or
part of the funds used to purchase the required qualifying equity
interest may be borrowed from any party, including the bank or its
affiliates;
(2) Shares purchased subject to an absolute option vested in the
seller to repurchase the shares within a specified period; and
(3) Shares deposited in a voting trust where the depositor
surrenders:
(i) Legal ownership (depositor ceases to be registered owner of the
stock);
(ii) Power to vote the stock or to direct how it shall be voted; or
(iii) Power to transfer legal title to the stock.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999]
Sec. 7.2006 Cumulative voting in election of directors.
When electing directors, a shareholder shall have as many votes as
the number of directors to be elected multiplied by the number of the
shareholder's shares. If permitted by the national bank's articles of
association, the shareholder may cast all these votes for one candidate
or distribute the votes among as many candidates as the shareholder
chooses. If, after the first ballot, subsequent ballots are necessary to
elect directors, a shareholder may not vote shares that he or she has
[[Page 195]]
already fully cumulated and voted in favor of a successful candidate.
[61 FR 4862, Feb. 9, 1996, as amended at 73 FR 22241, Apr. 24, 2008]
Sec. 7.2007 Filling vacancies and increasing board of directors other than by
shareholder action.
(a) Increasing board of directors. If authorized by the bank's
articles of association, between shareholder meetings a majority of the
board of directors may increase the number of the bank's directors
within the limits specified in 12 U.S.C. 71a. The board of directors may
increase the number of directors only by up to two directors, when the
number of directors last elected by shareholders was 15 or fewer, and by
up to four directors, when the number of directors last elected by
shareholders was 16 or more.
(b) Vacancies. If a vacancy occurs on the board of directors,
including a vacancy resulting from an increase in the number of
directors, the vacancy may be filled by the shareholders, a majority of
the board of directors remaining in office, or, if the directors
remaining in office constitute fewer than a quorum, by an affirmative
vote of a majority of all the directors remaining in office.
Sec. 7.2008 Oath of directors.
(a) Administration of the oath. A notary public, including one who
is a director but not an officer of the national bank, may administer
the oath of directors. Any person, other than an officer of the bank,
having an official seal and authorized by the state to administer oaths,
may also administer the oath.
(b) Execution of the oath. Each director attending the organization
meeting shall execute either a joint or individual oath. A director not
attending the organization meeting (the first meeting after the election
of the directors) shall execute the individual oath. A director shall
take another oath upon re-election, notwithstanding uninterupted
service. Appropriate sample oaths are located in the ``Comptroller's
Corporate Manual''.
(c) Filing and recordkeeping. A national bank must file the original
executed oaths of directors with the OCC and retain a copy in the bank's
records in accordance with the Comptroller's Corporate Manual filing and
recordkeeping instructions for executed oaths of directors.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60099, Nov. 4, 1999]
Sec. 7.2009 Quorum of the board of directors; proxies not permissible.
A national bank shall provide in its articles of association or
bylaws that for the transaction of business, a quorum of the board of
directors is at least a majority of the entire board then in office. A
national bank director may not vote by proxy.
Sec. 7.2010 Directors' responsibilities.
The business and affairs of the bank shall be managed by or under
the direction of the board of directors. The board of directors should
refer to OCC published guidance for additional information regarding
responsibilities of directors.
Sec. 7.2011 Compensation plans.
Consistent with safe and sound banking practices and the
compensation provisions of 12 CFR part 30, a national bank may adopt
compensation plans, including, among others, the following:
(a) Bonus and profit-sharing plans. A national bank may adopt a
bonus or profit-sharing plan designed to ensure adequate remuneration of
bank officers and employees.
(b) Pension plans. A national bank may provide employee pension
plans and make reasonable contributions to the cost of the pension plan.
(c) Employee stock option and stock purchase plans. A national bank
may provide employee stock option and stock purchase plans.
Sec. 7.2012 President as director; chief executive officer.
Pursuant to 12 U.S.C. 76, the president of a national bank must be a
member of the board of directors, but a director other than the
president may be elected chairman of the board. A person other than the
president may serve as chief executive officer, and this person is not
required to be a director of the bank.
[[Page 196]]
Sec. 7.2013 Fidelity bonds covering officers and employees.
(a) Adequate coverage. All officers and employees of a national bank
must have adequate fidelity coverage. The failure of directors to
require bonds with adequate sureties and in sufficient amount may make
the directors liable for any losses that the bank sustains because of
the absence of such bonds. Directors should not serve as sureties on
such bonds.
(b) Factors. The board of directors should determine the amount of
such coverage, premised upon a consideration of factors, including:
(1) Internal auditing safeguards employed;
(2) Number of employees;
(3) Amount of deposit liabilities; and
(4) Amount of cash and securities normally held by the bank.
Sec. 7.2014 Indemnification of institution-affiliated parties.
(a) Administrative proceedings or civil actions initiated by Federal
banking agencies. A national bank may only make or agree to make
indemnification payments to an institution-affiliated party with respect
to an administrative proceeding or civil action initiated by any Federal
banking agency, that are reasonable and consistent with the requirements
of 12 U.S.C. 1828(k) and the implementing regulations thereunder. The
term ``institution-affiliated party'' has the same meaning as set forth
at 12 U.S.C. 1813(u).
(b) Administrative proceeding or civil actions not initiated by a
Federal banking agency--(1) General. In cases involving an
administrative proceeding or civil action not initiated by a Federal
banking agency, a national bank may indemnify an institution-affiliated
party for damages and expenses, including the advancement of expenses
and legal fees, in accordance with the law of the state in which the
main office of the bank is located, the law of the state in which the
bank's holding company is incorporated, or the relevant provisions of
the Model Business Corporation Act (1984, as amended 1994, and as
amended thereafter), or Delaware General Corporation Law, Del. Code Ann.
tit. 8 (1991, as amended 1994, and as amended thereafter), provided such
payments are consistent with safe and sound banking practices. A
national bank shall designate in its bylaws the body of law selected for
making indemnification payments under this paragraph.
(2) Insurance premiums. A national bank may provide for the payment
of reasonable premiums for insurance covering the expenses, legal fees,
and liability of institution-affiliated parties to the extent that the
expenses, fees, or liability could be indemnified under paragraph (b)(1)
of this section.
Sec. 7.2015 Cashier.
A national bank's bylaws, board of directors, or a duly designated
officer may assign some or all of the duties previously performed by the
bank's cashier to its president, chief executive officer, or any other
officer.
Sec. 7.2016 Restricting transfer of stock and record dates.
(a) Conditions for stock transfer. Under 12 U.S.C. 52, a national
bank may impose conditions upon the transfer of its stock reasonably
calculated to simplify the work of the bank with respect to stock
transfers, voting at shareholders' meetings, and related matters and to
protect it against fraudulent transfers.
(b) Record dates. A national bank may close its stock records for a
reasonable period to ascertain shareholders for voting purposes. The
board of directors may fix a record date for determining the
shareholders entitled to notice of, and to vote at, any meeting of
shareholders. The record date should be in reasonable proximity to the
date that notice is given to the shareholders of the meeting.
Sec. 7.2017 Facsimile signatures on bank stock certificates.
The president and cashier, or other officers authorized by the
bank's bylaws, shall sign each national bank stock certificate. The
signatures may be manual or facsimile, including electronic means of
signature. Each certificate must be sealed with the seal of the
association.
[[Page 197]]
Sec. 7.2018 Lost stock certificates.
If a national bank does not provide for replacing lost, stolen, or
destroyed stock certificates in its articles of association or bylaws,
the bank may adopt procedures in accordance with Sec. 7.2000.
Sec. 7.2019 Loans secured by a bank's own shares.
(a) Permitted agreements, relating to bank shares. A national bank
may require a borrower holding shares of the bank to execute agreements:
(1) Not to pledge, give away, transfer, or otherwise assign such
shares;
(2) To pledge such shares at the request of the bank when necessary
to prevent loss; and
(3) To leave such shares in the bank's custody.
(b) Use of capital notes and debentures. A national bank may not
make loans secured by a pledge of the bank's own capital notes and
debentures. Such notes and debentures must be subordinated to the claims
of depositors and other creditors of the issuing bank, and are,
therefore, capital instruments within the purview of 12 U.S.C. 83.
Sec. 7.2020 Acquisition and holding of shares as treasury stock.
(a) Acquisition of outstanding shares. Pursuant to 12 U.S.C. 59,
including the requirements for prior approval by the bank's shareholders
and the OCC imposed by that statute, a national bank may acquire its
outstanding shares and hold them as treasury stock, if the acquisition
and retention of the shares is, and continues to be, for a legitimate
corporate purpose.
(b) Legitimate corporate purpose. Examples of legitimate corporate
purposes include the acquisition and holding of treasury stock to:
(1) Have shares available for use in connection with employee stock
option, bonus, purchase, or similar plans;
(2) Sell to a director for the purpose of acquiring qualifying
shares;
(3) Purchase a director's qualifying shares upon the cessation of
the director's service in that capacity if there is no ready market for
the shares;
(4) Reduce the number of shareholders in order to qualify as a
Subchapter S corporation; and
(5) Reduce costs associated with shareholder communications and
meetings.
(c) Prohibition. It is not a legitimate corporate purpose to acquire
or hold treasury stock on speculation about changes in its value.
[64 FR 60099, Nov. 4, 1999]
Sec. 7.2021 Preemptive rights.
A national bank in its articles of association must grant or deny
preemptive rights to the bank's shareholders. Any amendment to a
national bank's articles of association which modifies such preemptive
rights must be approved by a vote of the holders of two-thirds of the
bank's outstanding voting shares.
Sec. 7.2022 Voting trusts.
The shareholders of a national bank may establish a voting trust
under the applicable law of a state selected by the participants and
designated in the trust agreement, provided the implementation of the
trust is consistent with safe and sound banking practices.
Sec. 7.2023 Reverse stock splits.
(a) Authority to engage in reverse stock splits. A national bank may
engage in a reverse stock split if the transaction serves a legitimate
corporate purpose and provides adequate dissenting shareholders' rights.
(b) Legitimate corporate purpose. Examples of legitimate corporate
purposes include a reverse stock split to:
(1) Reduce the number of shareholders in order to qualify as a
Subchapter S corporation; and
(2) Reduce costs associated with shareholder communications and
meetings.
[64 FR 60099, Nov. 4, 1999]
Sec. 7.2024 Staggered terms for national bank directors and size of bank
board.
(a) Staggered terms. Any national bank may adopt bylaws that provide
for staggering the terms of its directors. National banks shall provide
the OCC with copies of any bylaws so amended.
[[Page 198]]
(b) Maximum term. Any national bank director may hold office for a
term that does not exceed three years.
(c) Number of directors. A national bank's board of directors shall
consist of no fewer than 5 and no more than 25 members. A national bank
may, after notice to the OCC, increase the size of its board of
directors above the 25 member limit. A national bank seeking to increase
the number of its directors must notify the OCC any time the proposed
size would exceed 25 directors. The bank's notice shall specify the
reason(s) for the increase in the size of the board of directors beyond
the statutory limit.
[68 FR 70131, Dec. 17, 2003]
Subpart C_Bank Operations
Sec. 7.3000 Bank hours and closings.
(a) Bank hours. A national bank's board of directors should review
its banking hours, and, independently of any other bank, take
appropriate action to establish a schedule of banking hours.
(b) Emergency closings. Pursuant to 12 U.S.C. 95(b)(1), the
Comptroller of the Currency (Comptroller), a state, or a legally
authorized state official may declare a day a legal holiday if emergency
conditions exist. That day is a legal holiday for national banks or
their offices in the affected geographic area (i.e., throughout the
country, in a state, or in part of a state). Emergency conditions
include natural disasters and civil and municipal emergencies (e.g.,
severe flooding, or a power emergency declared by a local power company
or government requesting that businesses in the affected area close).
The Comptroller issues a proclamation authorizing the emergency closing
in accordance with 12 U.S.C. 95 at the time of the emergency condition,
or soon thereafter. When the Comptroller, a State, or a legally
authorized State official declares a legal holiday due to emergency
conditions, a national bank may temporarily limit or suspend operations
at its affected offices. Alternatively, the national bank may continue
its operations unless the Comptroller by written order directs
otherwise.
(c) Ceremonial closings. A state or a legally authorized state
official may declare a day a legal holiday for ceremonial reasons. When
a state or a legally authorized state official declares a day to be a
legal holiday for ceremonial reasons, a national bank may choose to
remain open or to close.
(d) Liability. A national bank should assure that all liabilities or
other obligations under the applicable law due to the bank's closing are
satisfied.
[61 FR 4862, Feb. 9, 1996, as amended at 66 FR 34791, July 2, 2001]
Sec. 7.3001 Sharing space and employees.
(a) Sharing space. A national bank may:
(1) Lease excess space on bank premises to one or more other
businesses (including other banks and financial institutions);
(2) Share space jointly held with one or more other businesses; or
(3) Offer its services in space owned or leased to other businesses.
(b) Sharing employees. When sharing space with other businesses as
described in paragraph (a) of this section, a national bank may provide,
under one or more written agreements among the bank, the other
businesses, and their employees, that:
(1) A bank employee may act as agent for the other business; or
(2) An employee of the other business may act as agent for the bank.
(c) Supervisory conditions. When a national bank engages in
arrangements of the types listed in paragraphs (a) and (b) of this
section, the bank shall ensure that:
(1) The other business is conspicuously, accurately, and separately
identified;
(2) Shared employees clearly and fully disclose the nature of their
agency relationship to customers of the bank and of the other businesses
so that customers will know the identity of the bank or business that is
providing the product or service;
(3) The arrangement does not constitute a joint venture or
partnership with the other business under applicable state law;
(4) All aspects of the relationship between the bank and the other
business are conducted at arm's length, unless a
[[Page 199]]
special arrangement is warranted because the other business is a
subsidiary of the bank;
(5) Security issues arising from the activities of the other
business on the premises are addressed;
(6) The activities of the other business do not adversely affect the
safety and soundness of the bank;
(7) The shared employees or the entity for which they perform
services are duly licensed or meet qualification requirements of
applicable statutes and regulations pertaining to agents or employees of
such other business; and
(8) The assets and records of the parties are segregated.
(d) Other legal requirements. When entering into arrangements, of
the types described in paragraphs (a) and (b) of this section, and in
conducting operations pursuant to those arrangements the bank must
ensure that each arrangement complies with 12 U.S.C. 29 and 36 and with
any other applicable laws and regulations. If the arrangement involves
an affiliate or a shareholder, director, officer or employee of the
bank:
(1) The bank must ensure compliance with all applicable statutory
and regulatory provisions governing bank transactions with these persons
or entities;
(2) The parties must comply with all applicable fiduciary duties;
and
(3) The parties, if they are in competition with each other, must
consider limitations, if any, imposed by applicable antitrust laws.
Subpart D_Preemption
Sec. 7.4000 Visitorial powers.
(a) General rule. (1) Only the OCC or an authorized representative
of the OCC may exercise visitorial powers with respect to national
banks, except as provided in paragraph (b) of this section. State
officials may not exercise visitorial powers with respect to national
banks, such as conducting examinations, inspecting or requiring the
production of books or records of national banks, or prosecuting
enforcement actions, except in limited circumstances authorized by
federal law. However, production of a bank's records (other than non-
public OCC information under 12 CFR part 4, subpart C) may be required
under normal judicial procedures.
(2) For purposes of this section, visitorial powers include:
(i) Examination of a bank;
(ii) Inspection of a bank's books and records;
(iii) Regulation and supervision of activities authorized or
permitted pursuant to federal banking law; and
(iv) Enforcing compliance with any applicable federal or state laws
concerning those activities.
(3) Unless otherwise provided by Federal law, the OCC has exclusive
visitorial authority with respect to the content and conduct of
activities authorized for national banks under Federal law.
(b) Exceptions to the general rule. Under 12 U.S.C. 484, the OCC's
exclusive visitorial powers are subject to the following exceptions:
(1) Exceptions authorized by Federal law. National banks are subject
to such visitorial powers as are provided by Federal law. Examples of
laws vesting visitorial power in other governmental entities include
laws authorizing state or other Federal officials to:
(i) Inspect the list of shareholders, provided that the official is
authorized to assess taxes under state authority (12 U.S.C. 62; this
section also authorizes inspection of the shareholder list by
shareholders and creditors of a national bank);
(ii) Review, at reasonable times and upon reasonable notice to a
bank, the bank's records solely to ensure compliance with applicable
state unclaimed property or escheat laws upon reasonable cause to
believe that the bank has failed to comply with those laws (12 U.S.C.
484(b));
(iii) Verify payroll records for unemployment compensation purposes
(26 U.S.C. 3305(c));
(iv) Ascertain the correctness of Federal tax returns (26 U.S.C.
7602);
(v) Enforce the Fair Labor Standards Act (29 U.S.C. 211); and
(vi) Functionally regulate certain activities, as provided under the
Gramm-Leach-Bliley Act, Pub. L. 106-102, 113 Stat. 1338 (Nov. 12, 1999).
(2) Exception for courts of justice. National banks are subject to
such
[[Page 200]]
visitorial powers as are vested in the courts of justice. This exception
pertains to the powers inherent in the judiciary and does not grant
state or other governmental authorities any right to inspect,
superintend, direct, regulate or compel compliance by a national bank
with respect to any law, regarding the content or conduct of activities
authorized for national banks under Federal law.
(3) Exception for Congress. National banks are subject to such
visitorial powers as shall be, or have been, exercised or directed by
Congress or by either House thereof or by any committee of Congress or
of either House duly authorized.
(c) Report of examination. The report of examination made by an OCC
examiner is designated solely for use in the supervision of the bank.
The bank's copy of the report is the property of the OCC and is loaned
to the bank and any holding company thereof solely for its confidential
use. The bank's directors, in keeping with their responsibilities both
to depositors and to shareholders, should thoroughly review the report.
The report may be made available to other persons only in accordance
with the rules on disclosure in 12 CFR part 4.
[61 FR 4862, Feb. 9, 1996, as amended at 64 FR 60100, Nov. 4, 1999; 69
FR 1904, Jan. 13, 2004]
Sec. 7.4001 Charging interest at rates permitted competing institutions;
charging interest to corporate borrowers.
(a) Definition. The term ``interest'' as used in 12 U.S.C. 85
includes any payment compensating a creditor or prospective creditor for
an extension of credit, making available of a line of credit, or any
default or breach by a borrower of a condition upon which credit was
extended. It includes, among other things, the following fees connected
with credit extension or availability: numerical periodic rates, late
fees, creditor-imposed not sufficient funds (NSF) fees charged when a
borrower tenders payment on a debt with a check drawn on insufficient
funds, overlimit fees, annual fees, cash advance fees, and membership
fees. It does not ordinarily include appraisal fees, premiums and
commissions attributable to insurance guaranteeing repayment of any
extension of credit, finders' fees, fees for document preparation or
notarization, or fees incurred to obtain credit reports.
(b) Authority. A national bank located in a state may charge
interest at the maximum rate permitted to any state-chartered or
licensed lending institution by the law of that state. If state law
permits different interest charges on specified classes of loans, a
national bank making such loans is subject only to the provisions of
state law relating to that class of loans that are material to the
determination of the permitted interest. For example, a national bank
may lawfully charge the highest rate permitted to be charged by a state-
licensed small loan company, without being so licensed, but subject to
state law limitations on the size of loans made by small loan companies.
(c) Effect on state definitions of interest. The Federal definition
of the term ``interest'' in paragraph (a) of this section does not
change how interest is defined by the individual states (nor how the
state definition of interest is used) solely for purposes of state law.
For example, if late fees are not ``interest'' under state law where a
national bank is located but state law permits its most favored lender
to charge late fees, then a national bank located in that state may
charge late fees to its intrastate customers. The national bank may also
charge late fees to its interstate customers because the fees are
interest under the Federal definition of interest and an allowable
charge under state law where the national bank is located. However, the
late fees would not be treated as interest for purposes of evaluating
compliance with state usury limitations because state law excludes late
fees when calculating the maximum interest that lending institutions may
charge under those limitations.
(d) Usury. A national bank located in a state the law of which
denies the defense of usury to a corporate borrower may charge a
corporate borrower any rate of interest agreed upon by a corporate
borrower.
[61 FR 4862, Feb. 9, 1996, as amended at 66 FR 34791, July 2, 2001]
[[Page 201]]
Sec. 7.4002 National bank charges.
(a) Authority to impose charges and fees. A national bank may charge
its customers non-interest charges and fees, including deposit account
service charges.
(b) Considerations. (1) All charges and fees should be arrived at by
each bank on a competitive basis and not on the basis of any agreement,
arrangement, undertaking, understanding, or discussion with other banks
or their officers.
(2) The establishment of non-interest charges and fees, their
amounts, and the method of calculating them are business decisions to be
made by each bank, in its discretion, according to sound banking
judgment and safe and sound banking principles. A national bank
establishes non-interest charges and fees in accordance with safe and
sound banking principles if the bank employs a decision-making process
through which it considers the following factors, among others:
(i) The cost incurred by the bank in providing the service;
(ii) The deterrence of misuse by customers of banking services;
(iii) The enhancement of the competitive position of the bank in
accordance with the bank's business plan and marketing strategy; and
(iv) The maintenance of the safety and soundness of the institution.
(c) Interest. Charges and fees that are ``interest'' within the
meaning of 12 U.S.C. 85 are governed by Sec. 7.4001 and not by this
section.
(d) State law. The OCC applies preemption principles derived from
the United States Constitution, as interpreted through judicial
precedent, when determining whether State laws apply that purport to
limit or prohibit charges and fees described in this section.
(e) National bank as fiduciary. This section does not apply to
charges imposed by a national bank in its capacity as a fiduciary, which
are governed by 12 CFR part 9.
[66 FR 34791, July 2, 2001]
Sec. 7.4003 Establishment and operation of a remote service unit by a
national bank.
A remote service unit (RSU) is an automated facility, operated by a
customer of a bank, that conducts banking functions, such as receiving
deposits, paying withdrawals, or lending money. A national bank may
establish and operate an RSU pursuant to 12 U.S.C. 24(Seventh). An RSU
includes an automated teller machine, automated loan machine, and
automated device for receiving deposits. An RSU may be equipped with a
telephone or televideo device that allows contact with bank personnel.
An RSU is not a ``branch'' within the meaning of 12 U.S.C. 36(j), and is
not subject to state geographic or operational restrictions or licensing
laws.
[64 FR 60100, Nov. 4, 1999]
Sec. 7.4004 Establishment and operation of a deposit production office by a
national bank.
(a) General rule. A national bank or its operating subsidiary may
engage in deposit production activities at a site other than the main
office or a branch of the bank. A deposit production office (DPO) may
solicit deposits, provide information about deposit products, and assist
persons in completing application forms and related documents to open a
deposit account. A DPO is not a branch within the meaning of 12 U.S.C.
36(j) and 12 CFR 5.30(d)(1) so long as it does not receive deposits, pay
withdrawals, or make loans. All deposit and withdrawal transactions of a
bank customer using a DPO must be performed by the customer, either in
person at the main office or a branch office of the bank, or by mail,
electronic transfer, or a similar method of transfer.
(b) Services of other persons. A national bank may use the services
of, and compensate, persons not employed by the bank in its deposit
production activities.
[64 FR 60100, Nov. 4, 1999]
Sec. 7.4005 Combination of loan production office, deposit production office,
and remote service unit.
A location at which a national bank operates a loan production
office (LPO), a deposit production office (DPO), and a remote service
unit (RSU) is not a ``branch'' within the meaning of 12 U.S.C. 36(j) by
virtue of that combination. Since an LPO, DPO, or RSU is not,
individually, a branch under 12
[[Page 202]]
U.S.C. 36(j), any combination of these facilities at one location does
not create a branch.
[64 FR 60100, Nov. 4, 1999]
Sec. 7.4006 Applicability of State law to national bank operating
subsidiaries.
Unless otherwise provided by Federal law or OCC regulation, State
laws apply to national bank operating subsidiaries to the same extent
that those laws apply to the parent national bank.
[66 FR 34791, July 2, 2001]
Sec. 7.4007 Deposit-taking.
(a) Authority of national banks. A national bank may receive
deposits and engage in any activity incidental to receiving deposits,
including issuing evidence of accounts, subject to such terms,
conditions, and limitations prescribed by the Comptroller of the
Currency and any other applicable Federal law.
(b) Applicability of state law. (1) Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its Federally authorized deposit-taking
powers are not applicable to national banks.
(2) A national bank may exercise its deposit-taking powers without
regard to state law limitations concerning:
(i) Abandoned and dormant accounts;\3\
---------------------------------------------------------------------------
\3\ This does not apply to state laws of the type upheld by the
United States Supreme Court in Anderson Nat'l Bank v. Luckett, 321 U.S.
233 (1944), which obligate a national bank to ``pay [deposits] to the
persons entitled to demand payment according to the law of the state
where it does business.'' Id. at 248-249.
---------------------------------------------------------------------------
(ii) Checking accounts;
(iii) Disclosure requirements;
(iv) Funds availability;
(v) Savings account orders of withdrawal;
(vi) State licensing or registration requirements (except for
purposes of service of process); and
(vii) Special purpose savings services; \4\
---------------------------------------------------------------------------
\4\ State laws purporting to regulate national bank fees and charges
are addressed in 12 CFR 7.4002.
---------------------------------------------------------------------------
(c) State laws that are not preempted. State laws on the following
subjects are not inconsistent with the deposit-taking powers of national
banks and apply to national banks to the extent that they only
incidentally affect the exercise of national banks' deposit-taking
powers:
(1) Contracts;
(2) Torts;
(3) Criminal law; \5\
---------------------------------------------------------------------------
\5\ But see the distinction drawn by the Supreme Court in Easton v.
Iowa, 188 U.S. 220, 238 (1903) between ``crimes defined and punishable
at common law or by the general statutes of a state and crimes and
offences cognizable under the authority of the United States.'' The
Court stated that ``[u]ndoubtedly a state has the legitimate power to
define and punish crimes by general laws applicable to all persons
within its jurisdiction * * *. But it is without lawful power to make
such special laws applicable to banks organized and operating under the
laws of the United States.'' Id. at 239 (holding that Federal law
governing the operations of national banks preempted a state criminal
law prohibiting insolvent banks from accepting deposits).
---------------------------------------------------------------------------
(4) Rights to collect debts;
(5) Acquisition and transfer of property;
(6) Taxation;
(7) Zoning; and
(8) Any other law the effect of which the OCC determines to be
incidental to the deposit-taking operations of national banks or
otherwise consistent with the powers set out in paragraph (a) of this
section.
[69 FR 1916, Jan. 13, 2004]
Sec. 7.4008 Lending.
(a) Authority of national banks. A national bank may make, sell,
purchase, participate in, or otherwise deal in loans and interests in
loans that are not secured by liens on, or interests in, real estate,
subject to such terms, conditions, and limitations prescribed by the
Comptroller of the Currency and any other applicable Federal law.
(b) Standards for loans. A national bank shall not make a consumer
loan subject to this Sec. 7.4008 based predominantly on the bank's
realization of the foreclosure or liquidation value of the borrower's
collateral, without regard to the borrower's ability to repay the loan
according to its terms. A bank
[[Page 203]]
may use any reasonable method to determine a borrower's ability to
repay, including, for example, the borrower's current and expected
income, current and expected cash flows, net worth, other relevant
financial resources, current financial obligations, employment status,
credit history, or other relevant factors.
(c) Unfair and deceptive practices. A national bank shall not engage
in unfair or deceptive practices within the meaning of section 5 of the
Federal Trade Commission Act, 15 U.S.C. 45(a)(1), and regulations
promulgated thereunder in connection with loans made under this Sec.
7.4008.
(d) Applicability of state law. (1) Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its Federally authorized non-real
estate lending powers are not applicable to national banks.
(2) A national bank may make non-real estate loans without regard to
state law limitations concerning:
(i) Licensing, registration (except for purposes of service of
process), filings, or reports by creditors;
(ii) The ability of a creditor to require or obtain insurance for
collateral or other credit enhancements or risk mitigants, in
furtherance of safe and sound banking practices;
(iii) Loan-to-value ratios;
(iv) The terms of credit, including the schedule for repayment of
principal and interest, amortization of loans, balance, payments due,
minimum payments, or term to maturity of the loan, including the
circumstances under which a loan may be called due and payable upon the
passage of time or a specified event external to the loan;
(v) Escrow accounts, impound accounts, and similar accounts;
(vi) Security property, including leaseholds;
(vii) Access to, and use of, credit reports;
(viii) Disclosure and advertising, including laws requiring specific
statements, information, or other content to be included in credit
application forms, credit solicitations, billing statements, credit
contracts, or other credit-related documents;
(ix) Disbursements and repayments; and
(x) Rates of interest on loans. \6\
---------------------------------------------------------------------------
\6\ The limitations on charges that comprise rates of interest on
loans by national banks are determined under Federal law. See 12 U.S.C.
85; 12 CFR 7.4001. State laws purporting to regulate national bank fees
and charges that do not constitute interest are addressed in 12 CFR
7.4002.
---------------------------------------------------------------------------
(e) State laws that are not preempted. State laws on the following
subjects are not inconsistent with the non-real estate lending powers of
national banks and apply to national banks to the extent that they only
incidentally affect the exercise of national banks' non-real estate
lending powers:
(1) Contracts;
(2) Torts;
(3) Criminal law;\7\
---------------------------------------------------------------------------
\7\ See supra note 5 regarding the distinction drawn by the Supreme
Court in Easton v. Iowa, 188 U.S. 220, 238 (1903) between ``crimes
defined and punishable at common law or by the general statutes of a
state and crimes and offences cognizable under the authority of the
United States.''
---------------------------------------------------------------------------
(4) Rights to collect debts;
(5) Acquisition and transfer of property;
(6) Taxation;
(7) Zoning; and
(8) Any other law the effect of which the OCC determines to be
incidental to the non-real estate lending operations of national banks
or otherwise consistent with the powers set out in paragraph (a) of this
section.
[69 FR 1916, Jan. 13, 2004]
Sec. 7.4009 Applicability of state law to national bank operations.
(a) Authority of national banks. A national bank may exercise all
powers authorized to it under Federal law, including conducting any
activity that is part of, or incidental to, the business of banking,
subject to such terms, conditions, and limitations prescribed by the
Comptroller of the Currency and any applicable Federal law.
(b) Applicability of state law. Except where made applicable by
Federal law, state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its powers to conduct activities
authorized under Federal law do not apply to national banks.
[[Page 204]]
(c) Applicability of state law to particular national bank
activities. (1) The provisions of this section govern with respect to
any national bank power or aspect of a national bank's operations that
is not covered by another OCC regulation specifically addressing the
applicability of state law.
(2) State laws on the following subjects are not inconsistent with
the powers of national banks and apply to national banks to the extent
that they only incidentally affect the exercise of national bank powers:
(i) Contracts;
(ii) Torts;
(iii) Criminal law \8\
---------------------------------------------------------------------------
\8\ 8 Id.
---------------------------------------------------------------------------
(iv) Rights to collect debts;
(v) Acquisition and transfer of property;
(vi) Taxation;
(vii) Zoning; and
(viii) Any other law the effect of which the OCC determines to be
incidental to the exercise of national bank powers or otherwise
consistent with the powers set out in paragraph (a) of this section.
[69 FR 1917, Jan. 13, 2004]
Subpart E_Electronic Activities
Source: 67 FR 35004, May 17, 2002, unless otherwise noted.
Sec. 7.5000 Scope.
This subpart applies to a national bank's use of technology to
deliver services and products consistent with safety and soundness.
Sec. 7.5001 Electronic activities that are part of, or incidental to, the
business of banking.
(a) Purpose. This section identifies the criteria that the OCC uses
to determine whether an electronic activity is authorized as part of, or
incidental to, the business of banking under 12 U.S.C. 24 (Seventh) or
other statutory authority.
(b) Restrictions and conditions on electronic activities. The OCC
may determine that activities are permissible under 12 U.S.C. 24
(Seventh) or other statutory authority only if they are subject to
standards or conditions designed to provide that the activities function
as intended and are conducted safely and soundly, in accordance with
other applicable statutes, regulations, or supervisory policies.
(c) Activities that are part of the business of banking. (1) An
activity is authorized for national banks as part of the business of
banking if the activity is described in 12 U.S.C. 24 (Seventh) or other
statutory authority. In determining whether an electronic activity is
part of the business of banking, the OCC considers the following
factors:
(i) Whether the activity is the functional equivalent to, or a
logical outgrowth of, a recognized banking activity;
(ii) Whether the activity strengthens the bank by benefiting its
customers or its business;
(iii) Whether the activity involves risks similar in nature to those
already assumed by banks; and
(iv) Whether the activity is authorized for state-chartered banks.
(2) The weight accorded each factor set out in paragraph (c)(1) of
this section depends on the facts and circumstances of each case.
(d) Activities that are incidental to the business of banking. (1)
An electronic banking activity is authorized for a national bank as
incidental to the business of banking if it is convenient or useful to
an activity that is specifically authorized for national banks or to an
activity that is otherwise part of the business of banking. In
determining whether an activity is convenient or useful to such
activities, the OCC considers the following factors:
(i) Whether the activity facilitates the production or delivery of a
bank's products or services, enhances the bank's ability to sell or
market its products or services, or improves the effectiveness or
efficiency of the bank's operations, in light of risks presented,
innovations, strategies, techniques and new technologies for producing
and delivering financial products and services; and
(ii) Whether the activity enables the bank to use capacity acquired
for its banking operations or otherwise avoid economic loss or waste.
[[Page 205]]
(2) The weight accorded each factor set out in paragraph (d)(1) of
this section depends on the facts and circumstances of each case.
(3) In addition to the electronic activities specifically permitted
in Sec. 7.5004 (sale of excess electronic capacity and by-products) and
Sec. 7.5006 (incidental non-financial data processing), the OCC has
determined that the following electronic activities are incidental to
the business of banking, pursuant to this section. This list of
activities is illustrative and not exclusive; the OCC may determine that
other activities are permissible pursuant to this authority.
(i) Web site development where incidental to other banking services;
(ii) Internet access and e-mail provided on a non-profit basis as a
promotional activity;
(iii) Advisory and consulting services on electronic activities
where the services are incidental to customer use of electronic banking
services; and
(iv) Sale of equipment that is convenient or useful to customer's
use of related electronic banking services, such as specialized
terminals for scanning checks that will be deposited electronically by
wholesale customers of banks under the Check Clearing for the 21st
Century Act, Public Law 108-100 (12 U.S.C. 5001-5018) (the Check 21
Act).
[61 FR 4862, Feb. 9, 1996, as amended at 73 FR 22242, Apr. 24, 2008]
Sec. 7.5002 Furnishing of products and services by electronic means and
facilities.
(a) Use of electronic means and facilities. A national bank may
perform, provide, or deliver through electronic means and facilities any
activity, function, product, or service that it is otherwise authorized
to perform, provide, or deliver, subject to Sec. 7.5001(b) and
applicable OCC guidance. The following list provides examples of
permissible activities under this authority. This list is illustrative
and not exclusive; the OCC may determine that other activities are
permissible pursuant to this authority.
(1) Acting as an electronic finder by:
(i) Establishing, registering, and hosting commercially enabled web
sites in the name of sellers;
(ii) Establishing hyperlinks between the bank's site and a third-
party site, including acting as a ``virtual mall'' by providing a
collection of links to web sites of third-party vendors, organized by-
product type and made available to bank customers;
(iii) Hosting an electronic marketplace on the bank's Internet web
site by providing links to the web sites of third-party buyers or
sellers through the use of hypertext or other similar means;
(iv) Hosting on the bank's servers the Internet web site of:
(A) A buyer or seller that provides information concerning the
hosted party and the products or services offered or sought and allows
the submission of interest, bids, offers, orders and confirmations
relating to such products or services; or
(B) A governmental entity that provides information concerning the
services or benefits made available by the governmental entity, assists
persons in completing applications to receive such services or benefits
and permits persons to transmit their applications for such services or
benefits;
(v) Operating an Internet web site that permits numerous buyers and
sellers to exchange information concerning the products and services
that they are willing to purchase or sell, locate potential counter-
parties for transactions, aggregate orders for goods or services with
those made by other parties, and enter into transactions between
themselves;
(vi) Operating a telephone call center that provides permissible
finder services; and
(vii) Providing electronic communications services relating to all
aspects of transactions between buyers and sellers;
(2) Providing electronic bill presentment services;
(3) Offering electronic stored value systems;
(4) Safekeeping for personal information or valuable confidential
trade or business information, such as encryption keys; and
(5) Issuing electronic letters of credit within the scope of 12 CFR
7.1016.
(b) Applicability of guidance and requirements not affected. When a
national
[[Page 206]]
bank performs, provides, or delivers through electronic means and
facilities an activity, function, product, or service that it is
otherwise authorized to perform, provide, or deliver, the electronic
activity is not exempt from the regulatory requirements and supervisory
guidance that the OCC would apply if the activity were conducted by non-
electronic means or facilities.
(c) State laws. As a general rule, and except as provided by Federal
law, State law is not applicable to a national bank's conduct of an
authorized activity through electronic means or facilities if the State
law, as applied to the activity, would be preempted pursuant to
traditional principles of Federal preemption derived from the Supremacy
Clause of the U.S. Constitution and applicable judicial precedent.
Accordingly, State laws that stand as an obstacle to the ability of
national banks to exercise uniformly their Federally authorized powers
through electronic means or facilities, are not applicable to national
banks.
[61 FR 4862, Feb. 9, 1996, as amended at 73 FR 22242, Apr. 24, 2008]
Sec. 7.5003 Composite authority to engage in electronic activities.
Unless otherwise prohibited by Federal law, a national bank may
engage in an electronic activity that is comprised of several component
activities if each of the component activities is itself part of or
incidental to the business of banking or is otherwise permissible under
Federal law.
Sec. 7.5004 Sale of excess electronic capacity and by-products.
(a) A national bank may, in order to optimize the use of the bank's
resources or avoid economic loss or waste, market and sell to third
parties electronic capacities legitimately acquired or developed by the
bank for its banking business.
(b) With respect to acquired equipment or facilities, legitimate
excess electronic capacity that may be sold to others can arise in a
variety of situations, including the following:
(1) Due to the characteristics of the desired equipment or
facilities available in the market, the capacity of the most practical
optimal equipment or facilities available to meet the bank's
requirements exceeds its present needs;
(2) The acquisition and retention of additional capacity, beyond
present needs, reasonably may be necessary for planned future expansion
or to meet the expected future banking needs during the useful life of
the equipment;
(3) Requirements for capacity fluctuate because a bank engages in
batch processing of banking transactions or because a bank must have
capacity to meet peak period demand with the result that the bank has
periods when its capacity is underutilized; and
(4) After the initial acquisition of capacity thought to be fully
needed for banking operations, the bank experiences either a decline in
level of the banking operations or an increase in the efficiency of the
banking operations using that capacity.
(c) Types of electronic capacity in equipment or facilities that
banks may have legitimately acquired and that may be sold to third
parties if excess to the bank's needs for banking purposes include:
(1) Data processing services;
(2) Production and distribution of non-financial software;
(3) Providing periodic back-up call answering services;
(4) Providing full Internet access;
(5) Providing electronic security system support services;
(6) Providing long line communications services; and
(7) Electronic imaging and storage.
(d) A national bank may sell to third parties electronic by-products
legitimately acquired or developed by the bank for its banking business.
Examples of electronic by-products that banks may have legitimately
acquired that may be sold to third parties if excess to the bank's needs
include:
(1) Software acquired (not merely licensed) or developed by the bank
for banking purposes or to support its banking business; and
(2) Electronic databases, records, or media (such as electronic
images) developed by the bank for or during the performance of its
permissible data processing activities.
[[Page 207]]
Sec. 7.5005 National bank acting as digital certification authority.
(a) It is part of the business of banking under 12 U.S.C.
24(Seventh) for a national bank to act as a certificate authority and to
issue digital certificates verifying the identity of persons associated
with a particular public/private key pair. As part of this service, the
bank may also maintain a listing or repository of public keys.
(b) A national bank may issue digital certificates verifying
attributes in addition to identity of persons associated with a
particular public/private key pair where the attribute is one for which
verification is part of or incidental to the business of banking. For
example, national banks may issue digital certificates verifying certain
financial attributes of a customer as of the current or a previous date,
such as account balance as of a particular date, lines of credit as of a
particular date, past financial performance of the customer, and
verification of customer relationship with the bank as of a particular
date.
(c) When a national bank issues a digital certificate relating to
financial capacity under this section, the bank shall include in that
certificate an express disclaimer stating that the bank does not thereby
promise or represent that funds will be available or will be advanced
for any particular transaction.
Sec. 7.5006 Data processing.
(a) Eligible activities. It is part of the business of banking under
12 U.S.C. 24(Seventh) for a national bank to provide data processing,
and data transmission services, facilities (including equipment,
technology, and personnel), data bases, advice and access to such
services, facilities, data bases and advice, for itself and for others,
where the data is banking, financial, or economic data, and other types
of data if the derivative or resultant product is banking, financial, or
economic data. For this purpose, economic data includes anything of
value in banking and financial decisions.
(b) Other data. A national bank also may perform the activities
described in paragraph (a) of this section for itself and others with
respect to additional types of data to the extent convenient or useful
to provide the data processing services described in paragraph (a),
including where reasonably necessary to conduct those activities on a
competitive basis. The total revenue attributable to the bank's data
processing activities under this section must be derived predominantly
from processing the activities described in paragraph (a) of this
section.
(c) Software for performance of authorized banking functions. A
national bank may produce, market, or sell software that performs
services or functions that the bank could perform directly, as part of
the business of banking.
[61 FR 4862, Feb. 9, 1996, as amended at 73 FR 22242, Apr. 24, 2008]
Sec. 7.5007 Correspondent services.
It is part of the business of banking for a national bank to offer
as a correspondent service to any of its affiliates or to other
financial institutions any service it may perform for itself. The
following list provides examples of electronic activities that banks may
offer correspondents under this authority. This list is illustrative and
not exclusive; the OCC may determine that other activities are
permissible pursuant to this authority.
(a) The provision of computer networking packages and related
hardware;
(b) Data processing services;
(c) The sale of software that performs data processing functions;
(d) The development, operation, management, and marketing of
products and processing services for transactions conducted at
electronic terminal devices;
(e) Item processing services and related software;
(f) Document control and record keeping through the use of
electronic imaging technology;
(g) The provision of Internet merchant hosting services for resale
to merchant customers;
(h) The provision of communication support services through
electronic means; and
(i) Digital certification authority services.
[[Page 208]]
Sec. 7.5008 Location of a national bank conducting electronic activities.
A national bank shall not be considered located in a State solely
because it physically maintains technology, such as a server or
automated loan center, in that state, or because the bank's products or
services are accessed through electronic means by customers located in
the state.
Sec. 7.5009 Location under 12 U.S.C. 85 of national banks operating
exclusively through the Internet.
For purposes of 12 U.S.C. 85, the main office of a national bank
that operates exclusively through the Internet is the office identified
by the bank under 12 U.S.C. 22(Second) or as relocated under 12 U.S.C.
30 or other appropriate authority.
Sec. 7.5010 Shared electronic space.
National banks that share electronic space, including a co-branded
web site, with a bank subsidiary, affiliate, or another third-party must
take reasonable steps to clearly, conspicuously, and understandably
distinguish between products and services offered by the bank and those
offered by the bank's subsidiary, affiliate, or the third-party.
PART 8_ASSESSMENT OF FEES--Table of Contents
Sec.
8.1 Scope and application.
8.2 Semiannual assessment.
8.6 Fees for special examinations and investigations.
8.7 Payment of interest on delinquent assessments and examination and
investigation fees.
8.8 Notice of Comptroller of the Currency fees.
Authority: 12 U.S.C. 93a, 481, 482, 1867, 3102, and 3108; and 15
U.S.C. 78c and 78l.
Sec. 8.1 Scope and application.
The assessments contained in this part are made pursuant to the
authority contained in 12 U.S.C. 93a, 481, 482, 1867, 3102, and 3108;
and 15 U.S.C. 78c and 78l.
[70 FR 69643, Nov. 17, 2005]
Sec. 8.2 Semiannual assessment.
(a) Each national bank shall pay to the Comptroller of the Currency
a semiannual assessment fee, due by March 31 and September 30 of each
year, for the six month period beginning on January 1 and July 1 before
each payment date. The Comptroller of the Currency will calculate the
amount due under this section and provide a notice of assessments to
each national bank no later than 7 business days prior to March 31 and
September 30 of each year. The semiannual assessment will be calculated
as follows:
------------------------------------------------------------------------
If the bank's total assets The semiannual assessment is:
(consolidated domestic and -------------------------------------------
foreign subsidiaries) are:
----------------------------- This amount-- Plus Of excess
But not over-- base amount marginal over--
Over-- rates
------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Million Million .............. ............ Million
------------------------------------------------------------------------
$0 $2 $X1 0
2 20 X2 Y1 $2
20 100 X3 Y2 20
100 200 X4 Y3 100
200 1,000 X5 Y4 200
1,000 2,000 X6 Y5 1,000
2,000 6,000 X7 Y6 2,000
6,000 20,000 X8 Y7 6,000
20,000 40,000 X9 Y8 20,000
40,000 250,000 X10 Y9 40,000
250,000 ............. X11 Y10 250,000
------------------------------------------------------------------------
(1) Every national bank falls into one of the asset-size brackets
denoted by Columns A and B. A bank's semiannual assessment is composed
of two parts. The first part is the calculation of a base amount of the
assessment, which is computed on the assets of the bank up to the lower
endpoint (Column A) of
[[Page 209]]
the bracket in which it falls. This base amount of the assessment is
calculated by the OCC in Column C.
(2) The second part is the calculation of assessments due on the
remaining assets of the bank in excess of Column E. The excess is
assessed at the marginal rate shown in Column D.
(3) The total semiannual assessment is the amount in Column C, plus
the amount of the bank's assets in excess of Column E times the marginal
rate in Column D: Assessments = C+[(Assets-E) x D].
(4) Each year, the OCC may index the marginal rates in Column D to
adjust for the percent change in the level of prices, as measured by
changes in the Gross Domestic Product Implicit Price Deflator (GDPIPD)
for each June-to-June period. The OCC may at its discretion adjust
marginal rates by amounts less than the percentage change in the GDPIPD.
The OCC will also adjust the amounts in Column C to reflect any change
made to the marginal rate.
(5) The specific marginal rates and complete assessment schedule
will be published in the ``Notice of Comptroller of the Currency Fees,''
provided for at Sec. 8.8 of this part. Each semiannual assessment is
based upon the total assets shown in the national bank's most recent
``Consolidated Reports of Condition and Income'' (Call Report) preceding
the payment date. Each bank subject to the jurisdiction of the
Comptroller of the Currency on the date of the second or fourth
quarterly Call Report required by the Office under 12 U.S.C. 161 is
subject to the full assessment for the next six month period.
(6)(i) Notwithstanding any other provision of this part, the OCC may
reduce the semiannual assessment for each non-lead bank by a percentage
that it will specify in the Notice of Comptroller of the Currency Fees
described in Sec. 8.8.
(ii) For purposes of this paragraph (a)(6):
(A) Lead bank means the largest national bank controlled by a
company, based on a comparison of the total assets held by each national
bank controlled by that company as reported in each bank's Call Report
filed for the quarter immediately preceding the payment of a semiannual
assessment.
(B) Non-lead bank means a national bank that is not the lead bank
controlled by a company that controls two or more national banks.
(C) Control and company have the same meanings as these terms have
in sections 2(a)(2) and 2(b), respectively, of the Bank Holding Company
Act of 1956 (12 U.S.C. 1841(a)(2) and (b)).
(b)(1) Each Federal branch and each Federal agency shall pay to the
Comptroller of the Currency a semiannual assessment fee, due by March 31
and September 30 of each year, for the six month period beginning on
January 1 and July 1 before each payment date. The Comptroller of the
Currency will calculate the amount due under this section and provide a
notice of assessments to each national bank no later than 7 business
days prior to March 31 and September 30 of each year.
(2) The amount of the semiannual assessment paid by each Federal
branch and Federal agency shall be computed at the same rate as provided
in the Table in 12 CFR 8.2(a); however, only the total domestic assets
of the Federal branch or Federal agency shall be subject to assessment.
(3) Each semiannual assessment of each Federal branch or Federal
agency is based upon the total assets shown in the Federal branch's Call
Report most recently preceding the payment date. Each Federal branch or
Federal agency subject to the jurisdiction of the OCC on the date of the
second and fourth Call Reports is subject to the full assessment for the
next six-month period.
(4)(i) Notwithstanding any other provision of this part, the OCC may
reduce the semiannual assessment for each non-lead Federal branch or
agency by an amount that it will specify in the Notice of Comptroller of
the Currency Fees described in Sec. 8.8.
(ii) For purposes of this paragraph (b)(4):
(A) Lead Federal branch or agency means the largest Federal branch
or agency of a foreign bank, based on a comparison of the total assets
held by each Federal branch or agency of that foreign bank as reported
in each Federal branch's or agency's Call Report
[[Page 210]]
filed for the quarter immediately preceding the payment of a semiannual
assessment.
(B) Non-lead Federal branch or agency means a Federal branch or
Federal agency that is not the lead Federal branch or agency of a
foreign bank that controls two or more Federal branches or agencies.
(c) Additional assessment for independent credit card banks--(1)
General rule. In addition to the assessment calculated according to
paragraph (a) of this section, each independent credit card bank will
pay an assessment based on receivables attributable to credit card
accounts owned by the bank. This assessment will be computed by adding
to its asset-based assessment an additional amount determined by its
level of receivables attributable. The dollar amount of the additional
assessment will be published in the ``Notice of Comptroller of the
Currency Notice of Fees,'' described at Sec. 8.8.
(2) Credit card banks affiliated with full-service national banks.
The OCC will assess an independent credit card bank in accordance with
paragraph (c)(1) of this section, notwithstanding that the bank is
affiliated with a full-service national bank, if the OCC concludes that
the affiliation is intended to evade this part.
(3) Definitions. For purposes of this paragraph (c), the following
definitions apply:
(i) Affiliate has the same meaning as this term has in 12 U.S.C.
221a(b).
(ii) Engaged primarily in card operations means a bank described in
section 2(c)(2)(F) of the Bank Holding Company Act (12 U.S.C.
1841(c)(2)(F)) or whose ratio of total gross receivables attributable to
the bank's balance sheet assets exceeds 50%.
(iii) Full-service national bank is a national bank that generates
more than 50% of its interest and non-interest income from activities
other than credit card operations or trust activities and is authorized
according to its charter to engage in all types of permissible banking
activities.
(iv) Independent credit card bank is a national bank that engages
primarily in credit card operations and is not affiliated with a full-
service national bank.
(v) Receivables attributable is the total amount of outstanding
balances due on credit card accounts owned by an independent credit card
bank (the receivables attributable to those accounts) on the last day of
the assessment period, minus receivables retained on the bank's balance
sheet as of that day.
(4) Reports of receivables attributable. Independent credit card
banks will report receivables attributable data to the OCC semiannually
at a time specified by the OCC.
(d) Surcharge based on the condition of the bank. Subject to any
limit that the OCC prescribes in the Notice of the Comptroller of the
Currency Fees, the OCC shall apply a surcharge to the semiannual
assessment computed in accordance with paragraphs (a) through (c) of
this section. This surcharge will be determined by multiplying the
semiannual assessment computed in accordance with paragraphs (a) through
(c) of this section by--
(1) 1.5, in the case of any bank that receives a composite rating of
3 under the Uniform Financial Institutions Rating System (UFIRS) and any
Federal branch or agency that receives a composite rating of 3 under the
ROCA rating system (which rates risk management, operational controls,
compliance, and asset quality) at its most recent examination; and
(2) 2.0, in the case of any bank that receives a composite UFIRS
rating of 4 or 5 and any Federal branch or agency that receives a
composite rating of 4 or 5 under the ROCA rating system at its most
recent examination.
[44 FR 20065, Apr. 4, 1979, as amended at 49 FR 26205, June 27, 1984; 49
FR 50602, Dec. 31, 1984; 53 FR 48627, Dec. 1, 1988; 55 FR 49842, Nov.
30, 1990; 57 FR 22416, May 28, 1992; 61 FR 64002, Dec. 2, 1996; 62 FR
54745, Oct. 21, 1997; 62 FR 64137, Dec. 4, 1997; 66 FR 29893, June 1,
2001; 66 FR 57647, Nov. 16, 2001; 66 FR 58786, Nov. 23, 2001; 67 FR
57509, Sept. 11, 2002; 67 FR 62873, Oct. 9, 2002; 70 FR 69643, Nov. 17,
2005; 73 FR 9014, Feb. 19, 2008; 73 FR 9625, Feb. 21, 2008]
Sec. 8.6 Fees for special examinations and investigations.
(a) Fees. Pursuant to the authority contained in 12 U.S.C. 481 and
482, the Office of the Comptroller of the Currency assesses a fee for:
[[Page 211]]
(1) Examining the fiduciary activities of national banks and related
entities;
(2) Conducting special examinations and investigations of national
banks and Federal branches or Federal agencies of foreign banks;
(3) Conducting special examinations and investigations of an entity
with respect to its performance of activities described in section 7(c)
of the Bank Service Company Act (12 U.S.C. 1867(c)), if the OCC
determines that assessment of the fee is warranted with regard to a
particular bank because of the high risk or unusual nature of the
activities performed; the significance to the bank's operations and
income of the activities performed; or the extent to which the bank has
sufficient systems, controls, and personnel to adequately monitor,
measure, and control risks arising from such activities;
(4) Conducting special examinations and investigations of affiliates
of national banks and Federal branches or Federal agencies of foreign
banks; and
(5) Conducting examinations and investigations made pursuant to 12
CFR part 5, Rules, Policies, and Procedures for Corporate Activities.
(b) Notice of Comptroller of the Currency Fees. The OCC publishes
the fee schedule for fiduciary activities, special examinations and
investigations, examinations of affiliates and examinations related to
corporate activities in the Notice of Comptroller of the Currency Fees
described in Sec. 8.8.
(c) Additional assessments on trust banks--(1) Independent trust
banks. The assessment of independent trust banks will include a
fiduciary and related asset component, in addition to the assessment
calculated according to Sec. 8.2 of this part, as follows:
(i) Minimum fee. All independent trust banks will pay a minimum fee,
to be provided in the Notice of Comptroller of the Currency Fees.
(ii) Additional amount for independent trust banks with fiduciary
and related assets in excess of $1 billion. Independent trust banks with
fiduciary and related assets in excess of $1 billion will pay an amount
that exceeds the minimum fee. The amount to be paid will be calculated
by multiplying the amount of fiduciary and related assets by a rate or
rates provided by the OCC in the Notice of Comptroller of the Currency
Fees.
(iii) Surcharge based on the condition of the bank. Subject to any
limit that the OCC prescribes in the Notice of the Comptroller of the
Currency Fees, the OCC shall adjust the semiannual assessment computed
in accordance with paragraphs (c)(1)(i) and (ii) of this section by
multiplying that figure by 1.5 for each independent trust bank that
receives a composite rating of 3 under the Uniform Financial
Institutions Rating System (UFIRS) at its most recent examination and by
2.0 for each bank that receives a composite UFIRS rating of 4 or 5 at
such examination.
(2) Trust banks affiliated with full-service national banks. The OCC
will assess a trust bank in accordance with paragraph (c)(1) of this
section, notwithstanding that the bank is affiliated with a full-service
national bank, if the OCC concludes that the affiliation is intended to
evade the assessment regulation.
(3) Definitions. For purposes of this paragraph (c) of this section,
the following definitions apply:
(i) Affiliate has the same meaning as this term has in 12 U.S.C.
221a(b);
(ii) Full-service national bank is a national bank that generates
more than 50% of its interest and non-interest income from activities
other than credit card operations or trust activities and is authorized
according to its charter to engage in all types of permissible banking
activities.
(iii) Independent trust bank is a national bank that has trust
powers, does not primarily offer full-service banking, and is not
affiliated with a full-service national bank; and
(iv) Fiduciary and related assets are those assets reported on
Schedule RC-T of FFIEC Forms 031 and 041, Line 9 (columns A and B) and
Line 10 (column B), any successor form issued by the FFIEC, and any
other fiduciary and related assets defined in the Notice of Comptroller
of the Currency Fees.
[59 FR 59642, Nov. 18, 1994, as amended at 65 FR 75862, Dec. 5, 2000; 66
FR 23153, May 8, 2001; 66 FR 29894, June 1, 2001; 67 FR 37665, May 30,
2002; 70 FR 69643, Nov. 17, 2005; 73 FR 9014, Feb. 19, 2008]
[[Page 212]]
Sec. 8.7 Payment of interest on delinquent assessments and examination and
investigation fees.
(a) Each national bank, each Federal branch, and each Federal agency
shall pay to the Comptroller of the Currency interest on its delinquent
payments of semiannual assessments. In addition, each national bank and
each entity with a trust department examined by the Comptroller of the
Currency and each institution that is the subject of a special
examination or investigation conducted by the Comptroller of the
Currency shall pay to the Comptroller of the Currency interest on its
delinquent payments of examination and investigation fees. Semiannual
assessment payments will be considered delinquent if they are received
after the time for payment specified in Sec. 8.2. Examination and
investigation fees will be considered delinquent if not received by the
Comptroller of the Currency within 30 calendar days of the invoice date.
(b) In the event that an entity that is required to make semiannual
assessment payments or trust examination fee payments believes that the
notice of assessments prepared by the Comptroller of the Currency
contains an error of miscalculation, the entity may provide the
Comptroller of the Currency with a written request for a revised
assessment notice and a refund of any overpayments. Any such request for
a revised notice and refund must be made after timely payment of the
semiannual assessment under the dates specified in Sec. 8.2.
(1) Refund the amount of the overpayment or
(2) Provide notice of its unwillingness to accept the request for a
revised notice of assessments. In the latter instance, the Comptroller
of the Currency and the entity claiming the overpayment shall thereafter
attempt to reach agreement on the amount, if any, to be refunded; the
Comptroller of the Currency shall refund this amount within 30 calendar
days of such agreement.
The Comptroller of the Currency shall be considered delinquent if it
fails to return an overpayment in accordance with the time limitations
specified in this paragraph (b). The Comptroller of the Currency shall
pay interest on any such delinquent payments.
(c) Interest on delinquent payments, as described in paragraphs (a)
and (b) of this section, will be assessed beginning the first calendar
day on which payment is considered delinquent, and on each calendar day
thereafter up to and including the day payment is received. Interest
will be simple interest, calculated for each day payment is delinquent
by multiplying the daily equivalent of the applicable interest rate by
the amount delinquent. The rate of interest will be the United States
Treasury Department's current value of funds rate (the ``TFRM rate'');
that rate is issued under the Treasury Fiscal Requirements Manual and is
published quarterly in the Federal Register. The interest rates
applicable to a delinquent payment will be determined as follows:
(1) For delinquent days occurring from January 1 to March 31, the
rate will be the TFRM rate that is published the preceding December for
the first quarter of the ensuing year.
(2) For delinquent days occurring from April 1 to June 30, the rate
will be the TFRM rate that is published the preceding March for the
second quarter of that year.
(3) For delinquent days occurring from July 1 to September 30, the
rate will be the TFRM rate that is published the preceding June for the
third quarter of that year.
(4) For delinquent days occurring from October 1 to December 31, the
rate will be the TFRM rate that is published the preceding September for
the fourth quarter of that year.
[48 FR 30599, July 1, 1983. Redesignated and amended at 49 FR 50605,
Dec. 31, 1984; 70 FR 69643, Nov. 17, 2005]