[Title 12 CFR ]
[Code of Federal Regulations (annual edition) - January 1, 2014 Edition]
[From the U.S. Government Publishing Office]
[[Page i]]
Title 12
Banks and Banking
________________________
Parts 1 to 199
Revised as of January 1, 2014
Containing a codification of documents of general
applicability and future effect
As of January 1, 2014
Published by the Office of the Federal Register
National Archives and Records Administration as a
Special Edition of the Federal Register
[[Page ii]]
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[[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........................ 1049
Alphabetical List of Agencies Appearing in the CFR...... 1069
List of CFR Sections Affected........................... 1079
[[Page iv]]
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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.
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[[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
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LEGAL STATUS
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HOW TO USE THE CODE OF FEDERAL REGULATIONS
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To determine whether a Code volume has been amended since its
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EFFECTIVE AND EXPIRATION DATES
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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
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PAST PROVISIONS OF THE CODE
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``[RESERVED]'' TERMINOLOGY
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INCORPORATION BY REFERENCE
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(a) The incorporation will substantially reduce the volume of
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(b) The matter incorporated is in fact available to the extent
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(c) The incorporating document is drafted and submitted for
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this volume.
[[Page vii]]
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available at www.ecfr.gov.
Charles A. Barth,
Director,
Office of the Federal Register.
January 1, 2014.
[[Page ix]]
THIS TITLE
Title 12--Banks and Banking is composed of eight volumes. The parts
in these volumes are arranged in the following order: Parts 1-199, 200-
219, 220-229, 230-299, 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,
third and fourth volumes containing parts 200-299 are comprised of
chapter II--Federal Reserve System. The fifth 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
sixth volume containing parts 500-599 is comprised of chapter V--Office
of Thrift Supervision, Department of the Treasury. The seventh 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 eighth 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, 2014.
For this volume, Jonn V. Lilyea was Chief Editor. The Code of
Federal Regulations publication program is under the direction of the
Managing Editor, assisted by Ann Worley.
[[Page 1]]
TITLE 12--BANKS AND BANKING
(This book contains parts 1 to 199)
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Part
chapter i--Comptroller of the Currency, Department of the
Treasury.................................................. 1
[[Page 3]]
CHAPTER I--COMPTROLLER OF THE CURRENCY, DEPARTMENT OF THE TREASURY
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Part Page
1 Investment securities....................... 7
2 Sales of credit life insurance.............. 14
3 Capital adequacy standards.................. 15
4 Organization and functions, availability and
release of information, contracting
outreach program, post-employment
restrictions for senior examiners....... 259
5 Rules, policies, and procedures for
corporate activities.................... 283
6 Prompt corrective action.................... 337
7 Bank activities and operations.............. 348
8 Assessment of fees.......................... 370
9 Fiduciary activities of national banks...... 376
10 Municipal securities dealers................ 389
11 Securities Exchange Act disclosure rules.... 389
12 Recordkeeping and confirmation requirements
for securities transactions............. 391
13 Government securities sales practices....... 398
14 Consumer protection in sales of insurance... 401
15 [Reserved]
16 Securities offering disclosure rules........ 405
18 Disclosure of financial and other
information by national banks........... 411
19 Rules of practice and procedure............. 414
21 Minimum security devices and procedures,
reports of suspicious activities, and
Bank Secrecy Act Compliance Program..... 455
22 Loans in areas having special flood hazards. 460
23 Leasing..................................... 464
24 Community and economic development entities,
community development projects, and
other public welfare investments........ 467
25 Community Reinvestment Act and interstate
deposit production regulations.......... 477
26 Management official interlocks.............. 500
[[Page 4]]
27 Fair housing home loan data system.......... 504
28 International banking activities............ 515
29 [Reserved]
30 Safety and soundness standards.............. 529
31 Extensions of credit to insiders and
transactions with affiliates............ 543
32 Lending limits.............................. 547
33 [Reserved]
34 Real estate lending and appraisals.......... 569
35 Disclosure and reporting of CRA-related
agreements.............................. 602
36 [Reserved]
37 Debt cancellation contracts and debt
suspension agreements................... 614
38-39 [Reserved]
40 Privacy of consumer financial information... 619
41 Fair credit reporting....................... 647
42-45 [Reserved]
46 Annual stress test.......................... 680
47 [Reserved]
48 Retail foreign exchange transactions........ 684
49-99 [Reserved]
100 Rules applicable to savings associations.... 698
101-107 [Reserved]
108 Removals, suspensions, and prohibitions
where a crime is charged or proven...... 698
109 Rules of practice and procedure in
adjudicatory proceedings................ 701
110-111 [Reserved]
112 Rules for investigative proceedings and
formal examination proceedings.......... 724
113-115 [Reserved]
116 Application processing procedures........... 726
117-127 [Reserved]
128 Nondiscrimination requirements.............. 736
129-132 [Reserved]
133 Disclosure and reporting of CRA-related
agreements.............................. 741
134-135 [Reserved]
136 Consumer protection in sales of insurance... 753
137-140 [Reserved]
141 Definitions for regulations affecting
Federal savings associations............ 757
142 [Reserved]
143 Federal mutual savings associations--
incorporation, organization, and
conversion.............................. 759
144 Federal mutual savings associations--charter
and bylaws.............................. 766
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145 Federal savings associations--operations.... 773
146 Federal mutual savings associations--merger,
dissolution, reorganization, and
conversion.............................. 778
147-149 [Reserved]
150 Fiduciary powers of Federal savings
associations............................ 780
151 Recordkeeping and confirmation requirements
for securities transactions............. 791
152 Federal stock associations--incorporation,
organization, and conversion............ 799
153-154 [Reserved]
155 Electronic operations....................... 818
156 [Reserved]
157 Deposits.................................... 819
158 [Reserved]
159 Subordinate organizations................... 820
160 Lending and investment...................... 827
161 Definitions for regulations affecting all
savings associations.................... 845
162 Regulatory reporting standards.............. 851
163 Savings associations--operations............ 852
164 Appraisals.................................. 878
165 Prompt corrective action.................... 883
166 [Reserved]
167 Capital..................................... 886
168 Security procedures......................... 920
169 Proxies..................................... 921
170 Safety and soundness guidelines and
compliance procedures................... 922
171 Fair credit reporting....................... 936
172 Loans in areas having special flood hazards. 942
173 [Reserved]
174 Acquisition of control of Federal savings
associations............................ 946
175-189 [Reserved]
190 Preemption of State usury laws.............. 961
191 Preemption of State due-on-sale laws........ 966
192 Conversions from mutual to stock form....... 970
193 Accounting requirements..................... 998
194 Securities of Federal savings associations.. 1007
195 Community reinvestment...................... 1009
196 Management official interlocks.............. 1032
197 Securities offerings........................ 1037
198-199 [Reserved]
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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 8]]
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 the issuer of a security has an adequate
capacity to meet financial commitments under the security for the
projected life of the asset or exposure. An issuer has an adequate
capacity to meet financial commitments if the risk of default by the
obligor is low and the full and timely repayment of principal and
interest is expected.
(e) Investment security means a marketable debt obligation that is
investment grade and not predominately speculative in nature.
(f) Marketable means that the security:
(1) Is registered under the Securities Act of 1933, 15 U.S.C. 77a et
seq.;
(2) Is a municipal revenue bond exempt from registration under the
Securities Act of 1933, 15 U.S.C. 77c(a)(2);
(3) Is offered and sold pursuant to Securities and Exchange
Commission Rule 144A, 17 CFR 230.144A, and investment grade; or
(4) Can be sold with reasonable promptness at a price that
corresponds reasonably to its fair value.
(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) [Reserved]
(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).
(l) Type III security means an investment security that does not
qualify as
[[Page 9]]
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 fully secured by interests in a pool of loans to
numerous obligors.
(2) A commercial mortgage-related security that is offered or sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is investment grade, or a commercial mortgage-related
security as described in section 3(a)(41) of the Securities Exchange Act
of 1934, 15 U.S.C. 78c(a)(41), that represents ownership of a promissory
note or certificate of interest or participation that is directly
secured by a first lien on one or more parcels of real estate upon which
one or more commercial structures are located and that is fully secured
by interests in a pool of loans to numerous obligors.
(3) A residential mortgage-related security that is offered and sold
pursuant to section 4(5) of the Securities Act of 1933, 15 U.S.C.
77d(5), that is investment grade, or a residential mortgage-related
security as described in section 3(a)(41) of the Securities Exchange Act
of 1934, 15 U.S.C. 78c(a)(41)) that does not otherwise qualify as a Type
I security.
(n) Type V security means a security that is:
(1) Investment grade;
(2) Marketable;
(3) Not a Type IV security; and
(4) Fully secured by interests in a pool of loans to numerous
obligors and in which a national bank could invest directly.
[61 FR 63982, Dec. 2, 1996, as amended at 66 FR 34791, July 2, 2001; 77
FR 35257, June 13, 2012]
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.
(e) Type IV securities. A national bank may purchase and sell Type
IV securities for its own account. The amount of the Type IV securities
that a bank may purchase and sell is not limited to a specified
percentage of the bank's capital and surplus.
(f) Type V securities. A national bank may purchase and sell Type V
securities for its own account provided that
[[Page 10]]
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 investment grade, or
(ii) Satisfy the requirements of Sec. 1.3(i).
(i) Securities held based on estimates of obligor's performance. (1)
Notwithstanding Secs. 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; 77 FR 35257, June 13, 2012]
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 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.
[[Page 11]]
(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.
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
[[Page 12]]
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. 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
[[Page 13]]
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.
(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
[[Page 14]]
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 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.
[[Page 15]]
(c) Except as provided in Secs. 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_CAPITAL ADEQUACY STANDARDS--Table of Contents
Subpart A_General Provisions
Sec.
3.1 Purpose, applicability, reservations of authority, and timing.
3.2 Definitions.
3.3 Operational requirements for certain exposures.
3.4-3.9 [Reserved]
Subpart B_Capital Ratio Requirements and Buffers
3.10 Minimum capital requirements.
3.11 Capital conservation buffer and countercyclical capital buffer
amount.
3.12-3.19 [Reserved]
Subpart C_Definition of Capital
3.20 Capital components and eligibility criteria for regulatory capital
instruments.
3.21 Minority interest.
3.22 Regulatory capital adjustments and deductions.
3.23-3.29 [Reserved]
Subpart D_Risk-weighted Assets_Standardized Approach
3.30 Applicability.
Risk-Weighted Assets for General Credit Risk
3.31 Mechanics for calculating risk-weighted assets for general credit
risk.
3.32 General risk weights.
3.33 Off-balance sheet exposures.
3.34 OTC derivative contracts.
3.35 Cleared transactions.
3.36 Guarantees and credit derivatives: Substitution treatment.
3.37 Collateralized transactions.
Risk-Weighted Assets for Unsettled Transactions
3.38 Unsettled transactions.
3.39-3.40 [Reserved]
Risk-Weighted Assets for Securitization Exposures
3.41 Operational requirements for securitization exposures.
[[Page 16]]
3.42 Risk-weighted assets for securitization exposures.
3.43 Simplified supervisory formula approach (SSFA) and the gross-up
approach.
3.44 Securitization exposures to which the SSFA and gross-up approach
do not apply.
3.45 Recognition of credit risk mitigants for securitization exposures.
3.46-3.50 [Reserved]
Risk-Weighted Assets for Equity Exposures
3.51 Introduction and exposure measurement.
3.52 Simple risk-weight approach (SRWA).
3.53 Equity exposures to investment funds.
3.54-3.60 [Reserved]
Disclosures
3.61 Purpose and scope.
3.62 Disclosure requirements.
3.63 Disclosures by national banks or Federal savings associations
described in Sec. 3.61.
3.64-3.99 [Reserved]
Subpart E_Risk-Weighted Assets_Internal Ratings-Based and Advanced
Measurement Approaches
3.100 Purpose, applicability, and principle of conservatism.
3.101 Definitions.
3.102-3.120 [Reserved]
Qualification
3.121 Qualification process.
3.122 Qualification requirements.
3.123 Ongoing qualification.
3.124 Merger and acquisition transitional arrangements.
3.125-3.130 [Reserved]
Risk-Weighted Assets For General Credit Risk
3.131 Mechanics for calculating total wholesale and retail risk-
weighted assets.
3.132 Counterparty credit risk of repo-style transactions, eligible
margin loans, and OTC derivative contracts.
3.133 Cleared transactions.
3.134 Guarantees and credit derivatives: PD substitution and LGD
adjustment approaches.
3.135 Guarantees and credit derivatives: Double default treatment.
3.136 Unsettled transactions.
3.137-3.140 [Reserved]
Risk-Weighted Assets for Securitization Exposures
3.141 Operational criteria for recognizing the transfer of risk.
3.142 Risk-weighted assets for securitization exposures.
3.143 Supervisory formula approach (SFA).
3.144 Simplified supervisory formula approach (SSFA).
3.145 Recognition of credit risk mitigants for securitization
exposures.
3.146-3.150 [Reserved]
Risk-Weighted Assets For Equity Exposures
3.151 Introduction and exposure measurement.
3.152 Simple risk weight approach (SRWA).
3.153 Internal models approach (IMA).
3.154 Equity exposures to investment funds.
3.155 Equity derivative contracts.
3.166-3.160 [Reserved]
Risk-Weighted Assets For Operational Risk
3.161 Qualification requirements for incorporation of operational risk
mitigants.
3.162 Mechanics of risk-weighted asset calculation.
3.163-3.170 [RESERVED]
Disclosures
3.171 Purpose and scope.
3.172 Disclosure requirements.
3.173 Disclosures by certain advanced approaches national banks and
Federal savings associations.
3.174-3.200 [Reserved]
Subpart F_Risk-weighted Assets_Market Risk
3.201 Purpose, applicability, and reservation of authority.
3.202 Definitions.
3.203 Requirements for application of this subpart F.
3.204 Measure for market risk.
3.205 VaR-based measure.
3.206 Stressed VaR-based measure.
3.207 Specific risk.
3.208 Incremental risk.
3.209 Comprehensive risk.
3.210 Standardized measurement method for specific risk.
3.211 Simplified supervisory formula approach (SSFA).
3.212 Market risk disclosures.
3.213-3.299 [Reserved]
Subpart G_Transition Provisions
3.300 Transitions.
Subpart H_Establishment of Minimum Capital Ratios for an Individual Bank
or Individual Federal Savings Association
3.401 Purpose and scope.
3.402 Applicability.
[[Page 17]]
3.403 Standards for determination of appropriate individual minimum
capital ratios.
3.404 Procedures.
3.405 Relation to other actions.
Subpart I_Enforcement
3.501 Remedies.
Subpart J_Issuance of a Directive
3.601 Purpose and scope.
3.602 Notice of intent to issue a directive.
3.603 Response to notice.
3.604 Decision.
3.605 Issuance of a directive.
3.606 Change in circumstances.
3.607 Relation to other administrative actions.
Subpart K_Interpretations
3.701 Capital and surplus.
Appendix A to Part 3--Risk-Based Capital Guidelines
Appendix B to Part 3-- Risk-Based Capital Guidelines; Market Risk
Authority: 12 U.S.C. 93a, 161, 1462, 1462a, 1463, 1464, 1818,
1828(n), 1828 note, 1831n note, 1835, 3907, 3909, and 5412(b)(2)(B).
Source: 50 FR 10216, Mar. 14, 1985, unless otherwise noted.
Subpart A_General Provisions
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.1 Purpose, applicability, reservations of authority, and timing.
(a) Purpose. This part establishes minimum capital requirements and
overall capital adequacy standards for national banks or Federal savings
associations. This part includes methodologies for calculating minimum
capital requirements, public disclosure requirements related to the
capital requirements, and transition provisions for the application of
this part.
(b) Limitation of authority. Nothing in this part shall be read to
limit the authority of the OCC to take action under other provisions of
law, including action to address unsafe or unsound practices or
conditions, deficient capital levels, or violations of law or
regulation, under section 8 of the Federal Deposit Insurance Act.
(c) Applicability. Subject to the requirements in paragraphs (d) and
(f) of this section:
(1) Minimum capital requirements and overall capital adequacy
standards. Each national bank or Federal savings association must
calculate its minimum capital requirements and meet the overall capital
adequacy standards in subpart B of this part.
(2) Regulatory capital. Each national bank or Federal savings
association must calculate its regulatory capital in accordance with
subpart C of this part.
(3) Risk-weighted assets. (i) Each national bank or Federal savings
association must use the methodologies in subpart D of this part (and
subpart F of this part for a market risk national bank or Federal
savings association) to calculate standardized total risk-weighted
assets.
(ii) Each advanced approaches national bank or Federal savings
association must use the methodologies in subpart E (and subpart F of
this part for a market risk national bank or Federal savings
association) to calculate advanced approaches total risk-weighted
assets.
(4) Disclosures. (i) Except for an advanced approaches national bank
or Federal savings association that is making public disclosures
pursuant to the requirements in subpart E of this part, each national
bank or Federal savings association with total consolidated assets of
$50 billion or more must make the public disclosures described in
subpart D of this part.
(ii) Each market risk national bank or Federal savings association
must make the public disclosures described in subpart F of this part.
(iii) Each advanced approaches national bank or Federal savings
association must make the public disclosures described in subpart E of
this part.
(d) Reservation of authority--(1) Additional capital in the
aggregate. The OCC may require a national bank or Federal savings
association to hold an amount of regulatory capital greater than
otherwise required under this part if the OCC determines that the
national bank's or Federal savings association's capital requirements
under this part
[[Page 18]]
are not commensurate with the national bank's or Federal savings
association's credit, market, operational, or other risks.
(2) Regulatory capital elements. (i) If the OCC determines that a
particular common equity tier 1, additional tier 1, or tier 2 capital
element has characteristics or terms that diminish its ability to absorb
losses, or otherwise present safety and soundness concerns, the OCC may
require the national bank or Federal savings association to exclude all
or a portion of such element from common equity tier 1 capital,
additional tier 1 capital, or tier 2 capital, as appropriate.
(ii) Notwithstanding the criteria for regulatory capital instruments
set forth in subpart C of this part, the OCC may find that a capital
element may be included in a national bank's or Federal savings
association's common equity tier 1 capital, additional tier 1 capital,
or tier 2 capital on a permanent or temporary basis consistent with the
loss absorption capacity of the element and in accordance with
Sec. 3.20(e).
(3) Risk-weighted asset amounts. If the OCC determines that the
risk-weighted asset amount calculated under this part by the national
bank or Federal savings association for one or more exposures is not
commensurate with the risks associated with those exposures, the OCC may
require the national bank or Federal savings association to assign a
different risk-weighted asset amount to the exposure(s) or to deduct the
amount of the exposure(s) from its regulatory capital.
(4) Total leverage. If the OCC determines that the leverage exposure
amount, or the amount reflected in the national bank's or Federal
savings association's reported average total consolidated assets, for an
on- or off-balance sheet exposure calculated by a national bank or
Federal savings association under Sec. 3.10 is inappropriate for the
exposure(s) or the circumstances of the national bank or Federal savings
association, the OCC may require the national bank or Federal savings
association to adjust this exposure amount in the numerator and the
denominator for purposes of the leverage ratio calculations.
(5) Consolidation of certain exposures. The OCC may determine that
the risk-based capital treatment for an exposure or the treatment
provided to an entity that is not consolidated on the national bank's or
Federal savings association's balance sheet is not commensurate with the
risk of the exposure and the relationship of the national bank or
Federal savings association to the entity. Upon making this
determination, the OCC may require the national bank or Federal savings
association to treat the exposure or entity as if it were consolidated
on the balance sheet of the national bank or Federal savings association
for purposes of determining the national bank's or Federal savings
association's risk-based capital requirements and calculating the
national bank's or Federal savings association's risk-based capital
ratios accordingly. 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.
(6) Other reservation of authority. With respect to any deduction or
limitation required under this part, the OCC may require a different
deduction or limitation, provided that such alternative deduction or
limitation is commensurate with the national bank's or Federal savings
association's risk and consistent with safety and soundness.
(e) Notice and response procedures. In making a determination under
this section, the OCC will apply notice and response procedures in the
same manner as the notice and response procedures in Sec. 3.404.
(f) Timing. (1) Subject to the transition provisions in subpart G of
this part, an advanced approaches national bank or Federal savings
association that is not a savings and loan holding company must:
(i) Except as described in paragraph (f)(1)(ii) of this section,
beginning on January 1, 2014, calculate advanced approaches total risk-
weighted assets in accordance with subpart E and, if applicable, subpart
F of this part and, beginning on January 1, 2015, calculate standardized
total risk-weighted assets in accordance with subpart D and, if
applicable, subpart F of this part;
[[Page 19]]
(ii) From January 1, 2014 to December 31, 2014:
(A) Calculate risk-weighted assets in accordance with the general
risk-based capital rules under appendix A to this part and, if
applicable, subpart F of this part (national banks), or 12 CFR part 167
and, if applicable, subpart F of this part (Federal savings
associations) \1\ and substitute such risk-weighted assets for
standardized total risk-weighted assets for purposes of Sec. 3.10;
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\1\ For the purpose of calculating its general risk-based capital
ratios from January 1, 2014 to December 31, 2014, an advanced approaches
national bank or Federal savings association shall adjust, as
appropriate, its risk-weighted asset measure (as that amount is
calculated under appendix A to this part, Sec. 3 and, if applicable,
subpart F of this part (national banks), or 12 CFR part 167 and, if
applicable, subpart F of this part (Federal savings associations) in the
general risk-based capital rules) by excluding those assets that are
deducted from its regulatory capital under Sec. 3.22.
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(B) If applicable, calculate general market risk equivalent assets
in accordance with appendix B to this part, section 4(a)(3) (national
banks) and substitute such general market risk equivalent assets for
standardized market risk-weighted assets for purposes of
Sec. 3.20(d)(3); and
(C) Substitute the corresponding provision or provisions of appendix
A to this part, and, if applicable, appendix B to this part (national
banks), or 12 CFR part 167 (Federal savings associations) for any
reference to subpart D of this part in: Sec. 3.121(c); Sec. 3.124(a) and
(b); Sec. 3.144(b); Sec. 3.154(c) and (d); Sec. 3.202(b) (definition of
covered position in paragraph (b)(3)(iv)); and Sec. 3.211(b);\2\
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\2\ In addition, for purposes of Sec. 3.201(c)(3), from January 1,
2014 to December 31, 2014, for any circumstance in which the OCC may
require a national bank or Federal savings association to calculate
risk-based capital requirements for specific positions or portfolios
under subpart D of this part, the OCC will instead require the national
bank or Federal savings association to make such calculations according
to appendix A to this part and, if applicable, subpart F of this part
(national banks), or 12 CFR part 167 and, if applicable, subpart F of
this part (Federal savings associations).
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(iii) Beginning on January 1, 2014, calculate and maintain minimum
capital ratios in accordance with subparts A, B, and C of this part,
provided, however, that such national bank or Federal savings
association must:
(A) From January 1, 2014 to December 31, 2014, maintain a minimum
common equity tier 1 capital ratio of 4 percent, a minimum tier 1
capital ratio of 5.5 percent, a minimum total capital ratio of 8
percent, and a minimum leverage ratio of 4 percent; and
(B) From January 1, 2015 to December 31, 2017, an advanced
approaches national bank or Federal savings association:
(1) Is not required to maintain a supplementary leverage ratio; and
(2) Must calculate a supplementary leverage ratio in accordance with
Sec. 3.10(c), and must report the calculated supplementary leverage
ratio on any applicable regulatory reports.
(2) Subject to the transition provisions in subpart G of this part,
a national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association or a savings and
loan holding company that is an advanced approaches national bank or
Federal savings association must:
(i) Beginning on January 1, 2015, calculate standardized total risk-
weighted assets in accordance with subpart D, and if applicable, subpart
F of this part; and
(ii) Beginning on January 1, 2015, calculate and maintain minimum
capital ratios in accordance with subparts A, B and C of this part,
provided, however, that from January 1, 2015 to December 31, 2017, a
savings and loan holding company that is an advanced approaches national
bank or Federal savings association:
(A) Is not required to maintain a supplementary leverage ratio; and
(B) Must calculate a supplementary leverage ratio in accordance with
Sec. 3.10(c), and must report the calculated supplementary leverage
ratio on any applicable regulatory reports.
(3) Beginning on January 1, 2016, and subject to the transition
provisions in subpart G of this part, a national bank or Federal savings
association is subject to limitations on distributions and discretionary
bonus payments with respect to its capital conservation buffer
[[Page 20]]
and any applicable countercyclical capital buffer amount, in accordance
with subpart B of this part.
(4) No national bank or Federal savings association that is not an
advanced approaches bank or advanced approaches savings association is
subject to this part 3 until January 1, 2015.
Sec. 3.2 Definitions.
As used in this part:
Additional tier 1 capital is defined in Sec. 3.20(c).
Advanced approaches national bank or Federal savings association
means a national bank or Federal savings association that is described
in Sec. 3.100(b)(1).
Advanced approaches total risk-weighted assets means:
(1) The sum of:
(i) Credit-risk-weighted assets;
(ii) Credit valuation adjustment (CVA) risk-weighted assets;
(iii) Risk-weighted assets for operational risk; and
(iv) For a market risk national bank or Federal savings association
only, advanced market risk-weighted assets; minus
(2) Excess eligible credit reserves not included in the national
bank's or Federal savings association's tier 2 capital.
Advanced market risk-weighted assets means the advanced measure for
market risk calculated under Sec. 3.204 multiplied by 12.5.
Affiliate with respect to a company, means any company that
controls, is controlled by, or is under common control with, the
company.
Allocated transfer risk reserves means reserves that have been
established in accordance with section 905(a) of the International
Lending Supervision Act, against certain assets whose value U.S.
supervisory authorities have found to be significantly impaired by
protracted transfer risk problems.
Allowances for loan and lease losses (ALLL) means valuation
allowances that have been established through a charge against earnings
to cover estimated credit losses on loans, lease financing receivables
or other extensions of credit as determined in accordance with GAAP.
ALLL excludes ``allocated transfer risk reserves.'' For purposes of this
part, ALLL includes allowances that have been established through a
charge against earnings to cover estimated credit losses associated with
off-balance sheet credit exposures as determined in accordance with
GAAP.
Asset-backed commercial paper (ABCP) program means a program
established primarily for the purpose of issuing commercial paper that
is investment grade and backed by underlying exposures held in a
bankruptcy-remote special purpose entity (SPE).
Asset-backed commercial paper (ABCP) program sponsor means a
national bank or Federal savings association 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.
Bank holding company means a bank holding company as defined in
section 2 of the Bank Holding Company Act.
Bank Holding Company Act means the Bank Holding Company Act of 1956,
as amended (12 U.S.C. 1841 et seq.).
Bankruptcy remote means, with respect to an entity or asset, that
the entity or asset would be excluded from an insolvent entity's estate
in receivership, insolvency, liquidation, or similar proceeding.
Call Report means Consolidated Reports of Condition and Income.
Carrying value means, with respect to an asset, the value of the
asset on the balance sheet of the national bank or Federal savings
association, determined in accordance with GAAP.
Central counterparty (CCP) means a counterparty (for example, a
clearing house) that facilitates trades between counterparties in one or
more financial markets by either guaranteeing trades or novating
contracts.
CFTC means the U.S. Commodity Futures Trading Commission.
Clean-up call means a contractual provision that permits an
originating national bank or Federal savings association or servicer to
call
[[Page 21]]
securitization exposures before their stated maturity or call date.
Cleared transaction means an exposure associated with an outstanding
derivative contract or repo-style transaction that a national bank or
Federal savings association or clearing member has entered into with a
central counterparty (that is, a transaction that a central counterparty
has accepted).
(1) The following transactions are cleared transactions:
(i) A transaction between a CCP and a national bank or Federal
savings association that is a clearing member of the CCP where the
national bank or Federal savings association enters into the transaction
with the CCP for the national bank's or Federal savings association's
own account;
(ii) A transaction between a CCP and a national bank or Federal
savings association that is a clearing member of the CCP where the
national bank or Federal savings association is acting as a financial
intermediary on behalf of a clearing member client and the transaction
offsets another transaction that satisfies the requirements set forth in
Sec. 3.3(a);
(iii) A transaction between a clearing member client national bank
or Federal savings association and a clearing member where the clearing
member acts as a financial intermediary on behalf of the clearing member
client and enters into an offsetting transaction with a CCP, provided
that the requirements set forth in Sec. 3.3(a) are met; or
(iv) A transaction between a clearing member client national bank or
Federal savings association and a CCP where a clearing member guarantees
the performance of the clearing member client national bank or Federal
savings association to the CCP and the transaction meets the
requirements of Sec. 3.3(a)(2) and (3).
(2) The exposure of a national bank or Federal savings association
that is a clearing member to its clearing member client is not a cleared
transaction where the national bank or Federal savings association is
either acting as a financial intermediary and enters into an offsetting
transaction with a CCP or where the national bank or Federal savings
association provides a guarantee to the CCP on the performance of the
client.\3\
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\3\ For the standardized approach treatment of these exposures, see
Sec. 3.34(e) (OTC derivative contracts) or Sec. 3.37(c) (repo-style
transactions). For the advanced approaches treatment of these exposures,
see Secs. 3.132(c)(8) and (d) (OTC derivative contracts) or
Secs. 3.132(b) and Sec. 3.132(d) (repo-style transactions) and for
calculation of the margin period of risk, see Secs. 3.132(d)(5)(iii)(C)
(OTC derivative contracts) and Sec. 3.132(d)(5)(iii)(A) (repo-style
transactions).
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Clearing member means a member of, or direct participant in, a CCP
that is entitled to enter into transactions with the CCP.
Clearing member client means a party to a cleared transaction
associated with a CCP in which a clearing member acts either as a
financial intermediary with respect to the party or guarantees the
performance of the party to the CCP.
Collateral agreement means a legal contract that specifies the time
when, and circumstances under which, a counterparty is required to
pledge collateral to a national bank or Federal savings association for
a single financial contract or for all financial contracts in a netting
set and confers upon the national bank or Federal savings association 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 national bank or
Federal savings association 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 national bank's or
Federal savings association's exercise of rights under the agreement may
be stayed or avoided under applicable law in the relevant jurisdictions,
other than in receivership, conservatorship, resolution under the
Federal Deposit Insurance Act, Title II of the Dodd-Frank Act, or under
any similar insolvency law applicable to GSEs.
[[Page 22]]
Commitment means any legally binding arrangement that obligates a
national bank or Federal savings association to extend credit or to
purchase assets.
Commodity derivative contract means a commodity-linked swap,
purchased commodity-linked option, forward commodity-linked contract, or
any other instrument linked to commodities that gives rise to similar
counterparty credit risks.
Commodity Exchange Act means the Commodity Exchange Act of 1936 (7
U.S.C. 1 et seq.)
Common equity tier 1 capital is defined in Sec. 3.20(b).
Common equity tier 1 minority interest means the common equity tier
1 capital of a depository institution or foreign bank that is:
(1) A consolidated subsidiary of a national bank or Federal savings
association; and
(2) Not owned by the national bank or Federal savings association.
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.
Core capital means tier 1 capital, as calculated in accordance with
subpart B of this part.
Corporate exposure means an exposure to a company that is not:
(1) An exposure to a sovereign, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, a multi-lateral development bank (MDB), a
depository institution, a foreign bank, a credit union, or a public
sector entity (PSE);
(2) An exposure to a GSE;
(3) A residential mortgage exposure;
(4) A pre-sold construction loan;
(5) A statutory multifamily mortgage;
(6) A high volatility commercial real estate (HVCRE) exposure;
(7) A cleared transaction;
(8) A default fund contribution;
(9) A securitization exposure;
(10) An equity exposure; or
(11) An unsettled transaction.
Country risk classification (CRC) with respect to a sovereign, means
the most recent consensus CRC published by the Organization for Economic
Cooperation and Development (OECD) as of December 31st of the prior
calendar year that provides a view of the likelihood that the sovereign
will service its external debt.
Covered savings and loan holding company means a top-tier savings
and loan holding company other than:
(1) A top-tier savings and loan holding company that is:
(i) A grandfathered unitary savings and loan holding company as
defined in section 10(c)(9)(A) of HOLA; and
(ii) As of June 30 of the previous calendar year, derived 50 percent
or more of its total consolidated assets or 50 percent of its total
revenues on an enterprise-wide basis (as calculated under GAAP) from
activities that are not financial in nature under section 4(k) of the
Bank Holding Company Act (12 U.S.C. 1842(k));
(2) A top-tier savings and loan holding company that is an insurance
underwriting company; or
(3)(i) A top-tier savings and loan holding company that, as of June
30 of the previous calendar year, held 25 percent or more of its total
consolidated assets in subsidiaries that are insurance underwriting
companies (other than assets associated with insurance for credit risk);
and
(ii) For purposes of paragraph (3)(i) of this definition, the
company must calculate its total consolidated assets in accordance with
GAAP, or if the company does not calculate its total consolidated assets
under GAAP for any regulatory purpose (including compliance with
applicable securities laws), the company may estimate its total
consolidated assets, subject to review and adjustment by the Board.
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
[[Page 23]]
one or more exposures (reference exposure(s)) to another party (the
protection provider) for a certain period of time.
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 of the CEIO 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 national bank or Federal savings association
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 counterparties 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 covering, 1-4 family residential
first mortgage loans that qualify for a 50 percent risk weight 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;
(2) Premium refund clauses that cover assets guaranteed, in whole or
in part, by the U.S. Government, a U.S. Government agency or a GSE,
provided the premium refund 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 as calculated
under Sec. 3.131;
(2) Risk-weighted assets for securitization exposures as calculated
under Sec. 3.142; and
(3) Risk-weighted assets for equity exposures as calculated under
Sec. 3.151.
Credit union means an insured credit union as defined under the
Federal Credit Union Act (12 U.S.C. 1752 et seq.).
Current exposure means, with respect to a netting set, the larger of
zero or the fair 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.
Current exposure methodology means the method of calculating the
exposure amount for over-the-counter derivative contracts in
Sec. 3.34(a) and exposure at default (EAD) in Sec. 3.132(c)(5) or (6),
as applicable.
Custodian means a financial institution that has legal custody of
collateral provided to a CCP.
Default fund contribution means the funds contributed or commitments
made by a clearing member to a CCP's mutualized loss sharing
arrangement.
Depository institution means a depository institution as defined in
section 3 of the Federal Deposit Insurance Act.
Depository institution holding company means a bank holding company
or savings and loan holding company.
Derivative contract means a financial contract whose value is
derived from the values of one or more underlying assets, reference
rates, or indices of asset values or reference rates. Derivative
contracts include interest rate derivative contracts, exchange rate
derivative contracts, equity derivative contracts, commodity derivative
contracts, credit derivative contracts, and any other instrument that
poses similar counterparty credit risks. Derivative contracts also
include unsettled securities, commodities, and foreign
[[Page 24]]
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.
Discretionary bonus payment means a payment made to an executive
officer of a national bank or Federal savings association, where:
(1) The national bank or Federal savings association retains
discretion as to whether to make, and the amount of, the payment until
the payment is awarded to the executive officer;
(2) The amount paid is determined by the national bank or Federal
savings association without prior promise to, or agreement with, the
executive officer; and
(3) The executive officer has no contractual right, whether express
or implied, to the bonus payment.
Distribution means:
(1) A reduction of tier 1 capital through the repurchase of a tier 1
capital instrument or by other means, except when a national bank or
Federal savings association, within the same quarter when the repurchase
is announced, fully replaces a tier 1 capital instrument it has
repurchased by issuing another capital instrument that meets the
eligibility criteria for:
(i) A common equity tier 1 capital instrument if the instrument
being repurchased was part of the national bank's or Federal savings
association's common equity tier 1 capital, or
(ii) A common equity tier 1 or additional tier 1 capital instrument
if the instrument being repurchased was part of the national bank's or
Federal savings association's tier 1 capital;
(2) A reduction of tier 2 capital through the repurchase, or
redemption prior to maturity, of a tier 2 capital instrument or by other
means, except when a national bank or Federal savings association,
within the same quarter when the repurchase or redemption is announced,
fully replaces a tier 2 capital instrument it has repurchased by issuing
another capital instrument that meets the eligibility criteria for a
tier 1 or tier 2 capital instrument;
(3) A dividend declaration or payment on any tier 1 capital
instrument;
(4) A dividend declaration or interest payment on any tier 2 capital
instrument if the national bank or Federal savings association has full
discretion to permanently or temporarily suspend such payments without
triggering an event of default; or
(5) Any similar transaction that the OCC determines to be in
substance a distribution of capital.
Dodd-Frank Act means the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (Pub. L. 111-203, 124 Stat. 1376).
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 national bank
or Federal savings association (such as material changes in tax laws or
regulations); or
(2) Leaves investors fully exposed to future draws by borrowers on
the underlying exposures even after the provision is triggered.
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 exposure amount (or EAD for
purposes of subpart E of this part) of the hedged exposure, multiplied
by the percentage coverage of the credit risk mitigant.
Eligible ABCP liquidity facility means a liquidity facility
supporting ABCP, in form or in substance, that is subject to an asset
quality test at the time of draw that precludes funding against assets
that are 90 days or more past due or in default. Notwithstanding the
preceding sentence, a liquidity facility is an eligible ABCP liquidity
facility if the assets or exposures funded under the liquidity facility
that do not meet the eligibility requirements are guaranteed by a
sovereign that qualifies for a 20 percent risk weight or lower.
Eligible clean-up call means a clean-up call that:
(1) Is exercisable solely at the discretion of the originating
national bank or Federal savings association or servicer;
[[Page 25]]
(2) Is not structured to avoid allocating losses to securitization
exposures held by investors or otherwise structured to provide credit
enhancement to the securitization; and
(3)(i) For a traditional securitization, is only exercisable when 10
percent or less of the principal amount of the underlying exposures or
securitization exposures (determined as of the inception of the
securitization) is outstanding; or
(ii) For a synthetic securitization, is only exercisable when 10
percent or less of the principal amount of the reference portfolio of
underlying exposures (determined as of the inception of the
securitization) is outstanding.
Eligible credit derivative means a credit derivative in the form of
a credit default swap, nth-to-default swap, total return
swap, or any other form of credit derivative approved by the 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
nth-to-default swap, the contract includes the following
credit events:
(i) Failure to pay any amount due under the terms of the reference
exposure, subject to any applicable minimal payment threshold that is
consistent with standard market practice and with a grace period that is
closely in line with the grace period of the reference exposure; and
(ii) Receivership, insolvency, liquidation, conservatorship or
inability of the reference exposure issuer 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 provide that any required consent to transfer may not be
unreasonably withheld;
(7) If the credit derivative is a credit default swap or
nth-to-default swap, the contract clearly identifies the
parties responsible for determining whether a credit event has occurred,
specifies that this determination is not the sole responsibility of the
protection provider, and gives the protection purchaser the right to
notify the protection provider of the occurrence of a credit event; and
(8) If the credit derivative is a total return swap and the national
bank or Federal savings association records net payments received on the
swap as net income, the national bank or Federal savings association
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 cover estimated credit
losses associated with on- or off-balance sheet wholesale and retail
exposures, including the 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.
Eligible guarantee means a guarantee from an eligible guarantor
that:
(1) Is written;
(2) Is either:
(i) Unconditional, or
(ii) A contingent obligation of the U.S. government or its agencies,
the enforceability of which is dependent upon some affirmative action on
the part of the beneficiary of the guarantee or a third party (for
example, meeting servicing requirements);
(3) Covers all or a pro rata portion of all contractual payments of
the obligated party on the reference exposure;
(4) Gives the beneficiary a direct claim against the protection
provider;
[[Page 26]]
(5) Is not unilaterally cancelable by the protection provider for
reasons other than the breach of the contract by the beneficiary;
(6) Except for a guarantee by a sovereign, is legally enforceable
against the protection provider in a jurisdiction where the protection
provider has sufficient assets against which a judgment may be attached
and enforced;
(7) Requires the protection provider to make payment to the
beneficiary on the occurrence of a default (as defined in the guarantee)
of the obligated party on the reference exposure in a timely manner
without the beneficiary first having to take legal actions to pursue the
obligor for payment;
(8) Does not increase the beneficiary's cost of credit protection on
the guarantee in response to deterioration in the credit quality of the
reference exposure; and
(9) Is not provided by an affiliate of the national bank or Federal
savings association, unless the affiliate is an insured depository
institution, foreign bank, securities broker or dealer, or insurance
company that:
(i) Does not control the national bank or Federal savings
association; and
(ii) Is subject to consolidated supervision and regulation
comparable to that imposed on depository institutions, U.S. securities
broker-dealers, or U.S. insurance companies (as the case may be).
Eligible guarantor means:
(1) A sovereign, 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 (MDB), a
depository institution, a bank holding company, a savings and loan
holding company, a credit union, a foreign bank, or a qualifying central
counterparty; or
(2) An entity (other than a special purpose entity):
(i) That at the time the guarantee is issued or anytime thereafter,
has issued and outstanding an unsecured debt security without credit
enhancement that is investment grade;
(ii) Whose creditworthiness is not positively correlated with the
credit risk of the exposures for which it has provided guarantees; and
(iii) That is not an insurance company engaged predominately in the
business of providing credit protection (such as a monoline bond insurer
or re-insurer).
Eligible margin loan means:
(1) An extension of credit where:
(i) The extension of credit is collateralized exclusively by liquid
and readily marketable debt or equity securities, or gold;
(ii) The collateral is marked-to-fair value daily, and the
transaction is subject to daily margin maintenance requirements; and
(iii) The extension of credit is conducted under an agreement that
provides the national bank or Federal savings association 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 receivership, insolvency, liquidation, conservatorship, 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, other than
in receivership, conservatorship, resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs.\4\
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\4\ 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, or netting contracts between or among
financial institutions under sections 401-407 of the Federal Deposit
Insurance Corporation Improvement Act or the Federal Reserve Board's
Regulation EE (12 CFR part 231).
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(2) In order to recognize an exposure as an eligible margin loan for
purposes of this subpart, a national bank or Federal savings association
must comply with the requirements of Sec. 3.3(b) with respect to that
exposure.
[[Page 27]]
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.
Employee stock ownership plan has the same meaning as in 29 CFR
2550.407d-6.
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 an 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 national bank or
Federal savings association under GAAP;
(ii) The national bank or Federal savings association is required to
deduct the ownership interest from tier 1 or tier 2 capital under this
part;
(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.
ERISA means the Employee Retirement Income and Security Act of 1974
(29 U.S.C. 1001 et seq.).
Exchange rate derivative contract means a cross-currency interest
rate swap, forward foreign-exchange contract, currency option purchased,
or any other instrument linked to exchange rates that gives rise to
similar counterparty credit risks.
Executive officer means a person who holds the title or, without
regard to title, salary, or compensation, performs the function of one
or more of the following positions: President, chief executive officer,
executive chairman, chief operating officer, chief financial officer,
chief investment officer, chief legal officer, chief lending officer,
chief risk officer, or head of a major business line, and other staff
that the board of directors of the national bank or Federal savings
association deems to have equivalent responsibility.
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 the
probability of default (PD) times the loss given default (LGD) times the
exposure at default (EAD) for the exposure or segment.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, the national bank's or Federal savings
association'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 national bank or
Federal
[[Page 28]]
savings association has applied the double default treatment in
Sec. 3.135.
Exposure amount means:
(1) For the on-balance sheet component of an exposure (other than an
available-for-sale or held-to-maturity security, if the national bank or
Federal savings association has made an AOCI opt-out election (as
defined in Sec. 3.22(b)(2)); an OTC derivative contract; a repo-style
transaction or an eligible margin loan for which the national bank or
Federal savings association determines the exposure amount under
Sec. 3.37; a cleared transaction; a default fund contribution; or a
securitization exposure), the national bank's or Federal savings
association's carrying value of the exposure.
(2) For a security (that is not a securitization exposure, equity
exposure, or preferred stock classified as an equity security under
GAAP) classified as available-for-sale or held-to-maturity if the
national bank or Federal savings association has made an AOCI opt-out
election (as defined in Sec. 3.22(b)(2)), the national bank's or Federal
savings association's carrying value (including net accrued but unpaid
interest and fees) for the exposure less any net unrealized gains on the
exposure and plus any net unrealized losses on the exposure.
(3) For available-for-sale preferred stock classified as an equity
security under GAAP if the national bank or Federal savings association
has made an AOCI opt-out election (as defined in Sec. 3.22(b)(2)), the
national bank's or Federal savings association's carrying value of the
exposure less any net unrealized gains on the exposure that are
reflected in such carrying value but excluded from the national bank's
or Federal savings association's regulatory capital components.
(4) For the off-balance sheet component of an exposure (other than
an OTC derivative contract; a repo-style transaction or an eligible
margin loan for which the national bank or Federal savings association
calculates the exposure amount under Sec. 3.37; a cleared transaction; a
default fund contribution; or a securitization exposure), the notional
amount of the off-balance sheet component multiplied by the appropriate
credit conversion factor (CCF) in Sec. 3.33.
(5) For an exposure that is an OTC derivative contract, the exposure
amount determined under Sec. 3.34.
(6) For an exposure that is a cleared transaction, the exposure
amount determined under Sec. 3.35.
(7) For an exposure that is an eligible margin loan or repo-style
transaction for which the bank calculates the exposure amount as
provided in Sec. 3.37, the exposure amount determined under Sec. 3.37.
(8) For an exposure that is a securitization exposure, the exposure
amount determined under Sec. 3.42.
Federal Deposit Insurance Act means the Federal Deposit Insurance
Act (12 U.S.C. 1813).
Federal Deposit Insurance Corporation Improvement Act means the
Federal Deposit Insurance Corporation Improvement Act of 1991 (12 U.S.C.
4401).
Financial collateral means collateral:
(1) In the form of:
(i) Cash on deposit with the national bank or Federal savings
association (including cash held for the national bank or Federal
savings association by a third-party custodian or trustee);
(ii) Gold bullion;
(iii) Long-term debt securities that are not resecuritization
exposures and that are investment grade;
(iv) Short-term debt instruments that are not resecuritization
exposures and that are investment grade;
(v) Equity securities that are publicly traded;
(vi) Convertible bonds that are publicly traded; or
(vii) Money market fund shares and other mutual fund shares if a
price for the shares is publicly quoted daily; and
(2) In which the national bank or Federal savings association 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).
Federal savings association means an insured Federal savings
association or an insured Federal savings bank chartered under section 5
of the Home Owners' Loan Act of 1933.
Financial institution means:
[[Page 29]]
(1) A bank holding company; savings and loan holding company;
nonbank financial institution supervised by the Board under Title I of
the Dodd-Frank Act; depository institution; foreign bank; credit union;
industrial loan company, industrial bank, or other similar institution
described in section 2 of the Bank Holding Company Act; national
association, state member bank, or state non-member bank that is not a
depository institution; insurance company; securities holding company as
defined in section 618 of the Dodd-Frank Act; broker or dealer
registered with the SEC under section 15 of the Securities Exchange Act;
futures commission merchant as defined in section 1a of the Commodity
Exchange Act; swap dealer as defined in section 1a of the Commodity
Exchange Act; or security-based swap dealer as defined in section 3 of
the Securities Exchange Act;
(2) Any designated financial market utility, as defined in section
803 of the Dodd-Frank Act;
(3) Any entity not domiciled in the United States (or a political
subdivision thereof) that is supervised and regulated in a manner
similar to entities described in paragraphs (1) or (2) of this
definition; or
(4) Any other company:
(i) Of which the national bank or Federal savings association owns:
(A) An investment in GAAP equity instruments of the company with an
adjusted carrying value or exposure amount equal to or greater than $10
million; or
(B) More than 10 percent of the company's issued and outstanding
common shares (or similar equity interest), and
(ii) Which is predominantly engaged in the following activities:
(A) Lending money, securities or other financial instruments,
including servicing loans;
(B) Insuring, guaranteeing, indemnifying against loss, harm, damage,
illness, disability, or death, or issuing annuities;
(C) Underwriting, dealing in, making a market in, or investing as
principal in securities or other financial instruments; or
(D) Asset management activities (not including investment or
financial advisory activities).
(5) For the purposes of this definition, a company is
``predominantly engaged'' in an activity or activities if:
(i) 85 percent or more of the total consolidated annual gross
revenues (as determined in accordance with applicable accounting
standards) of the company is either of the two most recent calendar
years were derived, directly or indirectly, by the company on a
consolidated basis from the activities; or
(ii) 85 percent or more of the company's consolidated total assets
(as determined in accordance with applicable accounting standards) as of
the end of either of the two most recent calendar years were related to
the activities.
(6) Any other company that the OCC may determine is a financial
institution based on activities similar in scope, nature, or operation
to those of the entities included in paragraphs (1) through (4) of this
definition.
(7) For purposes of this part, ``financial institution'' does not
include the following entities:
(i) GSEs;
(ii) Small business investment companies, as defined in section 102
of the Small Business Investment Act of 1958 (15 U.S.C. 662);
(iii) Entities designated as Community Development Financial
Institutions (CDFIs) under 12 U.S.C. 4701 et seq. and 12 CFR part 1805;
(iv) Entities registered with the SEC under the Investment Company
Act of 1940 (15 U.S.C. 80a-1) or foreign equivalents thereof;
(v) Entities to the extent that the national bank's or Federal
savings association's investment in such entities would qualify as a
community development investment under section 24 (Eleventh) of the
National Bank Act; and
(vi) An employee benefit plan as defined in paragraphs (3) and (32)
of section 3 of ERISA, a ``governmental plan'' (as defined in 29 U.S.C.
1002(32)) that complies with the tax deferral qualification requirements
provided in the Internal Revenue Code, or any similar employee benefit
plan established under the laws of a foreign jurisdiction.
[[Page 30]]
First-lien residential mortgage exposure means a residential
mortgage exposure secured by a first lien.
Foreign bank means a foreign bank as defined in Sec. 211.2 of the
Federal Reserve Board's Regulation K (12 CFR 211.2) (other than a
depository institution).
Forward agreement means a legally binding contractual obligation to
purchase assets with certain drawdown at a specified future date, not
including commitments to make residential mortgage loans or forward
foreign exchange contracts.
GAAP means generally accepted accounting principles as used in the
United States.
Gain-on-sale means an increase in the equity capital of a national
bank or Federal savings association (as reported on [Schedule RC of the
Call Report or Schedule HC of the FR Y-9C]) resulting from a traditional
securitization (other than an increase in equity capital resulting from
the national bank's or Federal savings association's receipt of cash in
connection with the securitization or reporting of a mortgage servicing
asset on [Schedule RC of the Call Report or Schedule HC of the FRY-9C]).
General obligation means a bond or similar obligation that is backed
by the full faith and credit of a public sector entity (PSE).
Government-sponsored enterprise (GSE) means an entity established or
chartered by the U.S. government to serve public purposes specified by
the U.S. Congress but whose debt obligations are not explicitly
guaranteed by the full faith and credit of the U.S. government.
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).
High volatility commercial real estate (HVCRE) exposure means a
credit facility that, prior to conversion to permanent financing,
finances or has financed the acquisition, development, or construction
(ADC) of real property, unless the facility finances:
(1) One- to four-family residential properties;
(2) Real property that:
(i) Would qualify as an investment in community development under 12
U.S.C. 338a or 12 U.S.C. 24 (Eleventh), as applicable, or as a
``qualified investment'' under 12 CFR parts 25 (national banks) and 195
(Federal savings associations), and
(ii) Is not an ADC loan to any entity described in 12 CFR
25.12(g)(3) (national banks) and 12 CFR 195.12(g)(3) (Federal savings
associations), unless it is otherwise described in paragraph (1),
(2)(i), (3) or (4) of this definition;
(3) The purchase or development of agricultural land, which includes
all land known to be used or usable for agricultural purposes (such as
crop and livestock production), provided that the valuation of the
agricultural land is based on its value for agricultural purposes and
the valuation does not take into consideration any potential use of the
land for non-agricultural commercial development or residential
development; or
(4) 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 (national banks) and 12 CFR part
160, subparts A and B (Federal savings associations);
(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 (4)(ii) of this definition before the national bank or Federal
savings association 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
[[Page 31]]
sold or paid in full. Permanent financing may be provided by the
national bank or Federal savings association that provided the ADC
facility as long as the permanent financing is subject to the national
bank's or Federal savings association's underwriting criteria for long-
term mortgage loans.
Home country means the country where an entity is incorporated,
chartered, or similarly established.
Indirect exposure means an exposure that arises from the national
bank's or Federal savings association's investment in an investment fund
which holds an investment in the national bank's or Federal savings
association's own capital instrument or an investment in the capital of
an unconsolidated financial institution.
Insurance company means an insurance company as defined in section
201 of the Dodd-Frank Act (12 U.S.C. 5381).
Insurance underwriting company means an insurance company as defined
in section 201 of the Dodd-Frank Act (12 U.S.C. 5381) that engages in
insurance underwriting activities.
Insured depository institution means an insured depository
institution as defined in section 3 of the Federal Deposit Insurance
Act.
Interest rate derivative contract means a single-currency interest
rate swap, basis swap, forward rate agreement, purchased interest rate
option, when-issued securities, or any other instrument linked to
interest rates that gives rise to similar counterparty credit risks.
International Lending Supervision Act means the International
Lending Supervision Act of 1983 (12 U.S.C. 3907).
Investing bank means, with respect to a securitization, a national
bank or Federal savings association that assumes the credit risk of a
securitization exposure (other than an originating national bank or
Federal savings association of the securitization). In the typical
synthetic securitization, the investing national bank or Federal savings
association sells credit protection on a pool of underlying exposures to
the originating national bank or Federal savings association.
Investment fund means a company:
(1) Where all or substantially all of the assets of the company are
financial assets; and
(2) That has no material liabilities.
Investment grade means that the entity to which the national bank or
Federal savings association is exposed through a loan or security, or
the reference entity with respect to a credit derivative, has adequate
capacity to meet financial commitments for the projected life of the
asset or exposure. Such an entity or reference entity has adequate
capacity to meet financial commitments if the risk of its default is low
and the full and timely repayment of principal and interest is expected.
Investment in the capital of an unconsolidated financial institution
means a net long position calculated in accordance with Sec. 3.22(h) in
an instrument that is recognized as capital for regulatory purposes by
the primary supervisor of an unconsolidated regulated financial
institution and is an instrument that is part of the GAAP equity of an
unconsolidated unregulated financial institution, including direct,
indirect, and synthetic exposures to capital instruments, excluding
underwriting positions held by the national bank or Federal savings
association for five or fewer business days.
Investment in the national bank's or Federal savings association's
own capital instrument means a net long position calculated in
accordance with Sec. 3.22(h) in the national bank's or Federal savings
association's own common stock instrument, own additional tier 1 capital
instrument or own tier 2 capital instrument, including direct, indirect,
or synthetic exposures to such capital instruments. An investment in the
national bank's or Federal savings association's own capital instrument
includes any contractual obligation to purchase such capital instrument.
Junior-lien residential mortgage exposure means a residential
mortgage exposure that is not a first-lien residential mortgage
exposure.
Main index means the Standard & Poor's 500 Index, the FTSE All-World
Index, and any other index for which the national bank or Federal
savings association can demonstrate to the satisfaction of the OCC that
the equities
[[Page 32]]
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.
Market risk [BANK] means a national bank or Federal savings
association that is described in Sec. 3.201(b).
Money market fund means an investment fund that is subject to 17 CFR
270.2a-7 or any foreign equivalent thereof.
Mortgage servicing assets (MSAs) means the contractual rights owned
by a national bank or Federal savings association to service for a fee
mortgage loans that are owned by others.
Multilateral development bank (MDB) means the International Bank for
Reconstruction and Development, the Multilateral Investment Guarantee
Agency, 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.
National Bank Act means the National Bank Act (12 U.S.C. 24).
Netting set means a group of transactions with a single counterparty
that are subject to a qualifying master netting agreement or a
qualifying cross-product master netting agreement. For purposes of
calculating risk-based capital requirements using the internal models
methodology in subpart E of this part, this term does not cover a
transaction:
(1) That is not subject to such a master netting agreement; or
(2) Where the national bank or Federal savings association has
identified specific wrong-way risk.
Non-significant investment in the capital of an unconsolidated
financial institution means an investment in the capital of an
unconsolidated financial institution where the national bank or Federal
savings association owns 10 percent or less of the issued and
outstanding common stock of the unconsolidated financial institution.
Nth-to-default credit derivative means a credit
derivative that provides credit protection only for the nth-
defaulting reference exposure in a group of reference exposures.
Operating entity means a company established to conduct business
with clients with the intention of earning a profit in its own right.
Original maturity with respect to an off-balance sheet commitment
means the length of time between the date a commitment is issued and:
(1) For a commitment that is not subject to extension or renewal,
the stated expiration date of the commitment; or
(2) For a commitment that is subject to extension or renewal, the
earliest date on which the national bank or Federal savings association
can, at its option, unconditionally cancel the commitment.
Originating national bank or Federal savings association, with
respect to a securitization, means a national bank or Federal savings
association 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.
Over-the-counter (OTC) derivative contract means a derivative
contract that is not a cleared transaction. An OTC derivative includes a
transaction:
(1) Between a national bank or Federal savings association that is a
clearing member and a counterparty where the national bank or Federal
savings association is acting as a financial intermediary and enters
into a cleared transaction with a CCP that offsets the transaction with
the counterparty; or
(2) In which a national bank or Federal savings association that is
a clearing member provides a CCP a guarantee on the performance of the
counterparty to the transaction.
Performance standby letter of credit (or performance bond) means an
irrevocable obligation of a national bank or Federal savings association
to pay a third-
[[Page 33]]
party beneficiary when a customer (account party) fails to perform on
any contractual nonfinancial or commercial obligation. To the extent
permitted by law or regulation, performance standby letters of credit
include arrangements backing, among other things, subcontractors' and
suppliers' performance, labor and materials contracts, and construction
bids.
Pre-sold construction loan means any one-to-four family residential
construction loan to a builder that meets the requirements of section
618(a)(1) or (2) of the Resolution Trust Corporation Refinancing,
Restructuring, and Improvement Act of 1991 (12 U.S.C. 1831n note) and
the following criteria:
(1) The loan is made in accordance with prudent underwriting
standards, meaning that the national bank or Federal savings association
has obtained sufficient documentation that the buyer of the home has a
legally binding written sales contract and has a firm written commitment
for permanent financing of the home upon completion;
(2) The purchaser is an individual(s) that intends to occupy the
residence and is 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 residences for
speculative purposes;
(3) The purchaser has entered into a legally binding written sales
contract for the residence;
(4) The purchaser has not terminated the contract;
(5) The purchaser has made a substantial earnest money deposit of no
less than 3 percent of the sales price, which is subject to forfeiture
if the purchaser terminates the sales contract; provided that, 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;
(6) The earnest money deposit must be held in escrow by the national
bank or Federal savings association or an independent party in a
fiduciary capacity, and the escrow agreement must provide that in an
event of default arising from the cancellation of the sales contract by
the purchaser of the residence, the escrow funds shall be used to defray
any cost incurred by the national bank or Federal savings association;
(7) The builder must incur at least the first 10 percent of the
direct costs of construction of the residence (that is, actual costs of
the land, labor, and material) before any drawdown is made under the
loan;
(8) The loan may not exceed 80 percent of the sales price of the
presold residence; and
(9) The loan is not more than 90 days past due, or on nonaccrual.
Protection amount (P) means, with respect to an exposure hedged by
an eligible guarantee or eligible credit derivative, the effective
notional amount of the guarantee or credit derivative, reduced to
reflect any currency mismatch, maturity mismatch, or lack of
restructuring coverage (as provided in Secs. 3.36 or 3.134, as
appropriate).
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; 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.
Public sector entity (PSE) means a state, local authority, or other
governmental subdivision below the sovereign level.
Qualifying central counterparty (QCCP) means a central counterparty
that:
(1)(i) Is a designated financial market utility (FMU) under Title
VIII of the Dodd-Frank Act;
(ii) If not located in the United States, is regulated and
supervised in a manner equivalent to a designated FMU; or
(iii) Meets the following standards:
(A) The central counterparty requires all parties to contracts
cleared by the counterparty to be fully collateralized on a daily basis;
(B) The national bank or Federal savings association demonstrates to
the satisfaction of the OCC that the central counterparty:
[[Page 34]]
(1) Is in sound financial condition;
(2) Is subject to supervision by the Board, the CFTC, or the
Securities Exchange Commission (SEC), or, if the central counterparty is
not located in the United States, is subject to effective oversight by a
national supervisory authority in its home country; and
(3) Meets or exceeds the risk-management standards for central
counterparties set forth in regulations established by the Board, the
CFTC, or the SEC under Title VII or Title VIII of the Dodd-Frank Act; or
if the central counterparty is not located in the United States, meets
or exceeds similar risk-management standards established under the law
of its home country that are consistent with international standards for
central counterparty risk management as established by the relevant
standard setting body of the Bank of International Settlements; and
(2)(i) Provides the national bank or Federal savings association
with the central counterparty's hypothetical capital requirement or the
information necessary to calculate such hypothetical capital
requirement, and other information the national bank or Federal savings
association is required to obtain under Secs. 3.35(d)(3) and
3.133(d)(3);
(ii) Makes available to the OCC and the CCP's regulator the
information described in paragraph (2)(i) of this definition; and
(iii) Has not otherwise been determined by the OCC to not be a QCCP
due to its financial condition, risk profile, failure to meet
supervisory risk management standards, or other weaknesses or
supervisory concerns that are inconsistent with the risk weight assigned
to qualifying central counterparties under Secs. 3.35 and 3.133.
(3) Exception. A QCCP that fails to meet the requirements of a QCCP
in the future may still be treated as a QCCP under the conditions
specified in Sec. 3.3(f).
Qualifying master netting agreement means a written, legally
enforceable 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 upon an event of receivership, insolvency,
liquidation, or similar proceeding, of the counterparty;
(2) The agreement provides the national bank or Federal savings
association 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
receivership, insolvency, liquidation, 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, other than in receivership,
conservatorship, resolution under the Federal Deposit Insurance Act,
Title II of the Dodd-Frank Act, or under any similar insolvency law
applicable to GSEs;
(3) 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 otherwise would make under the agreement, or no payment
at all, to a defaulter or the estate of a defaulter, even if the
defaulter or the estate of the defaulter is a net creditor under the
agreement); and
(4) In order to recognize an agreement as a qualifying master
netting agreement for purposes of this subpart, a national bank or
Federal savings association must comply with the requirements of
Sec. 3.3(d) with respect to that agreement.
Regulated financial institution means a financial institution
subject to consolidated supervision and regulation comparable to that
imposed on the following U.S. financial institutions: Depository
institutions, depository institution holding companies, nonbank
financial companies supervised by the Board, designated financial market
utilities, securities broker-dealers, credit unions, or insurance
companies.
Repo-style transaction means a repurchase or reverse repurchase
transaction, or a securities borrowing or securities lending
transaction, including a transaction in which the national bank or
Federal savings association acts as agent for a customer and indemnifies
the customer against loss, provided that:
[[Page 35]]
(1) The transaction is based solely on liquid and readily marketable
securities, cash, or gold;
(2) The transaction is marked-to-fair value 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, or a netting
contract between or among financial institutions under sections 401-407
of the Federal Deposit Insurance Corporation Improvement Act 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
national bank or Federal savings association 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 receivership, insolvency, liquidation, 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, other than in
receivership, conservatorship, resolution under the Federal Deposit
Insurance Act, Title II of the Dodd-Frank Act, or under any similar
insolvency law applicable to GSEs; or
(B) The transaction is:
(1) Either overnight or unconditionally cancelable at any time by
the national bank or Federal savings association; and
(2) Executed under an agreement that provides the national bank or
Federal savings association 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) In order to recognize an exposure as a repo-style transaction
for purposes of this subpart, a national bank or Federal savings
association must comply with the requirements of Sec. 3.3(e) of this
part with respect to that exposure.
Resecuritization means a securitization which has more than one
underlying exposure and in which one or more of the underlying exposures
is a securitization exposure.
Resecuritization exposure means:
(1) An on- or off-balance sheet exposure to a resecuritization;
(2) An exposure that directly or indirectly references a
resecuritization exposure.
(3) An exposure to an asset-backed commercial paper program is not a
resecuritization exposure if either:
(i) The program-wide credit enhancement does not meet the definition
of a resecuritization exposure; or
(ii) The entity sponsoring the program fully supports the commercial
paper through the provision of liquidity so that the commercial paper
holders effectively are exposed to the default risk of the sponsor
instead of the underlying exposures.
Residential mortgage exposure means an exposure (other than a
securitization exposure, equity exposure, statutory multifamily
mortgage, or presold construction loan) that is:
(1) An exposure that is primarily secured by a first or subsequent
lien on one-to-four family residential property; or
(2)(i) 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; and
(ii) For purposes of calculating capital requirements under subpart
E of this part, is managed as part of a segment of exposures with
homogeneous risk characteristics and not on an individual-exposure
basis.
Revenue obligation means a bond or similar obligation that is an
obligation of a PSE, but which the PSE is committed to repay with
revenues from the specific project financed rather than general tax
funds.
Savings and loan holding company means a savings and loan holding
company as defined in section 10 of the Home Owners' Loan Act (12 U.S.C.
1467a).
[[Page 36]]
Securities and Exchange Commission (SEC) means the U.S. Securities
and Exchange Commission.
Securities Exchange Act means the Securities Exchange Act of 1934
(15 U.S.C. 78).
Securitization exposure means:
(1) An on-balance sheet or off-balance sheet credit exposure
(including credit-enhancing representations and warranties) that arises
from a traditional securitization or synthetic securitization (including
a resecuritization), or
(2) An exposure that directly or indirectly references a
securitization exposure described in paragraph (1) of this definition.
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.
Separate account means a legally segregated pool of assets owned and
held by an insurance company and maintained separately from the
insurance company's general account assets for the benefit of an
individual contract holder. To be a separate account:
(1) The account must be legally recognized as a separate account
under applicable law;
(2) The assets in the account must be insulated from general
liabilities of the insurance company under applicable law in the event
of the insurance company's insolvency;
(3) The insurance company must invest the funds within the account
as directed by the contract holder in designated investment alternatives
or in accordance with specific investment objectives or policies; and
(4) All investment gains and losses, net of contract fees and
assessments, must be passed through to the contract holder, provided
that the contract may specify conditions under which there may be a
minimum guarantee but must not include contract terms that limit the
maximum investment return available to the policyholder.
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.
Significant investment in the capital of an unconsolidated financial
institution means an investment in the capital of an unconsolidated
financial institution where the national bank or Federal savings
association owns more than 10 percent of the issued and outstanding
common stock of the unconsolidated financial institution.
Small Business Act means the Small Business Act (15 U.S.C. 632).
Small Business Investment Act means the Small Business Investment
Act of 1958 (15 U.S.C. 682).
Sovereign means a central government (including the U.S. government)
or an agency, department, ministry, or central bank of a central
government.
Sovereign default means noncompliance by a sovereign with its
external debt service obligations or the inability or unwillingness of a
sovereign government to service an existing loan according to its
original terms, as evidenced by failure to pay principal and interest
timely and fully, arrearages, or restructuring.
Sovereign exposure means:
(1) A direct exposure to a sovereign; or
(2) An exposure directly and unconditionally backed by the full
faith and credit of a sovereign.
Specific wrong-way risk means wrong-way risk that arises when
either:
(1) The counterparty and issuer of the collateral supporting the
transaction; or
(2) The counterparty and the reference asset of the transaction, are
affiliates or are the same entity.
Standardized market risk-weighted assets means the standardized
measure for market risk calculated under Sec. 3.204 multiplied by 12.5.
Standardized total risk-weighted assets means:
[[Page 37]]
(1) The sum of:
(i) Total risk-weighted assets for general credit risk as calculated
under Sec. 3.31;
(ii) Total risk-weighted assets for cleared transactions and default
fund contributions as calculated under Sec. 3.35;
(iii) Total risk-weighted assets for unsettled transactions as
calculated under Sec. 3.38;
(iv) Total risk-weighted assets for securitization exposures as
calculated under Sec. 3.42;
(v) Total risk-weighted assets for equity exposures as calculated
under Secs. 3.52 and 3.53; and
(vi) For a market risk national bank or Federal savings association
only, standardized market risk-weighted assets; minus
(2) Any amount of the national bank's or Federal savings
association's allowance for loan and lease losses that is not included
in tier 2 capital and any amount of allocated transfer risk reserves.
Statutory multifamily mortgage means a loan secured by a multifamily
residential property that meets the requirements under section 618(b)(1)
of the Resolution Trust Corporation Refinancing, Restructuring, and
Improvement Act of 1991, and that meets the following criteria: \5\
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\5\ The types of loans that qualify as loans secured by multifamily
residential properties are listed in the instructions for preparation of
the Call Report.
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(1) The loan is made in accordance with prudent underwriting
standards;
(2) The principal amount of the loan at origination does not exceed
80 percent of the value of the property (or 75 percent of the value of
the property if the loan is based on an interest rate that changes over
the term of the loan) where the value of the property is the lower of
the acquisition cost of the property or the appraised (or, if
appropriate, evaluated) value of the property;
(3) All principal and interest payments on the loan must have been
made on a timely basis in accordance with the terms of the loan for at
least one year prior to applying a 50 percent risk weight to the loan,
or in the case where an existing owner is refinancing a loan on the
property, all principal and interest payments on the loan being
refinanced must have been made on a timely basis in accordance with the
terms of the loan for at least one year prior to applying a 50 percent
risk weight to the loan;
(4) Amortization of principal and interest on the loan must occur
over a period of not more than 30 years and the minimum original
maturity for repayment of principal must not be less than 7 years;
(5) Annual net operating income (before making any payment on the
loan) generated by the property securing the loan during its most recent
fiscal year must not be less than 120 percent of the loan's current
annual debt service (or 115 percent of current annual debt service if
the loan is based on an interest rate that changes over the term of the
loan) or, in the case of a cooperative or other not-for-profit housing
project, the property must generate sufficient cash flow to provide
comparable protection to the national bank or Federal savings
association; and
(6) The loan is not more than 90 days past due, or on nonaccrual.
Subsidiary means, with respect to a company, a company controlled by
that company.
Synthetic exposure means an exposure whose value is linked to the
value of an investment in the national bank's or Federal savings
association's own capital instrument or to the value of an investment in
the capital of an unconsolidated financial institution.
Synthetic securitization means a transaction in which:
(1) All or a portion of the credit risk of one or more underlying
exposures is retained or 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,
[[Page 38]]
credit derivatives, guarantees, receivables, asset-backed securities,
mortgage-backed securities, other debt securities, or equity
securities).
Tangible capital means the amount of core capital (tier 1 capital),
as calculated in accordance with subpart B of this part, plus the amount
of outstanding perpetual preferred stock (including related surplus) not
included in tier 1 capital.
Tier 1 capital means the sum of common equity tier 1 capital and
additional tier 1 capital.
Tier 1 minority interest means the tier 1 capital of a consolidated
subsidiary of a national bank or Federal savings association that is not
owned by the national bank or Federal savings association.
Tier 2 capital is defined in Sec. 3.20(d).
Total capital means the sum of tier 1 capital and tier 2 capital.
Total capital minority interest means the total capital of a
consolidated subsidiary of a national bank or Federal savings
association that is not owned by the national bank or Federal savings
association.
Total leverage exposure means the sum of the following:
(1) The balance sheet carrying value of all of the national bank's
or Federal savings association's on-balance sheet assets, less amounts
deducted from tier 1 capital under Sec. 3.22(a), (c), and (d);
(2) The potential future credit exposure (PFE) amount for each
derivative contract to which the national bank or Federal savings
association is a counterparty (or each single-product netting set of
such transactions) determined in accordance with Sec. 3.34, but without
regard to Sec. 3.34(b);
(3) 10 percent of the notional amount of unconditionally cancellable
commitments made by the national bank or Federal savings association;
and
(4) The notional amount of all other off-balance sheet exposures of
the national bank or Federal savings association (excluding securities
lending, securities borrowing, reverse repurchase transactions,
derivatives and unconditionally cancellable commitments).
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 defined in section 302 of the Small Business
Investment Act;
(7) The underlying exposures are not owned by a firm an investment
in which qualifies as a community development investment under section
24(Eleventh) of the National Bank Act;
(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 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; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in 12 CFR 9.18
(national banks), 12 CFR 151.40 (Federal saving associations);
(iii) An employee benefit plan (as defined in paragraphs (3) and
(32) of section 3 of ERISA), a ``governmental plan'' (as defined in 29
U.S.C. 1002(32)) that complies with the tax deferral qualification
requirements provided in the Internal Revenue Code, or any
[[Page 39]]
similar employee benefit plan established under the laws of a foreign
jurisdiction;
(iv) A synthetic exposure to the capital of a financial institution
to the extent deducted from capital under Sec. 3.22; or
(v) Registered with the SEC under the Investment Company Act of 1940
(15 U.S.C. 80a-1) or foreign equivalents thereof.
Tranche means all securitization exposures associated with a
securitization that have the same seniority level.
Two-way market means a market where there are independent bona fide
offers to buy and sell so that a price reasonably related to the last
sales price or current bona fide competitive bid and offer quotations
can be determined within one day and settled at that price within a
relatively short time frame conforming to trade custom.
Unconditionally cancelable means with respect to a commitment, that
a national bank or Federal savings association may, at any time, with or
without cause, refuse to extend credit under the commitment (to the
extent permitted under applicable law).
Underlying exposures means one or more exposures that have been
securitized in a securitization transaction.
Unregulated financial institution means, for purposes of Sec. 3.131,
a financial institution that is not a regulated financial institution,
including any financial institution that would meet the definition of
``financial institution'' under this section but for the ownership
interest thresholds set forth in paragraph (4)(i) of that definition.
U.S. Government agency means an instrumentality of the U.S.
Government whose obligations are fully and explicitly guaranteed as to
the timely payment of principal and interest by the full faith and
credit of the U.S. Government.
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.
Wrong-way risk means the risk that arises when an exposure to a
particular counterparty is positively correlated with the probability of
default of such counterparty itself.
Sec. 3.3 Operational requirements for counterparty credit risk.
For purposes of calculating risk-weighted assets under subparts D
and E of this part:
(a) Cleared transaction. In order to recognize certain exposures as
cleared transactions pursuant to paragraphs (1)(ii), (iii) or (iv) of
the definition of ``cleared transaction'' in Sec. 3.2, the exposures
must meet the applicable requirements set forth in this paragraph (a).
(1) The offsetting transaction must be identified by the CCP as a
transaction for the clearing member client.
(2) The collateral supporting the transaction must be held in a
manner that prevents the national bank or Federal savings association
from facing any loss due to an event of default, including from a
liquidation, receivership, insolvency, or similar proceeding of either
the clearing member or the clearing member's other clients. Omnibus
accounts established under 17 CFR parts 190 and 300 satisfy the
requirements of this paragraph (a).
(3) The national bank or Federal savings association must conduct
sufficient legal review to conclude with a well-founded basis (and
maintain sufficient written documentation of that legal review) that in
the event of a legal challenge (including one resulting from a default
or receivership, insolvency, liquidation, or similar proceeding) the
relevant court and administrative authorities would find the
arrangements of paragraph (a)(2) of this section to be legal, valid,
binding and enforceable under the law of the relevant jurisdictions.
(4) The offsetting transaction with a clearing member must be
transferable under the transaction documents and applicable laws in the
relevant jurisdiction(s) to another clearing member should the clearing
member default, become insolvent, or enter receivership, insolvency,
liquidation, or similar proceedings.
[[Page 40]]
(b) Eligible margin loan. In order to recognize an exposure as an
eligible margin loan as defined in Sec. 3.2, a national bank or Federal
savings association must conduct sufficient legal review to conclude
with a well-founded basis (and maintain sufficient written documentation
of that legal review) that the agreement underlying the exposure:
(1) Meets the requirements of paragraph (1)(iii) of the definition
of eligible margin loan in Sec. 3.2, and
(2) Is legal, valid, binding, and enforceable under applicable law
in the relevant jurisdictions.
(c) Qualifying cross-product master netting agreement. In order to
recognize an agreement as a qualifying cross-product master netting
agreement as defined in Sec. 3.101, a national bank or Federal savings
association must obtain 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 receivership, insolvency, liquidation, or
similar proceeding.
(d) Qualifying master netting agreement. In order to recognize an
agreement as a qualifying master netting agreement as defined in
Sec. 3.2, a national bank or Federal savings association must:
(1) Conduct sufficient legal review to conclude with a well-founded
basis (and maintain sufficient written documentation of that legal
review) that:
(i) The agreement meets the requirements of paragraph (2) of the
definition of qualifying master netting agreement in Sec. 3.2; and
(ii) In the event of a legal challenge (including one resulting from
default or from receivership, insolvency, liquidation, 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; and
(2) Establish and maintain written procedures to monitor possible
changes in relevant law and to ensure that the agreement continues to
satisfy the requirements of the definition of qualifying master netting
agreement in Sec. 3.2.
(e) Repo-style transaction. In order to recognize an exposure as a
repo-style transaction as defined in Sec. 3.2, a national bank or
Federal savings association must conduct sufficient legal review to
conclude with a well-founded basis (and maintain sufficient written
documentation of that legal review) that the agreement underlying the
exposure:
(1) Meets the requirements of paragraph (3) of the definition of
repo-style transaction in Sec. 3.2, and
(2) Is legal, valid, binding, and enforceable under applicable law
in the relevant jurisdictions.
(f) Failure of a QCCP to satisfy the rule's requirements. If a
national bank or Federal savings association determines that a CCP
ceases to be a QCCP due to the failure of the CCP to satisfy one or more
of the requirements set forth in paragraphs (2)(i) through (2)(iii) of
the definition of a QCCP in Sec. 3.2, the national bank or Federal
savings association may continue to treat the CCP as a QCCP for up to
three months following the determination. If the CCP fails to remedy the
relevant deficiency within three months after the initial determination,
or the CCP fails to satisfy the requirements set forth in paragraphs
(2)(i) through (2)(iii) of the definition of a QCCP continuously for a
three-month period after remedying the relevant deficiency, a national
bank or Federal savings association may not treat the CCP as a QCCP for
the purposes of this part until after the national bank or Federal
savings association has determined that the CCP has satisfied the
requirements in paragraphs (2)(i) through (2)(iii) of the definition of
a QCCP for three continuous months.
Secs. 3.4-3.9 [Reserved]
Subpart B_Capital Ratio Requirements and Buffers
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.10 Minimum capital requirements.
(a) Minimum capital requirements. A national bank or Federal savings
association must maintain the following minimum capital ratios:
[[Page 41]]
(1) A common equity tier 1 capital ratio of 4.5 percent.
(2) A tier 1 capital ratio of 6 percent.
(3) A total capital ratio of 8 percent.
(4) A leverage ratio of 4 percent.
(5) For advanced approaches national banks or Federal savings
associations, a supplementary leverage ratio of 3 percent.
(6) For Federal savings associations, a tangible capital ratio of
1.5 percent.
(b) Standardized capital ratio calculations. Other than as provided
in paragraph (c) of this section:
(1) Common equity tier 1 capital ratio. A national bank's or Federal
savings association's common equity tier 1 capital ratio is the ratio of
the national bank's or Federal savings association's common equity tier
1 capital to standardized total risk-weighted assets;
(2) Tier 1 capital ratio. A national bank's or Federal savings
association's tier 1 capital ratio is the ratio of the national bank's
or Federal savings association's tier 1 capital to standardized total
risk-weighted assets;
(3) Total capital ratio. A national bank's or Federal savings
association's total capital ratio is the ratio of the national bank's or
Federal savings association's total capital to standardized total risk-
weighted assets; and
(4) Leverage ratio. A national bank's or Federal savings
association's leverage ratio is the ratio of the national bank's or
Federal savings association's tier 1 capital to the national bank's or
Federal savings association's average total consolidated assets as
reported on the national bank's or Federal savings association's Call
Report minus amounts deducted from tier 1 capital under Sec. 3.22(a),
(c) and (d).
(5) Federal savings association tangible capital ratio. A Federal
savings association's tangible capital ratio is the ratio of the Federal
savings association's core capital (tier 1 capital) to average total
assets as calculated under this subpart B. For purposes of this
paragraph (b)(5), the term ``total assets'' means ``total assets'' as
defined in part 6, subpart A of this chapter, subject to subpart G of
this part.
(c) Advanced approaches capital ratio calculations. An advanced
approaches national bank or Federal savings association that has
completed the parallel run process and received notification from the
OCC pursuant to Sec. 3.121(d) must determine its regulatory capital
ratios as described in this paragraph (c).
(1) Common equity tier 1 capital ratio. The national bank's or
Federal savings association's common equity tier 1 capital ratio is the
lower of:
(i) The ratio of the national bank's or Federal savings
association's common equity tier 1 capital to standardized total risk-
weighted assets; and
(ii) The ratio of the national bank's or Federal savings
association's common equity tier 1 capital to advanced approaches total
risk-weighted assets.
(2) Tier 1 capital ratio. The national bank's or Federal savings
association's tier 1 capital ratio is the lower of:
(i) The ratio of the national bank's or Federal savings
association's tier 1 capital to standardized total risk-weighted assets;
and
(ii) The ratio of the national bank's or Federal savings
association's tier 1 capital to advanced approaches total risk-weighted
assets.
(3) Total capital ratio. The national bank's or Federal savings
association's total capital ratio is the lower of:
(i) The ratio of the national bank's or Federal savings
association's total capital to standardized total risk-weighted assets;
and
(ii) The ratio of the national bank's or Federal savings
association's advanced-approaches-adjusted total capital to advanced
approaches total risk-weighted assets. A national bank's or Federal
savings association's advanced-approaches-adjusted total capital is the
national bank's or Federal savings association's total capital after
being adjusted as follows:
(A) An advanced approaches national bank or Federal savings
association must deduct from its total capital any allowance for loan
and lease losses included in its tier 2 capital in accordance with
Sec. 3.20(d)(3); and
(B) An advanced approaches national bank or Federal savings
association must add to its total capital any eligible credit reserves
that exceed the national bank's or Federal savings association's total
expected credit losses to the extent that the excess reserve amount does
not exceed 0.6 percent of
[[Page 42]]
the national bank's or Federal savings association's credit risk-
weighted assets.
(4) Supplementary leverage ratio. An advanced approaches national
bank's or Federal savings association's supplementary leverage ratio is
the simple arithmetic mean of the ratio of its tier 1 capital to total
leverage exposure calculated as of the last day of each month in the
reporting quarter.
(5) Federal savings association tangible capital ratio. A Federal
savings association's tangible capital ratio is the ratio of the Federal
savings association's core capital (tier 1 capital) to average total
assets as calculated under this subpart B. For purposes of this
paragraph (c)(5), the term ``total assets'' means ``total assets'' as
defined in part 6, subpart A of this chapter, subject to subpart G of
this part.
(d) Capital adequacy. (1) Notwithstanding the minimum requirements
in this part, a national bank or Federal savings association must
maintain capital commensurate with the level and nature of all risks to
which the national bank or Federal savings association is exposed. The
supervisory evaluation of a national bank's or Federal savings
association's capital adequacy is based on an individual assessment of
numerous factors, including those listed at this section (national
banks), 12 CFR 167.3(c) (Federal savings associations).
(2) A national bank or Federal savings association must have a
process for assessing its overall capital adequacy in relation to its
risk profile and a comprehensive strategy for maintaining an appropriate
level of capital.
Sec. 3.11 Capital conservation buffer and countercyclical capital
buffer amount.
(a) Capital conservation buffer. (1) Composition of the capital
conservation buffer. The capital conservation buffer is composed solely
of common equity tier 1 capital.
(2) Definitions. For purposes of this section, the following
definitions apply:
(i) Eligible retained income. The eligible retained income of a
national bank or Federal savings association is the national bank's or
Federal savings association's net income for the four calendar quarters
preceding the current calendar quarter, based on the national bank's or
Federal savings association's quarterly Call Reports, net of any
distributions and associated tax effects not already reflected in net
income.
(ii) Maximum payout ratio. The maximum payout ratio is the
percentage of eligible retained income that a national bank or Federal
savings association can pay out in the form of distributions and
discretionary bonus payments during the current calendar quarter. The
maximum payout ratio is based on the national bank's or Federal savings
association's capital conservation buffer, calculated as of the last day
of the previous calendar quarter, as set forth in Table 1 to Sec. 3.11.
(iii) Maximum payout amount. A national bank's or Federal savings
association's maximum payout amount for the current calendar quarter is
equal to the national bank's or Federal savings association's eligible
retained income, multiplied by the applicable maximum payout ratio, as
set forth in Table 1 to Sec. 3.11.
(iv) Private sector credit exposure. Private sector credit exposure
means an exposure to a company or an individual that is not an exposure
to a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
a MDB, a PSE, or a GSE.
(3) Calculation of capital conservation buffer. (i) A national
bank's or Federal savings association's capital conservation buffer is
equal to the lowest of the following ratios, calculated as of the last
day of the previous calendar quarter based on the national bank's or
Federal savings association's most recent Call Report:
(A) The national bank's or Federal savings association's common
equity tier 1 capital ratio minus the national bank's or Federal savings
association's minimum common equity tier 1 capital ratio requirement
under Sec. 3.10;
(B) The national bank's or Federal savings association's tier 1
capital ratio minus the national bank's or Federal savings association's
minimum tier 1 capital ratio requirement under Sec. 3.10; and
[[Page 43]]
(C) The national bank's or Federal savings association's total
capital ratio minus the national bank's or Federal savings association's
minimum total capital ratio requirement under Sec. 3.10; or
(ii) Notwithstanding paragraphs (a)(3)(i)(A)-(C) of this section, if
the national bank's or Federal savings association's common equity tier
1, tier 1 or total capital ratio is less than or equal to the national
bank's or Federal savings association's minimum common equity tier 1,
tier 1 or total capital ratio requirement under Sec. 3.10, respectively,
the national bank's or Federal savings association's capital
conservation buffer is zero.
(4) Limits on distributions and discretionary bonus payments. (i) A
national bank or Federal savings association shall not make
distributions or discretionary bonus payments or create an obligation to
make such distributions or payments during the current calendar quarter
that, in the aggregate, exceed the maximum payout amount.
(ii) A national bank or Federal savings association with a capital
conservation buffer that is greater than 2.5 percent plus 100 percent of
its applicable countercyclical capital buffer, in accordance with
paragraph (b) of this section, is not subject to a maximum payout amount
under this section.
(iii) Negative eligible retained income. Except as provided in
paragraph (a)(4)(iv) of this section, a national bank or Federal savings
association may not make distributions or discretionary bonus payments
during the current calendar quarter if the national bank's or Federal
savings association's:
(A) Eligible retained income is negative; and
(B) Capital conservation buffer was less than 2.5 percent as of the
end of the previous calendar quarter.
(iv) Prior approval. Notwithstanding the limitations in paragraphs
(a)(4)(i) through (iii) of this section, the OCC may permit a national
bank or Federal savings association to make a distribution or
discretionary bonus payment upon a request of the national bank or
Federal savings association, if the OCC determines that the distribution
or discretionary bonus payment would not be contrary to the purposes of
this section, or to the safety and soundness of the national bank or
Federal savings association. In making such a determination, the OCC
will consider the nature and extent of the request and the particular
circumstances giving rise to the request.
Table 1 toSec. 3.11--Calculation of Maximum Payout Amount
------------------------------------------------------------------------
Maximum payout ratio (as a percentage
Capital conservation buffer of eligible retained income)
------------------------------------------------------------------------
Greater than 2.5 percent plus 100 No payout ratio limitation applies.
percent of the national bank's
or Federal savings association's
applicable countercyclical
capital buffer amount.
Less than or equal to 2.5 percent 60 percent.
plus 100 percent of the national
bank's or Federal savings
association's applicable
countercyclical capital buffer
amount, and greater than 1.875
percent plus 75 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount.
Less than or equal to 1.875 40 percent.
percent plus 75 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount, and greater than 1.25
percent plus 50 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount.
Less than or equal to 1.25 20 percent.
percent plus 50 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount, and greater than 0.625
percent plus 25 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount.
Less than or equal to 0.625 0 percent.
percent plus 25 percent of the
national bank's or Federal
savings association's applicable
countercyclical capital buffer
amount.
------------------------------------------------------------------------
(v) Other limitations on distributions. Additional limitations on
distributions may apply to a national bank or Federal savings
association under subparts H and I of this part; 12 CFR 5.46, 12 CFR
part 5, subpart E; 12 CFR part 6.
[[Page 44]]
(b) Countercyclical capital buffer amount. (1) General. An advanced
approaches national bank or Federal savings association must calculate a
countercyclical capital buffer amount in accordance with the following
paragraphs for purposes of determining its maximum payout ratio under
Table 1 to Sec. 3.11.
(i) Extension of capital conservation buffer. The countercyclical
capital buffer amount is an extension of the capital conservation buffer
as described in paragraph (a) of this section.
(ii) Amount. An advanced approaches national bank or Federal savings
association has a countercyclical capital buffer amount determined by
calculating the weighted average of the countercyclical capital buffer
amounts established for the national jurisdictions where the national
bank's or Federal savings association's private sector credit exposures
are located, as specified in paragraphs (b)(2) and (3) of this section.
(iii) Weighting. The weight assigned to a jurisdiction's
countercyclical capital buffer amount is calculated by dividing the
total risk-weighted assets for the national bank's or Federal savings
association's private sector credit exposures located in the
jurisdiction by the total risk-weighted assets for all of the national
bank's or Federal savings association's private sector credit exposures.
The methodology a national bank or Federal savings association uses for
determining risk-weighted assets for purposes of this paragraph (b) must
be the methodology that determines its risk-based capital ratios under
Sec. 3.10. Notwithstanding the previous sentence, the risk-weighted
asset amount for a private sector credit exposure that is a covered
position under subpart F of this part is its specific risk add-on as
determined under Sec. 3.210 multiplied by 12.5.
(iv) Location. (A) Except as provided in paragraphs (b)(1)(iv)(B)
and (b)(1)(iv)(C) of this section, the location of a private sector
credit exposure is the national jurisdiction where the borrower is
located (that is, where it is incorporated, chartered, or similarly
established or, if the borrower is an individual, where the borrower
resides).
(B) If, in accordance with subparts D or E of this part, the
national bank or Federal savings association has assigned to a private
sector credit exposure a risk weight associated with a protection
provider on a guarantee or credit derivative, the location of the
exposure is the national jurisdiction where the protection provider is
located.
(C) The location of a securitization exposure is the location of the
underlying exposures, or, if the underlying exposures are located in
more than one national jurisdiction, the national jurisdiction where the
underlying exposures with the largest aggregate unpaid principal balance
are located. For purposes of this paragraph (b), the location of an
underlying exposure shall be the location of the borrower, determined
consistent with paragraph (b)(1)(iv)(A) of this section.
(2) Countercyclical capital buffer amount for credit exposures in
the United States--(i) Initial countercyclical capital buffer amount
with respect to credit exposures in the United States. The initial
countercyclical capital buffer amount in the United States is zero.
(ii) Adjustment of the countercyclical capital buffer amount. The
OCC will adjust the countercyclical capital buffer amount for credit
exposures in the United States in accordance with applicable law.\6\
---------------------------------------------------------------------------
\6\ The OCC expects that any adjustment will be based on a
determination made jointly by the Board, OCC, and FDIC.
---------------------------------------------------------------------------
(iii) Range of countercyclical capital buffer amount. The OCC will
adjust the countercyclical capital buffer amount for credit exposures in
the United States between zero percent and 2.5 percent of risk-weighted
assets.
(iv) Adjustment determination. The OCC will base its decision to
adjust the countercyclical capital buffer amount under this section on a
range of macroeconomic, financial, and supervisory information
indicating an increase in systemic risk including, but not limited to,
the ratio of credit to gross domestic product, a variety of asset
prices, other factors indicative of relative credit and liquidity
expansion or contraction, funding spreads, credit condition surveys,
indices based on
[[Page 45]]
credit default swap spreads, options implied volatility, and measures of
systemic risk.
(v) Effective date of adjusted countercyclical capital buffer
amount. (A) Increase adjustment. A determination by the OCC under
paragraph (b)(2)(ii) of this section to increase the countercyclical
capital buffer amount will be effective 12 months from the date of
announcement, unless the OCC establishes an earlier effective date and
includes a statement articulating the reasons for the earlier effective
date.
(B) Decrease adjustment. A determination by the OCC to decrease the
established countercyclical capital buffer amount under paragraph
(b)(2)(ii) of this section will be effective on the day following
announcement of the final determination or the earliest date permissible
under applicable law or regulation, whichever is later.
(vi) Twelve month sunset. The countercyclical capital buffer amount
will return to zero percent 12 months after the effective date that the
adjusted countercyclical capital buffer amount is announced, unless the
OCC announces a decision to maintain the adjusted countercyclical
capital buffer amount or adjust it again before the expiration of the
12-month period.
(3) Countercyclical capital buffer amount for foreign jurisdictions.
The OCC will adjust the countercyclical capital buffer amount for
private sector credit exposures to reflect decisions made by foreign
jurisdictions consistent with due process requirements described in
paragraph (b)(2) of this section.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Secs. 3.12-3.19 [Reserved]
Subpart C_Definition of Capital
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.20 Capital components and eligibility criteria for regulatory
capital instruments.
(a) Regulatory capital components. A national bank's or Federal
savings association's regulatory capital components are:
(1) Common equity tier 1 capital;
(2) Additional tier 1 capital; and
(3) Tier 2 capital.
(b) Common equity tier 1 capital. Common equity tier 1 capital is
the sum of the common equity tier 1 capital elements in this paragraph
(b), minus regulatory adjustments and deductions in Sec. 3.22. The
common equity tier 1 capital elements are:
(1) Any common stock instruments (plus any related surplus) issued
by the national bank or Federal savings association, net of treasury
stock, and any capital instruments issued by mutual banking
organizations, that meet all the following criteria:
(i) The instrument is paid-in, issued directly by the national bank
or Federal savings association, and represents the most subordinated
claim in a receivership, insolvency, liquidation, or similar proceeding
of the national bank or Federal savings association;
(ii) The holder of the instrument is entitled to a claim on the
residual assets of the national bank or Federal savings association that
is proportional with the holder's share of the national bank's or
Federal savings association's issued capital after all senior claims
have been satisfied in a receivership, insolvency, liquidation, or
similar proceeding;
(iii) The instrument has no maturity date, can only be redeemed via
discretionary repurchases with the prior approval of the OCC, and does
not contain any term or feature that creates an incentive to redeem;
(iv) The national bank or Federal savings association did not create
at issuance of the instrument through any action or communication an
expectation that it will buy back, cancel, or redeem the instrument, and
the instrument does not include any term or feature that might give rise
to such an expectation;
(v) Any cash dividend payments on the instrument are paid out of the
national bank's or Federal savings association's net income or retained
earnings and are not subject to a limit imposed by the contractual terms
governing the instrument.
(vi) The national bank or Federal savings association has full
discretion at all times to refrain from paying any dividends and making
any other distributions on the instrument without
[[Page 46]]
triggering an event of default, a requirement to make a payment-in-kind,
or an imposition of any other restrictions on the national bank or
Federal savings association;
(vii) Dividend payments and any other distributions on the
instrument may be paid only after all legal and contractual obligations
of the national bank or Federal savings association have been satisfied,
including payments due on more senior claims;
(viii) The holders of the instrument bear losses as they occur
equally, proportionately, and simultaneously with the holders of all
other common stock instruments before any losses are borne by holders of
claims on the national bank or Federal savings association with greater
priority in a receivership, insolvency, liquidation, or similar
proceeding;
(ix) The paid-in amount is classified as equity under GAAP;
(x) The national bank or Federal savings association, or an entity
that the national bank or Federal savings association controls, did not
purchase or directly or indirectly fund the purchase of the instrument;
(xi) The instrument is not secured, not covered by a guarantee of
the national bank or Federal savings association or of an affiliate of
the national bank or Federal savings association, and is not subject to
any other arrangement that legally or economically enhances the
seniority of the instrument;
(xii) The instrument has been issued in accordance with applicable
laws and regulations; and
(xiii) The instrument is reported on the national bank's or Federal
savings association's regulatory financial statements separately from
other capital instruments.
(2) Retained earnings.
(3) Accumulated other comprehensive income (AOCI) as reported under
GAAP.\7\
---------------------------------------------------------------------------
\7\ See Sec. 3.22 for specific adjustments related to AOCI.
---------------------------------------------------------------------------
(4) Any common equity tier 1 minority interest, subject to the
limitations in Sec. 3.21(c).
(5) Notwithstanding the criteria for common stock instruments
referenced above, a national bank's or Federal savings association's
common stock issued and held in trust for the benefit of its employees
as part of an employee stock ownership plan does not violate any of the
criteria in paragraph (b)(1)(iii), paragraph (b)(1)(iv) or paragraph
(b)(1)(xi) of this section, provided that any repurchase of the stock is
required solely by virtue of ERISA for an instrument of a national bank
or Federal savings association that is not publicly-traded. In addition,
an instrument issued by a national bank or Federal savings association
to its employee stock ownership plan does not violate the criterion in
paragraph (b)(1)(x) of this section.
(c) Additional tier 1 capital. Additional tier 1 capital is the sum
of additional tier 1 capital elements and any related surplus, minus the
regulatory adjustments and deductions in Sec. 3.22. Additional tier 1
capital elements are:
(1) Instruments (plus any related surplus) that meet the following
criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors, general
creditors, and subordinated debt holders of the national bank or Federal
savings association in a receivership, insolvency, liquidation, or
similar proceeding;
(iii) The instrument is not secured, not covered by a guarantee of
the national bank or Federal savings association or of an affiliate of
the national bank or Federal savings association, and not subject to any
other arrangement that legally or economically enhances the seniority of
the instrument;
(iv) The instrument has no maturity date and does not contain a
dividend step-up or any other term or feature that creates an incentive
to redeem; and
(v) If callable by its terms, the instrument may be called by the
national bank or Federal savings association only after a minimum of
five years following issuance, except that the terms of the instrument
may allow it to be called earlier than five years upon the occurrence of
a regulatory event that precludes the instrument from being included in
additional tier 1 capital, a tax event, or if the issuing entity is
required to register as an investment
[[Page 47]]
company pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1
et seq.). In addition:
(A) The national bank or Federal savings association must receive
prior approval from the OCC to exercise a call option on the instrument.
(B) The national bank or Federal savings association does not create
at issuance of the instrument, through any action or communication, an
expectation that the call option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter,
the national bank or Federal savings association must either: Replace
the instrument to be called with an equal amount of instruments that
meet the criteria under paragraph (b) of this section or this paragraph
(c); \8\ or demonstrate to the satisfaction of the OCC that following
redemption, the national bank or Federal savings association will
continue to hold capital commensurate with its risk.
---------------------------------------------------------------------------
\8\ Replacement can be concurrent with redemption of existing
additional tier 1 capital instruments.
---------------------------------------------------------------------------
(vi) Redemption or repurchase of the instrument requires prior
approval from the OCC.
(vii) The national bank or Federal savings association has full
discretion at all times to cancel dividends or other distributions on
the instrument without triggering an event of default, a requirement to
make a payment-in-kind, or an imposition of other restrictions on the
national bank or Federal savings association except in relation to any
distributions to holders of common stock or instruments that are pari
passu with the instrument.
(viii) Any cash dividend payments on the instrument are paid out of
the national bank's or Federal savings association's net income or
retained earnings and are not subject to a limit imposed by the
contractual terms governing the instrument.
(ix) The instrument does not have a credit-sensitive feature, such
as a dividend rate that is reset periodically based in whole or in part
on the national bank's or Federal savings association's credit quality,
but may have a dividend rate that is adjusted periodically independent
of the national bank's or Federal savings association's credit quality,
in relation to general market interest rates or similar adjustments.
(x) The paid-in amount is classified as equity under GAAP.
(xi) The national bank or Federal savings association, or an entity
that the national bank or Federal savings association controls, did not
purchase or directly or indirectly fund the purchase of the instrument.
(xii) The instrument does not have any features that would limit or
discourage additional issuance of capital by the national bank or
Federal savings association, such as provisions that require the
national bank or Federal savings association to compensate holders of
the instrument if a new instrument is issued at a lower price during a
specified time frame.
(xiii) If the instrument is not issued directly by the national bank
or Federal savings association or by a subsidiary of the national bank
or Federal savings association that is an operating entity, the only
asset of the issuing entity is its investment in the capital of the
national bank or Federal savings association, and proceeds must be
immediately available without limitation to the national bank or Federal
savings association or to the national bank's or Federal savings
association's top-tier holding company in a form which meets or exceeds
all of the other criteria for additional tier 1 capital instruments.\9\
---------------------------------------------------------------------------
\9\ De minimis assets related to the operation of the issuing entity
can be disregarded for purposes of this criterion.
---------------------------------------------------------------------------
(xiv) For an advanced approaches national bank or Federal savings
association, the governing agreement, offering circular, or prospectus
of an instrument issued after the date upon which the national bank or
Federal savings association becomes subject to this part as set forth in
Sec. 3.1(f) must disclose that the holders of the instrument may be
fully subordinated to interests held by the U.S. government in the event
that the national bank or Federal savings association enters into a
receivership, insolvency, liquidation, or similar proceeding.
[[Page 48]]
(2) Tier 1 minority interest, subject to the limitations in
Sec. 3.21(d), that is not included in the national bank's or Federal
savings association's common equity tier 1 capital.
(3) Any and all instruments that qualified as tier 1 capital under
the OCC's general risk-based capital rules under appendix A to this part
(national banks), 12 CFR part 167 (Federal savings associations) as then
in effect, that were issued under the Small Business Jobs Act of 2010
\10\ or prior to October 4, 2010, under the Emergency Economic
Stabilization Act of 2008.\11\
---------------------------------------------------------------------------
\10\ Public Law 111-240; 124 Stat. 2504 (2010).
\11\ Public Law 110-343, 122 Stat. 3765 (2008).
---------------------------------------------------------------------------
(4) Notwithstanding the criteria for additional tier 1 capital
instruments referenced above:
(i) An instrument issued by a national bank or Federal savings
association and held in trust for the benefit of its employees as part
of an employee stock ownership plan does not violate any of the criteria
in paragraph (c)(1)(iii) of this section, provided that any repurchase
is required solely by virtue of ERISA for an instrument of a national
bank or Federal savings association that is not publicly-traded. In
addition, an instrument issued by a national bank or Federal savings
association to its employee stock ownership plan does not violate the
criteria in paragraph (c)(1)(v) or paragraph (c)(1)(xi) of this section;
and
(ii) An instrument with terms that provide that the instrument may
be called earlier than five years upon the occurrence of a rating agency
event does not violate the criterion in paragraph (c)(1)(v) of this
section provided that the instrument was issued and included in a
national bank's or Federal savings association's tier 1 capital prior to
January 1, 2014, and that such instrument satisfies all other criteria
under this Sec. 3.20(c).
(d) Tier 2 Capital. Tier 2 capital is the sum of tier 2 capital
elements and any related surplus, minus regulatory adjustments and
deductions in Sec. 3.22. Tier 2 capital elements are:
(1) Instruments (plus related surplus) that meet the following
criteria:
(i) The instrument is issued and paid-in;
(ii) The instrument is subordinated to depositors and general
creditors of the national bank or Federal savings association;
(iii) The instrument is not secured, not covered by a guarantee of
the national bank or Federal savings association or of an affiliate of
the national bank or Federal savings association, and not subject to any
other arrangement that legally or economically enhances the seniority of
the instrument in relation to more senior claims;
(iv) The instrument has a minimum original maturity of at least five
years. At the beginning of each of the last five years of the life of
the instrument, the amount that is eligible to be included in tier 2
capital is reduced by 20 percent of the original amount of the
instrument (net of redemptions) and is excluded from regulatory capital
when the remaining maturity is less than one year. In addition, the
instrument must not have any terms or features that require, or create
significant incentives for, the national bank or Federal savings
association to redeem the instrument prior to maturity; \12\ and
---------------------------------------------------------------------------
\12\ An instrument that by its terms automatically converts into a
tier 1 capital instrument prior to five years after issuance complies
with the five-year maturity requirement of this criterion.
---------------------------------------------------------------------------
(v) The instrument, by its terms, may be called by the national bank
or Federal savings association only after a minimum of five years
following issuance, except that the terms of the instrument may allow it
to be called sooner upon the occurrence of an event that would preclude
the instrument from being included in tier 2 capital, a tax event, or if
the issuing entity is required to register as an investment company
pursuant to the Investment Company Act of 1940 (15 U.S.C. 80a-1 et
seq.). In addition:
(A) The national bank or Federal savings association must receive
the prior approval of the OCC to exercise a call option on the
instrument.
(B) The national bank or Federal savings association does not create
at issuance, through action or communication, an expectation the call
option will be exercised.
(C) Prior to exercising the call option, or immediately thereafter,
the
[[Page 49]]
national bank or Federal savings association must either: Replace any
amount called with an equivalent amount of an instrument that meets the
criteria for regulatory capital under this section; \13\ or demonstrate
to the satisfaction of the OCC that following redemption, the national
bank or Federal savings association would continue to hold an amount of
capital that is commensurate with its risk.
---------------------------------------------------------------------------
\13\ A national bank or Federal savings association may replace tier
2 capital instruments concurrent with the redemption of existing tier 2
capital instruments.
---------------------------------------------------------------------------
(vi) The holder of the instrument must have no contractual right to
accelerate payment of principal or interest on the instrument, except in
the event of a receivership, insolvency, liquidation, or similar
proceeding of the national bank or Federal savings association.
(vii) The instrument has no credit-sensitive feature, such as a
dividend or interest rate that is reset periodically based in whole or
in part on the national bank's or Federal savings association's credit
standing, but may have a dividend rate that is adjusted periodically
independent of the national bank's or Federal savings association's
credit standing, in relation to general market interest rates or similar
adjustments.
(viii) The national bank or Federal savings association, or an
entity that the national bank or Federal savings association controls,
has not purchased and has not directly or indirectly funded the purchase
of the instrument.
(ix) If the instrument is not issued directly by the national bank
or Federal savings association or by a subsidiary of the national bank
or Federal savings association that is an operating entity, the only
asset of the issuing entity is its investment in the capital of the
national bank or Federal savings association, and proceeds must be
immediately available without limitation to the national bank or Federal
savings association or the national bank's or Federal savings
association's top-tier holding company in a form that meets or exceeds
all the other criteria for tier 2 capital instruments under this
section.\14\
---------------------------------------------------------------------------
\14\ A national bank or Federal savings association may disregard de
minimis assets related to the operation of the issuing entity for
purposes of this criterion.
---------------------------------------------------------------------------
(x) Redemption of the instrument prior to maturity or repurchase
requires the prior approval of the OCC.
(xi) For an advanced approaches national bank or Federal savings
association, the governing agreement, offering circular, or prospectus
of an instrument issued after the date on which the advanced approaches
national bank or Federal savings association becomes subject to this
part under Sec. 3.1(f) must disclose that the holders of the instrument
may be fully subordinated to interests held by the U.S. government in
the event that the national bank or Federal savings association enters
into a receivership, insolvency, liquidation, or similar proceeding.
(2) Total capital minority interest, subject to the limitations set
forth in Sec. 3.21(e), that is not included in the national bank's or
Federal savings association's tier 1 capital.
(3) ALLL up to 1.25 percent of the national bank's or Federal
savings association's standardized total risk-weighted assets not
including any amount of the ALLL (and excluding in the case of a market
risk national bank or Federal savings association, its standardized
market risk-weighted assets).
(4) Any instrument that qualified as tier 2 capital under the OCC's
general risk-based capital rules under appendix A to this part, 12 CFR
part 167 as then in effect, that were issued under the Small Business
Jobs Act of 2010,\15\ or prior to October 4, 2010, under the Emergency
Economic Stabilization Act of 2008.\16\
---------------------------------------------------------------------------
\15\ Public Law 111-240; 124 Stat. 2504 (2010).
\16\ Public Law 110-343, 122 Stat. 3765 (2008).
---------------------------------------------------------------------------
(5) For a national bank or Federal savings association that makes an
AOCI opt-out election (as defined in paragraph (b)(2) of this section),
45 percent of pretax net unrealized gains on available-for-sale
preferred stock classified as an equity security under GAAP and
available-for-sale equity exposures.
[[Page 50]]
(6) Notwithstanding the criteria for tier 2 capital instruments
referenced above, an instrument with terms that provide that the
instrument may be called earlier than five years upon the occurrence of
a rating agency event does not violate the criterion in paragraph
(d)(1)(v) of this section provided that the instrument was issued and
included in a national bank's or Federal savings association's tier 1 or
tier 2 capital prior to January 1, 2014, and that such instrument
satisfies all other criteria under this paragraph (d).
(e) OCC approval of a capital element. (1) A national bank or
Federal savings association must receive OCC prior approval to include a
capital element (as listed in this section) in its common equity tier 1
capital, additional tier 1 capital, or tier 2 capital unless the
element:
(i) Was included in a national bank's or Federal savings
association's tier 1 capital or tier 2 capital prior to May 19, 2010 in
accordance with the OCC's risk-based capital rules that were effective
as of that date and the underlying instrument may continue to be
included under the criteria set forth in this section; or
(ii) Is equivalent, in terms of capital quality and ability to
absorb losses with respect to all material terms, to a regulatory
capital element the OCC determined may be included in regulatory capital
pursuant to paragraph (e)(3) of this section.
(2) When considering whether a national bank or Federal savings
association may include a regulatory capital element in its common
equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the
OCC will consult with the Federal Deposit Insurance Corporation and
Federal Reserve Board.
(3) After determining that a regulatory capital element may be
included in a national bank's or Federal savings association's common
equity tier 1 capital, additional tier 1 capital, or tier 2 capital, the
OCC will make its decision publicly available, including a brief
description of the material terms of the regulatory capital element and
the rationale for the determination.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Sec. 3.21 Minority interest.
(a) Applicability. For purposes of Sec. 3.20, a national bank or
Federal savings association is subject to the minority interest
limitations in this section if:
(1) A consolidated subsidiary of the national bank or Federal
savings association has issued regulatory capital that is not owned by
the national bank or Federal savings association; and
(2) For each relevant regulatory capital ratio of the consolidated
subsidiary, the ratio exceeds the sum of the subsidiary's minimum
regulatory capital requirements plus its capital conservation buffer.
(b) Difference in capital adequacy standards at the subsidiary
level. For purposes of the minority interest calculations in this
section, if the consolidated subsidiary issuing the capital is not
subject to capital adequacy standards similar to those of the national
bank or Federal savings association, the national bank or Federal
savings association must assume that the capital adequacy standards of
the national bank or Federal savings association apply to the
subsidiary.
(c) Common equity tier 1 minority interest includable in the common
equity tier 1 capital of the national bank or Federal savings
association. For each consolidated subsidiary of a national bank or
Federal savings association, the amount of common equity tier 1 minority
interest the national bank or Federal savings association may include in
common equity tier 1 capital is equal to:
(1) The common equity tier 1 minority interest of the subsidiary;
minus
(2) The percentage of the subsidiary's common equity tier 1 capital
that is not owned by the national bank or Federal savings association,
multiplied by the difference between the common equity tier 1 capital of
the subsidiary and the lower of:
(i) The amount of common equity tier 1 capital the subsidiary must
hold, or would be required to hold pursuant to paragraph (b) of this
section, to avoid restrictions on distributions and discretionary bonus
payments under Sec. 3.11 or equivalent standards established by the
subsidiary's home country supervisor; or
[[Page 51]]
(ii)(A) The standardized total risk-weighted assets of the national
bank or Federal savings association that relate to the subsidiary
multiplied by
(B) The common equity tier 1 capital ratio the subsidiary must
maintain to avoid restrictions on distributions and discretionary bonus
payments under Sec. 3.11 or equivalent standards established by the
subsidiary's home country supervisor.
(d) Tier 1 minority interest includable in the tier 1 capital of the
national bank or Federal savings association. For each consolidated
subsidiary of the national bank or Federal savings association, the
amount of tier 1 minority interest the national bank or Federal savings
association may include in tier 1 capital is equal to:
(1) The tier 1 minority interest of the subsidiary; minus
(2) The percentage of the subsidiary's tier 1 capital that is not
owned by the national bank or Federal savings association multiplied by
the difference between the tier 1 capital of the subsidiary and the
lower of:
(i) The amount of tier 1 capital the subsidiary must hold, or would
be required to hold pursuant to paragraph (b) of this section, to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor, or
(ii)(A) The standardized total risk-weighted assets of the national
bank or Federal savings association that relate to the subsidiary
multiplied by
(B) The tier 1 capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor.
(e) Total capital minority interest includable in the total capital
of the national bank or Federal savings association. For each
consolidated subsidiary of the national bank or Federal savings
association, the amount of total capital minority interest the national
bank or Federal savings association may include in total capital is
equal to:
(1) The total capital minority interest of the subsidiary; minus
(2) The percentage of the subsidiary's total capital that is not
owned by the national bank or Federal savings association multiplied by
the difference between the total capital of the subsidiary and the lower
of:
(i) The amount of total capital the subsidiary must hold, or would
be required to hold pursuant to paragraph (b) of this section, to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor, or
(ii)(A) The standardized total risk-weighted assets of the national
bank or Federal savings association that relate to the subsidiary
multiplied by
(B) The total capital ratio the subsidiary must maintain to avoid
restrictions on distributions and discretionary bonus payments under
Sec. 3.11 or equivalent standards established by the subsidiary's home
country supervisor.
Sec. 3.22 Regulatory capital adjustments and deductions.
(a) Regulatory capital deductions from common equity tier 1 capital.
A national bank or Federal savings association must deduct from the sum
of its common equity tier 1 capital elements the items set forth in this
paragraph (a):
(1) Goodwill, net of associated deferred tax liabilities (DTLs) in
accordance with paragraph (e) of this section, including goodwill that
is embedded in the valuation of a significant investment in the capital
of an unconsolidated financial institution in the form of common stock
(and that is reflected in the consolidated financial statements of the
national bank or Federal savings association), in accordance with
paragraph (d) of this section;
(2) Intangible assets, other than MSAs, net of associated DTLs in
accordance with paragraph (e) of this section;
(3) Deferred tax assets (DTAs) that arise from net operating loss
and tax credit carryforwards net of any related valuation allowances and
net of DTLs in accordance with paragraph (e) of this section;
(4) Any gain-on-sale in connection with a securitization exposure;
(5)(i) Any defined benefit pension fund net asset, net of any
associated
[[Page 52]]
DTL in accordance with paragraph (e) of this section, held by a
depository institution holding company. With the prior approval of the
OCC, this deduction is not required for any defined benefit pension fund
net asset to the extent the depository institution holding company has
unrestricted and unfettered access to the assets in that fund.
(ii) For an insured depository institution, no deduction is
required.
(iii) A national bank or Federal savings association must risk
weight any portion of the defined benefit pension fund asset that is not
deducted under paragraphs (a)(5)(i) or (a)(5)(ii) of this section as if
the national bank or Federal savings association directly holds a
proportional ownership share of each exposure in the defined benefit
pension fund.
(6) For an advanced approaches national bank or Federal savings
association that has completed the parallel run process and that has
received notification from the OCC pursuant to Sec. 3.121(d), the amount
of expected credit loss that exceeds its eligible credit reserves; and
(7) With respect to a financial subsidiary, the aggregate amount of
the national bank's or Federal savings association's outstanding equity
investment, including retained earnings, in its financial subsidiaries
(as defined in [12 CFR 5.39 (OCC); 12 CFR 208.77 (Board))]. A national
bank or Federal savings association must not consolidate the assets and
liabilities of a financial subsidiary with those of the parent bank, and
no other deduction is required under paragraph (c) of this section for
investments in the capital instruments of financial subsidiaries.
(8)(i) A Federal savings association must deduct the aggregate
amount of its outstanding investments (both equity and debt) in, and
extensions of credit to, subsidiaries that are not includable
subsidiaries as defined in paragraph (a)(8)(iv) of this section and may
not consolidate the assets and liabilities of the subsidiary with those
of the Federal savings association. Any such deductions shall be
deducted from assets and common equity tier 1 except as provided in
paragraphs (a)(8)(ii) and (iii) of this section.
(ii) If a Federal savings association has any investments (both debt
and equity) in, or extensions or credit to, one or more subsidiaries
engaged in any activity that would not fall within the scope of
activities in which includable subsidiaries as defined in paragraph
(a)(8)(iv) of this section may engage, it must deduct such investments
and extensions of credit from assets and, thus, common equity tier 1 in
accordance with paragraph (a)(8)(i) of this section.
(iii) If a Federal savings association holds a subsidiary (either
directly or through a subsidiary) that is itself a domestic depository
institution, the OCC may, in its sole discretion upon determining that
the amount of common equity tier 1 that would be required would be
higher if the assets and liabilities of such subsidiary were
consolidated with those of the parent Federal savings association than
the amount that would be required if the parent Federal savings
association's investment were deducted pursuant to paragraphs (a)(8)(i)
and (ii) of this section, consolidate the assets and liabilities of that
subsidiary with those of the parent Federal savings association in
calculating the capital adequacy of the parent Federal savings
association, regardless of whether the subsidiary would otherwise be an
includable subsidiary as defined in paragraph (a)(8)(iv) of this
section.
(iv) For purposes of this section, the term includable subsidiary
means a subsidiary of a Federal savings association that:
(A) Is engaged solely in activities not impermissible for a national
bank;
(B) Is engaged in activities not permissible for a national bank,
but only if acting solely as agent for its customers and such agency
position is clearly documented in the Federal savings association's
files;
(C) Is engaged solely in mortgage-banking activities;
(D)(1) Is itself an insured depository institution or a company the
sole investment of which is an insured depository institution; and
(2) Was acquired by the parent Federal savings association prior to
May 1, 1989; or
[[Page 53]]
(E) Was a subsidiary of any Federal savings association existing as
a Federal savings association on August 9, 1989:
(1) That was chartered prior to October 15, 1982, as a savings bank
or a cooperative bank under state law; or
(2) That acquired its principal assets from an association that was
chartered prior to October 15, 1982, as a savings bank or a cooperative
bank under state law.
(b) Regulatory adjustments to common equity tier 1 capital. (1) A
national bank or Federal savings association must adjust the sum of
common equity tier 1 capital elements pursuant to the requirements set
forth in this paragraph (b). Such adjustments to common equity tier 1
capital must be made net of the associated deferred tax effects.
(i) A national bank or Federal savings association that makes an
AOCI opt-out election (as defined in paragraph (b)(2) of this section),
must make the adjustments required under Sec. 3.22(b)(2)(i).
(ii) A national bank or Federal savings association that is an
advanced approaches national bank or Federal savings association, and a
national bank or Federal savings association that has not made an AOCI
opt-out election (as defined in paragraph (b)(2) of this section), must
deduct any accumulated net gains and add any accumulated net losses on
cash flow hedges included in AOCI that relate to the hedging of items
that are not recognized at fair value on the balance sheet.
(iii) A national bank or Federal savings association must deduct any
net gain and add any net loss related to changes in the fair value of
liabilities that are due to changes in the national bank's or Federal
savings association's own credit risk. An advanced approaches national
bank or Federal savings association also must deduct the credit spread
premium over the risk free rate for derivatives that are liabilities.
(2) AOCI opt-out election. (i) A national bank or Federal savings
association that is not an advanced approaches national bank or Federal
savings association may make a one-time election to opt out of the
requirement to include all components of AOCI (with the exception of
accumulated net gains and losses on cash flow hedges related to items
that are not fair-valued on the balance sheet) in common equity tier 1
capital (AOCI opt-out election). A national bank or Federal savings
association that makes an AOCI opt-out election in accordance with this
paragraph (b)(2) must adjust common equity tier 1 capital as follows:
(A) Subtract any net unrealized gains and add any net unrealized
losses on available-for-sale securities;
(B) Subtract any net unrealized losses on available-for-sale
preferred stock classified as an equity security under GAAP and
available-for-sale equity exposures;
(C) Subtract any accumulated net gains and add any accumulated net
losses on cash flow hedges;
(D) Subtract any amounts recorded in AOCI attributed to defined
benefit postretirement plans resulting from the initial and subsequent
application of the relevant GAAP standards that pertain to such plans
(excluding, at the national bank's or Federal savings association's
option, the portion relating to pension assets deducted under paragraph
(a)(5) of this section); and
(E) Subtract any net unrealized gains and add any net unrealized
losses on held-to-maturity securities that are included in AOCI.
(ii) A national bank or Federal savings association that is not an
advanced approaches national bank or Federal savings association must
make its AOCI opt-out election in its Call Report filed for the first
regulatory reporting period after the date required for such national
bank or Federal savings association to comply with subpart A of this
part as set forth in Sec. 3.1(f).
(iii) With respect to a national bank or Federal savings association
that is not an advanced approaches national bank or Federal savings
association, each of its subsidiary banking organizations that is
subject to regulatory capital requirements issued by the Board of
Governors of the Federal Reserve, the Federal Deposit Insurance
[[Page 54]]
Corporation, or the Office of the Comptroller of the Currency \17\ must
elect the same option as the national bank or Federal savings
association pursuant to this paragraph (b)(2).
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\17\ These rules include the regulatory capital requirements set
forth at 12 CFR part 3 (OCC); 12 CFR part 225 (Board); 12 CFR part 325,
and 12 CFR part 390 (FDIC).
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(iv) With prior notice to the OCC, a national bank or Federal
savings association resulting from a merger, acquisition, or purchase
transaction and that is not an advanced approaches national bank or
Federal savings association may change its AOCI opt-out election in its
Call Report filed for the first reporting period after the date required
for such national bank or Federal savings association to comply with
subpart A of this part as set forth in Sec. 3.1(f) if:
(A) Other than as set forth in paragraph (b)(2)(iv)(C) of this
section, the merger, acquisition, or purchase transaction involved the
acquisition or purchase of all or substantially all of either the assets
or voting stock of another banking organization that is subject to
regulatory capital requirements issued by the Board of Governors of the
Federal Reserve, the Federal Deposit Insurance Corporation, or the
Office of the Comptroller of the Currency; \18\
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\18\ These rules include the regulatory capital requirements set
forth at 12 CFR part 3 (OCC); 12 CFR part 225 (Board); 12 CFR part 325,
and 12 CFR part 390 (FDIC).
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(B) Prior to the merger, acquisition, or purchase transaction, only
one of the banking organizations involved in the transaction made an
AOCI opt-out election under this section; and
(C) A national bank or Federal savings association may, with the
prior approval of the OCC, change its AOCI opt-out election under this
paragraph (b) in the case of a merger, acquisition, or purchase
transaction that meets the requirements set forth at paragraph
(b)(2)(iv)(B) of this section, but does not meet the requirements of
paragraph (b)(2)(iv)(A). In making such a determination, the OCC may
consider the terms of the merger, acquisition, or purchase transaction,
as well as the extent of any changes to the risk profile, complexity,
and scope of operations of the national bank or Federal savings
association resulting from the merger, acquisition, or purchase
transaction.
(c) Deductions from regulatory capital related to investments in
capital instruments \19\--(1) Investment in the national bank's or
Federal savings association's own capital instruments. A national bank
or Federal savings association must deduct an investment in the national
bank's or Federal savings association's own capital instruments as
follows:
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\19\ The national bank or Federal savings association must calculate
amounts deducted under paragraphs (c) through (f) of this section after
it calculates the amount of ALLL includable in tier 2 capital under
Sec. 3.20(d)(3).
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(i) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
common stock instruments from its common equity tier 1 capital elements
to the extent such instruments are not excluded from regulatory capital
under Sec. 3.20(b)(1);
(ii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
additional tier 1 capital instruments from its additional tier 1 capital
elements; and
(iii) A national bank or Federal savings association must deduct an
investment in the national bank's or Federal savings association's own
tier 2 capital instruments from its tier 2 capital elements.
(2) Corresponding deduction approach. For purposes of subpart C of
this part, the corresponding deduction approach is the methodology used
for the deductions from regulatory capital related to reciprocal cross
holdings (as described in paragraph (c)(3) of this section), non-
significant investments in the capital of unconsolidated financial
institutions (as described in paragraph (c)(4) of this section), and
non-common stock significant investments in the capital of
unconsolidated financial institutions (as described in paragraph (c)(5)
of this section). Under the corresponding deduction approach, a national
bank or Federal savings association must make deductions from the
component of capital for which the underlying instrument would qualify
if it were issued by the national bank or
[[Page 55]]
Federal savings association itself, as described in paragraphs
(c)(2)(i)-(iii) of this section. If the national bank or Federal savings
association does not have a sufficient amount of a specific component of
capital to effect the required deduction, the shortfall must be deducted
according to paragraph (f) of this section.
(i) If an investment is in the form of an instrument issued by a
financial institution that is not a regulated financial institution, the
national bank or Federal savings association must treat the instrument
as:
(A) A common equity tier 1 capital instrument if it is common stock
or represents the most subordinated claim in liquidation of the
financial institution; and
(B) An additional tier 1 capital instrument if it is subordinated to
all creditors of the financial institution and is senior in liquidation
only to common shareholders.
(ii) If an investment is in the form of an instrument issued by a
regulated financial institution and the instrument does not meet the
criteria for common equity tier 1, additional tier 1 or tier 2 capital
instruments under Sec. 3.20, the national bank or Federal savings
association must treat the instrument as:
(A) A common equity tier 1 capital instrument if it is common stock
included in GAAP equity or represents the most subordinated claim in
liquidation of the financial institution;
(B) An additional tier 1 capital instrument if it is included in
GAAP equity, subordinated to all creditors of the financial institution,
and senior in a receivership, insolvency, liquidation, or similar
proceeding only to common shareholders; and
(C) A tier 2 capital instrument if it is not included in GAAP equity
but considered regulatory capital by the primary supervisor of the
financial institution.
(iii) If an investment is in the form of a non-qualifying capital
instrument (as defined in Sec. 3.300(c)), the national bank or Federal
savings association must treat the instrument as:
(A) An additional tier 1 capital instrument if such instrument was
included in the issuer's tier 1 capital prior to May 19, 2010; or
(B) A tier 2 capital instrument if such instrument was included in
the issuer's tier 2 capital (but not includable in tier 1 capital) prior
to May 19, 2010.
(3) Reciprocal cross holdings in the capital of financial
institutions. A national bank or Federal savings association must deduct
investments in the capital of other financial institutions it holds
reciprocally, where such reciprocal cross holdings result from a formal
or informal arrangement to swap, exchange, or otherwise intend to hold
each other's capital instruments, by applying the corresponding
deduction approach.
(4) Non-significant investments in the capital of unconsolidated
financial institutions. (i) A national bank or Federal savings
association must deduct its non-significant investments in the capital
of unconsolidated financial institutions (as defined in Sec. 3.2) that,
in the aggregate, exceed 10 percent of the sum of the national bank's or
Federal savings association's common equity tier 1 capital elements
minus all deductions from and adjustments to common equity tier 1
capital elements required under paragraphs (a) through (c)(3) of this
section (the 10 percent threshold for non-significant investments) by
applying the corresponding deduction approach.\20\ The deductions
described in this section are net of associated DTLs in accordance with
paragraph (e) of this section. In addition, a national bank or Federal
savings association that underwrites a failed underwriting, with the
prior written approval of the OCC, for the period of time stipulated by
the OCC, is not required to deduct a non-significant investment in the
capital of an unconsolidated financial institution pursuant to this
paragraph
[[Page 56]]
(c) to the extent the investment is related to the failed
underwriting.\21\
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\20\ With the prior written approval of the OCC, for the period of
time stipulated by the OCC, a national bank or Federal savings
association is not required to deduct a non-significant investment in
the capital instrument of an unconsolidated financial institution
pursuant to this paragraph if the financial institution is in distress
and if such investment is made for the purpose of providing financial
support to the financial institution, as determined by the OCC.
\21\ Any non-significant investments in the capital of
unconsolidated financial institutions that do not exceed the 10 percent
threshold for non-significant investments under this section must be
assigned the appropriate risk weight under subparts D, E, or F of this
part, as applicable.
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(ii) The amount to be deducted under this section from a specific
capital component is equal to:
(A) The national bank's or Federal savings association's non-
significant investments in the capital of unconsolidated financial
institutions exceeding the 10 percent threshold for non-significant
investments, multiplied by
(B) The ratio of the national bank's or Federal savings
association's non-significant investments in the capital of
unconsolidated financial institutions in the form of such capital
component to the national bank's or Federal savings association's total
non-significant investments in unconsolidated financial institutions.
(5) Significant investments in the capital of unconsolidated
financial institutions that are not in the form of common stock. A
national bank or Federal savings association must deduct its significant
investments in the capital of unconsolidated financial institutions that
are not in the form of common stock by applying the corresponding
deduction approach.\22\ The deductions described in this section are net
of associated DTLs in accordance with paragraph (e) of this section. In
addition, with the prior written approval of the OCC, for the period of
time stipulated by the OCC, a national bank or Federal savings
association that underwrites a failed underwriting is not required to
deduct a significant investment in the capital of an unconsolidated
financial institution pursuant to this paragraph (c) if such investment
is related to such failed underwriting.
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\22\ With prior written approval of the OCC, for the period of time
stipulated by the OCC, a national bank or Federal savings association is
not required to deduct a significant investment in the capital
instrument of an unconsolidated financial institution in distress which
is not in the form of common stock pursuant to this section if such
investment is made for the purpose of providing financial support to the
financial institution as determined by the OCC.
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(d) Items subject to the 10 and 15 percent common equity tier 1
capital deduction thresholds. (1) A national bank or Federal savings
association must deduct from common equity tier 1 capital elements the
amount of each of the items set forth in this paragraph (d) that,
individually, exceeds 10 percent of the sum of the national bank's or
Federal savings association's common equity tier 1 capital elements,
less adjustments to and deductions from common equity tier 1 capital
required under paragraphs (a) through (c) of this section (the 10
percent common equity tier 1 capital deduction threshold).
(i) DTAs arising from temporary differences that the national bank
or Federal savings association could not realize through net operating
loss carrybacks, net of any related valuation allowances and net of
DTLs, in accordance with paragraph (e) of this section. A national bank
or Federal savings association is not required to deduct from the sum of
its common equity tier 1 capital elements DTAs (net of any related
valuation allowances and net of DTLs, in accordance with Sec. 3.22(e))
arising from timing differences that the national bank or Federal
savings association could realize through net operating loss carrybacks.
The national bank or Federal savings association must risk weight these
assets at 100 percent. For a national bank or Federal savings
association that is a member of a consolidated group for tax purposes,
the amount of DTAs that could be realized through net operating loss
carrybacks may not exceed the amount that the national bank or Federal
savings association could reasonably expect to have refunded by its
parent holding company.
(ii) MSAs net of associated DTLs, in accordance with paragraph (e)
of this section.
(iii) Significant investments in the capital of unconsolidated
financial institutions in the form of common stock, net of associated
DTLs in accordance with paragraph (e) of this section.\23\ Significant
investments in the
[[Page 57]]
capital of unconsolidated financial institutions in the form of common
stock subject to the 10 percent common equity tier 1 capital deduction
threshold may be reduced by any goodwill embedded in the valuation of
such investments deducted by the national bank or Federal savings
association pursuant to paragraph (a)(1) of this section. In addition,
with the prior written approval of the OCC, for the period of time
stipulated by the OCC, a national bank or Federal savings association
that underwrites a failed underwriting is not required to deduct a
significant investment in the capital of an unconsolidated financial
institution in the form of common stock pursuant to this paragraph (d)
if such investment is related to such failed underwriting.
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\23\ With the prior written approval of the OCC, for the period of
time stipulated by the OCC, a national bank or Federal savings
association is not required to deduct a significant investment in the
capital instrument of an unconsolidated financial institution in
distress in the form of common stock pursuant to this section if such
investment is made for the purpose of providing financial support to the
financial institution as determined by the OCC.
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(2) A national bank or Federal savings association must deduct from
common equity tier 1 capital elements the items listed in paragraph
(d)(1) of this section that are not deducted as a result of the
application of the 10 percent common equity tier 1 capital deduction
threshold, and that, in aggregate, exceed 17.65 percent of the sum of
the national bank's or Federal savings association's common equity tier
1 capital elements, minus adjustments to and deductions from common
equity tier 1 capital required under paragraphs (a) through (c) of this
section, minus the items listed in paragraph (d)(1) of this section (the
15 percent common equity tier 1 capital deduction threshold). Any
goodwill that has been deducted under paragraph (a)(1) of this section
can be excluded from the significant investments in the capital of
unconsolidated financial institutions in the form of common stock.\24\
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\24\ The amount of the items in paragraph (d) of this section that
is not deducted from common equity tier 1 capital pursuant to this
section must be included in the risk-weighted assets of the national
bank or Federal savings association and assigned a 250 percent risk
weight.
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(3) For purposes of calculating the amount of DTAs subject to the 10
and 15 percent common equity tier 1 capital deduction thresholds, a
national bank or Federal savings association may exclude DTAs and DTLs
relating to adjustments made to common equity tier 1 capital under
paragraph (b) of this section. A national bank or Federal savings
association that elects to exclude DTAs relating to adjustments under
paragraph (b) of this section also must exclude DTLs and must do so
consistently in all future calculations. A national bank or Federal
savings association may change its exclusion preference only after
obtaining the prior approval of the OCC.
(e) Netting of DTLs against assets subject to deduction. (1) Except
as described in paragraph (e)(3) of this section, netting of DTLs
against assets that are subject to deduction under this section is
permitted, but not required, if the following conditions are met:
(i) The DTL is associated with the asset; and
(ii) The DTL would be extinguished if the associated asset becomes
impaired or is derecognized under GAAP.
(2) A DTL may only be netted against a single asset.
(3) For purposes of calculating the amount of DTAs subject to the
threshold deduction in paragraph (d) of this section, the amount of DTAs
that arise from net operating loss and tax credit carryforwards, net of
any related valuation allowances, and of DTAs arising from temporary
differences that the national bank or Federal savings association could
not realize through net operating loss carrybacks, net of any related
valuation allowances, may be offset by DTLs (that have not been netted
against assets subject to deduction pursuant to paragraph (e)(1) of this
section) subject to the conditions set forth in this paragraph (e).
(i) Only the DTAs and DTLs that relate to taxes levied by the same
taxation authority and that are eligible for offsetting by that
authority may be offset for purposes of this deduction.
(ii) The amount of DTLs that the national bank or Federal savings
association nets against DTAs that arise from net operating loss and tax
credit
[[Page 58]]
carryforwards, net of any related valuation allowances, and against DTAs
arising from temporary differences that the national bank or Federal
savings association could not realize through net operating loss
carrybacks, net of any related valuation allowances, must be allocated
in proportion to the amount of DTAs that arise from net operating loss
and tax credit carryforwards (net of any related valuation allowances,
but before any offsetting of DTLs) and of DTAs arising from temporary
differences that the national bank or Federal savings association could
not realize through net operating loss carrybacks (net of any related
valuation allowances, but before any offsetting of DTLs), respectively.
(4) A national bank or Federal savings association may offset DTLs
embedded in the carrying value of a leveraged lease portfolio acquired
in a business combination that are not recognized under GAAP against
DTAs that are subject to paragraph (d) of this section in accordance
with this paragraph (e).
(5) A national bank or Federal savings association must net DTLs
against assets subject to deduction under this section in a consistent
manner from reporting period to reporting period. A national bank or
Federal savings association may change its preference regarding the
manner in which it nets DTLs against specific assets subject to
deduction under this section only after obtaining the prior approval of
the OCC.
(f) Insufficient amounts of a specific regulatory capital component
to effect deductions. Under the corresponding deduction approach, if a
national bank or Federal savings association does not have a sufficient
amount of a specific component of capital to effect the required
deduction after completing the deductions required under paragraph (d)
of this section, the national bank or Federal savings association must
deduct the shortfall from the next higher (that is, more subordinated)
component of regulatory capital.
(g) Treatment of assets that are deducted. A national bank or
Federal savings association must exclude from standardized total risk-
weighted assets and, as applicable, advanced approaches total risk-
weighted assets any item deducted from regulatory capital under
paragraphs (a), (c), and (d) of this section.
(h) Net long position. (1) For purposes of calculating an investment
in the national bank's or Federal savings association's own capital
instrument and an investment in the capital of an unconsolidated
financial institution under this section, the net long position is the
gross long position in the underlying instrument determined in
accordance with paragraph (h)(2) of this section, as adjusted to
recognize a short position in the same instrument calculated in
accordance with paragraph (h)(3) of this section.
(2) Gross long position. The gross long position is determined as
follows:
(i) For an equity exposure that is held directly, the adjusted
carrying value as that term is defined in Sec. 3.51(b);
(ii) For an exposure that is held directly and is not an equity
exposure or a securitization exposure, the exposure amount as that term
is defined in Sec. 3.2;
(iii) For an indirect exposure, the national bank's or Federal
savings association's carrying value of the investment in the investment
fund, provided that, alternatively:
(A) A national bank or Federal savings association may, with the
prior approval of the OCC, use a conservative estimate of the amount of
its investment in its own capital instruments or the capital of an
unconsolidated financial institution held through a position in an
index; or
(B) A national bank or Federal savings association may calculate the
gross long position for the national bank's or Federal savings
association's own capital instruments or the capital of an
unconsolidated financial institution by multiplying the national bank's
or Federal savings association's carrying value of its investment in the
investment fund by either:
(1) The highest stated investment limit (in percent) for investments
in the national bank's or Federal savings association's own capital
instruments or the capital of unconsolidated financial institutions as
stated in the prospectus, partnership agreement, or
[[Page 59]]
similar contract defining permissible investments of the investment
fund; or
(2) The investment fund's actual holdings of own capital instruments
or the capital of unconsolidated financial institutions.
(iv) For a synthetic exposure, the amount of the national bank's or
Federal savings association's loss on the exposure if the reference
capital instrument were to have a value of zero.
(3) Adjustments to reflect a short position. In order to adjust the
gross long position to recognize a short position in the same
instrument, the following criteria must be met:
(i) The maturity of the short position must match the maturity of
the long position, or the short position has a residual maturity of at
least one year (maturity requirement); or
(ii) For a position that is a trading asset or trading liability
(whether on- or off-balance sheet) as reported on the national bank's or
Federal savings association's Call Report, if the national bank or
Federal savings association has a contractual right or obligation to
sell the long position at a specific point in time and the counterparty
to the contract has an obligation to purchase the long position if the
national bank or Federal savings association exercises its right to
sell, this point in time may be treated as the maturity of the long
position such that the maturity of the long position and short position
are deemed to match for purposes of the maturity requirement, even if
the maturity of the short position is less than one year; and
(iii) For an investment in the national bank's or Federal savings
association's own capital instrument under paragraph (c)(1) of this
section or an investment in a capital of an unconsolidated financial
institution under paragraphs (c)(4), (c)(5), and (d)(1)(iii) of this
section.
(A) A national bank or Federal savings association may only net a
short position against a long position in the national bank's or Federal
savings association's own capital instrument under paragraph (c)(1) of
this section if the short position involves no counterparty credit risk.
(B) A gross long position in a national bank's or Federal savings
association's own capital instrument or in a capital instrument of an
unconsolidated financial institution resulting from a position in an
index may be netted against a short position in the same index. Long and
short positions in the same index without maturity dates are considered
to have matching maturities.
(C) A short position in an index that is hedging a long cash or
synthetic position in a national bank's or Federal savings association's
own capital instrument or in a capital instrument of an unconsolidated
financial institution can be decomposed to provide recognition of the
hedge. More specifically, the portion of the index that is composed of
the same underlying instrument that is being hedged may be used to
offset the long position if both the long position being hedged and the
short position in the index are reported as a trading asset or trading
liability (whether on- or off-balance sheet) on the national bank's or
Federal savings association's Call Report, and the hedge is deemed
effective by the national bank's or Federal savings association's
internal control processes, which have not been found to be inadequate
by the OCC.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Secs. 3.23-3.29 [Reserved]
Subpart D_Risk-Weighted Assets_Standardized Approach
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.30 Applicability.
(a) This subpart sets forth methodologies for determining risk-
weighted assets for purposes of the generally applicable risk-based
capital requirements for all national banks or Federal savings
associations.
(b) Notwithstanding paragraph (a) of this section, a market risk
national bank or Federal savings association must exclude from its
calculation of risk-weighted assets under this subpart the risk-weighted
asset amounts of all covered positions, as defined in subpart F of this
part (except foreign exchange
[[Page 60]]
positions that are not trading positions, OTC derivative positions,
cleared transactions, and unsettled transactions).
Risk-Weighted Assets For General Credit Risk
Sec. 3.31 Mechanics for calculating risk-weighted assets for general
credit risk.
(a) General risk-weighting requirements. A national bank or Federal
savings association must apply risk weights to its exposures as follows:
(1) A national bank or Federal savings association must determine
the exposure amount of each on-balance sheet exposure, each OTC
derivative contract, and each off-balance sheet commitment, trade and
transaction-related contingency, guarantee, repo-style transaction,
financial standby letter of credit, forward agreement, or other similar
transaction that is not:
(i) An unsettled transaction subject to Sec. 3.38;
(ii) A cleared transaction subject to Sec. 3.35;
(iii) A default fund contribution subject to Sec. 3.35;
(iv) A securitization exposure subject to Secs. 3.41 through 3.45;
or
(v) An equity exposure (other than an equity OTC derivative
contract) subject to Secs. 3.51 through 3.53.
(2) The national bank or Federal savings association must multiply
each exposure amount by the risk weight appropriate to the exposure
based on the exposure type or counterparty, eligible guarantor, or
financial collateral to determine the risk-weighted asset amount for
each exposure.
(b) Total risk-weighted assets for general credit risk equals the
sum of the risk-weighted asset amounts calculated under this section.
Sec. 3.32 General risk weights.
(a) Sovereign exposures--(1) Exposures to the U.S. government. (i)
Notwithstanding any other requirement in this subpart, a national bank
or Federal savings association must assign a zero percent risk weight
to:
(A) An exposure to the U.S. government, its central bank, or a U.S.
government agency; and
(B) The portion of an exposure that is directly and unconditionally
guaranteed by the U.S. government, its central bank, or a U.S.
government agency. This includes a deposit or other exposure, or the
portion of a deposit or other exposure, that is insured or otherwise
unconditionally guaranteed by the FDIC or National Credit Union
Administration.
(ii) A national bank or Federal savings association must assign a 20
percent risk weight to the portion of an exposure that is conditionally
guaranteed by the U.S. government, its central bank, or a U.S.
government agency. This includes an exposure, or the portion of an
exposure, that is conditionally guaranteed by the FDIC or National
Credit Union Administration.
(2) Other sovereign exposures. In accordance with Table 1 to
Sec. 3.32, a national bank or Federal savings association must assign a
risk weight to a sovereign exposure based on the CRC applicable to the
sovereign or the sovereign's OECD membership status if there is no CRC
applicable to the sovereign.
Table 1 toSec. 3.32--Risk Weights for Sovereign Exposures
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 0
2..................................................... 20
3..................................................... 50
4-6................................................... 100
7..................................................... 150
OECD Member with No CRC................................. 0
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(3) Certain sovereign exposures. Notwithstanding paragraph (a)(2) of
this section, a national bank or Federal savings association may assign
to a sovereign exposure a risk weight that is lower than the applicable
risk weight in Table 1 to Sec. 3.32 if:
(i) The exposure is denominated in the sovereign's currency;
(ii) The national bank or Federal savings association has at least
an equivalent amount of liabilities in that currency; and
(iii) The risk weight is not lower than the risk weight that the
home country supervisor allows national banks or Federal savings
associations
[[Page 61]]
under its jurisdiction to assign to the same exposures to the sovereign.
(4) Exposures to a non-OECD member sovereign with no CRC. Except as
provided in paragraphs (a)(3), (a)(5) and (a)(6) of this section, a
national bank or Federal savings association must assign a 100 percent
risk weight to an exposure to a sovereign if the sovereign does not have
a CRC.
(5) Exposures to an OECD member sovereign with no CRC. Except as
provided in paragraph (a)(6) of this section, a national bank or Federal
savings association must assign a 0 percent risk weight to an exposure
to a sovereign that is a member of the OECD if the sovereign does not
have a CRC.
(6) Sovereign default. A national bank or Federal savings
association must assign a 150 percent risk weight to a sovereign
exposure immediately upon determining that an event of sovereign default
has occurred, or if an event of sovereign default has occurred during
the previous five years.
(b) Certain supranational entities and multilateral development
banks (MDBs). A national bank or Federal savings association must assign
a zero percent risk weight to an exposure to the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, or an MDB.
(c) Exposures to GSEs. (1) A national bank or Federal savings
association must assign a 20 percent risk weight to an exposure to a GSE
other than an equity exposure or preferred stock.
(2) A national bank or Federal savings association must assign a 100
percent risk weight to preferred stock issued by a GSE.
(d) Exposures to depository institutions, foreign banks, and credit
unions--(1) Exposures to U.S. depository institutions and credit unions.
A national bank or Federal savings association must assign a 20 percent
risk weight to an exposure to a depository institution or credit union
that is organized under the laws of the United States or any state
thereof, except as otherwise provided under paragraph (d)(3) of this
section.
(2) Exposures to foreign banks. (i) Except as otherwise provided
under paragraphs (d)(2)(iv) and (d)(3) of this section, a national bank
or Federal savings association must assign a risk weight to an exposure
to a foreign bank, in accordance with Table 2 to Sec. 3.32, based on the
CRC that corresponds to the foreign bank's home country or the OECD
membership status of the foreign bank's home country if there is no CRC
applicable to the foreign bank's home country.
Table 2 toSec. 3.32--Risk Weights for Exposures to Foreign Banks
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 20
2..................................................... 50
3..................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 20
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(ii) A national bank or Federal savings association must assign a 20
percent risk weight to an exposure to a foreign bank whose home country
is a member of the OECD and does not have a CRC.
(iii) A national bank or Federal savings association must assign a
100 percent risk weight to an exposure to a foreign bank whose home
country is not a member of the OECD and does not have a CRC, with the
exception of self-liquidating, trade-related contingent items that arise
from the movement of goods, and that have a maturity of three months or
less, which may be assigned a 20 percent risk weight.
(iv) A national bank or Federal savings association must assign a
150 percent risk weight to an exposure to a foreign bank immediately
upon determining that an event of sovereign default has occurred in the
bank's home country, or if an event of sovereign default has occurred in
the foreign bank's home country during the previous five years.
(3) A national bank or Federal savings association must assign a 100
percent risk weight to an exposure to a financial institution if the
exposure may be included in that financial institution's capital unless
the exposure is:
(i) An equity exposure;
(ii) A significant investment in the capital of an unconsolidated
financial
[[Page 62]]
institution in the form of common stock pursuant to Sec. 3.22(d)(iii);
(iii) Deducted from regulatory capital under Sec. 3.22; or
(iv) Subject to a 150 percent risk weight under paragraph (d)(2)(iv)
or Table 2 of paragraph (d)(2) of this section.
(e) Exposures to public sector entities (PSEs)--(1) Exposures to
U.S. PSEs. (i) A national bank or Federal savings association must
assign a 20 percent risk weight to a general obligation exposure to a
PSE that is organized under the laws of the United States or any state
or political subdivision thereof.
(ii) A national bank or Federal savings association must assign a 50
percent risk weight to a revenue obligation exposure to a PSE that is
organized under the laws of the United States or any state or political
subdivision thereof.
(2) Exposures to foreign PSEs. (i) Except as provided in paragraphs
(e)(1) and (e)(3) of this section, a national bank or Federal savings
association must assign a risk weight to a general obligation exposure
to a PSE, in accordance with Table 3 to Sec. 3.32, based on the CRC that
corresponds to the PSE's home country or the OECD membership status of
the PSE's home country if there is no CRC applicable to the PSE's home
country.
(ii) Except as provided in paragraphs (e)(1) and (e)(3) of this
section, a national bank or Federal savings association must assign a
risk weight to a revenue obligation exposure to a PSE, in accordance
with Table 4 to Sec. 3.32, based on the CRC that corresponds to the
PSE's home country; or the OECD membership status of the PSE's home
country if there is no CRC applicable to the PSE's home country.
(3) A national bank or Federal savings association may assign a
lower risk weight than would otherwise apply under Tables 3 or 4 to
Sec. 3.32 to an exposure to a foreign PSE if:
(i) The PSE's home country supervisor allows banks under its
jurisdiction to assign a lower risk weight to such exposures; and
(ii) The risk weight is not lower than the risk weight that
corresponds to the PSE's home country in accordance with Table 1 to
Sec. 3.32.
Table 3 toSec. 3.32--Risk Weights for Non-U.S. PSE General Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 20
2..................................................... 50
3..................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 20
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
Table 4 toSec. 3.32--Risk Weights for Non-U.S. PSE Revenue Obligations
------------------------------------------------------------------------
Risk weight
(in percent)
------------------------------------------------------------------------
CRC:
0-1................................................... 50
2-3................................................... 100
4-7................................................... 150
OECD Member with No CRC................................. 50
Non-OECD Member with No CRC............................. 100
Sovereign Default....................................... 150
------------------------------------------------------------------------
(4) Exposures to PSEs from an OECD member sovereign with no CRC. (i)
A national bank or Federal savings association must assign a 20 percent
risk weight to a general obligation exposure to a PSE whose home country
is an OECD member sovereign with no CRC.
(ii) A national bank or Federal savings association must assign a 50
percent risk weight to a revenue obligation exposure to a PSE whose home
country is an OECD member sovereign with no CRC.
(5) Exposures to PSEs whose home country is not an OECD member
sovereign with no CRC. A national bank or Federal savings association
must assign a 100 percent risk weight to an exposure to a PSE whose home
country is not a member of the OECD and does not have a CRC.
(6) A national bank or Federal savings association must assign a 150
percent risk weight to a PSE exposure immediately upon determining that
an event of sovereign default has occurred in a PSE's home country or if
an event of sovereign default has occurred in the PSE's home country
during the previous five years.
(f) Corporate exposures. A national bank or Federal savings
association must assign a 100 percent risk weight to all its corporate
exposures.
[[Page 63]]
(g) Residential mortgage exposures. (1) A national bank or Federal
savings association must assign a 50 percent risk weight to a first-lien
residential mortgage exposure that:
(i) Is secured by a property that is either owner-occupied or
rented;
(ii) Is made in accordance with prudent underwriting standards,
including standards relating to the loan amount as a percent of the
appraised value of the property;
(iii) Is not 90 days or more past due or carried in nonaccrual
status; and
(iv) Is not restructured or modified.
(2) A national bank or Federal savings association must assign a 100
percent risk weight to a first-lien residential mortgage exposure that
does not meet the criteria in paragraph (g)(1) of this section, and to
junior-lien residential mortgage exposures.
(3) For the purpose of this paragraph (g), if a national bank or
Federal savings association holds the first-lien and junior-lien(s)
residential mortgage exposures, and no other party holds an intervening
lien, the national bank or Federal savings association must combine the
exposures and treat them as a single first-lien residential mortgage
exposure.
(4) A loan modified or restructured solely pursuant to the U.S.
Treasury's Home Affordable Mortgage Program is not modified or
restructured for purposes of this section.
(h) Pre-sold construction loans. A national bank or Federal savings
association must assign a 50 percent risk weight to a pre-sold
construction loan unless the purchase contract is cancelled, in which
case a national bank or Federal savings association must assign a 100
percent risk weight.
(i) Statutory multifamily mortgages. A national bank or Federal
savings association must assign a 50 percent risk weight to a statutory
multifamily mortgage.
(j) High-volatility commercial real estate (HVCRE) exposures. A
national bank or Federal savings association must assign a 150 percent
risk weight to an HVCRE exposure.
(k) Past due exposures. Except for a sovereign exposure or a
residential mortgage exposure, a national bank or Federal savings
association must determine a risk weight for an exposure that is 90 days
or more past due or on nonaccrual according to the requirements set
forth in this paragraph (k).
(1) A national bank or Federal savings association must assign a 150
percent risk weight to the portion of the exposure that is not
guaranteed or that is unsecured.
(2) A national bank or Federal savings association may assign a risk
weight to the guaranteed portion of a past due exposure based on the
risk weight that applies under Sec. 3.36 if the guarantee or credit
derivative meets the requirements of that section.
(3) A national bank or Federal savings association may assign a risk
weight to the collateralized portion of a past due exposure based on the
risk weight that applies under Sec. 3.37 if the collateral meets the
requirements of that section.
(l) Other assets. (1) A national bank or Federal savings association
must assign a zero percent risk weight to cash owned and held in all
offices of the national bank or Federal savings association or in
transit; to gold bullion held in the national bank's or Federal savings
association's own vaults or held in another depository institution's
vaults on an allocated basis, to the extent the gold bullion assets are
offset by gold bullion liabilities; and to exposures that arise from the
settlement of cash transactions (such as equities, fixed income, spot
foreign exchange and spot commodities) with a central counterparty where
there is no assumption of ongoing counterparty credit risk by the
central counterparty after settlement of the trade and associated
default fund contributions.
(2) A national bank or Federal savings association must assign a 20
percent risk weight to cash items in the process of collection.
(3) A national bank or Federal savings association must assign a 100
percent risk weight to DTAs arising from temporary differences that the
national bank or Federal savings association could realize through net
operating loss carrybacks.
(4) A national bank or Federal savings association must assign a 250
percent risk weight to the portion of each
[[Page 64]]
of the following items that is not deducted from common equity tier 1
capital pursuant to Sec. 3.22(d):
(i) MSAs; and
(ii) DTAs arising from temporary differences that the national bank
or Federal savings association could not realize through net operating
loss carrybacks.
(5) A national bank or Federal savings association must assign a 100
percent risk weight to all assets not specifically assigned a different
risk weight under this subpart and that are not deducted from tier 1 or
tier 2 capital pursuant to Sec. 3.22.
(6) Notwithstanding the requirements of this section, a national
bank or Federal savings association may assign an asset that is not
included in one of the categories provided in this section to the risk
weight category applicable under the capital rules applicable to bank
holding companies and savings and loan holding companies at 12 CFR part
217, provided that all of the following conditions apply:
(i) The national bank or Federal savings association is not
authorized to hold the asset under applicable law other than debt
previously contracted or similar authority; and
(ii) The risks associated with the asset are substantially similar
to the risks of assets that are otherwise assigned to a risk weight
category of less than 100 percent under this subpart.
Sec. 3.33 Off-balance sheet exposures.
(a) General. (1) A national bank or Federal savings association must
calculate the exposure amount of an off-balance sheet exposure using the
credit conversion factors (CCFs) in paragraph (b) of this section.
(2) Where a national bank or Federal savings association commits to
provide a commitment, the national bank or Federal savings association
may apply the lower of the two applicable CCFs.
(3) Where a national bank or Federal savings association provides a
commitment structured as a syndication or participation, the national
bank or Federal savings association is only required to calculate the
exposure amount for its pro rata share of the commitment.
(4) Where a national bank or Federal savings association provides a
commitment, enters into a repurchase agreement, or provides a credit-
enhancing representation and warranty, and such commitment, repurchase
agreement, or credit-enhancing representation and warranty is not a
securitization exposure, the exposure amount shall be no greater than
the maximum contractual amount of the commitment, repurchase agreement,
or credit-enhancing representation and warranty, as applicable.
(b) Credit conversion factors--(1) Zero percent CCF. A national bank
or Federal savings association must apply a zero percent CCF to the
unused portion of a commitment that is unconditionally cancelable by the
national bank or Federal savings association.
(2) 20 percent CCF. A national bank or Federal savings association
must apply a 20 percent CCF to the amount of:
(i) Commitments with an original maturity of one year or less that
are not unconditionally cancelable by the national bank or Federal
savings association; and
(ii) Self-liquidating, trade-related contingent items that arise
from the movement of goods, with an original maturity of one year or
less.
(3) 50 percent CCF. A national bank or Federal savings association
must apply a 50 percent CCF to the amount of:
(i) Commitments with an original maturity of more than one year that
are not unconditionally cancelable by the national bank or Federal
savings association; and
(ii) Transaction-related contingent items, including performance
bonds, bid bonds, warranties, and performance standby letters of credit.
(4) 100 percent CCF. A national bank or Federal savings association
must apply a 100 percent CCF to the amount of the following off-balance-
sheet items and other similar transactions:
(i) Guarantees;
(ii) Repurchase agreements (the off-balance sheet component of which
equals the sum of the current fair values of all positions the national
bank or Federal savings association has sold subject to repurchase);
[[Page 65]]
(iii) Credit-enhancing representations and warranties that are not
securitization exposures;
(iv) Off-balance sheet securities lending transactions (the off-
balance sheet component of which equals the sum of the current fair
values of all positions the national bank or Federal savings association
has lent under the transaction);
(v) Off-balance sheet securities borrowing transactions (the off-
balance sheet component of which equals the sum of the current fair
values of all non-cash positions the national bank or Federal savings
association has posted as collateral under the transaction);
(vi) Financial standby letters of credit; and
(vii) Forward agreements.
Sec. 3.34 OTC derivative contracts.
(a) Exposure amount--(1) Single OTC derivative contract. Except as
modified by paragraph (b) of this section, the exposure amount for a
single OTC derivative contract that is not subject to a qualifying
master netting agreement is equal to the sum of the national bank's or
Federal savings association's current credit exposure and potential
future credit exposure (PFE) on the OTC derivative contract.
(i) Current credit exposure. The current credit exposure for a
single OTC derivative contract is the greater of the mark-to-fair value
of the OTC derivative contract or zero.
(ii) PFE. (A) The PFE for a single OTC derivative contract,
including an OTC derivative contract with a negative mark-to-fair value,
is calculated by multiplying the notional principal amount of the OTC
derivative contract by the appropriate conversion factor in Table 1 to
Sec. 3.34.
(B) For purposes of calculating either the PFE under this paragraph
(a) or the gross PFE under paragraph (a)(2) 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.
(C) For an OTC derivative contract that does not fall within one of
the specified categories in Table 1 to Sec. 3.34, the PFE must be
calculated using the appropriate ``other'' conversion factor.
(D) A national bank or Federal savings association must use an OTC
derivative contract's effective notional principal amount (that is, the
apparent or stated notional principal amount multiplied by any
multiplier in the OTC derivative contract) rather than the apparent or
stated notional principal amount in calculating PFE.
(E) The PFE of the protection provider of a credit derivative is
capped at the net present value of the amount of unpaid premiums.
Table 1 toSec. 3.34--Conversion Factor Matrix for Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment investment- Precious
Remaining maturity \2\ Interest exchange grade grade Equity metals Other
rate rate and reference reference (except
gold asset) \3\ asset) gold)
--------------------------------------------------------------------------------------------------------------------------------------------------------
One year or less............................................. 0.00 0.01 0.05 0.10 0.06 0.07 0.10
Greater than one year and less than or equal to five years... 0.005 0.05 0.05 0.10 0.08 0.07 0.12
Greater than five years...................................... 0.015 0.075 0.05 0.10 0.10 0.08 0.15
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ For a 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 fair 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 national bank or Federal savings association must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative
whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or
Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' for all other credit derivatives.
[[Page 66]]
(2) Multiple OTC derivative contracts subject to a qualifying master
netting agreement. Except as modified by paragraph (b) of this section,
the exposure amount for multiple OTC derivative contracts subject to a
qualifying master netting agreement is equal to the sum of the net
current credit exposure and the adjusted sum of the PFE amounts 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 the net sum of all positive and negative mark-to-fair
values of the individual OTC derivative contracts subject to the
qualifying master netting agreement or zero.
(ii) Adjusted sum of the PFE amounts. The adjusted sum of the PFE
amounts, Anet, is calculated as Anet = (0.4 x Agross) + (0.6 x NGR x
Agross),
where:
(A) Agross = the gross PFE (that is, the sum of the PFE amounts as
determined under paragraph (a)(1)(ii) of this section for each
individual derivative contract subject to the qualifying master netting
agreement); and
(B) Net-to-gross Ratio (NGR) = 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 (a)(1)(i) of this
section) of all individual derivative contracts subject to the
qualifying master netting agreement.
(b) Recognition of credit risk mitigation of collateralized OTC
derivative contracts: (1) A national bank or Federal savings association
may recognize the credit risk mitigation benefits of financial
collateral that secures an OTC derivative contract or multiple OTC
derivative contracts subject to a qualifying master netting agreement
(netting set) by using the simple approach in Sec. 3.37(b).
(2) As an alternative to the simple approach, a national bank or
Federal savings association may recognize the credit risk mitigation
benefits of financial collateral that secures such a contract or netting
set if the financial collateral is marked-to-fair value on a daily basis
and subject to a daily margin maintenance requirement by applying a risk
weight to the exposure as if it were uncollateralized and adjusting the
exposure amount calculated under paragraph (a)(1) or (2) of this section
using the collateral haircut approach in Sec. 3.37(c). The national bank
or Federal savings association must substitute the exposure amount
calculated under paragraph (a)(1) or (2) of this section for [Sigma]E in
the equation in Sec. 3.37(c)(2).
(c) Counterparty credit risk for OTC credit derivatives. (1)
Protection purchasers. A national bank or Federal savings association
that purchases an OTC credit derivative that is recognized under
Sec. 3.36 as a credit risk mitigant for an exposure that is not a
covered position under subpart F is not required to compute a separate
counterparty credit risk capital requirement under Sec. 3.32 provided
that the national bank or Federal savings association does so
consistently for all such credit derivatives. The national bank or
Federal savings association must either include all or exclude all such
credit derivatives that are subject to a qualifying master netting
agreement from any measure used to determine counterparty credit risk
exposure to all relevant counterparties for risk-based capital purposes.
(2) Protection providers. (i) A national bank or Federal savings
association that is the protection provider under an OTC credit
derivative must treat the OTC credit derivative as an exposure to the
underlying reference asset. The national bank or Federal savings
association is not required to compute a counterparty credit risk
capital requirement for the OTC credit derivative under Sec. 3.32,
provided that this treatment is applied consistently for all such OTC
credit derivatives. The national bank or Federal savings association
must either include all or exclude all such OTC credit derivatives that
are subject to a qualifying master netting agreement from any measure
used to determine counterparty credit risk exposure.
(ii) The provisions of this paragraph (c)(2) apply to all relevant
counterparties for risk-based capital purposes unless the national bank
or Federal savings association is treating the OTC
[[Page 67]]
credit derivative as a covered position under subpart F, in which case
the national bank or Federal savings association must compute a
supplemental counterparty credit risk capital requirement under this
section.
(d) Counterparty credit risk for OTC equity derivatives. (1) A
national bank or Federal savings association must treat an OTC equity
derivative contract as an equity exposure and compute a risk-weighted
asset amount for the OTC equity derivative contract under Secs. 3.51
through 3.53 (unless the national bank or Federal savings association is
treating the contract as a covered position under subpart F of this
part).
(2) In addition, the national bank or Federal savings association
must also calculate a risk-based capital requirement for the
counterparty credit risk of an OTC equity derivative contract under this
section if the national bank or Federal savings association is treating
the contract as a covered position under subpart F of this part.
(3) If the national bank or Federal savings association risk weights
the contract under the Simple Risk-Weight Approach (SRWA) in Sec. 3.52,
the national bank or Federal savings association may choose not to hold
risk-based capital against the counterparty credit risk of the OTC
equity derivative contract, as long as it does so for all such
contracts. Where the OTC equity derivative contracts are subject to a
qualified master netting agreement, a national bank or Federal savings
association using the SRWA must either include all or exclude all of the
contracts from any measure used to determine counterparty credit risk
exposure.
(e) Clearing member national bank's or Federal savings association's
exposure amount. A clearing member national bank's or Federal savings
association's exposure amount for an OTC derivative contract or netting
set of OTC derivative contracts where the national bank or Federal
savings association is either acting as a financial intermediary and
enters into an offsetting transaction with a QCCP or where the national
bank or Federal savings association provides a guarantee to the QCCP on
the performance of the client equals the exposure amount calculated
according to paragraph (a)(1) or (2) of this section multiplied by the
scaling factor 0.71. If the national bank or Federal savings association
determines that a longer period is appropriate, the national bank or
Federal savings association must use a larger scaling factor to adjust
for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR11OC13.015
where
H = the holding period greater than five days. Additionally, the OCC may
require the national bank or Federal savings association to
set a longer holding period if the OCC determines that a
longer period is appropriate due to the nature, structure, or
characteristics of the transaction or is commensurate with the
risks associated with the transaction.
Sec. 3.35 Cleared transactions.
(a) General requirements--(1) Clearing member clients. A national
bank or Federal savings association that is a clearing member client
must use the methodologies described in paragraph (b) of this section to
calculate risk-weighted assets for a cleared transaction.
(2) Clearing members. A national bank or Federal savings association
that is a clearing member must use the methodologies described in
paragraph (c) of this section to calculate its risk-weighted assets for
a cleared transaction and paragraph (d) of this section to calculate its
risk-weighted assets for its default fund contribution to a CCP.
(b) Clearing member client national banks or Federal savings
associations--(1) Risk-weighted assets for cleared transactions. (i) To
determine the risk-weighted asset amount for a cleared transaction, a
national bank or Federal
[[Page 68]]
savings association that is a clearing member client must multiply the
trade exposure amount for the cleared transaction, calculated in
accordance with paragraph (b)(2) of this section, by the risk weight
appropriate for the cleared transaction, determined in accordance with
paragraph (b)(3) of this section.
(ii) A clearing member client national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is the
sum of the risk-weighted asset amounts for all its cleared transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is
either a derivative contract or a netting set of derivative contracts,
the trade exposure amount equals:
(A) The exposure amount for the derivative contract or netting set
of derivative contracts, calculated using the methodology used to
calculate exposure amount for OTC derivative contracts under Sec. 3.34;
plus
(B) The fair value of the collateral posted by the clearing member
client national bank or Federal savings association and held by the CCP,
clearing member, or custodian in a manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, the trade exposure amount
equals:
(A) The exposure amount for the repo-style transaction calculated
using the methodologies under Sec. 3.37(c); plus
(B) The fair value of the collateral posted by the clearing member
client national bank or Federal savings association and held by the CCP,
clearing member, or custodian in a manner that is not bankruptcy remote.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client national bank or Federal savings
association must apply a risk weight of:
(A) 2 percent if the collateral posted by the national bank or
Federal savings association to the QCCP or clearing member is subject to
an arrangement that prevents any losses to the clearing member client
national bank or Federal savings association due to the joint default or
a concurrent insolvency, liquidation, or receivership proceeding of the
clearing member and any other clearing member clients of the clearing
member; and the clearing member client national bank or Federal savings
association has conducted sufficient legal review to conclude with a
well-founded basis (and maintains sufficient written documentation of
that legal review) that in the event of a legal challenge (including one
resulting from an event of default or from liquidation, insolvency, or
receivership proceedings) the relevant court and administrative
authorities would find the arrangements to be legal, valid, binding and
enforceable under the law of the relevant jurisdictions; or
(B) 4 percent if the requirements of Sec. 3.35(b)(3)(A) are not met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association must
apply the risk weight appropriate for the CCP according to Sec. 3.32.
(4) Collateral. (i) Notwithstanding any other requirements in this
section, collateral posted by a clearing member client national bank or
Federal savings association that is held by a custodian (in its capacity
as custodian) in a manner that is bankruptcy remote from the CCP, the
custodian, clearing member and other clearing member clients of the
clearing member, is not subject to a capital requirement under this
section.
(ii) A clearing member client national bank or Federal savings
association must calculate a risk-weighted asset amount for any
collateral provided to a CCP, clearing member, or custodian in
connection with a cleared transaction in accordance with the
requirements under Sec. 3.32.
(c) Clearing member national banks or Federal savings associations--
(1) Risk-weighted assets for cleared transactions.
(i) To determine the risk-weighted asset amount for a cleared
transaction, a clearing member national bank or Federal savings
association must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (c)(2) of this
section, by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (c)(3) of this section.
[[Page 69]]
(ii) A clearing member national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is the
sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. A clearing member national bank or
Federal savings association must calculate its trade exposure amount for
a cleared transaction as follows:
(i) For a cleared transaction that is either a derivative contract
or a netting set of derivative contracts, the trade exposure amount
equals:
(A) The exposure amount for the derivative contract, calculated
using the methodology to calculate exposure amount for OTC derivative
contracts under Sec. 3.34; plus
(B) The fair value of the collateral posted by the clearing member
national bank or Federal savings association and held by the CCP in a
manner that is not bankruptcy remote.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals:
(A) The exposure amount for repo-style transactions calculated using
methodologies under Sec. 3.37(c); plus
(B) The fair value of the collateral posted by the clearing member
national bank or Federal savings association and held by the CCP in a
manner that is not bankruptcy remote.
(3) Cleared transaction risk weight. (i) A clearing member national
bank or Federal savings association must apply a risk weight of 2
percent to the trade exposure amount for a cleared transaction with a
QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight appropriate for the CCP according to Sec. 3.32.
(4) Collateral. (i) Notwithstanding any other requirement in this
section, collateral posted by a clearing member national bank or Federal
savings association that is held by a custodian in a manner that is
bankruptcy remote from the CCP is not subject to a capital requirement
under this section.
(ii) A clearing member national bank or Federal savings association
must calculate a risk-weighted asset amount for any collateral provided
to a CCP, clearing member, or a custodian in connection with a cleared
transaction in accordance with requirements under Sec. 3.32.
(d) Default fund contributions. (1) General requirement. A clearing
member national bank or Federal savings association must determine the
risk-weighted asset amount for a default fund contribution to a CCP at
least quarterly, or more frequently if, in the opinion of the national
bank or Federal savings association or the OCC, there is a material
change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
non-qualifying CCPs. A clearing member national bank's or Federal
savings association's risk-weighted asset amount for default fund
contributions to CCPs that are not QCCPs equals the sum of such default
fund contributions multiplied by 1,250 percent, or an amount determined
by the OCC, based on factors such as size, structure and membership
characteristics of the CCP and riskiness of its transactions, in cases
where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for default fund contributions
to QCCPs equals the sum of its capital requirement, KCM for
each QCCP, as calculated under the methodology set forth in paragraphs
(d)(3)(i) through (iii) of this section (Method 1), multiplied by 1,250
percent or in paragraphs (d)(3)(iv) of this section (Method 2).
(i) Method 1. The hypothetical capital requirement of a QCCP
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.058
[[Page 70]]
(A) EBRMi = the exposure amount for each transaction
cleared through the QCCP by clearing member i, calculated in accordance
with Sec. 3.34 for OTC derivative contracts and Sec. 3.37(c)(2) for
repo-style transactions, provided that:
(1) For purposes of this section, in calculating the exposure amount
the national bank or Federal savings association may replace the formula
provided in Sec. 3.34(a)(2)(ii) with the following: Anet = (0.15 x
Agross) + (0.85 x NGR x Agross); and
(2) For option derivative contracts that are cleared transactions,
the PFE described in Sec. 3.34(a)(1)(ii) must be adjusted by multiplying
the notional principal amount of the derivative contract by the
appropriate conversion factor in Table 1 to Sec. 3.34 and the absolute
value of the option's delta, that is, the ratio of the change in the
value of the derivative contract to the corresponding change in the
price of the underlying asset.
(3) For repo-style transactions, when applying Sec. 3.37(c)(2), the
national bank or Federal savings association must use the methodology in
Sec. 3.37(c)(3);
(B) VMi = any collateral posted by clearing member i to
the QCCP that it is entitled to receive from the QCCP, but has not yet
received, and any collateral that the QCCP has actually received from
clearing member i;
(C) IMi = the collateral posted as initial margin by
clearing member i to the QCCP;
(D) DFi = the funded portion of clearing member i's
default fund contribution that will be applied to reduce the QCCP's loss
upon a default by clearing member i;
(E) RW = 20 percent, except when the OCC has determined that a
higher risk weight is more appropriate based on the specific
characteristics of the QCCP and its clearing members; and
(F) Where a QCCP has provided its KCCP, a national bank
or Federal savings association must rely on such disclosed figure
instead of calculating KCCP under this paragraph (d), unless
the national bank or Federal savings association determines that a more
conservative figure is appropriate based on the nature, structure, or
characteristics of the QCCP.
(ii) For a national bank or Federal savings association that is a
clearing member of a QCCP with a default fund supported by funded
commitments, KCM equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.016
Subscripts 1 and 2 denote the clearing members with the two largest
ANet values. For purposes of this paragraph (d), for
derivatives ANet is defined in Sec. 3.34(a)(2)(ii) and for
repo-style transactions, ANet means the exposure amount as
defined in Sec. 3.37(c)(2) using the methodology in Sec. 3.37(c)(3);
[[Page 71]]
(B) N = the number of clearing members in the QCCP;
(C) DFCCP = the QCCP's own funds and other financial
resources that would be used to cover its losses before clearing
members' default fund contributions are used to cover losses;
(D) DFCM = funded default fund contributions from all
clearing members and any other clearing member contributed financial
resources that are available to absorb mutualized QCCP losses;
(E) DF = DFCCP + DFCM (that is, the total
funded default fund contribution);
[GRAPHIC] [TIFF OMITTED] TR11OC13.017
[[Page 72]]
Where:
(1) DFi = the national bank's or Federal savings
association's unfunded commitment to the default fund;
(2) DFCM = the total of all clearing members' unfunded
commitment to the default fund; and
(3) K*CM as defined in paragraph (d)(3)(ii) of this section.
(B) For a national bank or Federal savings association that is a
clearing member of a QCCP with a default fund supported by unfunded
commitments and is unable to calculate KCM using the
methodology described in paragraph (d)(3)(iii) of this section,
KCM equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.018
Where:
(1) IMi = the national bank's or Federal savings
association's initial margin posted to the QCCP;
(2) IMCM = the total of initial margin posted to the
QCCP; and
(3)K*CM as defined in paragraph (d)(3)(ii) of this section.
(iv) Method 2. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for its default fund
contribution to a QCCP, RWADF, equals:
RWADF = Min {12.5 * DF; 0.18 * TE{time}
Where:
(A) TE = the national bank's or Federal savings association's trade
exposure amount to the QCCP, calculated according to section 35(c)(2);
(B) DF = the funded portion of the national bank's or Federal
savings association's default fund contribution to the QCCP.
(4) Total risk-weighted assets for default fund contributions. Total
risk-weighted assets for default fund contributions is the sum of a
clearing member national bank's or Federal savings association's risk-
weighted assets for all of its default fund contributions to all CCPs of
which the national bank or Federal savings association is a clearing
member.
Sec. 3.36 Guarantees and credit derivatives: substitution treatment.
(a) Scope--(1) General. A national bank or Federal savings
association may recognize the credit risk mitigation benefits of an
eligible guarantee or eligible credit derivative by substituting the
risk weight associated with the protection provider for the risk weight
assigned to an exposure, as provided under this section.
(2) This section applies to exposures for which:
(i) Credit risk is fully covered by an eligible guarantee or
eligible credit derivative; or
(ii) Credit risk is covered on a pro rata basis (that is, on a basis
in which the national bank or Federal savings association and the
protection provider share losses proportionately) by an eligible
guarantee or eligible credit derivative.
(3) Exposures on which there is a tranching of credit risk
(reflecting at least two different levels of seniority) generally are
securitization exposures subject to Secs. 3.41 through 3.45.
(4) If multiple eligible guarantees or eligible credit derivatives
cover a single exposure described in this section, a national bank or
Federal savings association may treat the hedged exposure as multiple
separate exposures each covered by a single eligible guarantee or
eligible credit derivative and may calculate a separate risk-weighted
asset amount for each separate exposure as described in paragraph (c) of
this section.
(5) If a single eligible guarantee or eligible credit derivative
covers multiple hedged exposures described in paragraph (a)(2) of this
section, a national bank or Federal savings association must treat each
hedged exposure as covered by a separate eligible guarantee or eligible
credit derivative and
[[Page 73]]
must calculate a separate risk-weighted asset amount for each exposure
as described in paragraph (c) of this section.
(b) Rules of recognition. (1) A national bank or Federal savings
association may only recognize the credit risk mitigation benefits of
eligible guarantees and eligible credit derivatives.
(2) A national bank or Federal savings association may only
recognize the credit risk mitigation benefits of an eligible credit
derivative to hedge an exposure that is different from the credit
derivative's reference exposure used for determining the derivative's
cash settlement value, deliverable obligation, or occurrence of a credit
event if:
(i) The reference exposure ranks pari passu with, or is subordinated
to, the hedged exposure; and
(ii) The reference exposure and the hedged exposure are to the same
legal entity, and legally enforceable cross-default or cross-
acceleration clauses are in place to ensure payments under the credit
derivative are triggered when the obligated party of the hedged exposure
fails to pay under the terms of the hedged exposure.
(c) Substitution approach--(1) Full coverage. If an eligible
guarantee or eligible credit derivative meets the conditions in
paragraphs (a) and (b) of this section and the protection amount (P) of
the guarantee or credit derivative is greater than or equal to the
exposure amount of the hedged exposure, a national bank or Federal
savings association may recognize the guarantee or credit derivative in
determining the risk-weighted asset amount for the hedged exposure by
substituting the risk weight applicable to the guarantor or credit
derivative protection provider under Sec. 3.32 for the risk weight
assigned to the exposure.
(2) Partial coverage. If an eligible guarantee or eligible credit
derivative meets the conditions in Secs. 3.36(a) and 3.37(b) and the
protection amount (P) of the guarantee or credit derivative is less than
the exposure amount of the hedged exposure, the national bank or Federal
savings association must treat the hedged exposure as two separate
exposures (protected and unprotected) in order to recognize the credit
risk mitigation benefit of the guarantee or credit derivative.
(i) The national bank or Federal savings association may calculate
the risk-weighted asset amount for the protected exposure under
Sec. 3.32, where the applicable risk weight is the risk weight
applicable to the guarantor or credit derivative protection provider.
(ii) The national bank or Federal savings association must calculate
the risk-weighted asset amount for the unprotected exposure under
Sec. 3.32, where the applicable risk weight is that of the unprotected
portion of the hedged exposure.
(iii) The treatment provided in this section is applicable when the
credit risk of an exposure is covered on a partial pro rata basis and
may be applicable when an adjustment is made to the effective notional
amount of the guarantee or credit derivative under paragraphs (d), (e),
or (f) of this section.
(d) Maturity mismatch adjustment. (1) A national bank or Federal
savings association that recognizes an eligible guarantee or eligible
credit derivative in determining the risk-weighted asset amount for a
hedged exposure must adjust the effective notional amount of the credit
risk mitigant to reflect any maturity mismatch between the hedged
exposure and the credit risk mitigant.
(2) A maturity mismatch occurs when the residual maturity of a
credit risk mitigant is less than that of the hedged exposure(s).
(3) The residual maturity of a hedged exposure is the longest
possible remaining time before the obligated party of the hedged
exposure is scheduled to fulfil its obligation on the hedged exposure.
If a credit risk mitigant has embedded options that may reduce its term,
the national bank or Federal savings association (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 national bank or Federal savings
association (protection purchaser), but the terms of the arrangement at
origination of
[[Page 74]]
the credit risk mitigant contain a positive incentive for the national
bank or Federal savings association to call the transaction before
contractual maturity, the remaining time to the first call date is the
residual maturity of the credit risk mitigant.
(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 national bank or Federal
savings association must apply the following adjustment to reduce 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) Adjustment for credit derivatives without restructuring as a
credit event. If a national bank or Federal savings association
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 national bank
or Federal savings association must apply the following adjustment to
reduce 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 adjustment. (1) If a national bank or Federal
savings association 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 national bank or Federal
savings association 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.
(2) A national bank or Federal savings association must set
HFX equal to eight percent unless it qualifies for the use of
and uses its own internal estimates of foreign exchange volatility based
on a ten-business-day holding period. A national bank or Federal savings
association qualifies for the use of its own internal estimates of
foreign exchange volatility if it qualifies for the use of its own-
estimates haircuts in Sec. 3.37(c)(4).
(3) A national bank or Federal savings association must adjust
HFX calculated in paragraph (f)(2) of this section upward if
the national bank or Federal savings association revalues the guarantee
or credit derivative less frequently than once every 10 business days
using the following square root of time formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.021
[[Page 75]]
Sec. 3.37 Collateralized transactions.
(a) General. (1) To recognize the risk-mitigating effects of
financial collateral, a national bank or Federal savings association may
use:
(i) The simple approach in paragraph (b) of this section for any
exposure; or
(ii) The collateral haircut approach in paragraph (c) of this
section for repo-style transactions, eligible margin loans,
collateralized derivative contracts, and single-product netting sets of
such transactions.
(2) A national bank or Federal savings association may use any
approach described in this section that is valid for a particular type
of exposure or transaction; however, it must use the same approach for
similar exposures or transactions.
(b) The simple approach--(1) General requirements. (i) A national
bank or Federal savings association may recognize the credit risk
mitigation benefits of financial collateral that secures any exposure.
(ii) To qualify for the simple approach, the financial collateral
must meet the following requirements:
(A) The collateral must be subject to a collateral agreement for at
least the life of the exposure;
(B) The collateral must be revalued at least every six months; and
(C) The collateral (other than gold) and the exposure must be
denominated in the same currency.
(2) Risk weight substitution. (i) A national bank or Federal savings
association may apply a risk weight to the portion of an exposure that
is secured by the fair value of financial collateral (that meets the
requirements of paragraph (b)(1) of this section) based on the risk
weight assigned to the collateral under Sec. 3.32. For repurchase
agreements, reverse repurchase agreements, and securities lending and
borrowing transactions, the collateral is the instruments, gold, and
cash the national bank or Federal savings association has borrowed,
purchased subject to resale, or taken as collateral from the
counterparty under the transaction. Except as provided in paragraph
(b)(3) of this section, the risk weight assigned to the collateralized
portion of the exposure may not be less than 20 percent.
(ii) A national bank or Federal savings association must apply a
risk weight to the unsecured portion of the exposure based on the risk
weight applicable to the exposure under this subpart.
(3) Exceptions to the 20 percent risk-weight floor and other
requirements. Notwithstanding paragraph (b)(2)(i) of this section:
(i) A national bank or Federal savings association may assign a zero
percent risk weight to an exposure to an OTC derivative contract that is
marked-to-market on a daily basis and subject to a daily margin
maintenance requirement, to the extent the contract is collateralized by
cash on deposit.
(ii) A national bank or Federal savings association may assign a 10
percent risk weight to an exposure to an OTC derivative contract that is
marked-to-market daily and subject to a daily margin maintenance
requirement, to the extent that the contract is collateralized by an
exposure to a sovereign that qualifies for a zero percent risk weight
under Sec. 3.32.
(iii) A national bank or Federal savings association may assign a
zero percent risk weight to the collateralized portion of an exposure
where:
(A) The financial collateral is cash on deposit; or
(B) The financial collateral is an exposure to a sovereign that
qualifies for a zero percent risk weight under Sec. 3.32, and the
national bank or Federal savings association has discounted the fair
value of the collateral by 20 percent.
(c) Collateral haircut approach--(1) General. A national bank or
Federal savings association may recognize the credit risk mitigation
benefits of financial collateral that secures an eligible margin loan,
repo-style transaction, collateralized derivative contract, or single-
product netting set of such transactions, and of any collateral that
secures a repo-style transaction that is included in the national bank's
or Federal savings association's VaR-based measure under subpart F of
this part by using the collateral haircut approach in this section. A
national bank or Federal savings association may use the standard
supervisory haircuts in paragraph (c)(3) of this section or, with
[[Page 76]]
prior written approval of the OCC, its own estimates of haircuts
according to paragraph (c)(4) of this section.
(2) Exposure amount equation. A national bank or Federal savings
association must determine the exposure amount for an eligible margin
loan, repo-style transaction, collateralized derivative contract, or a
single-product netting set of such transactions by setting the exposure
amount equal to max {0, [([Sigma]E - [Sigma]C) + [Sigma](Es x Hs) +
[Sigma](Efx x Hfx)]{time} , where:
(i)(A) For eligible margin loans and repo-style transactions and
netting sets thereof, [Sigma]E equals the value of the exposure (the sum
of the current fair values of all instruments, gold, and cash the
national bank or Federal savings association has lent, sold subject to
repurchase, or posted as collateral to the counterparty under the
transaction (or netting set)); and
(B) For collateralized derivative contracts and netting sets
thereof, [Sigma]E equals the exposure amount of the OTC derivative
contract (or netting set) calculated under Sec. 3.34 (a)(1) or (2).
(ii) [Sigma]C equals the value of the collateral (the sum of the
current fair values of all instruments, gold and cash the national bank
or Federal savings association has borrowed, purchased subject to
resale, or taken as collateral from the counterparty under the
transaction (or netting set));
(iii) Es equals the absolute value of the net position in a given
instrument or in gold (where the net position in the instrument or gold
equals the sum of the current fair values of the instrument or gold the
national bank or Federal savings association has lent, sold subject to
repurchase, or posted as collateral to the counterparty minus the sum of
the current fair values of that same instrument or gold the national
bank or Federal savings association has borrowed, purchased subject to
resale, or taken as collateral from the counterparty);
(iv) Hs equals the market price volatility haircut appropriate to
the instrument or gold referenced in Es;
(v) Efx equals the absolute value of the net position of instruments
and cash in a currency that is different from the settlement currency
(where the net position in a given currency equals the sum of the
current fair values of any instruments or cash in the currency the
national bank or Federal savings association has lent, sold subject to
repurchase, or posted as collateral to the counterparty minus the sum of
the current fair values of any instruments or cash in the currency the
national bank or Federal savings association has borrowed, purchased
subject to resale, or taken as collateral from the counterparty); and
(vi) Hfx equals the haircut appropriate to the mismatch between the
currency referenced in Efx and the settlement currency.
(3) Standard supervisory haircuts. (i) A national bank or Federal
savings association must use the haircuts for market price volatility
(Hs) provided in Table 1 to Sec. 3.37, as adjusted in certain
circumstances in accordance with the requirements of paragraphs
(c)(3)(iii) and (iv) of this section.
Table 1 toSec. 3.37--Standard Supervisory Market Price Volatility Haircuts \1\
----------------------------------------------------------------------------------------------------------------
Haircut (in percent) assigned based on:
------------------------------------------------------------------ Investment
Sovereign issuers risk weight Non-sovereign issuers risk grade
Residual maturity underSec. 3.32 (in percent) weight underSec. 3.32 (in securitization
\2\ percent) exposures (in
------------------------------------------------------------------ percent)
Zero 20 or 50 100 20 50 100
----------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.. 0.5 1.0 15.0 1.0 2.0 4.0 4.0
Greater than 1 year and less 2.0 3.0 15.0 4.0 6.0 8.0 12.0
than or equal to 5 years.....
Greater than 5 years.......... 4.0 6.0 15.0 8.0 12.0 16.0 24.0
----------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) a15.0old.....
----------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertib25.0onds)...
----------------------------------------------------------------------------------------------------------------
Mutual funds....................Highest haircut applicable to any security
in which the fund can invest.
----------------------------------------------------------------------------------------------------------------
[[Page 77]]
Cash collateral held...............................Zero........
----------------------------------------------------------------------------------------------------------------
Other exposure types...............................25.0........
----------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 1 toSec. 3.37 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
(ii) For currency mismatches, a national bank or Federal savings
association must use a haircut for foreign exchange rate volatility
(Hfx) of 8.0 percent, as adjusted in certain circumstances under
paragraphs (c)(3)(iii) and (iv) of this section.
(iii) For repo-style transactions, a national bank or Federal
savings association may multiply the standard supervisory haircuts
provided in paragraphs (c)(3)(i) and (ii) of this section by the square
root of \1/2\ (which equals 0.707107).
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a national bank or Federal savings association
must adjust the supervisory haircuts provided in paragraphs (c)(3)(i)
and (ii) of this section upward on the basis of a holding period of
twenty business days for the following quarter except in the calculation
of the exposure amount for purposes of Sec. 3.35. If a netting set
contains one or more trades involving illiquid collateral or an OTC
derivative that cannot be easily replaced, a national bank or Federal
savings association must adjust the supervisory haircuts upward on the
basis of a holding period of twenty business days. If over the two
previous quarters more than two margin disputes on a netting set have
occurred that lasted more than the holding period, then the national
bank or Federal savings association must adjust the supervisory haircuts
upward for that netting set on the basis of a holding period that is at
least two times the minimum holding period for that netting set. A
national bank or Federal savings association must adjust the standard
supervisory haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.022
(A) TM equals a holding period of longer than 10 business
days for eligible margin loans and derivative contracts or longer than 5
business days for repo-style transactions;
(B) HS equals the standard supervisory haircut; and
(C) TS equals 10 business days for eligible margin loans
and derivative contracts or 5 business days for repo-style transactions.
(v) If the instrument a national bank or Federal savings association
has lent, sold subject to repurchase, or posted as collateral does not
meet the definition of financial collateral, the national bank or
Federal savings association must use a 25.0 percent haircut for market
price volatility (Hs).
(4) Own internal estimates for haircuts. With the prior written
approval of the OCC, a national bank or Federal savings association may
calculate haircuts (Hs and Hfx) using its own internal estimates of the
volatilities of market prices and foreign exchange rates:
(i) To receive OCC approval to use its own internal estimates, a
national bank or Federal savings association
[[Page 78]]
must satisfy the following minimum standards:
(A) A national bank or Federal savings association must use a 99th
percentile one-tailed confidence interval.
(B) The minimum holding period for a repo-style transaction is five
business days and for an eligible margin loan is ten business days
except for transactions or netting sets for which paragraph (c)(4)(i)(C)
of this section applies. When a national bank or Federal savings
association 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] TR11OC13.023
(1) TM equals 5 for repo-style transactions and 10 for
eligible margin loans;
(2) TN equals the holding period used by the national
bank or Federal savings association to derive HN; and
(3) HN equals the haircut based on the holding period
TN.
(C) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a national bank or Federal savings association
must calculate the haircut using a minimum holding period of twenty
business days for the following quarter except in the calculation of the
exposure amount for purposes of Sec. 3.35. If a netting set contains one
or more trades involving illiquid collateral or an OTC derivative that
cannot be easily replaced, a national bank or Federal savings
association must calculate the haircut using a minimum holding period of
twenty business days. If over the two previous quarters more than two
margin disputes on a netting set have occurred that lasted more than the
holding period, then the national bank or Federal savings association
must calculate the haircut for transactions in that netting set on the
basis of a holding period that is at least two times the minimum holding
period for that netting set.
(D) A national bank or Federal savings association is required to
calculate its own internal estimates with inputs calibrated to
historical data from a continuous 12-month period that reflects a period
of significant financial stress appropriate to the security or category
of securities.
(E) A national bank or Federal savings association must have
policies and procedures that describe how it determines the period of
significant financial stress used to calculate the national bank's or
Federal savings association's own internal estimates for haircuts under
this section and must be able to provide empirical support for the
period used. The national bank or Federal savings association must
obtain the prior approval of the OCC for, and notify the OCC if the
national bank or Federal savings association makes any material changes
to, these policies and procedures.
(F) Nothing in this section prevents the OCC from requiring a
national bank or Federal savings association to use a different period
of significant financial stress in the calculation of own internal
estimates for haircuts.
(G) A national bank or Federal savings association must update its
data sets and calculate haircuts no less frequently than quarterly and
must also reassess data sets and haircuts whenever market prices change
materially.
(ii) With respect to debt securities that are investment grade, a
national bank or Federal savings association may calculate haircuts for
categories of securities. For a category of securities, the national
bank or Federal savings association must calculate the haircut on the
basis of internal volatility estimates for securities in that category
that are representative of the
[[Page 79]]
securities in that category that the national bank or Federal savings
association has lent, sold subject to repurchase, posted as collateral,
borrowed, purchased subject to resale, or taken as collateral. In
determining relevant categories, the national bank or Federal savings
association must at a minimum take into account:
(A) The type of issuer of the security;
(B) The credit quality of the security;
(C) The maturity of the security; and
(D) The interest rate sensitivity of the security.
(iii) With respect to debt securities that are not investment grade
and equity securities, a national bank or Federal savings association
must calculate a separate haircut for each individual security.
(iv) Where an exposure or collateral (whether in the form of cash or
securities) is denominated in a currency that differs from the
settlement currency, the national bank or Federal savings association
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.
(v) A national bank's or Federal savings association'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).
Risk-Weighted Assets for Unsettled Transactions
Sec. 3.38 Unsettled transactions.
(a) Definitions. For purposes of this section:
(1) Delivery-versus-payment (DvP) transaction means a securities or
commodities transaction in which the buyer is obligated to make payment
only if the 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) 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 of a national bank or Federal savings
association 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
national bank or Federal savings association 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) Cleared transactions that are marked-to-market daily and subject
to daily receipt and payment of variation margin;
(2) Repo-style transactions, including unsettled repo-style
transactions;
(3) One-way cash payments on OTC derivative contracts; or
(4) Transactions with a contractual settlement period that is longer
than the normal settlement period (which are treated as OTC derivative
contracts as provided in Sec. 3.34).
(c) System-wide failures. In the case of a system-wide failure of a
settlement, clearing system or central counterparty, 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 national bank or Federal savings association must hold
risk-based capital against any DvP or PvP transaction with a normal
settlement
[[Page 80]]
period if the national bank's or Federal savings association's
counterparty has not made delivery or payment within five business days
after the settlement date. The national bank or Federal savings
association must determine its risk-weighted asset amount for such a
transaction by multiplying the positive current exposure of the
transaction for the national bank or Federal savings association by the
appropriate risk weight in Table 1 to Sec. 3.38.
Table 1 toSec. 3.38--Risk Weights for Unsettled DvP and PvP
Transactions
------------------------------------------------------------------------
Risk weight to
be applied to
Number of business days after contractual settlement positive current
date exposure (in
percent)
------------------------------------------------------------------------
From 5 to 15.......................................... 100.0
From 16 to 30......................................... 625.0
From 31 to 45......................................... 937.5
46 or more............................................ 1,250.0
------------------------------------------------------------------------
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A national bank or Federal savings
association must hold risk-based capital against any non-DvP/non-PvP
transaction with a normal settlement period if the national bank or
Federal savings association 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 national bank or
Federal savings association must continue to hold risk-based capital
against the transaction until the national bank or Federal savings
association has received its corresponding deliverables.
(2) From the business day after the national bank or Federal savings
association has made its delivery until five business days after the
counterparty delivery is due, the national bank or Federal savings
association must calculate the risk-weighted asset amount for the
transaction by treating the current fair value of the deliverables owed
to the national bank or Federal savings association as an exposure to
the counterparty and using the applicable counterparty risk weight under
Sec. 3.32.
(3) If the national bank or Federal savings association has not
received its deliverables by the fifth business day after counterparty
delivery was due, the national bank or Federal savings association must
assign a 1,250 percent risk weight to the current fair value of the
deliverables owed to the national bank or Federal savings association.
(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.
Secs. 3.39-3.40 [Reserved]
Risk-Weighted Assets for Securitization Exposures
Sec. 3.41 Operational requirements for securitization exposures.
(a) Operational criteria for traditional securitizations. A national
bank or Federal savings association that transfers exposures it has
originated or purchased to a securitization SPE or other third party in
connection with a traditional securitization may exclude the exposures
from the calculation of its risk-weighted assets only if each condition
in this section is satisfied. A national bank or Federal savings
association that meets these conditions must hold risk-based capital
against any credit risk it retains in connection with the
securitization. A national bank or Federal savings association 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 common equity tier 1 capital any after-tax gain-on-sale
resulting from the transaction. The conditions are:
(1) The exposures are not reported on the national bank's or Federal
savings association's consolidated balance sheet under GAAP;
(2) The national bank or Federal savings association has transferred
to one or more third parties credit risk associated with the underlying
exposures;
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls; and
(4) The securitization does not:
(i) Include 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
[[Page 81]]
(ii) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For
synthetic securitizations, a national bank or Federal savings
association may recognize for risk-based capital purposes the use of a
credit risk mitigant to hedge underlying exposures only if each
condition in this paragraph (b) is satisfied. A national bank or Federal
savings association that meets these conditions must hold risk-based
capital against any credit risk of the exposures it retains in
connection with the synthetic securitization. A national bank or Federal
savings association that fails to meet these conditions or chooses not
to recognize the credit risk mitigant for purposes of this section must
instead hold risk-based capital against the underlying exposures as if
they had not been synthetically securitized. The conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral;
(ii) A guarantee that meets all criteria as set forth in the
definition of ``eligible guarantee'' in Sec. 3.2, except for the
criteria in paragraph (3) of that definition; or
(iii) A credit derivative that meets all criteria as set forth in
the definition of ``eligible credit derivative'' in Sec. 3.2, except for
the criteria in paragraph (3) of the definition of ``eligible
guarantee'' in Sec. 3.2.
(2) The national bank or Federal savings association transfers
credit risk associated with the underlying exposures to one or more
third parties, and the terms and conditions in the credit risk mitigants
employed do not include provisions that:
(i) Allow for the termination of the credit protection due to
deterioration in the credit quality of the underlying exposures;
(ii) Require the national bank or Federal savings association to
alter or replace the underlying exposures to improve the credit quality
of the underlying exposures;
(iii) Increase the national bank's or Federal savings association'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 national
bank or Federal savings association 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 national bank or Federal savings
association after the inception of the securitization;
(3) The national bank or Federal savings association 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.
(c) Due diligence requirements for securitization exposures. (1)
Except for exposures that are deducted from common equity tier 1 capital
and exposures subject to Sec. 3.42(h), if a national bank or Federal
savings association is unable to demonstrate to the satisfaction of the
OCC a comprehensive understanding of the features of a securitization
exposure that would materially affect the performance of the exposure,
the national bank or Federal savings association must assign the
securitization exposure a risk weight of 1,250 percent. The national
bank's or Federal savings association's analysis must be commensurate
with the complexity of the securitization exposure and the materiality
of the exposure in relation to its capital.
(2) A national bank or Federal savings association must demonstrate
its comprehensive understanding of a securitization exposure under
paragraph (c)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a
securitization exposure prior to acquiring the exposure, and documenting
such analysis within three business days after acquiring the exposure,
considering:
(A) Structural features of the securitization that would materially
impact the performance of the exposure, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity enhancements, fair value triggers, the
[[Page 82]]
performance of organizations that service the exposure, and deal-
specific definitions of default;
(B) Relevant information regarding the performance of the underlying
credit exposure(s), for example, the percentage of loans 30, 60, and 90
days past due; default rates; prepayment rates; loans in foreclosure;
property types; occupancy; average credit score or other measures of
creditworthiness; average LTV ratio; and industry and geographic
diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask
spread, most recent sales price and historic price volatility, trading
volume, implied market rating, and size, depth and concentration level
of the market for the securitization; and
(D) For resecuritization exposures, performance information on the
underlying securitization exposures, for example, the issuer name and
credit quality, and the characteristics and performance of the exposures
underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly),
evaluating, reviewing, and updating as appropriate the analysis required
under paragraph (c)(1) of this section for each securitization exposure.
Sec. 3.42 Risk-weighted assets for securitization exposures.
(a) Securitization risk weight approaches. Except as provided
elsewhere in this section or in Sec. 3.41:
(1) A national bank or Federal savings association must deduct from
common equity tier 1 capital any after-tax gain-on-sale resulting from a
securitization and apply a 1,250 percent risk weight to the portion of a
CEIO that does not constitute after-tax gain-on-sale.
(2) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section, a national bank or Federal savings
association may assign a risk weight to the securitization exposure
using the simplified supervisory formula approach (SSFA) in accordance
with Secs. 3.43(a) through 3.43(d) and subject to the limitation under
paragraph (e) of this section. Alternatively, a national bank or Federal
savings association that is not subject to subpart F of this part may
assign a risk weight to the securitization exposure using the gross-up
approach in accordance with Sec. 3.43(e), provided, however, that such
national bank or Federal savings association must apply either the SSFA
or the gross-up approach consistently across all of its securitization
exposures, except as provided in paragraphs (a)(1), (a)(3), and (a)(4)
of this section.
(3) If a securitization exposure does not require deduction under
paragraph (a)(1) of this section and the national bank or Federal
savings association cannot, or chooses not to apply the SSFA or the
gross-up approach to the exposure, the national bank or Federal savings
association must assign a risk weight to the exposure as described in
Sec. 3.44.
(4) If a securitization exposure is a derivative contract (other
than protection provided by a national bank or Federal savings
association in the form of a credit derivative) that has a first
priority claim on the cash flows from the underlying exposures
(notwithstanding amounts due under interest rate or currency derivative
contracts, fees due, or other similar payments), a national bank or
Federal savings association may choose to set the risk-weighted asset
amount of the exposure equal to the amount of the exposure as determined
in paragraph (c) of this section.
(b) Total risk-weighted assets for securitization exposures. A
national bank's or Federal savings association's total risk-weighted
assets for securitization exposures equals the sum of the risk-weighted
asset amount for securitization exposures that the national bank or
Federal savings association risk weights under Secs. 3.41(c),
3.42(a)(1), and 3.43, 3.44, or 3.45, and paragraphs (e) through (j) of
this section, as applicable.
(c) Exposure amount of a securitization exposure--(1) On-balance
sheet securitization exposures. The exposure amount of an on-balance
sheet securitization exposure (excluding an available-for-sale or held-
to-maturity security where the national bank or Federal savings
association has made an AOCI opt-out election under
[[Page 83]]
Sec. 3.22(b)(2), a repo-style transaction, eligible margin loan, OTC
derivative contract, or cleared transaction) is equal to the carrying
value of the exposure.
(2) On-balance sheet securitization exposures held by a national
bank or Federal savings association that has made an AOCI opt-out
election. The exposure amount of an on-balance sheet securitization
exposure that is an available-for-sale or held-to-maturity security held
by a national bank or Federal savings association that has made an AOCI
opt-out election under Sec. 3.22(b)(2) is the national bank's or Federal
savings association's carrying value (including net accrued but unpaid
interest and fees), less any net unrealized gains on the exposure and
plus any net unrealized losses on the exposure.
(3) Off-balance sheet securitization exposures. (i) Except as
provided in paragraph (j) of this section, the exposure amount of an
off-balance sheet securitization exposure that is not a repo-style
transaction, eligible margin loan, cleared transaction (other than a
credit derivative), or an OTC derivative contract (other than a credit
derivative) is the notional amount of the exposure. For an off-balance
sheet securitization exposure to an ABCP program, such as an eligible
ABCP liquidity facility, the notional amount may be reduced to the
maximum potential amount that the national bank or Federal savings
association could be required to fund given the ABCP program's current
underlying assets (calculated without regard to the current credit
quality of those assets).
(ii) A national bank or Federal savings association must determine
the exposure amount of an eligible ABCP liquidity facility for which the
SSFA does not apply by multiplying the notional amount of the exposure
by a CCF of 50 percent.
(iii) A national bank or Federal savings association must determine
the exposure amount of an eligible ABCP liquidity facility for which the
SSFA applies by multiplying the notional amount of the exposure by a CCF
of 100 percent.
(4) Repo-style transactions, eligible margin loans, and derivative
contracts. The exposure amount of a securitization exposure that is a
repo-style transaction, eligible margin loan, or derivative contract
(other than a credit derivative) is the exposure amount of the
transaction as calculated under Sec. 3.34 or Sec. 3.37, as applicable.
(d) Overlapping exposures. If a national bank or Federal savings
association has multiple securitization exposures that provide
duplicative coverage to the underlying exposures of a securitization
(such as when a national bank or Federal savings association provides a
program-wide credit enhancement and multiple pool-specific liquidity
facilities to an ABCP program), the national bank or Federal savings
association is not required to hold duplicative risk-based capital
against the overlapping position. Instead, the national bank or Federal
savings association may apply to the overlapping position the applicable
risk-based capital treatment that results in the highest risk-based
capital requirement.
(e) Implicit support. If a national bank or Federal savings
association provides support to a securitization in excess of the
national bank's or Federal savings association's contractual obligation
to provide credit support to the securitization (implicit support):
(1) The national bank or Federal savings association must include in
risk-weighted assets all of the underlying exposures associated with the
securitization as if the exposures had not been securitized and must
deduct from common equity tier 1 capital any after-tax gain-on-sale
resulting from the securitization; and
(2) The national bank or Federal savings association must disclose
publicly:
(i) That it has provided implicit support to the securitization; and
(ii) The risk-based capital impact to the national bank or Federal
savings association of providing such implicit support.
(f) Undrawn portion of a servicer cash advance facility. (1)
Notwithstanding any other provision of this subpart, a national bank or
Federal savings association that is a servicer under an eligible
servicer cash advance facility is not required to hold risk-based
capital against potential future cash advance payments that it may be
required to
[[Page 84]]
provide under the contract governing the facility.
(2) For a national bank or Federal savings association that acts as
a servicer, the exposure amount for a servicer cash advance facility
that is not an eligible servicer cash advance facility is equal to the
amount of all potential future cash advance payments that the national
bank or Federal savings association may be contractually required to
provide during the subsequent 12 month period under the contract
governing the facility.
(g) Interest-only mortgage-backed securities. Regardless of any
other provisions in this subpart, the risk weight for a non-credit-
enhancing interest-only mortgage-backed security may not be less than
100 percent.
(h) Small-business loans and leases on personal property transferred
with retained contractual exposure. (1) Regardless of any other
provision of this subpart, a national bank or Federal savings
association that has transferred small-business loans and leases on
personal property (small-business obligations) with recourse must
include in risk-weighted assets only its contractual exposure to the
small-business obligations if all the following conditions are met:
(i) The transaction must be treated as a sale under GAAP.
(ii) The national bank or Federal savings association establishes
and maintains, pursuant to GAAP, a non-capital reserve sufficient to
meet the national bank's or Federal savings association's reasonably
estimated liability under the contractual obligation.
(iii) The small-business obligations 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 et seq.).
(iv) The national bank or Federal savings association is well
capitalized, as defined in 12 CFR 6.4. For purposes of determining
whether a national bank or Federal savings association is well
capitalized for purposes of this paragraph (h), the national bank's or
Federal savings association's capital ratios must be calculated without
regard to the capital treatment for transfers of small-business
obligations under this paragraph (h).
(2) The total outstanding amount of contractual exposure retained by
a national bank or Federal savings association on transfers of small-
business obligations receiving the capital treatment specified in
paragraph (h)(1) of this section cannot exceed 15 percent of the
national bank's or Federal savings association's total capital.
(3) If a national bank or Federal savings association ceases to be
well capitalized under 12 CFR 6.4 or exceeds the 15 percent capital
limitation provided in paragraph (h)(2) of this section, the capital
treatment under paragraph (h)(1) of this section will continue to apply
to any transfers of small-business obligations with retained contractual
exposure that occurred during the time that the national bank or Federal
savings association was well capitalized and did not exceed the capital
limit.
(4) The risk-based capital ratios of the national bank or Federal
savings association must be calculated without regard to the capital
treatment for transfers of small-business obligations specified in
paragraph (h)(1) of this section for purposes of:
(i) Determining whether a national bank or Federal savings
association is adequately capitalized, undercapitalized, significantly
undercapitalized, or critically undercapitalized under the OCC's prompt
corrective action regulations; and
(ii) Reclassifying a well-capitalized national bank or Federal
savings association to adequately capitalized and requiring an
adequately capitalized national bank or Federal savings association to
comply with certain mandatory or discretionary supervisory actions as if
the national bank or Federal savings association were in the next lower
prompt-corrective-action category.
(i) Nth-to-default credit derivatives--(1) Protection provider. A
national bank or Federal savings association may assign a risk weight
using the SSFA in Sec. 3.43 to an nth-to-default credit
derivative in accordance with this paragraph (i). A national bank or
Federal savings association must determine its exposure in the
nth-to-default credit derivative as
[[Page 85]]
the largest notional amount of all the underlying exposures.
(2) For purposes of determining the risk weight for an
nth-to-default credit derivative using the SSFA, the national
bank or Federal savings association must calculate the attachment point
and detachment point of its exposure as follows:
(i) The attachment point (parameter A) is the ratio of the sum of
the notional amounts of all underlying exposures that are subordinated
to the national bank's or Federal savings association's exposure to the
total notional amount of all underlying exposures. The ratio is
expressed as a decimal value between zero and one. In the case of a
first-to-default credit derivative, there are no underlying exposures
that are subordinated to the national bank's or Federal savings
association's exposure. In the case of a second-or-subsequent-to-default
credit derivative, the smallest (n-1) notional amounts of the underlying
exposure(s) are subordinated to the national bank's or Federal savings
association's exposure.
(ii) The detachment point (parameter D) equals the sum of parameter
A plus the ratio of the notional amount of the national bank's or
Federal savings association's exposure in the nth-to-default
credit derivative to the total notional amount of all underlying
exposures. The ratio is expressed as a decimal value between zero and
one.
(3) A national bank or Federal savings association that does not use
the SSFA to determine a risk weight for its nth-to-default
credit derivative must assign a risk weight of 1,250 percent to the
exposure.
(4) Protection purchaser--(i) First-to-default credit derivatives. A
national bank or Federal savings association that obtains credit
protection on a group of underlying exposures through a first-to-default
credit derivative that meets the rules of recognition of Sec. 3.36(b)
must determine its risk-based capital requirement for the underlying
exposures as if the national bank or Federal savings association
synthetically securitized the underlying exposure with the smallest
risk-weighted asset amount and had obtained no credit risk mitigant on
the other underlying exposures. A national bank or Federal savings
association must calculate a risk-based capital requirement for
counterparty credit risk according to Sec. 3.34 for a first-to-default
credit derivative that does not meet the rules of recognition of
Sec. 3.36(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A
national bank or Federal savings association that obtains credit
protection on a group of underlying exposures through a nth-
to-default credit derivative that meets the rules of recognition of
Sec. 3.36(b) (other than a first-to-default credit derivative) may
recognize the credit risk mitigation benefits of the derivative only if:
(1) The national bank or Federal savings association 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 national bank or Federal savings association satisfies the
requirements of paragraph (i)(4)(ii)(A) of this section, the national
bank or Federal savings association must determine its risk-based
capital requirement for the underlying exposures as if the national bank
or Federal savings association had only synthetically securitized the
underlying exposure with the nth smallest risk-weighted asset
amount and had obtained no credit risk mitigant on the other underlying
exposures.
(C) A national bank or Federal savings association must calculate a
risk-based capital requirement for counterparty credit risk according to
Sec. 3.34 for a nth-to-default credit derivative that does
not meet the rules of recognition of Sec. 3.36(b).
(j) Guarantees and credit derivatives other than nth-to-default
credit derivatives--(1) Protection provider. For a guarantee or credit
derivative (other than an nth-to-default credit derivative)
provided by a national bank or Federal savings association that covers
the full amount or a pro rata share of a securitization exposure's
principal and interest, the national bank or Federal savings association
must risk weight the guarantee or credit derivative as if it holds the
portion of the reference exposure covered by the guarantee or credit
derivative.
[[Page 86]]
(2) Protection purchaser. (i) A national bank or Federal savings
association that purchases a guarantee or OTC credit derivative (other
than an nth-to-default credit derivative) that is recognized
under Sec. 3.45 as a credit risk mitigant (including via collateral
recognized under Sec. 3.37) is not required to compute a separate
counterparty credit risk capital requirement under Sec. 3.31, in
accordance with 34(c).
(ii) If a national bank or Federal savings association cannot, or
chooses not to, recognize a purchased credit derivative as a credit risk
mitigant under Sec. 3.45, the national bank or Federal savings
association must determine the exposure amount of the credit derivative
under Sec. 3.34.
(A) If the national bank or Federal savings association purchases
credit protection from a counterparty that is not a securitization SPE,
the national bank or Federal savings association must determine the risk
weight for the exposure according to general risk weights under
Sec. 3.32.
(B) If the national bank or Federal savings association purchases
the credit protection from a counterparty that is a securitization SPE,
the national bank or Federal savings association must determine the risk
weight for the exposure according to section Sec. 3.42, including
Sec. 3.42(a)(4) for a credit derivative that has a first priority claim
on the cash flows from the underlying exposures of the securitization
SPE (notwithstanding amounts due under interest rate or currency
derivative contracts, fees due, or other similar payments).
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Sec. 3.43 Simplified supervisory formula approach (SSFA) and the
gross-up approach.
(a) General requirements for the SSFA. To use the SSFA to determine
the risk weight for a securitization exposure, a national bank or
Federal savings association must have data that enables it to assign
accurately the parameters described in paragraph (b) of this section.
Data used to assign the parameters described in paragraph (b) of this
section must be the most currently available data; if the contracts
governing the underlying exposures of the securitization require
payments on a monthly or quarterly basis, the data used to assign the
parameters described in paragraph (b) of this section must be no more
than 91 calendar days old. A national bank or Federal savings
association that does not have the appropriate data to assign the
parameters described in paragraph (b) of this section must assign a risk
weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a
securitization exposure using the SSFA, a national bank or Federal
savings association must have accurate information on the following five
inputs to the SSFA calculation:
(1) KG is the weighted-average (with unpaid principal
used as the weight for each exposure) total capital requirement of the
underlying exposures calculated using this subpart. KG is
expressed as a decimal value between zero and one (that is, an average
risk weight of 100 percent represents a value of KG equal to
0.08).
(2) Parameter W is expressed as a decimal value between zero and
one. Parameter W is the ratio of the sum of the dollar amounts of any
underlying exposures of the securitization that meet any of the criteria
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the
balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other
than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms
of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student
loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide
for period(s) of deferral that are not initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
[[Page 87]]
(3) Parameter A is the attachment point for the exposure, which
represents the threshold at which credit losses will first be allocated
to the exposure. Except as provided in Sec. 3.42(i) for nth-
to-default credit derivatives, parameter A equals the ratio of the
current dollar amount of underlying exposures that are subordinated to
the exposure of the national bank or Federal savings association to the
current dollar amount of underlying exposures. Any reserve account
funded by the accumulated cash flows from the underlying exposures that
is subordinated to the national bank's or Federal savings association's
securitization exposure may be included in the calculation of parameter
A to the extent that cash is present in the account. Parameter A is
expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which
represents the threshold at which credit losses of principal allocated
to the exposure would result in a total loss of principal. Except as
provided in section 42(i) for nth-to-default credit
derivatives, parameter D equals parameter A plus the ratio of the
current dollar amount of the securitization exposures that are pari
passu with the exposure (that is, have equal seniority with respect to
credit risk) to the current dollar amount of the underlying exposures.
Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for
securitization exposures that are not resecuritization exposures and
equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W are used to calculate
KA, the augmented value of KG, which reflects the
observed credit quality of the underlying exposures. KA is
defined in paragraph (d) of this section. The values of parameters A and
D, relative to KA determine the risk weight assigned to a
securitization exposure as described in paragraph (d) of this section.
The risk weight assigned to a securitization exposure, or portion of a
securitization exposure, as appropriate, is the larger of the risk
weight determined in accordance with this paragraph (c) or paragraph (d)
of this section and a risk weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization
exposure is less than or equal to KA, the exposure must be
assigned a risk weight of 1,250 percent.
(2) When the attachment point, parameter A, for a securitization
exposure is greater than or equal to KA, the national bank or
Federal savings association must calculate the risk weight in accordance
with paragraph (d) of this section.
(3) When A is less than KA and D is greater than
KA, the risk weight is a weighted-average of 1,250 percent
and 1,250 percent times KSSFA calculated in accordance with
paragraph (d) of this section. For the purpose of this weighted-average
calculation:
[[Page 88]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.024
(e) Gross-up approach--(1) Applicability. A national bank or Federal
savings association that is not subject to subpart F of this part may
apply the gross-up approach set forth in this section instead of the
SSFA to determine the risk weight of its securitization exposures,
provided that it applies the gross-up approach to all of its
securitization exposures, except as otherwise provided for certain
securitization exposures in Secs. 3.44 and 3.45.
(2) To use the gross-up approach, a national bank or Federal savings
association must calculate the following four inputs:
(i) Pro rata share, which is the par value of the national bank's or
Federal
[[Page 89]]
savings association's securitization exposure as a percent of the par
value of the tranche in which the securitization exposure resides;
(ii) Enhanced amount, which is the par value of tranches that are
more senior to the tranche in which the national bank's or Federal
savings association's securitization resides;
(iii) Exposure amount of the national bank's or Federal savings
association's securitization exposure calculated under Sec. 3.42(c); and
(iv) Risk weight, which is the weighted-average risk weight of
underlying exposures of the securitization as calculated under this
subpart.
(3) Credit equivalent amount. The credit equivalent amount of a
securitization exposure under this section equals the sum of:
(i) The exposure amount of the national bank's or Federal savings
association's securitization exposure; and
(ii) The pro rata share multiplied by the enhanced amount, each
calculated in accordance with paragraph (e)(2) of this section.
(4) Risk-weighted assets. To calculate risk-weighted assets for a
securitization exposure under the gross-up approach, a national bank or
Federal savings association must apply the risk weight required under
paragraph (e)(2) of this section to the credit equivalent amount
calculated in paragraph (e)(3) of this section.
(f) Limitations. Notwithstanding any other provision of this
section, a national bank or Federal savings association must assign a
risk weight of not less than 20 percent to a securitization exposure.
Sec. 3.44 Securitization exposures to which the SSFA and gross-up
approach do not apply.
(a) General requirement. A national bank or Federal savings
association must assign a 1,250 percent risk weight to all
securitization exposures to which the national bank or Federal savings
association does not apply the SSFA or the gross-up approach under
Sec. 3.43, except as set forth in this section.
(b) Eligible ABCP liquidity facilities. A national bank or Federal
savings association may determine the risk-weighted asset amount of an
eligible ABCP liquidity facility by multiplying the exposure amount by
the highest risk weight applicable to any of the individual underlying
exposures covered by the facility.
(c) A securitization exposure in a second loss position or better to
an ABCP program--(1) Risk weighting. A national bank or Federal savings
association may determine the risk-weighted asset amount of a
securitization exposure that is in a second loss position or better to
an ABCP program that meets the requirements of paragraph (c)(2) of this
section by multiplying the exposure amount by the higher of the
following risk weights:
(i) 100 percent; and
(ii) The highest risk weight applicable to any of the individual
underlying exposures of the ABCP program.
(2) Requirements. (i) The exposure is not an eligible ABCP liquidity
facility;
(ii) The exposure must be economically in a second loss position or
better, and the first loss position must provide significant credit
protection to the second loss position;
(iii) The exposure qualifies as investment grade; and
(iv) The national bank or Federal savings association holding the
exposure must not retain or provide protection to the first loss
position.
Sec. 3.45 Recognition of credit risk mitigants for securitization
exposures.
(a) General. (1) An originating national bank or Federal savings
association that has obtained a credit risk mitigant to hedge its
exposure to a synthetic or traditional securitization that satisfies the
operational criteria provided in Sec. 3.41 may recognize the credit risk
mitigant under Secs. 3.36 or 3.37, but only as provided in this section.
(2) An investing national bank or Federal savings association that
has obtained a credit risk mitigant to hedge a securitization exposure
may recognize the credit risk mitigant under Secs. 3.36 or 3.37, but
only as provided in this section.
(b) Mismatches. A national bank or Federal savings association must
make
[[Page 90]]
any applicable adjustment to the protection amount of an eligible
guarantee or credit derivative as required in Sec. 3.36(d), (e), and (f)
for any hedged securitization exposure. In the context of a synthetic
securitization, when an eligible guarantee or eligible credit derivative
covers multiple hedged exposures that have different residual
maturities, the national bank or Federal savings association must use
the longest residual maturity of any of the hedged exposures as the
residual maturity of all hedged exposures.
Secs. 3.46-3.50 [Reserved]
Risk-Weighted Assets for Equity Exposures
Sec. 3.51 Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for
equity exposures that are not equity exposures to an investment fund, a
national bank or Federal savings association must use the Simple Risk-
Weight Approach (SRWA) provided in 3.52. A national bank or Federal
savings association must use the look-through approaches provided in
Sec. 3.53 to calculate its risk-weighted asset amounts for equity
exposures to investment funds.
(2) A national bank or Federal savings association must treat an
investment in a separate account (as defined in Sec. 3.2) as if it were
an equity exposure to an investment fund as provided in Sec. 3.53.
(3) Stable value protection. (i) Stable value protection means a
contract where the provider of the contract is obligated to pay:
(A) The policy owner of a separate account an amount equal to the
shortfall between the fair value and cost basis of the separate account
when the policy owner of the separate account surrenders the policy; or
(B) The beneficiary of the contract an amount equal to the shortfall
between the fair value and book value of a specified portfolio of
assets.
(ii) A national bank or Federal savings association that purchases
stable value protection on its investment in a separate account must
treat the portion of the carrying value of its investment in the
separate account attributable to the stable value protection as an
exposure to the provider of the protection and the remaining portion of
the carrying value of its separate account as an equity exposure to an
investment fund.
(iii) A national bank or Federal savings association that provides
stable value protection must treat the exposure as an equity derivative
with an adjusted carrying value determined as the sum of paragraphs
(b)(1) and (3) of this section.
(b) Adjusted carrying value. For purposes of Secs. 3.51 through
3.53, the adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure (other
than an equity exposure that is classified as available-for-sale where
the national bank or Federal savings association has made an AOCI opt-
out election under Sec. 3.22(b)(2)), the national bank's or Federal
savings association's carrying value of the exposure;
(2) For the on-balance sheet component of an equity exposure that is
classified as available-for-sale where the national bank or Federal
savings association has made an AOCI opt-out election under
Sec. 3.22(b)(2), the national bank's or Federal savings association's
carrying value of the exposure less any net unrealized gains on the
exposure that are reflected in such carrying value but excluded from the
national bank's or Federal savings association's regulatory capital
components;
(3) For the off-balance sheet component of an equity exposure that
is not an equity commitment, the effective notional principal amount of
the exposure, the size of which is equivalent to a hypothetical on-
balance sheet position in the underlying equity instrument that would
evidence the same change in fair value (measured in dollars) given a
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; and
(4) For a commitment to acquire an equity exposure (an equity
commitment), the effective notional principal amount of the exposure is
multiplied
[[Page 91]]
by the following conversion factors (CFs):
(i) Conditional equity commitments with an original maturity of one
year or less receive a CF of 20 percent.
(ii) Conditional equity commitments with an original maturity of
over one year receive a CF of 50 percent.
(iii) Unconditional equity commitments receive a CF of 100 percent.
Sec. 3.52 Simple risk-weight approach (SRWA).
(a) General. Under the SRWA, a national bank's or Federal savings
association's total risk-weighted assets for equity exposures equals the
sum of the risk-weighted asset amounts for each of the national bank's
or Federal savings association's individual equity exposures (other than
equity exposures to an investment fund) as determined under this section
and the risk-weighted asset amounts for each of the national bank's or
Federal savings association's individual equity exposures to an
investment fund as determined under Sec. 3.53.
(b) SRWA computation for individual equity exposures. A national
bank or Federal savings association must determine the risk-weighted
asset amount for an individual equity exposure (other than an equity
exposure to an investment fund) by multiplying the adjusted carrying
value of the equity exposure or the effective portion and ineffective
portion of a hedge pair (as defined in paragraph (c) of this section) by
the lowest applicable risk weight in this paragraph (b).
(1) Zero percent risk weight equity exposures. An equity exposure to
a sovereign, the Bank for International Settlements, the European
Central Bank, the European Commission, the International Monetary Fund,
an MDB, and any other entity whose credit exposures receive a zero
percent risk weight under Sec. 3.32 may be assigned a zero percent risk
weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a
PSE, Federal Home Loan Bank or the Federal Agricultural Mortgage
Corporation (Farmer Mac) must be assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The equity exposures
set forth in this paragraph (b)(3) must be assigned a 100 percent risk
weight.
(i) Community development equity exposures. An equity exposure that
qualifies as a community development investment under section 24
(Eleventh) of the National Bank Act, 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.
(ii) Effective portion of hedge pairs. The effective portion of a
hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding
significant investments in the capital of an unconsolidated financial
institution in the form of common stock and exposures to an investment
firm that would meet the definition of a traditional securitization were
it not for the application of paragraph (8) of that definition in
Sec. 3.2 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 national bank's or Federal savings association's total
capital.
(A) To compute the aggregate adjusted carrying value of a national
bank's or Federal savings association's equity exposures for purposes of
this section, the national bank or Federal savings association 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 national
bank or Federal savings association does not know the actual holdings of
the investment fund, the national bank or Federal savings association
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
[[Page 92]]
the fund exceeds 100 percent, the national bank or Federal savings
association must assume for purposes of this section that the investment
fund invests to the maximum extent possible in equity exposures.
(B) When determining which of a national bank's or Federal savings
association's equity exposures qualify for a 100 percent risk weight
under this paragraph (b), a national bank or Federal savings association
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, 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) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock that are not deducted from capital pursuant to
Sec. 3.22(d) are assigned a 250 percent risk weight.
(5) 300 percent risk weight equity exposures. A publicly traded
equity exposure (other than an equity exposure described in paragraph
(b)(7) of this section and including the ineffective portion of a hedge
pair) must be assigned a 300 percent risk weight.
(6) 400 percent risk weight equity exposures. An equity exposure
(other than an equity exposure described in paragraph (b)(7)) of this
section that is not publicly traded must be assigned a 400 percent risk
weight.
(7) 600 percent risk weight equity exposures. An equity exposure to
an investment firm must be assigned a 600 percent risk weight, provided
that the investment firm:
(i) Would meet the definition of a traditional securitization were
it not for the application of paragraph (8) of that definition; and
(ii) Has greater than immaterial leverage.
(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
national bank or Federal savings association acquires at least one of
the equity exposures); the documentation specifies the measure of
effectiveness (E) the national bank or Federal savings association 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
national bank or Federal savings association must measure E at least
quarterly and must use one of three alternative measures of E as set
forth in this paragraph (c).
(i) Under the dollar-offset method of measuring effectiveness, the
national bank or Federal savings association must determine the ratio of
value change (RVC). The RVC is the ratio of the cumulative sum of the
changes in value of one equity exposure to the cumulative sum of the
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 93]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.027
(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 E equals 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.
Sec. 3.53 Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the
requirements for a community development equity exposure under
Sec. 3.52(b)(3)(i), a national bank or Federal savings association must
determine the risk-weighted asset amount of an equity exposure to an
investment fund under the full look-through approach described in
paragraph (b) of this section, the simple modified look-through approach
described in paragraph (c) of this section, or the alterative modified
look-through approach described paragraph (d) of this section, provided,
however, that the minimum risk weight that may be assigned to an equity
exposure under this section is 20 percent.
(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 Sec. 3.52(b)(3)(i) is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge
pair and the national bank or Federal savings association does not use
the full look-through approach, the national bank or Federal savings
association must use the ineffective portion of the hedge pair as
determined under Sec. 3.52(c) 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 national bank or Federal savings
association 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 subpart as if the proportional ownership
share of the adjusted carrying value of each exposure were held directly
by the national bank or Federal savings association) may set the risk-
weighted asset amount of the national bank's or Federal savings
association's exposure to the fund equal to the product of:
(1) The aggregate risk-weighted asset amounts of the exposures held
by the fund as if they were held directly by
[[Page 94]]
the national bank or Federal savings association; and
(2) The national bank's or Federal savings association's
proportional ownership share of the fund.
(c) Simple modified look-through approach. Under the simple modified
look-through approach, the risk-weighted asset amount for a national
bank's or Federal savings association's equity exposure to an investment
fund equals the adjusted carrying value of the equity exposure
multiplied by the highest risk weight that applies to any exposure the
fund is permitted to hold under the prospectus, partnership agreement,
or similar agreement that defines the fund's permissible investments
(excluding derivative contracts that are used for hedging rather than
speculative purposes and that do not constitute a material portion of
the fund's exposures).
(d) Alternative modified look-through approach. Under the
alternative modified look-through approach, a national bank or Federal
savings association may assign the adjusted carrying value of an equity
exposure to an investment fund on a pro rata basis to different risk
weight categories under this subpart 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 national bank's or Federal savings association's equity
exposure to the investment fund equals the sum of each portion of the
adjusted carrying value assigned to an exposure type multiplied by the
applicable risk weight under this subpart. If the sum of the investment
limits for all exposure types within the fund exceeds 100 percent, the
national bank or Federal savings association must assume that the fund
invests to the maximum extent permitted under its investment limits in
the exposure type with the highest applicable risk weight under this
subpart and continues to make investments in order of the exposure type
with the next highest applicable risk weight under this subpart until
the maximum total investment level is reached. If more than one exposure
type applies to an exposure, the national bank or Federal savings
association must use the highest applicable risk weight. A national bank
or Federal savings association 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.
Secs. 3.54-3.60 [Reserved]
Disclosures
Sec. 3.61 Purpose and scope.
Sections 3.61-3.63 of this subpart establish public disclosure
requirements related to the capital requirements described in subpart B
of this part for a national bank or Federal savings association with
total consolidated assets of $50 billion or more as reported on the
national bank's or Federal savings association's most recent year-end
Call Report that is not an advanced approaches national bank or Federal
savings association making public disclosures pursuant to Sec. 3.172. An
advanced approaches national bank or Federal savings association that
has not received approval from the OCC to exit parallel run pursuant to
Sec. 3.121(d) is subject to the disclosure requirements described in
Secs. 3.62 and 3.63. Such a national bank or Federal savings association
must comply with Sec. 3.62 unless it is a consolidated subsidiary of a
bank holding company, savings and loan holding company, or depository
institution that is subject to these disclosure requirements or a
subsidiary of a non-U.S. banking organization that is subject to
comparable public disclosure requirements in its home jurisdiction. For
purposes of this section, total consolidated assets are determined based
on the average of the national bank's or Federal savings association's
total consolidated assets in the four most recent quarters as reported
on the Call Report; or the average of the national bank's or Federal
savings association's total consolidated assets in the most recent
consecutive quarters as reported quarterly on the national bank's or
Federal savings association's Call Report if the national bank or
Federal savings association has not filed such a report for each of the
most recent four quarters.
[[Page 95]]
Sec. 3.62 Disclosure requirements.
(a) A national bank or Federal savings association described in
Sec. 3.61 must provide timely public disclosures each calendar quarter
of the information in the applicable tables in Sec. 3.63. If a
significant change occurs, such that the most recent reported amounts
are no longer reflective of the national bank's or Federal savings
association's capital adequacy and risk profile, then a brief discussion
of this change and its likely impact must be disclosed as soon as
practicable thereafter. Qualitative disclosures that typically do not
change each quarter (for example, a general summary of the national
bank's or Federal savings association's risk management objectives and
policies, reporting system, and definitions) may be disclosed annually
after the end of the fourth calendar quarter, provided that any
significant changes are disclosed in the interim. The national bank's or
Federal savings association's management may provide all of the
disclosures required by Secs. 3.61 through 3.63 in one place on the
national bank's or Federal savings association's public Web site or may
provide the disclosures in more than one public financial report or
other regulatory reports, provided that the national bank or Federal
savings association publicly provides a summary table specifically
indicating the location(s) of all such disclosures.
(b) A national bank or Federal savings association described in
Sec. 3.61 must have a formal disclosure policy approved by the board of
directors that addresses its approach for determining the disclosures it
makes. The policy must address the associated internal controls and
disclosure controls and procedures. The board of directors and senior
management are responsible for establishing and maintaining an effective
internal control structure over financial reporting, including the
disclosures required by this subpart, and must ensure that appropriate
review of the disclosures takes place. One or more senior officers of
the national bank or Federal savings association must attest that the
disclosures meet the requirements of this subpart.
(c) If a national bank or Federal savings association described in
Sec. 3.61 concludes that specific commercial or financial information
that it would otherwise be required to disclose under this section would
be exempt from disclosure by the OCC under the Freedom of Information
Act (5 U.S.C. 552), then the national bank or Federal savings
association is not required to disclose that specific information
pursuant to this section, but must disclose more general information
about the subject matter of the requirement, together with the fact
that, and the reason why, the specific items of information have not
been disclosed.
Sec. 3.63 Disclosures by national banks or Federal savings associations
described in Sec. 3.61.
(a) Except as provided in Sec. 3.62, a national bank or Federal
savings association described in Sec. 3.61 must make the disclosures
described in Tables 1 through 10 of this section. The national bank or
Federal savings association must make these disclosures publicly
available for each of the last three years (that is, twelve quarters) or
such shorter period beginning on January 1, 2015.
(b) A national bank or Federal savings association must publicly
disclose each quarter the following:
(1) Common equity tier 1 capital, additional tier 1 capital, tier 2
capital, tier 1 and total capital ratios, including the regulatory
capital elements and all the regulatory adjustments and deductions
needed to calculate the numerator of such ratios;
(2) Total risk-weighted assets, including the different regulatory
adjustments and deductions needed to calculate total risk-weighted
assets;
(3) Regulatory capital ratios during any transition periods,
including a description of all the regulatory capital elements and all
regulatory adjustments and deductions needed to calculate the numerator
and denominator of each capital ratio during any transition period; and
(4) A reconciliation of regulatory capital elements as they relate
to its balance sheet in any audited consolidated financial statements.
[[Page 96]]
Table 1 toSec. 3.63--Scope of Application
Qualitative Disclosures....... (a).............. The name of the top
corporate entity in
the group to which
subpart D of this
part applies.
(b).............. A brief description
of the differences
in the basis for
consolidating
entities \1\ for
accounting and
regulatory purposes,
with a description
of those entities:
(1) That are fully
consolidated;
(2) That are
deconsolidated and
deducted from total
capital;
(3) For which the
total capital
requirement is
deducted; and
(4) That are neither
consolidated nor
deducted (for
example, where the
investment in the
entity is assigned a
risk weight in
accordance with this
subpart).
(c).............. Any restrictions, or
other major
impediments, on
transfer of funds or
total capital within
the group.
(d).............. The aggregate amount
of surplus capital
of insurance
subsidiaries
included in the
total capital of the
consolidated group.
(e).............. The aggregate amount
by which actual
total capital is
less than the
minimum total
capital requirement
in all subsidiaries,
with total capital
requirements and the
name(s) of the
subsidiaries with
such deficiencies.
------------------------------------------------------------------------
\1\ Entities include securities, insurance and other financial
subsidiaries, commercial subsidiaries (where permitted), and
significant minority equity investments in insurance, financial and
commercial entities.
Table 2 toSec. 3.63--Capital Structure
Qualitative Disclosures....... (a).............. Summary information
on the terms and
conditions of the
main features of all
regulatory capital
instruments.
Quantitative Disclosures...... (b).............. The amount of common
equity tier 1
capital, with
separate disclosure
of:
(1) Common stock and
related surplus;
(2) Retained
earnings;
(3) Common equity
minority interest;
(4) AOCI; and
(5) Regulatory
adjustments and
deductions made to
common equity tier 1
capital.
(c).............. The amount of tier 1
capital, with
separate disclosure
of:
(1) Additional tier 1
capital elements,
including additional
tier 1 capital
instruments and tier
1 minority interest
not included in
common equity tier 1
capital; and
(2) Regulatory
adjustments and
deductions made to
tier 1 capital.
(d).............. The amount of total
capital, with
separate disclosure
of:
(1) Tier 2 capital
elements, including
tier 2 capital
instruments and
total capital
minority interest
not included in tier
1 capital; and
(2) Regulatory
adjustments and
deductions made to
total capital.
------------------------------------------------------------------------
Table 3 toSec. 3.63--Capital Adequacy
Qualitative disclosures....... (a).............. A summary discussion
of the national
bank's or Federal
savings
association's
approach to
assessing the
adequacy of its
capital to support
current and future
activities.
Quantitative disclosures...... (b).............. Risk-weighted assets
for:
(1) Exposures to
sovereign entities;
(2) Exposures to
certain
supranational
entities and MDBs;
(3) Exposures to
depository
institutions,
foreign banks, and
credit unions;
(4) Exposures to
PSEs;
(5) Corporate
exposures;
(6) Residential
mortgage exposures;
(7) Statutory
multifamily
mortgages and pre-
sold construction
loans;
(8) HVCRE loans;
(9) Past due loans;
(10) Other assets;
(11) Cleared
transactions;
(12) Default fund
contributions;
(13) Unsettled
transactions;
(14) Securitization
exposures; and
(15) Equity
exposures.
(c).............. Standardized market
risk-weighted assets
as calculated under
subpart F of this
part.
(d).............. Common equity tier 1,
tier 1 and total
risk-based capital
ratios:
(1) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
(e).............. Total standardized
risk-weighted
assets.
------------------------------------------------------------------------
[[Page 97]]
Table 4 toSec. 3.63--Capital Conservation Buffer
Quantitative Disclosures...... (a).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
the capital
conservation buffer
as described under
Sec. 3.11.
(b).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
the eligible
retained income of
the national bank or
Federal savings
association, as
described under Sec.
3.11.
(c).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
any limitations it
has on distributions
and discretionary
bonus payments
resulting from the
capital conservation
buffer framework
described under Sec.
3.11, including the
maximum payout
amount for the
quarter.
------------------------------------------------------------------------
(c) General qualitative disclosure requirement. For each separate
risk area described in Tables 5 through 10, the national bank or Federal
savings association must describe its risk management objectives and
policies, including: Strategies and processes; the structure and
organization of the relevant risk management function; the scope and
nature of risk reporting and/or measurement systems; policies for
hedging and/or mitigating risk and strategies and processes for
monitoring the continuing effectiveness of hedges/mitigants.
Table 5 toSec. 3.63 \1\--Credit Risk: General Disclosures
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to credit
risk (excluding
counterparty credit
risk disclosed in
accordance with
Table 6), including
the:
(1) Policy for
determining past due
or delinquency
status;
(2) Policy for
placing loans on
nonaccrual;
(3) Policy for
returning loans to
accrual status;
(4) Definition of and
policy for
identifying impaired
loans (for financial
accounting
purposes);
(5) Description of
the methodology that
the national bank or
Federal savings
association uses to
estimate its
allowance for loan
and lease losses,
including
statistical methods
used where
applicable;
(6) Policy for
charging-off
uncollectible
amounts; and
(7) Discussion of the
national bank's or
Federal savings
association's credit
risk management
policy.
Quantitative Disclosures...... (b).............. Total credit risk
exposures and
average credit risk
exposures, after
accounting offsets
in accordance with
GAAP, without taking
into account the
effects of credit
risk mitigation
techniques (for
example, collateral
and netting not
permitted under
GAAP), over the
period categorized
by major types of
credit exposure. For
example, national
banks or Federal
savings associations
could use categories
similar to that used
for financial
statement purposes.
Such categories
might include, for
instance
(1) Loans, off-
balance sheet
commitments, and
other non-derivative
off-balance sheet
exposures;
(2) Debt securities;
and
(3) OTC
derivatives.\2\
(c).............. Geographic
distribution of
exposures,
categorized in
significant areas by
major types of
credit exposure.\3\
(d).............. Industry or
counterparty type
distribution of
exposures,
categorized by major
types of credit
exposure.
(e).............. By major industry or
counterparty type:
(1) Amount of
impaired loans for
which there was a
related allowance
under GAAP;
(2) Amount of
impaired loans for
which there was no
related allowance
under GAAP;
(3) Amount of loans
past due 90 days and
on nonaccrual;
(4) Amount of loans
past due 90 days and
still accruing; \4\
(5) The balance in
the allowance for
loan and lease
losses at the end of
each period,
disaggregated on the
basis of the
national bank's or
Federal savings
association's
impairment method.
To disaggregate the
information required
on the basis of
impairment
methodology, an
entity shall
separately disclose
the amounts based on
the requirements in
GAAP; and
(6) Charge-offs
during the period.
[[Page 98]]
(f).............. Amount of impaired
loans and, if
available, the
amount of past due
loans categorized by
significant
geographic areas
including, if
practical, the
amounts of
allowances related
to each geographical
area,\5\ further
categorized as
required by GAAP.
(g).............. Reconciliation of
changes in ALLL.\6\
(h).............. Remaining contractual
maturity delineation
(for example, one
year or less) of the
whole portfolio,
categorized by
credit exposure.
------------------------------------------------------------------------
\1\ Table 5 does not cover equity exposures, which should be reported in
Table 9.
\2\ See, for example, ASC Topic 815-10 and 210, as they may be amended
from time to time.
\3\ Geographical areas may consist of individual countries, groups of
countries, or regions within countries. A national bank or Federal
savings association might choose to define the geographical areas
based on the way the national bank's or Federal savings association's
portfolio is geographically managed. The criteria used to allocate the
loans to geographical areas must be specified.
\4\ A national bank or Federal savings association is encouraged also to
provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a
geographical area should be disclosed separately.
\6\ The reconciliation should include the following: A description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
Table 6 toSec. 3.63--General Disclosure for Counterparty Credit Risk-
Related Exposures
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to OTC
derivatives,
eligible margin
loans, and repo-
style transactions,
including a
discussion of:
(1) The methodology
used to assign
credit limits for
counterparty credit
exposures;
(2) Policies for
securing collateral,
valuing and managing
collateral, and
establishing credit
reserves;
(3) The primary types
of collateral taken;
and
(4) The impact of the
amount of collateral
the national bank or
Federal savings
association would
have to provide
given a
deterioration in the
national bank's or
Federal savings
association's own
creditworthiness.
Quantitative Disclosures...... (b).............. Gross positive fair
value of contracts,
collateral held
(including type, for
example, cash,
government
securities), and net
unsecured credit
exposure.\1\ A
national bank or
Federal savings
association also
must disclose the
notional value of
credit derivative
hedges purchased for
counterparty credit
risk protection and
the distribution of
current credit
exposure by exposure
type.\2\
(c).............. Notional amount of
purchased and sold
credit derivatives,
segregated between
use for the national
bank's or Federal
savings
association's own
credit portfolio and
in its
intermediation
activities,
including the
distribution of the
credit derivative
products used,
categorized further
by protection bought
and sold within each
product group.
------------------------------------------------------------------------
\1\ Net unsecured credit exposure is the credit exposure after
considering both the benefits from legally enforceable netting
agreements and collateral arrangements without taking into account
haircuts for price volatility, liquidity, etc.
\2\ This may include interest rate derivative contracts, foreign
exchange derivative contracts, equity derivative contracts, credit
derivatives, commodity or other derivative contracts, repo-style
transactions, and eligible margin loans.
Table 7 toSec. 3.63--Credit Risk Mitigation \1 2\
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to credit
risk mitigation,
including:
(1) Policies and
processes for
collateral valuation
and management;
(2) A description of
the main types of
collateral taken by
the national bank or
Federal savings
association;
(3) The main types of
guarantors/credit
derivative
counterparties and
their
creditworthiness;
and
(4) Information about
(market or credit)
risk concentrations
with respect to
credit risk
mitigation.
Quantitative Disclosures...... (b).............. For each separately
disclosed credit
risk portfolio, the
total exposure that
is covered by
eligible financial
collateral, and
after the
application of
haircuts.
(c).............. For each separately
disclosed portfolio,
the total exposure
that is covered by
guarantees/credit
derivatives and the
risk-weighted asset
amount associated
with that exposure.
------------------------------------------------------------------------
\1\ At a minimum, a national bank or Federal savings association must
provide the disclosures in Table 7 in relation to credit risk
mitigation that has been recognized for the purposes of reducing
capital requirements under this subpart. Where relevant, national
banks or Federal savings associations are encouraged to give further
information about mitigants that have not been recognized for that
purpose.
\2\ Credit derivatives that are treated, for the purposes of this
subpart, as synthetic securitization exposures should be excluded from
the credit risk mitigation disclosures and included within those
relating to securitization (Table 8).
[[Page 99]]
Table 8 toSec. 3.63--Securitization
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to a
securitization
(including synthetic
securitizations),
including a
discussion of:
(1) The national
bank's or Federal
savings
association's
objectives for
securitizing assets,
including the extent
to which these
activities transfer
credit risk of the
underlying exposures
away from the
national bank or
Federal savings
association to other
entities and
including the type
of risks assumed and
retained with
resecuritization
activity; \1\
(2) The nature of the
risks (e.g.
liquidity risk)
inherent in the
securitized assets;
(3) The roles played
by the national bank
or Federal savings
association in the
securitization
process \2\ and an
indication of the
extent of the
national bank's or
Federal savings
association's
involvement in each
of them;
(4) The processes in
place to monitor
changes in the
credit and market
risk of
securitization
exposures including
how those processes
differ for
resecuritization
exposures;
(5) The national
bank's or Federal
savings
association's policy
for mitigating the
credit risk retained
through
securitization and
resecuritization
exposures; and
(6) The risk-based
capital approaches
that the national
bank or Federal
savings association
follows for its
securitization
exposures including
the type of
securitization
exposure to which
each approach
applies.
(b).............. A list of:
(1) The type of
securitization SPEs
that the national
bank or Federal
savings association,
as sponsor, uses to
securitize third-
party exposures. The
national bank or
Federal savings
association must
indicate whether it
has exposure to
these SPEs, either
on- or off-balance
sheet; and
(2) Affiliated
entities:
(i) That the national
bank or Federal
savings association
manages or advises;
and
(ii) That invest
either in the
securitization
exposures that the
national bank or
Federal savings
association has
securitized or in
securitization SPEs
that the national
bank or Federal
savings association
sponsors.\3\
(c).............. Summary of the
national bank's or
Federal savings
association's
accounting policies
for securitization
activities,
including:
(1) Whether the
transactions are
treated as sales or
financings;
(2) Recognition of
gain-on-sale;
(3) Methods and key
assumptions applied
in valuing retained
or purchased
interests;
(4) Changes in
methods and key
assumptions from the
previous period for
valuing retained
interests and impact
of the changes;
(5) Treatment of
synthetic
securitizations;
(6) How exposures
intended to be
securitized are
valued and whether
they are recorded
under subpart D of
this part; and
(7) Policies for
recognizing
liabilities on the
balance sheet for
arrangements that
could require the
national bank or
Federal savings
association to
provide financial
support for
securitized assets.
(d).............. An explanation of
significant changes
to any quantitative
information since
the last reporting
period.
Quantitative Disclosures...... (e).............. The total outstanding
exposures
securitized by the
national bank or
Federal savings
association in
securitizations that
meet the operational
criteria provided in
Sec. 3.41
(categorized into
traditional and
synthetic
securitizations), by
exposure type,
separately for
securitizations of
third-party
exposures for which
the bank acts only
as sponsor.\4\
(f).............. For exposures
securitized by the
national bank or
Federal savings
association in
securitizations that
meet the operational
criteria in Sec.
3.41:
(1) Amount of
securitized assets
that are impaired/
past due categorized
by exposure type;
\5\ and
(2) Losses recognized
by the national bank
or Federal savings
association during
the current period
categorized by
exposure type.\6\
(g).............. The total amount of
outstanding
exposures intended
to be securitized
categorized by
exposure type.
(h).............. Aggregate amount of:
(1) On-balance sheet
securitization
exposures retained
or purchased
categorized by
exposure type; and
(2) Off-balance sheet
securitization
exposures
categorized by
exposure type.
[[Page 100]]
(i).............. (1) Aggregate amount
of securitization
exposures retained
or purchased and the
associated capital
requirements for
these exposures,
categorized between
securitization and
resecuritization
exposures, further
categorized into a
meaningful number of
risk weight bands
and by risk-based
capital approach
(e.g., SSFA); and
(2) Exposures that
have been deducted
entirely from tier 1
capital, CEIOs
deducted from total
capital (as
described in Sec.
3.42(a)(1), and
other exposures
deducted from total
capital should be
disclosed separately
by exposure type.
(j).............. Summary of current
year's
securitization
activity, including
the amount of
exposures
securitized (by
exposure type), and
recognized gain or
loss on sale by
exposure type.
(k).............. Aggregate amount of
resecuritization
exposures retained
or purchased
categorized
according to:
(1) Exposures to
which credit risk
mitigation is
applied and those
not applied; and
(2) Exposures to
guarantors
categorized
according to
guarantor
creditworthiness
categories or
guarantor name.
------------------------------------------------------------------------
\1\ The national bank or Federal savings association should describe the
structure of resecuritizations in which it participates; this
description should be provided for the main categories of
resecuritization products in which the national bank or Federal
savings association is active.
\2\ For example, these roles may include originator, investor, servicer,
provider of credit enhancement, sponsor, liquidity provider, or swap
provider.
\3\ Such affiliated entities may include, for example, money market
funds, to be listed individually, and personal and private trusts, to
be noted collectively.
\4\ ``Exposures securitized'' include underlying exposures originated by
the bank, whether generated by them or purchased, and recognized in
the balance sheet, from third parties, and third-party exposures
included in sponsored transactions. Securitization transactions
(including underlying exposures originally on the bank's balance sheet
and underlying exposures acquired by the bank from third-party
entities) in which the originating bank does not retain any
securitization exposure should be shown separately but need only be
reported for the year of inception. Banks are required to disclose
exposures regardless of whether there is a capital charge under this
part.
\5\ Include credit-related other than temporary impairment (OTTI).
\6\ For example, charge-offs/allowances (if the assets remain on the
bank's balance sheet) or credit-related OTTI of interest-only strips
and other retained residual interests, as well as recognition of
liabilities for probable future financial support required of the bank
with respect to securitized assets.
Table 9 toSec. 3.63--Equities Not Subject to Subpart F of This Part
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to equity
risk for equities
not subject to
subpart F of this
part, including:
(1) Differentiation
between holdings on
which capital gains
are expected and
those taken under
other objectives
including for
relationship and
strategic reasons;
and
(2) Discussion of
important policies
covering the
valuation of and
accounting for
equity holdings not
subject to subpart F
of this part. This
includes the
accounting
techniques and
valuation
methodologies used,
including key
assumptions and
practices affecting
valuation as well as
significant changes
in these practices.
Quantitative Disclosures...... (b).............. Value disclosed on
the balance sheet of
investments, as well
as the fair value of
those investments;
for securities that
are publicly traded,
a comparison to
publicly-quoted
share values where
the share price is
materially different
from fair value.
(c).............. The types and nature
of investments,
including the amount
that is: (1)
Publicly traded; and
(2) Non publicly
traded.
(d).............. The cumulative
realized gains
(losses) arising
from sales and
liquidations in the
reporting period.
(e).............. (1) Total unrealized
gains (losses).\1\
(2) Total latent
revaluation gains
(losses).\2\
(3) Any amounts of
the above included
in tier 1 or tier 2
capital.
(f).............. Capital requirements
categorized by
appropriate equity
groupings,
consistent with the
national bank's or
Federal savings
association's
methodology, as well
as the aggregate
amounts and the type
of equity
investments subject
to any supervisory
transition regarding
regulatory capital
requirements.
------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized on the balance sheet but not
through earnings.
\2\ Unrealized gains (losses) not recognized either on the balance sheet
or through earnings.
[[Page 101]]
Table 10 toSec. 3.63--Interest Rate Risk for Non-Trading Activities
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement,
including the nature
of interest rate
risk for non-trading
activities and key
assumptions,
including
assumptions
regarding loan
prepayments and
behavior of non-
maturity deposits,
and frequency of
measurement of
interest rate risk
for non-trading
activities.
Quantitative disclosures...... (b).............. The increase
(decline) in
earnings or economic
value (or relevant
measure used by
management) for
upward and downward
rate shocks
according to
management's method
for measuring
interest rate risk
for non-trading
activities,
categorized by
currency (as
appropriate).
------------------------------------------------------------------------
Secs. 3.64-3.99 [Reserved]
Subpart E_Risk-Weighted Assets_Internal Ratings-Based and Advanced
Measurement Approaches
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.100 Purpose, applicability, and principle of conservatism.
(a) Purpose. This subpart E establishes:
(1) Minimum qualifying criteria for national banks or Federal
savings associations using institution-specific internal risk
measurement and management processes for calculating risk-based capital
requirements; and
(2) Methodologies for such national banks or Federal savings
associations to calculate their total risk-weighted assets.
(b) Applicability. (1) This subpart applies to a national bank or
Federal savings association that:
(i) Has consolidated total assets, as reported on its most recent
year-end Call Report equal to $250 billion or more;
(ii) Has consolidated total on-balance sheet foreign exposure on its
most recent year-end Call Report equal to $10 billion or more (where
total on-balance sheet foreign exposure equals total cross-border claims
less claims with a 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 the
advanced approaches pursuant to subpart E of 12 CFR part 3 (OCC), 12 CFR
part 217 (Board), or 12 CFR part 325 (FDIC) to calculate its total risk-
weighted assets;
(iv) Is a subsidiary of a bank holding company or savings and loan
holding company that uses the advanced approaches pursuant to 12 CFR
part 217 to calculate its total risk-weighted assets; or
(v) Elects to use this subpart to calculate its total risk-weighted
assets.
(2) A national bank or Federal savings association that is subject
to this subpart shall remain subject to this subpart unless the OCC
determines in writing that application of this subpart is not
appropriate in light of the national bank's or Federal savings
association's asset size, level of complexity, risk profile, or scope of
operations. In making a determination under this paragraph (b), 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 3.404.
(3) A market risk national bank or Federal savings association must
exclude from its calculation of risk-weighted assets under this subpart
the risk-weighted asset amounts of all covered positions, as defined in
subpart F of this part (except foreign exchange positions that are not
trading positions, over-the-counter derivative positions, cleared
transactions, and unsettled transactions).
(c) Principle of conservatism. Notwithstanding the requirements of
this subpart, a national bank or Federal savings association may choose
not to
[[Page 102]]
apply a provision of this subpart to one or more exposures provided
that:
(1) The national bank or Federal savings association 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 subpart;
(2) The national bank or Federal savings association appropriately
manages the risk of each such exposure;
(3) The national bank or Federal savings association notifies the
OCC in writing prior to applying this principle to each such exposure;
and
(4) The exposures to which the national bank or Federal savings
association applies this principle are not, in the aggregate, material
to the national bank or Federal savings association.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Sec. 3.101 Definitions.
(a) Terms that are set forth in Sec. 3.2 and used in this subpart
have the definitions assigned thereto in Sec. 3.2.
(b) For the purposes of this subpart, the following terms are
defined as follows:
Advanced internal ratings-based (IRB) systems means an advanced
approaches national bank's or Federal savings association'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 an advanced approaches national bank's or
Federal savings association's advanced IRB systems, operational risk
management processes, operational risk data and assessment systems,
operational risk quantification systems, and, to the extent used by the
national bank or Federal savings association, the internal models
methodology, advanced CVA approach, double default excessive correlation
detection process, and internal models approach (IMA) for equity
exposures.
Backtesting means the comparison of a national bank's or Federal
savings association'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.
Benchmarking means the comparison of a national bank's or Federal
savings association's internal estimates with relevant internal and
external data or with estimates based on other estimation techniques.
Bond option contract means a bond option, bond future, or any other
instrument linked to a bond that gives rise to similar counterparty
credit risk.
Business environment and internal control factors means the
indicators of a national bank's or Federal savings association's
operational risk profile that reflect a current and forward-looking
assessment of the national bank's or Federal savings association's
underlying business risk factors and internal control environment.
Credit default swap (CDS) means a financial contract executed under
standard industry documentation that allows one party (the protection
purchaser) to transfer the credit risk of one or more exposures
(reference exposure(s)) to another party (the protection provider) for a
certain period of time.
Credit valuation adjustment (CVA) means the fair value adjustment to
reflect counterparty credit risk in valuation of OTC derivative
contracts.
Default--For the purposes of calculating capital requirements under
this subpart:
(1) Retail. (i) A retail exposure of a national bank or Federal
savings association 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 retail
exposures that are not residential mortgage exposures or revolving
exposures; or
(C) The national bank or Federal savings association 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
[[Page 103]]
held by a non-U.S. subsidiary of the national bank or Federal savings
association 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
national bank or Federal savings association may elect to use the
definition of default that is used in that jurisdiction, provided that
the national bank or Federal savings association 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
national bank or Federal savings association has reasonable assurance of
repayment and performance for all contractual principal and interest
payments on the exposure.
(2) Wholesale. (i) A national bank's or Federal savings
association's wholesale obligor is in default if:
(A) The national bank or Federal savings association determines that
the obligor is unlikely to pay its credit obligations to the national
bank or Federal savings association in full, without recourse by the
national bank or Federal savings association 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 national bank or Federal savings association.\25\
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\25\ Overdrafts are past due once the obligor has breached an
advised limit or been advised of a limit smaller than the current
outstanding balance.
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(ii) An obligor in default remains in default until the national
bank or Federal savings association has reasonable assurance of
repayment and performance for all contractual principal and interest
payments on all exposures of the national bank or Federal savings
association 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.
Economic downturn conditions means, with respect to an exposure held
by the national bank or Federal savings association, 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 national bank or Federal savings association) in the exposure's
national jurisdiction (or subdivision of such jurisdiction selected by
the national bank or Federal savings association) are significantly
higher than average.
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 national bank or Federal savings association does not
apply the internal models approach in section 132(d), 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 national bank or Federal savings
association applies the internal models approach in Sec. 3.132(d), the
value determined in Sec. 3.132(d)(4).
Eligible double default guarantor, with respect to a guarantee or
credit derivative obtained by a national bank or Federal savings
association, means:
(1) U.S.-based entities. A depository institution, a bank holding
company, a savings and loan holding company, or a securities broker or
dealer registered
[[Page 104]]
with the SEC under the Securities Exchange Act, if at the time the
guarantee is issued or anytime thereafter, has issued and outstanding an
unsecured debt security without credit enhancement that is investment
grade.
(2) Non-U.S.-based entities. A foreign bank, or a non-U.S.-based
securities firm if the national bank or Federal savings association
demonstrates that the guarantor is subject to consolidated supervision
and regulation comparable to that imposed on U.S. depository
institutions, or securities broker-dealers) if at the time the guarantee
is issued or anytime thereafter, has issued and outstanding an unsecured
debt security without credit enhancement that is investment grade.
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 national bank or Federal savings association 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 national bank or Federal savings association 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.
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 fair values in the
probability distribution of fair values to a counterparty at a specified
future date are set to zero to convert the probability distribution of
fair 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 national bank's or Federal savings association'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) means:
(1) For the on-balance sheet component of a wholesale exposure or
segment of retail exposures (other than an OTC derivative contract, a
repo-style transaction or eligible margin loan for which the national
bank or Federal savings association determines EAD under Sec. 3.132, a
cleared transaction, or default fund contribution), EAD means the
national bank's or Federal savings association'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, a
repo-style transaction or eligible margin loan for which the national
bank or Federal savings association determines EAD under Sec. 3.132,
cleared transaction, or default fund contribution) in the form of a loan
commitment, line of credit, trade-related letter of credit, or
transaction-related contingency, EAD means the national bank's or
Federal savings association's best estimate of net additions to the
outstanding
[[Page 105]]
amount owed the national bank or Federal savings association, 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. For the
purposes of this definition:
(i) 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.
(ii) 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, a
repo-style transaction, or eligible margin loan for which the national
bank or Federal savings association determines EAD under Sec. 3.132,
cleared transaction, or default fund contribution) 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
Sec. 3.132. A national bank or Federal savings association also may
determine EAD for repo-style transactions and eligible margin loans as
described in Sec. 3.132.
Exposure category means any of the wholesale, retail,
securitization, or equity exposure categories.
External operational loss event data means, with respect to a
national bank or Federal savings association, gross operational loss
amounts, dates, recoveries, and relevant causal information for
operational loss events occurring at organizations other than the
national bank or Federal savings association.
IMM exposure means a repo-style transaction, eligible margin loan,
or OTC derivative for which a national bank or Federal savings
association calculates its EAD using the internal models methodology of
Sec. 3.132(d).
Internal operational loss event data means, with respect to a
national bank or Federal savings association, gross operational loss
amounts, dates, recoveries, and relevant causal information for
operational loss events occurring at the national bank or Federal
savings association.
Loss given default (LGD) means:
(1) For a wholesale exposure, the greatest of:
(i) Zero;
(ii) The national bank's or Federal savings association's
empirically based best estimate of the long-run default-weighted average
economic loss, per dollar of EAD, the national bank or Federal savings
association would expect to incur if the obligor (or a typical obligor
in the loss severity grade assigned by the national bank or Federal
savings association to the exposure) were to default within a one-year
horizon over a mix of economic conditions, including economic downturn
conditions; or
(iii) The national bank's or Federal savings association's
empirically based best estimate of the economic loss, per dollar of EAD,
the national bank or Federal savings association would expect to incur
if the obligor (or a typical obligor in the loss severity grade assigned
by the national bank or Federal savings association 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 national bank's or Federal savings association's
empirically based best estimate of the long-run default-weighted average
economic loss, per dollar of EAD, the national bank or Federal savings
association 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 national bank's or Federal savings association's
empirically based best estimate of the economic loss, per dollar of EAD,
the national bank or Federal savings association would expect to incur
if the exposures in the segment were to default within a one-
[[Page 106]]
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.
Obligor means the legal entity or natural person contractually
obligated on a wholesale exposure, except that a national bank or
Federal savings association may treat 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 national bank or Federal savings association, 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
[[Page 107]]
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 99.9th percentile of the
distribution of potential aggregate operational losses, as generated by
the national bank's or Federal savings association's operational risk
quantification system over a one-year horizon (and not incorporating
eligible operational risk offsets or qualifying operational risk
mitigants).
Other retail exposure means an exposure (other than a securitization
exposure, an equity exposure, a residential mortgage exposure, a pre-
sold construction loan, 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 national bank's or Federal savings association's consolidated
business credit exposure to the individual or company is $1 million or
less.
Probability of default (PD) means:
(1) For a wholesale exposure to a non-defaulted obligor, the
national bank's or Federal savings association's empirically based best
estimate of the long-run average one-year default rate for the rating
grade assigned by the national bank or Federal savings association 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 national
bank's or Federal savings association'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.
(3) For a wholesale exposure to a defaulted obligor or segment of
defaulted retail exposures, 100 percent.
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 the underlying financial transactions are OTC derivative
contracts, eligible margin loans, or repo-style transactions. In order
to treat an agreement as a qualifying cross-product master netting
agreement for purposes of this subpart, a national bank or Federal
savings association must comply with the requirements of Sec. 3.3(c) of
this part with respect to that 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 a borrower's decision to borrow and repay up to a
pre-established maximum amount, except for an outstanding amount that
the borrower is required to pay in full every month);
(2) Is unsecured and unconditionally cancelable by the national bank
or Federal savings association to the fullest extent permitted by
Federal law; and
[[Page 108]]
(3)(i) Has a maximum contractual exposure amount (drawn plus
undrawn) of up to $100,000; or
(ii) With respect to a product with an outstanding amount that the
borrower is required to pay in full every month, the total outstanding
amount does not in practice exceed $100,000.
(4) A segment of exposures that contains one or more exposures that
fails to meet paragraph (3)(ii) of this definition must be treated as a
segment of other retail exposures for the 24 month period following the
month in which the total outstanding amount of one or more exposures
individually exceeds $100,000.
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 national bank's
or Federal savings association's operational risk profile and control
structure.
Total wholesale and retail risk-weighted assets means the sum of:
(1) Risk-weighted assets for wholesale exposures that are not IMM
exposures, cleared transactions, or default fund contributions to non-
defaulted obligors and segments of non-defaulted retail exposures;
(2) Risk-weighted assets for wholesale exposures to defaulted
obligors and segments of defaulted retail exposures;
(3) Risk-weighted assets for assets not defined by an exposure
category;
(4) Risk-weighted assets for non-material portfolios of exposures;
(5) Risk-weighted assets for IMM exposures (as determined in
Sec. 3.132(d));
(6) Risk-weighted assets for cleared transactions and risk-weighted
assets for default fund contributions (as determined in Sec. 3.133); and
(7) Risk-weighted assets for unsettled transactions (as determined
in Sec. 3.136).
Unexpected operational loss (UOL) means the difference between the
national bank's or Federal savings association's operational risk
exposure and the national bank's or Federal savings association's
expected operational loss.
Unit of measure means the level (for example, organizational unit or
operational loss event type) at which the national bank's or Federal
savings association's operational risk quantification system generates a
separate distribution of potential operational losses.
Wholesale exposure means a credit exposure to a company, natural
person, sovereign, or governmental entity (other than a securitization
exposure, retail exposure, pre-sold construction loan, or equity
exposure).
Wholesale exposure subcategory means the HVCRE or non-HVCRE
wholesale exposure subcategory.
Qualification
Sec. 3.121 Qualification process.
(a) Timing. (1) A national bank or Federal savings association that
is described in Sec. 3.100(b)(1)(i) through (iv) must adopt a written
implementation plan no later than six months after the date the national
bank or Federal savings association meets a criterion in that section.
The implementation plan must incorporate an explicit start date no later
than 36 months after the date the national bank or Federal savings
association meets at least one criterion under Sec. 3.100(b)(1)(i)
through (iv). The OCC may extend the start date.
(2) A national bank or Federal savings association that elects to be
subject to this appendix under Sec. 3.100(b)(1)(v) must adopt a written
implementation plan.
[[Page 109]]
(b) Implementation plan. (1) The national bank's or Federal savings
association's implementation plan must address in detail how the
national bank or Federal savings association complies, or plans to
comply, with the qualification requirements in Sec. 3.122. The national
bank or Federal savings association 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
Sec. 3.122 for the national bank or Federal savings association and each
consolidated subsidiary (U.S. and foreign-based) of the national bank or
Federal savings association with respect to all portfolios and exposures
of the national bank or Federal savings association and each of its
consolidated subsidiaries;
(ii) Justify and support any proposed temporary or permanent
exclusion of business lines, portfolios, or exposures from the
application of the advanced approaches in this subpart (which business
lines, portfolios, and exposures must be, in the aggregate, immaterial
to the national bank or Federal savings association);
(iii) Include the national bank's or Federal savings association's
self-assessment of:
(A) The national bank's or Federal savings association's current
status in meeting the qualification requirements in Sec. 3.122; and
(B) The consistency of the national bank's or Federal savings
association's current practices with the OCC's supervisory guidance on
the qualification requirements;
(iv) Based on the national bank's or Federal savings association's
self-assessment, identify and describe the areas in which the national
bank or Federal savings association proposes to undertake additional
work to comply with the qualification requirements in Sec. 3.122 or to
improve the consistency of the national bank's or Federal savings
association's current practices with the OCC's supervisory guidance on
the qualification requirements (gap analysis);
(v) Describe what specific actions the national bank or Federal
savings association 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 national bank's or Federal savings
association's implementation of the methodologies described in this
subpart will be fully operational;
(vii) Describe resources that have been budgeted and are available
to implement the plan; and
(viii) Receive approval of the national bank's or Federal savings
association's board of directors.
(2) The national bank or Federal savings association 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 national
bank or Federal savings association proposes to begin its parallel run,
unless the OCC waives prior notice.
(c) Parallel run. Before determining its risk-weighted assets under
this subpart and following adoption of the implementation plan, the
national bank or Federal savings association must conduct a satisfactory
parallel run. A satisfactory parallel run is a period of no less than
four consecutive calendar quarters during which the national bank or
Federal savings association complies with the qualification requirements
in Sec. 3.122 to the satisfaction of the OCC. During the parallel run,
the national bank or Federal savings association must report to the OCC
on a calendar quarterly basis its risk-based capital ratios determined
in accordance with Sec. 3.10(b)(1) through (3) and Sec. ???10.(c)(1)
through (3). During this period, the national bank's or Federal savings
association's minimum risk-based capital ratios are determined as set
forth in subpart D of this part.
(d) Approval to calculate risk-based capital requirements under this
subpart. The OCC will notify the national bank or Federal savings
association of the date that the national bank or Federal savings
association must begin to use this subpart for purposes of Sec. 3.10 if
the OCC determines that:
(1) The national bank or Federal savings association fully complies
with all
[[Page 110]]
the qualification requirements in Sec. 3.122;
(2) The national bank or Federal savings association has conducted a
satisfactory parallel run under paragraph (c) of this section; and
(3) The national bank or Federal savings association has an adequate
process to ensure ongoing compliance with the qualification requirements
in Sec. 3.122.
Sec. 3.122 Qualification requirements.
(a) Process and systems requirements. (1) A national bank or Federal
savings association 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 national bank or Federal
savings association for risk-based capital purposes under this subpart
must be consistent with the national bank's or Federal savings
association's internal risk management processes and management
information reporting systems.
(3) Each national bank or Federal savings association must have an
appropriate infrastructure with risk measurement and management
processes that meet the qualification requirements of this section and
are appropriate given the national bank's or Federal savings
association's size and level of complexity. Regardless of whether the
systems and models that generate the risk parameters necessary for
calculating a national bank's or Federal savings association's risk-
based capital requirements are located at any affiliate of the national
bank or Federal savings association, the national bank or Federal
savings association 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 national bank or Federal savings association must have
an internal risk rating and segmentation system that accurately and
reliably differentiates among degrees of credit risk for the national
bank's or Federal savings association's wholesale and retail exposures.
(2) For wholesale exposures:
(i) A national bank or Federal savings association 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 national bank or Federal savings association may elect,
however, not to assign to a rating grade an obligor to whom the national
bank or Federal savings association extends credit based solely on the
financial strength of a guarantor, provided that all of the national
bank's or Federal savings association's exposures to the obligor are
fully covered by eligible guarantees, the national bank or Federal
savings association applies the PD substitution approach in
Sec. 3.134(c)(1) to all exposures to that obligor, and the national bank
or Federal savings association immediately assigns the obligor to a
rating grade if a guarantee can no longer be recognized under this part.
The national bank's or Federal savings association'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 national bank or Federal savings association has
chosen to directly assign LGD estimates to each wholesale exposure, the
national bank or Federal savings association must have an internal risk
rating system that accurately and reliably assigns each wholesale
exposure to a loss severity rating grade (reflecting the national bank's
or Federal savings association's estimate of the LGD of the exposure). A
national bank or Federal savings association 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 national bank or Federal savings
association 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
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reliable PD and LGD estimates for each segment on a consistent basis.
The national bank's or Federal savings association's system must
identify and group in separate segments by subcategories exposures
identified in Sec. 3.131(c)(2)(ii) and (iii).
(4) The national bank's or Federal savings association's internal
risk rating policy for wholesale exposures must describe the national
bank's or Federal savings association's rating philosophy (that is, must
describe how wholesale obligor rating assignments are affected by the
national bank's or Federal savings association's choice of the range of
economic, business, and industry conditions that are considered in the
obligor rating process).
(5) The national bank's or Federal savings association'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 national bank or Federal savings
association receives new material information, but no less frequently
than annually. The national bank's or Federal savings association's
retail exposure segmentation system must provide for the review and
update (as appropriate) of assignments of retail exposures to segments
whenever the national bank or Federal savings association receives new
material information, but generally no less frequently than quarterly.
(c) Quantification of risk parameters for wholesale and retail
exposures. (1) The national bank or Federal savings association must
have a comprehensive risk parameter quantification process that produces
accurate, timely, and reliable estimates of the risk parameters for the
national bank's or Federal savings association's wholesale and retail
exposures.
(2) Data used to estimate the risk parameters must be relevant to
the national bank's or Federal savings association's actual wholesale
and retail exposures, and of sufficient quality to support the
determination of risk-based capital requirements for the exposures.
(3) The national bank's or Federal savings association's risk
parameter quantification process must produce appropriately conservative
risk parameter estimates where the national bank or Federal savings
association has limited relevant data, and any adjustments that are part
of the quantification process must not result in a pattern of bias
toward lower risk parameter estimates.
(4) The national bank's or Federal savings association'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 national bank's or Federal savings association'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 national bank or
Federal savings association 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 national bank or Federal
savings association must adjust its estimates of risk parameters to
compensate for the lack of data from periods of economic downturn
conditions.
(8) The national bank's or Federal savings association's PD, LGD,
and EAD estimates must be based on the definition of default in
Sec. 3.101.
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(9) The national bank or Federal savings association must review and
update (as appropriate) its risk parameters and its risk parameter
quantification process at least annually.
(10) The national bank or Federal savings association must, at least
annually, conduct a comprehensive review and analysis of reference data
to determine relevance of reference data to the national bank's or
Federal savings association's exposures, quality of reference data to
support PD, LGD, and EAD estimates, and consistency of reference data to
the definition of default in Sec. 3.101.
(d) Counterparty credit risk model. A national bank or Federal
savings association must obtain the prior written approval of the OCC
under Sec. 3.132 to use the internal models methodology for counterparty
credit risk and the advanced CVA approach for the CVA capital
requirement.
(e) Double default treatment. A national bank or Federal savings
association must obtain the prior written approval of the OCC under
Sec. 3.135 to use the double default treatment.
(f) Equity exposures model. A national bank or Federal savings
association must obtain the prior written approval of the OCC under
Sec. 3.153 to use the internal models approach for equity exposures.
(g) Operational risk. (1) Operational risk management processes. A
national bank or Federal savings association 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
national bank's or Federal savings association'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 national bank's
or Federal savings association's operational risk profile) to identify,
measure, monitor, and control operational risk in the national bank's or
Federal savings association's 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 national bank or
Federal savings association must have operational risk data and
assessment systems that capture operational risks to which the national
bank or Federal savings association is exposed. The national bank's or
Federal savings association's operational risk data and assessment
systems must:
(i) Be structured in a manner consistent with the national bank's or
Federal savings association'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 national bank or
Federal savings association must have a systematic process for capturing
and using internal operational loss event data in its operational risk
data and assessment systems.
(1) The national bank's or Federal savings association'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 national bank or Federal savings association must be able to
map its internal operational loss event data into the seven operational
loss event type categories.
(3) The national bank or Federal savings association may refrain
from collecting internal operational loss event data for individual
operational losses below established dollar threshold amounts if the
national bank or Federal savings association can demonstrate to the
satisfaction of the OCC that the thresholds are reasonable, do
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not exclude important internal operational loss event data, and permit
the national bank or Federal savings association to capture
substantially all the dollar value of the national bank's or Federal
savings association's operational losses.
(B) External operational loss event data. The national bank or
Federal savings association 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 national bank or Federal savings
association 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 national
bank or Federal savings association must incorporate business
environment and internal control factors into its operational risk data
and assessment systems. The national bank or Federal savings association
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 national bank's
or Federal savings association's operational risk quantification
systems:
(A) Must generate estimates of the national bank's or Federal
savings association's operational risk exposure using its operational
risk data and assessment systems;
(B) Must employ a unit of measure that is appropriate for the
national bank's or Federal savings association'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
(g)(2)(ii) of this section, that a national bank or Federal savings
association 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 national bank or
Federal savings association 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
uncertainty surrounding the estimates. If the national bank or Federal
savings association 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
national bank or Federal savings association becomes aware of
information that may have a material effect on the national bank's or
Federal savings association'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 national bank or
Federal savings association may generate an estimate of its operational
risk exposure using an alternative approach to that specified in
paragraph (g)(3)(i) of this section. A national bank or Federal savings
association proposing to use such an alternative operational risk
quantification system must submit a proposal to the OCC. In determining
whether to approve a national bank's or Federal savings association'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 national bank or Federal savings
association;
(B) The national bank or Federal savings association 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
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(C) A national bank or Federal savings association must not use an
allocation of operational risk capital requirements that includes
entities other than depository institutions or the benefits of
diversification across entities.
(h) Data management and maintenance. (1) A national bank or Federal
savings association 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 national bank or Federal savings association must retain data
using an electronic format that allows timely retrieval of data for
analysis, validation, reporting, and disclosure purposes.
(3) A national bank or Federal savings association must retain
sufficient data elements related to key risk drivers to permit adequate
monitoring, validation, and refinement of its advanced systems.
(i) Control, oversight, and validation mechanisms. (1) The national
bank's or Federal savings association's senior management must ensure
that all components of the national bank's or Federal savings
association's advanced systems function effectively and comply with the
qualification requirements in this section.
(2) The national bank's or Federal savings association's board of
directors (or a designated committee of the board) must at least
annually review the effectiveness of, and approve, the national bank's
or Federal savings association's advanced systems.
(3) A national bank or Federal savings association 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
national bank's or Federal savings association's advanced systems; and
(iii) Includes adequate governance and project management processes.
(4) The national bank or Federal savings association must validate,
on an ongoing basis, its advanced systems. The national bank's or
Federal savings association'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;
(ii) An ongoing monitoring process that includes verification of
processes and benchmarking; and
(iii) An outcomes analysis process that includes backtesting.
(5) The national bank or Federal savings association must have an
internal audit function independent of business-line management that at
least annually assesses the effectiveness of the controls supporting the
national bank's or Federal savings association's advanced systems and
reports its findings to the national bank's or Federal savings
association's board of directors (or a committee thereof).
(6) The national bank or Federal savings association 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).
(j) Documentation. The national bank or Federal savings association
must adequately document all material aspects of its advanced systems.
Sec. 3.123 Ongoing qualification.
(a) Changes to advanced systems. A national bank or Federal savings
association must meet all the qualification requirements in Sec. 3.122
on an ongoing basis. A national bank or Federal savings association must
notify the OCC when the national bank or Federal savings association
makes any change to an advanced system that would result in a material
change in the national bank's or Federal savings association's advanced
approaches total risk-weighted asset amount for an exposure type or when
the national bank or Federal
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savings association makes any significant change to its modeling
assumptions.
(b) Failure to comply with qualification requirements. (1) If the
OCC determines that a national bank or Federal savings association that
uses this subpart and that has conducted a satisfactory parallel run
fails to comply with the qualification requirements in Sec. 3.122, the
OCC will notify the national bank or Federal savings association in
writing of the national bank's or Federal savings association's failure
to comply.
(2) The national bank or Federal savings association 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 national bank's or
Federal savings association's advanced approaches total risk-weighted
assets are not commensurate with the national bank's or Federal savings
association's credit, market, operational, or other risks, the OCC may
require such a national bank or Federal savings association to calculate
its advanced approaches total risk-weighted assets with any
modifications provided by the OCC.
Sec. 3.124 Merger and acquisition transitional arrangements.
(a) Mergers and acquisitions of companies without advanced systems.
If a national bank or Federal savings association merges with or
acquires a company that does not calculate its risk-based capital
requirements using advanced systems, the national bank or Federal
savings association may use subpart D of this part to determine the
risk-weighted asset amounts for 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 national bank or Federal
savings association must submit to the OCC an implementation plan for
using its advanced systems for the acquired company. During the period
in which subpart D of this part applies 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 national bank's or
Federal savings association'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 national bank's or
Federal savings association's eligible credit reserves. In addition, the
risk-weighted assets of the merged or acquired company are not included
in the national bank's or Federal savings association's credit-risk-
weighted assets but are included in total risk-weighted assets. If a
national bank or Federal savings association relies on this paragraph
(a), the national bank or Federal savings association must disclose
publicly the amounts of risk-weighted assets and qualifying capital
calculated under this subpart for the acquiring national bank or Federal
savings association and under subpart D of this part for the acquired
company.
(b) Mergers and acquisitions of companies with advanced systems. (1)
If a national bank or Federal savings association merges with or
acquires a company that calculates its risk-based capital requirements
using advanced systems, the national bank or Federal savings association
may use the acquired company's advanced systems to determine total risk-
weighted assets for 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 national bank or Federal savings association must
submit to the OCC an implementation plan for using its advanced systems
for the merged or acquired company.
(2) If the acquiring national bank or Federal savings association is
not subject to the advanced approaches in this subpart at the time of
acquisition or merger, during the period when subpart D of this part
applies to the acquiring national bank or Federal savings association,
the ALLL associated with the
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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 national bank's or Federal savings association's tier 2
capital up to 0.6 percent of the credit-risk-weighted assets associated
with those exposures.
Secs. 3.125-3.130 [Reserved]
Risk-Weighted Assets for General Credit Risk
Sec. 3.131 Mechanics for calculating total wholesale and retail
risk-weighted assets.
(a) Overview. A national bank or Federal savings association 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 national bank or Federal savings
association must determine which of its exposures are wholesale
exposures, retail exposures, securitization exposures, or equity
exposures. The national bank or Federal savings association must
categorize each retail exposure as a residential mortgage exposure, a
QRE, or an other retail exposure. The national bank or Federal savings
association must identify which wholesale exposures are HVCRE exposures,
sovereign exposures, OTC derivative contracts, repo-style transactions,
eligible margin loans, eligible purchased wholesale exposures, cleared
transactions, default fund contributions, unsettled transactions to
which Sec. 3.136 applies, and eligible guarantees or eligible credit
derivatives that are used as credit risk mitigants. The national bank or
Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings association must identify
which of its wholesale obligors are in default.
(2) Segmentation of retail exposures. (i) The national bank or
Federal savings association must group the retail exposures in each
retail subcategory into segments that have homogeneous risk
characteristics.
(ii) The national bank or Federal savings association must identify
which of its retail exposures are in default. The national bank or
Federal savings association must segment defaulted retail exposures
separately from non-defaulted retail exposures.
(iii) If the national bank or Federal savings association determines
the EAD for eligible margin loans using the approach in Sec. 3.132(b),
the national bank or Federal savings association must identify which of
its retail exposures are eligible margin loans for which the national
bank or Federal savings association uses this EAD approach and must
segment such eligible margin loans separately from other retail
exposures.
(3) Eligible purchased wholesale exposures. A national bank or
Federal savings association may group its eligible purchased wholesale
exposures into segments that have homogeneous risk characteristics. A
national bank or Federal savings association must use the wholesale
exposure formula in Table 1 of 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
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this paragraph (d), the national bank or Federal savings association
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 national bank or Federal savings
association 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 may not be less than 10 percent, except for segments
of residential mortgage exposures for which all or substantially all of
the principal of each exposure is either:
(i) Directly and unconditionally guaranteed by the full faith and
credit of a sovereign entity; or
(ii) Guaranteed by a contingent obligation of the U.S. government or
its agencies, the enforceability of which is dependent upon some
affirmative action on the part of the beneficiary of the guarantee or a
third party (for example, meeting servicing requirements).
(4) Eligible purchased wholesale exposures. A national bank or
Federal savings association must assign a PD, LGD, EAD, and M to each
segment of eligible purchased wholesale exposures. If the national bank
or Federal savings association can estimate ECL (but not PD or LGD) for
a segment of eligible purchased wholesale exposures, the national bank
or Federal savings association 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 national bank or Federal savings association 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 Sec. 3.134 or, if applicable, applying double default
treatment to the exposure as provided in Sec. 3.135. A national bank or
Federal savings association may decide separately for each wholesale
exposure that qualifies for the double default treatment under
Sec. 3.135 whether to apply the double default treatment or to use the
PD substitution or LGD adjustment treatment without recognizing double
default effects.
(ii) A national bank or Federal savings association 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
national bank or Federal savings association 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. A national bank or Federal savings association
must calculate its EAD for an OTC derivative contract as provided in
Sec. 3.132 (c) and (d). A national bank or Federal savings association
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 national bank's or Federal savings association's VaR-based
measure under subpart F of this part through an adjustment to EAD as
provided in Sec. 3.132(b) and (d). A
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national bank or Federal savings association that takes collateral into
account through such an adjustment to EAD under Sec. 3.132 may not
reflect such collateral in LGD.
(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 is a trade related letter of credit,
or if the exposure has an original maturity of less than one year and is
not part of a national bank's or Federal savings association's ongoing
financing of the obligor. An exposure is not part of a national bank's
or Federal savings association's ongoing financing of the obligor if the
national bank or Federal savings association:
(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.
(8) EAD for exposures to certain central counterparties. A national
bank or Federal savings association may attribute an EAD of zero to
exposures that arise from the settlement of cash transactions (such as
equities, fixed income, spot foreign exchange, and spot commodities)
with a central counterparty where there is no assumption of ongoing
counterparty credit risk by the central counterparty after settlement of
the trade and associated default fund contributions.
(e) Phase 4--Calculation of risk-weighted assets--(1) Non-defaulted
exposures. (i) A national bank or Federal savings association must
calculate the dollar risk-based capital requirement for each of its
wholesale exposures to a non-defaulted obligor (except for eligible
guarantees and eligible credit derivatives that hedge another wholesale
exposure, IMM exposures, cleared transactions, default fund
contributions, unsettled transactions, and exposures to which the
national bank or Federal savings association applies the double default
treatment in Sec. 3.135) 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 1 and multiplying the output of the formula
(K) by the EAD of the exposure or segment. Alternatively, a national
bank or Federal savings association may apply a 300 percent risk weight
to the EAD of an eligible margin loan if the national bank or Federal
savings association is not able to meet the OCC's requirements for
estimation of PD and LGD for the margin loan.
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[GRAPHIC] [TIFF OMITTED] TR11OC13.029
(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 Sec. 3.135(e) 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 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) Not covered by an eligible U.S.
government guarantee: The dollar risk-based capital requirement for each
wholesale exposure not covered by an eligible guarantee from the U.S.
government to a defaulted obligor and each segment of defaulted retail
exposures not covered by an eligible guarantee from the U.S. government
equals 0.08 multiplied by the EAD of the exposure or segment.
(ii) Covered by an eligible U.S. government guarantee: The dollar
risk-based capital requirement for each wholesale exposure to a
defaulted obligor covered by an eligible guarantee from the U.S.
government and each segment of defaulted retail exposures covered by an
eligible guarantee from the U.S. government equals the sum of:
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(A) The sum of the EAD of the portion of each wholesale exposure to
a defaulted obligor covered by an eligible guarantee from the U.S.
government plus the EAD of the portion of each segment of defaulted
retail exposures that is covered by an eligible guarantee from the U.S.
government and the resulting sum is multiplied by 0.016, and
(B) The sum of the EAD of the portion of each wholesale exposure to
a defaulted obligor not covered by an eligible guarantee from the U.S.
government plus the EAD of the portion of each segment of defaulted
retail exposures that is not covered by an eligible guarantee from the
U.S. government and the resulting sum is multiplied by 0.08.
(iii) The sum of all the dollar risk-based capital requirements for
each wholesale exposure to a defaulted obligor and each segment of
defaulted retail exposures calculated in paragraph (e)(2)(i) of this
section plus the dollar risk-based capital requirements each wholesale
exposure to a defaulted obligor and for each segment of defaulted retail
exposures 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
national bank or Federal savings association may assign a risk-weighted
asset amount of zero to cash owned and held in all offices of the
national bank or Federal savings association or in transit and for gold
bullion held in the national bank's or Federal savings association's own
vaults, or held in another national bank's or Federal savings
association's vaults on an allocated basis, to the extent the gold
bullion assets are offset by gold bullion liabilities.
(ii) A national bank or Federal savings association must assign a
risk-weighted asset amount equal to 20 percent of the carrying value of
cash items in the process of collection.
(iii) A national bank or Federal savings association must assign a
risk-weighted asset amount equal to 50 percent of the carrying value to
a pre-sold construction loan unless the purchase contract is cancelled,
in which case a national bank or Federal savings association must assign
a risk-weighted asset amount equal to a 100 percent of the carrying
value of the pre-sold construction loan.
(iv) The risk-weighted asset amount for the residual value of a
retail lease exposure equals such residual value.
(v) The risk-weighted asset amount for DTAs arising from temporary
differences that the national bank or Federal savings association could
realize through net operating loss carrybacks equals the carrying value,
netted in accordance with Sec. 3.22.
(vi) The risk-weighted asset amount for MSAs, DTAs arising from
temporary timing differences that the national bank or Federal savings
association could not realize through net operating loss carrybacks, and
significant investments in the capital of unconsolidated financial
institutions in the form of common stock that are not deducted pursuant
to Sec. 3.22(a)(7) equals the amount not subject to deduction multiplied
by 250 percent.
(vii) The risk-weighted asset amount for any other on-balance-sheet
asset that does not meet the definition of a wholesale, retail,
securitization, IMM, or equity exposure, cleared transaction, or default
fund contribution and is not subject to deduction under Sec. 3.22(a),
(c), or (d) 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 national bank or
Federal savings association has demonstrated to the OCC's satisfaction
that the portfolio (when combined with all other portfolios of exposures
that the national bank or Federal savings association seeks to treat
under this paragraph (e)) is not material to the national bank or
Federal savings association 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
[[Page 122]]
derivative contract that is not a credit derivative is the EAD of the
derivative as calculated in Sec. 3.132.
Sec. 3.132 Counterparty credit risk of repo-style transactions,
eligible margin loans, and OTC derivative contracts.
(a) Methodologies for collateral recognition. (1) Instead of an LGD
estimation methodology, a national bank or Federal savings association
may use the following methodologies 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 national
bank's or Federal savings association's VaR-based measure under subpart
F of this part:
(i) The collateral haircut approach set forth in paragraph (b)(2) of
this section;
(ii) The internal models methodology set forth in paragraph (d) of
this section; and
(iii) For single product netting sets of repo-style transactions and
eligible margin loans, the simple VaR methodology set forth in paragraph
(b)(3) of this section.
(2) A national bank or Federal savings association may use any
combination of the three methodologies for collateral recognition;
however, it must use the same methodology for transactions in the same
category.
(3) A national bank or Federal savings association must use the
methodology in paragraph (c) of this section, or with prior written
approval of the OCC, the internal model methodology in paragraph (d) of
this section, to calculate EAD for an OTC derivative contract or a set
of OTC derivative contracts subject to a qualifying master netting
agreement. To estimate EAD for qualifying cross-product master netting
agreements, a national bank or Federal savings association may only use
the internal models methodology in paragraph (d) of this section.
(4) A national bank or Federal savings association must also use the
methodology in paragraph (e) of this section to calculate the risk-
weighted asset amounts for CVA for OTC derivatives.
(b) EAD for eligible margin loans and repo-style transactions--(1)
General. A national bank or Federal savings association 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 national bank or
Federal savings association may estimate an unsecured LGD for the
exposure, as well as for any repo-style transaction that is included in
the national bank's or Federal savings association's VaR-based measure
under subpart F of this part, 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 national bank
or Federal savings association 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 fair values of all instruments, gold, and cash the national bank
or Federal savings association 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 fair values of all instruments, gold, and cash the national bank
or Federal savings association has borrowed, purchased subject to
resale, or taken as collateral from the counterparty under the
transaction (or netting set));
[[Page 123]]
(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 fair values of the
instrument or gold the national bank or Federal savings association has
lent, sold subject to repurchase, or posted as collateral to the
counterparty minus the sum of the current fair values of that same
instrument or gold the national bank or Federal savings association 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 fair values of any instruments or cash in the currency the
national bank or Federal savings association has lent, sold subject to
repurchase, or posted as collateral to the counterparty minus the sum of
the current fair values of any instruments or cash in the currency the
national bank or Federal savings association 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 national bank or Federal savings association must use the
haircuts for market price volatility (Hs) in Table 1 to
Sec. 3.132, as adjusted in certain circumstances as provided in
paragraphs (b)(2)(ii)(A)(3) and (4) of this section;
Table 1 toSec. 3.132-- Standard Supervisory Market Price Volatility Haircuts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Haircut (in percent) assigned based on:
------------------------------------------------------------------------------ Investment
Sovereign issuers risk weight under Non-sovereign issuers risk weight grade
Residual maturity this section \2\ (in percent) under this section (in percent) securitization
------------------------------------------------------------------------------ exposures (in
Zero 20 or 50 100 20 50 100 percent)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Less than or equal to 1 year.............................. 0.5 1.0 15.0 1.0 2.0 4.0 4.0
Greater than 1 year and less than or equal to 5 years..... 2.0 3.0 15.0 4.0 6.0 8.0 12.0
Greater than 5 years...................................... 4.0 6.0 15.0 8.0 12.0 16.0 24.0
--------------------------------------------------------------------------------------------------------------------------------------------------------
Main index equities (including convertible bonds) and gold.........................15.0..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other publicly traded equities (including convertible bonds).......................25.0..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Mutual funds...................................................Highest haircut applicable to any security in
which the fund can invest. ROW RUL='s'
Cash collateral held...............................................................Zero..........
--------------------------------------------------------------------------------------------------------------------------------------------------------
Other exposure types...............................................................25.0 .........
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ The market price volatility haircuts in Table 1 toSec. 3.132 are based on a 10 business-day holding period.
\2\ Includes a foreign PSE that receives a zero percent risk weight.
(2) For currency mismatches, a national bank or Federal savings
association must use a haircut for foreign exchange rate volatility
(Hfx) of 8 percent, as adjusted in certain circumstances as
provided in paragraphs (b)(2)(ii)(A)(3) and (4) of this section.
(3) For repo-style transactions, a national bank or Federal savings
association 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 national bank or Federal savings association must adjust the
supervisory haircuts upward on the basis of a holding period longer than
ten business days (for eligible margin loans) or
[[Page 124]]
five business days (for repo-style transactions) where the following
conditions apply. If the number of trades in a netting set exceeds 5,000
at any time during a quarter, a national bank or Federal savings
association must adjust the supervisory haircuts upward on the basis of
a holding period of twenty business days for the following quarter
(except when a national bank or Federal savings association is
calculating EAD for a cleared transaction under Sec. 3.133). If a
netting set contains one or more trades involving illiquid collateral or
an OTC derivative that cannot be easily replaced, a national bank or
Federal savings association must adjust the supervisory haircuts upward
on the basis of a holding period of twenty business days. If over the
two previous quarters more than two margin disputes on a netting set
have occurred that lasted more than the holding period, then the
national bank or Federal savings association must adjust the supervisory
haircuts upward for that netting set on the basis of a holding period
that is at least two times the minimum holding period for that netting
set. A national bank or Federal savings association must adjust the
standard supervisory haircuts upward using the following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.030
(i) TM equals a holding period of longer than 10 business
days for eligible margin loans and derivative contracts or longer than 5
business days for repo-style transactions;
(ii) Hs equals the standard supervisory haircut; and
(iii) Ts equals 10 business days for eligible margin
loans and derivative contracts or 5 business days for repo-style
transactions.
(5) If the instrument a national bank or Federal savings association
has lent, sold subject to repurchase, or posted as collateral does not
meet the definition of financial collateral, the national bank or
Federal savings association must use a 25.0 percent haircut for market
price volatility (Hs).
(iii) Own internal estimates for haircuts. With the prior written
approval of the OCC, a national bank or Federal savings association 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
national bank or Federal savings association must satisfy the following
minimum quantitative standards:
(1) A national bank or Federal savings association 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
except for transactions or netting sets for which paragraph
(b)(2)(iii)(A)(3) of this section applies. When a national bank or
Federal savings association 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] TR11OC13.031
[[Page 125]]
(i) TM equals 5 for repo-style transactions and 10 for
eligible margin loans;
(ii) TN equals the holding period used by the national
bank or Federal savings association to derive HN; and
(iii) HN equals the haircut based on the holding period
TN
(3) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a national bank or Federal savings association
must calculate the haircut using a minimum holding period of twenty
business days for the following quarter (except when a national bank or
Federal savings association is calculating EAD for a cleared transaction
under Sec. 3.133). If a netting set contains one or more trades
involving illiquid collateral or an OTC derivative that cannot be easily
replaced, a national bank or Federal savings association must calculate
the haircut using a minimum holding period of twenty business days. If
over the two previous quarters more than two margin disputes on a
netting set have occurred that lasted more than the holding period, then
the national bank or Federal savings association must calculate the
haircut for transactions in that netting set on the basis of a holding
period that is at least two times the minimum holding period for that
netting set.
(4) A national bank or Federal savings association is required to
calculate its own internal estimates with inputs calibrated to
historical data from a continuous 12-month period that reflects a period
of significant financial stress appropriate to the security or category
of securities.
(5) A national bank or Federal savings association must have
policies and procedures that describe how it determines the period of
significant financial stress used to calculate the national bank's or
Federal savings association's own internal estimates for haircuts under
this section and must be able to provide empirical support for the
period used. The national bank or Federal savings association must
obtain the prior approval of the OCC for, and notify the OCC if the
national bank or Federal savings association makes any material changes
to, these policies and procedures.
(6) Nothing in this section prevents the OCC from requiring a
national bank or Federal savings association to use a different period
of significant financial stress in the calculation of own internal
estimates for haircuts.
(7) A national bank or Federal savings association must update its
data sets and calculate 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 are investment grade, a
national bank or Federal savings association may calculate haircuts for
categories of securities. For a category of securities, the national
bank or Federal savings association 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
national bank or Federal savings association has lent, sold subject to
repurchase, posted as collateral, borrowed, purchased subject to resale,
or taken as collateral. In determining relevant categories, the national
bank or Federal savings association must at a minimum take into account:
(1) The type of issuer of the security;
(2) The credit quality 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 are not investment grade
and equity securities, a national bank or Federal savings association
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 national bank or Federal savings association
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 national bank's or Federal savings association's own estimates
of market price and foreign exchange rate volatilities may not take into
account the correlations among securities and
[[Page 126]]
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 national bank or Federal savings association 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 national bank or Federal
savings association 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 fair values of all instruments, gold, and cash the national bank
or Federal savings association 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 fair values of all instruments, gold, and cash the national bank
or Federal savings association 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 national bank's or
Federal savings association'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 except for netting sets for which paragraph
(b)(3)(iv) of this section applies using a minimum one-year historical
observation period of price data representing the instruments that the
national bank or Federal savings association has lent, sold subject to
repurchase, posted as collateral, borrowed, purchased subject to resale,
or taken as collateral. The national bank or Federal savings association
must validate its VaR model by establishing and maintaining a rigorous
and regular backtesting regime.
(iv) If the number of trades in a netting set exceeds 5,000 at any
time during a quarter, a national bank or Federal savings association
must use a twenty-business-day holding period for the following quarter
(except when a national bank or Federal savings association is
calculating EAD for a cleared transaction under Sec. 3.133). If a
netting set contains one or more trades involving illiquid collateral, a
national bank or Federal savings association must use a twenty-business-
day holding period. If over the two previous quarters more than two
margin disputes on a netting set have occurred that lasted more than the
holding period, then the national bank or Federal savings association
must set its PFE for that netting set equal to an estimate over a
holding period that is at least two times the minimum holding period for
that netting set.
(c) EAD for OTC derivative contracts--(1) OTC derivative contracts
not subject to a qualifying master netting agreement. A national bank or
Federal savings association 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) OTC derivative contracts subject to a qualifying master netting
agreement. A national bank or Federal savings association 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) Credit derivatives. Notwithstanding paragraphs (c)(1) and (c)(2)
of this section:
(i) A national bank or Federal savings association that purchases a
credit derivative that is recognized under Sec. 3.134 or Sec. 3.135 as a
credit risk mitigant for an exposure that is not a covered position
under subpart F of this part is not required to calculate a separate
counterparty credit risk capital requirement under this section so long
as the national bank or Federal savings association does so consistently
for all such credit derivatives and either includes or excludes all such
credit derivatives that are subject to a
[[Page 127]]
master netting agreement from any measure used to determine counterparty
credit risk exposure to all relevant counterparties for risk-based
capital purposes.
(ii) A national bank or Federal savings association that is the
protection provider in a credit derivative must treat the credit
derivative as a wholesale exposure to the reference obligor and is not
required to calculate 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 national bank or Federal savings association is
treating the credit derivative as a covered position under subpart F of
this part, in which case the national bank or Federal savings
association must calculate a supplemental counterparty credit risk
capital requirement under this section).
(4) Equity derivatives. A national bank or Federal savings
association must treat an equity derivative contract as an equity
exposure and compute a risk-weighted asset amount for the equity
derivative contract under Secs. 3.151-3.155 (unless the national bank or
Federal savings association is treating the contract as a covered
position under subpart F of this part). In addition, if the national
bank or Federal savings association is treating the contract as a
covered position under subpart F of this part, and under certain other
circumstances described in Sec. 3.155, the national bank or Federal
savings association must also calculate a risk-based capital requirement
for the counterparty credit risk of an equity derivative contract under
this section.
(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 national bank's or Federal savings association'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-fair value
of the derivative contract or zero; and
(ii) PFE. The PFE for a single OTC derivative contract, including an
OTC derivative contract with a negative mark-to-fair value, is
calculated by multiplying the notional principal amount of the
derivative contract by the appropriate conversion factor in Table 2 to
Sec. 3.132. For purposes of calculating either the PFE under paragraph
(c)(5) of this section 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, the
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 2 to
Sec. 3.132, the PFE must be calculated using the ``other'' conversion
factors. A national bank or Federal savings association 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 2 toSec. 3.132--Conversion Factor Matrix for OTC Derivative Contracts \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Credit Credit (non-
Foreign (investment- investment- Precious
Remaining maturity \2\ Interest exchange grade grade Equity metals Other
rate rate and reference reference (except
gold asset) \3\ asset) 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
[[Page 128]]
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 fair 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 national bank or Federal savings association must use the column labeled ``Credit (investment-grade reference asset)'' for a credit derivative
whose reference asset is an outstanding unsecured long-term debt security without credit enhancement that is investment grade. A national bank or
Federal savings association must use the column labeled ``Credit (non-investment-grade reference asset)'' 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 fair values of the
individual OTC derivative contracts subject to the qualifying master
netting agreement; or
(B) Zero; and
(ii) Adjusted sum of the PFE. The adjusted sum of the PFE,
Anet, is calculated as
Anet = (0.4 x Agross) + (0.6 x NGR x
Agross),
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 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)(6)(i) of this section) of all individual derivative contracts
subject to the qualifying master netting agreement.
(7) Collateralized OTC derivative contracts. A national bank or
Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings association must
substitute the EAD calculated under paragraph (c)(5) or (c)(6) of this
section for [sum]E in the equation in paragraph (b)(2)(i) of this
section and must use a ten-business day minimum holding period
(TM = 10) unless a longer holding period is required by
paragraph (b)(2)(iii)(A)(3) of this section.
(8) Clearing member national bank's or Federal savings association's
EAD. A clearing member national bank's or Federal savings association's
EAD for an OTC derivative contract or netting set of OTC derivative
contracts where the national bank or Federal savings association is
either acting as a financial intermediary and enters into an
[[Page 129]]
offsetting transaction with a QCCP or where the national bank or Federal
savings association provides a guarantee to the QCCP on the performance
of the client equals the exposure amount calculated according to
paragraph (c)(5) or (6) of this section multiplied by the scaling factor
0.71. If the national bank or Federal savings association determines
that a longer period is appropriate, it must use a larger scaling factor
to adjust for a longer holding period as follows:
[GRAPHIC] [TIFF OMITTED] TR11OC13.032
where
H = the holding period greater than five days. Additionally, the OCC may
require the national bank or Federal savings association to
set a longer holding period if the OCC determines that a
longer period is appropriate due to the nature, structure, or
characteristics of the transaction or is commensurate with the
risks associated with the transaction.
(d) Internal models methodology. (1)(i) With prior written approval
from the OCC, a national bank or Federal savings association may use the
internal models methodology in this paragraph (d) to determine EAD for
counterparty credit risk for 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.
(ii) A national bank or Federal savings association that uses the
internal models methodology for a particular transaction type
(derivative contracts, eligible margin loans, or repo-style
transactions) must use the internal models methodology for all
transactions of that transaction type. A national bank or Federal
savings association may choose to use the internal models methodology
for one or two of these three types of exposures and not the other
types.
(iii) A national bank or Federal savings association may also use
the internal models methodology for derivative contracts, eligible
margin loans, and repo-style transactions subject to a qualifying cross-
product netting agreement if:
(A) The national bank or Federal savings association effectively
integrates the risk mitigating effects of cross-product netting into its
risk management and other information technology systems; and
(B) The national bank or Federal savings association obtains the
prior written approval of the OCC.
(iv) A national bank or Federal savings association 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) Risk-weighted assets using IMM. Under the IMM, a national bank
or Federal savings association uses an internal model to estimate the
expected exposure (EE) for a netting set and then calculates EAD based
on that EE. A national bank or Federal savings association must
calculate two EEs and two EADs (one stressed and one unstressed) for
each netting set as follows:
(i) EADunstressed is calculated using an EE estimate
based on the most recent data meeting the requirements of paragraph
(d)(3)(vii) of this section;
(ii) EADstressed is calculated using an EE estimate based
on a historical period that includes a period of stress to the credit
default spreads of the national bank's or Federal savings association's
counterparties according to paragraph (d)(3)(viii) of this section;
(iii) The national bank or Federal savings association must use its
internal model's probability distribution for changes in the fair value
of a netting set that are attributable to changes in market variables to
determine EE; and
[[Page 130]]
(iv) Under the internal models methodology, EAD = Max (0, [alpha] x
effective EPE - CVA), or, subject to the prior written approval of OCC
as provided in paragraph (d)(10) of this section, a more conservative
measure of EAD.
(A) CVA equals the credit valuation adjustment that the national
bank or Federal savings association has recognized in its balance sheet
valuation of any OTC derivative contracts in the netting set. For
purposes of this paragraph (d), CVA does not include any adjustments to
common equity tier 1 capital attributable to changes in the fair value
of the national bank's or Federal savings association's liabilities that
are due to changes in its own credit risk since the inception of the
transaction with the counterparty.
[GRAPHIC] [TIFF OMITTED] TR11OC13.033
(C) [alpha] = 1.4 except as provided in paragraph (d)(5) of this
section, or when the OCC has determined that the national bank or
Federal savings association must set [alpha] higher based on the
national bank's or Federal savings association's specific
characteristics of counterparty credit risk or model performance.
(v) A national bank or Federal savings association may include
financial collateral currently posted by the counterparty as collateral
(but may not include other forms of collateral) when calculating EE.
(vi) If a national bank or Federal savings association hedges some
or all of the counterparty credit risk associated with a netting set
using an eligible credit derivative, the national bank or Federal
savings association may take the reduction in exposure to the
counterparty into account when estimating EE. If the national bank or
Federal savings association 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 national bank's or Federal savings
association's exposure to the protection provider of the credit
derivative.
(3) Prior approval relating to EAD calculation. To obtain OCC
approval to calculate the distributions of exposures upon which the EAD
calculation is based, the national bank or Federal savings association
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 national bank or Federal savings
association 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);
[[Page 131]]
(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 national bank or Federal savings association 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;
(v) The national bank or Federal savings association must be able to
measure and manage current exposures gross and net of collateral held,
where appropriate. The national bank or Federal savings association must
estimate expected exposures for OTC derivative contracts both with and
without the effect of collateral agreements;
(vi) The national bank or Federal savings association must have
procedures to identify, monitor, and control wrong-way risk throughout
the life of an exposure. The procedures must include stress testing and
scenario analysis;
(vii) The model must use current market data to compute current
exposures. The national bank or Federal savings association must
estimate model parameters using historical data from the most recent
three-year period and update the data quarterly or more frequently if
market conditions warrant. The national bank or Federal savings
association should consider using model parameters based on forward-
looking measures, where appropriate;
(viii) When estimating model parameters based on a stress period,
the national bank or Federal savings association must use at least three
years of historical data that include a period of stress to the credit
default spreads of the national bank's or Federal savings association's
counterparties. The national bank or Federal savings association must
review the data set and update the data as necessary, particularly for
any material changes in its counterparties. The national bank or Federal
savings association must demonstrate, at least quarterly, and maintain
documentation of such demonstration, that the stress period coincides
with increased CDS or other credit spreads of the national bank's or
Federal savings association's counterparties. The national bank or
Federal savings association must have procedures to evaluate the
effectiveness of its stress calibration that include a process for using
benchmark portfolios that are vulnerable to the same risk factors as the
national bank's or Federal savings association's portfolio. The OCC may
require the national bank or Federal savings association to modify its
stress calibration to better reflect actual historic losses of the
portfolio;
(ix) A national bank or Federal savings association 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. As part of the model review
process, the national bank or Federal savings association must have a
backtesting program for its model that includes a process by which
unacceptable model performance will be determined and remedied;
(x) A national bank or Federal savings association must have
policies for the measurement, management and control of collateral and
margin amounts; and
(xi) A national bank or Federal savings association must have a
comprehensive stress testing program that captures all credit exposures
to counterparties, and incorporates stress testing of principal market
risk factors and creditworthiness of counterparties.
(4) Calculating the maturity of exposures. (i) If the remaining
maturity of the exposure or the longest-dated contract in the netting
set is greater than one year, the national bank or Federal savings
association must set M for the exposure or netting set equal to the
lower of five years or M(EPE), where:
[[Page 132]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.034
(ii) If the remaining maturity of the exposure or the longest-dated
contract in the netting set is one year or less, the national bank or
Federal savings association must set M for the exposure or netting set
equal to one year, except as provided in Sec. 3.131(d)(7).
(iii) Alternatively, a national bank or Federal savings association
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)(i) of this
section.
(5) Effects of collateral agreements on EAD. A national bank or
Federal savings association 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. Two methods are available to
capture the effect of a collateral agreement, as set forth in paragraphs
(d)(5)(i) and (ii) of this section:
(i) With prior written approval from the OCC, a national bank or
Federal savings association may include the effect of a collateral
agreement within its internal model used to calculate EAD. The national
bank or Federal savings association 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 set according to
paragraph (d)(5)(iii) of this section; or
(ii) As an alternative to paragraph (d)(5)(i) of this section, a
national bank or Federal savings association 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) An add-on that reflects the potential increase in exposure of
the netting set over the margin period of risk, plus the larger of:
(1) The current exposure of the netting set reflecting all
collateral held or posted by the national bank or Federal savings
association excluding any collateral called or in dispute; or
(2) The largest net exposure including all collateral held or posted
under the margin agreement that would not trigger a collateral call. For
purposes of this section, the add-on is computed as the expected
increase in the netting set's exposure over the margin period of risk
(set in accordance with paragraph (d)(5)(iii) of this section); or
(B) Effective EPE without a collateral agreement plus any collateral
the
[[Page 133]]
national bank or Federal savings association posts to the counterparty
that exceeds the required margin amount.
(iii) For purposes of this part, including paragraphs (d)(5)(i) and
(ii) of this section, the margin period of risk for a netting set
subject to a collateral agreement is:
(A) Five business days for repo-style transactions subject to daily
remargining and daily marking-to-market, and ten business days for other
transactions when liquid financial collateral is posted under a daily
margin maintenance requirement, or
(B) Twenty business days if the number of trades in a netting set
exceeds 5,000 at any time during the previous quarter or contains one or
more trades involving illiquid collateral or any derivative contract
that cannot be easily replaced (except if the national bank or Federal
savings association is calculating EAD for a cleared transaction under
Sec. 3.133). If over the two previous quarters more than two margin
disputes on a netting set have occurred that lasted more than the margin
period of risk, then the national bank or Federal savings association
must use a margin period of risk for that netting set that is at least
two times the minimum margin period of risk for that netting set. If the
periodicity of the receipt of collateral is N-days, the minimum margin
period of risk is the minimum margin period of risk under this paragraph
(d) plus N minus 1. This period should be extended to cover any
impediments to prompt re-hedging of any market risk.
(C) Five business days for an OTC derivative contract or netting set
of OTC derivative contracts where the national bank or Federal savings
association is either acting as a financial intermediary and enters into
an offsetting transaction with a CCP or where the national bank or
Federal savings association provides a guarantee to the CCP on the
performance of the client. A national bank or Federal savings
association must use a longer holding period if the national bank or
Federal savings association determines that a longer period is
appropriate. Additionally, the OCC may require the national bank or
Federal savings association to set a longer holding period if the OCC
determines that a longer period is appropriate due to the nature,
structure, or characteristics of the transaction or is commensurate with
the risks associated with the transaction.
(6) Own estimate of alpha. With prior written approval of the OCC, a
national bank or Federal savings association 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 national bank or
Federal savings association must meet the following minimum standards to
the satisfaction of the OCC:
(i) The national bank's or Federal savings association's own
estimate of alpha must capture in the numerator the effects of:
(A) The material sources of stochastic dependency of distributions
of fair 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 national bank or Federal savings association must assess
the potential model uncertainty in its estimates of alpha.
(iii) The national bank or Federal savings association must
calculate the numerator and denominator of alpha in a consistent fashion
with respect to modeling methodology, parameter specifications, and
portfolio composition.
(iv) The national bank or Federal savings association must review
and
[[Page 134]]
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) Risk-based capital requirements for transactions with specific
wrong-way risk. A national bank or Federal savings association must
determine if a repo-style transaction, eligible margin loan, bond
option, or equity derivative contract or purchased credit derivative to
which the national bank or Federal savings association applies the
internal models methodology under this paragraph (d) has specific wrong-
way risk. If a transaction has specific wrong-way risk, the national
bank or Federal savings association must treat the transaction as its
own netting set and exclude it from the model described in
Sec. 3.132(d)(2) and instead calculate the risk-based capital
requirement for the transaction as follows:
(i) For an equity derivative contract, by multiplying:
(A) K, calculated using the appropriate risk-based capital formula
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and
LGD equal to 100 percent, by
(B) The maximum amount the national bank or Federal savings
association could lose on the equity derivative.
(ii) For a purchased credit derivative by multiplying:
(A) K, calculated using the appropriate risk-based capital formula
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and
LGD equal to 100 percent, by
(B) The fair value of the reference asset of the credit derivative.
(iii) For a bond option, by multiplying:
(A) K, calculated using the appropriate risk-based capital formula
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and
LGD equal to 100 percent, by
(B) The smaller of the notional amount of the underlying reference
asset and the maximum potential loss under the bond option contract.
(iv) For a repo-style transaction or eligible margin loan by
multiplying:
(A) K, calculated using the appropriate risk-based capital formula
specified in Table 1 of Sec. 3.131 using the PD of the counterparty and
LGD equal to 100 percent, by
(B) The EAD of the transaction determined according to the EAD
equation in Sec. 3.131(b)(2), substituting the estimated value of the
collateral assuming a default of the counterparty for the value of the
collateral in [Sigma]c of the equation.
(8) Risk-weighted asset amount for IMM exposures with specific
wrong-way risk. The aggregate risk-weighted asset amount for IMM
exposures with specific wrong-way risk is the sum of a national bank's
or Federal savings association's risk-based capital requirement for
purchased credit derivatives that are not bond options with specific
wrong-way risk as calculated under paragraph (d)(7)(ii) of this section,
a national bank's or Federal savings association's risk-based capital
requirement for equity derivatives with specific wrong-way risk as
calculated under paragraph (d)(7)(i) of this section, a national bank's
or Federal savings association's risk-based capital requirement for bond
options with specific wrong-way risk as calculated under paragraph
(d)(7)(iii) of this section, and a national bank's or Federal savings
association's risk-based capital requirement for repo-style transactions
and eligible margin loans with specific wrong-way risk as calculated
under paragraph (d)(7)(iv) of this section, multiplied by 12.5.
(9) Risk-weighted assets for IMM exposures. (i) The national bank or
Federal savings association must insert the assigned risk parameters for
each counterparty and netting set into the appropriate formula specified
in Table 1 of Sec. 3.131 and multiply the output of the formula by the
EADunstressed of the netting set to obtain the unstressed
capital requirement for each netting set. A national bank or Federal
savings association that uses an advanced CVA approach that captures
migrations in credit spreads under paragraph (e)(3) of this section must
set the maturity adjustment (b) in the formula equal to zero. The sum of
the unstressed capital requirement calculated for each netting set
equals Kunstressed.
[[Page 135]]
(ii) The national bank or Federal savings association must insert
the assigned risk parameters for each wholesale obligor and netting set
into the appropriate formula specified in Table 1 of Sec. 3.131 and
multiply the output of the formula by the EADstressed of the
netting set to obtain the stressed capital requirement for each netting
set. A national bank or Federal savings association that uses an
advanced CVA approach that captures migrations in credit spreads under
paragraph (e)(3) of this section must set the maturity adjustment (b) in
the formula equal to zero. The sum of the stressed capital requirement
calculated for each netting set equals Kstressed.
(iii) The national bank's or Federal savings association's dollar
risk-based capital requirement under the internal models methodology
equals the larger of Kunstressed and Kstressed. A
national bank's or Federal savings association's risk-weighted assets
amount for IMM exposures is equal to the capital requirement multiplied
by 12.5, plus risk-weighted assets for IMM exposures with specific
wrong-way risk in paragraph (d)(8) of this section and those in
paragraph (d)(10) of this section.
(10) Other measures of counterparty exposure. (i) With prior written
approval of the OCC, a national bank or Federal savings association 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)(7)(iv)(C) of this section) times the
larger of EPEunstressed and EPEstressed for every
counterparty whose EAD will be measured under the alternative measure of
counterparty exposure. The national bank or Federal savings association
must demonstrate the conservatism of the measure of counterparty credit
risk exposure used for EAD. With respect to paragraph (d)(10)(i) of this
section:
(A) For material portfolios of new OTC derivative products, the
national bank or Federal savings association may assume that the current
exposure methodology in paragraphs (c)(5) and (c)(6) of this section
meets the conservatism requirement of this section for a period not to
exceed 180 days.
(B) For immaterial portfolios of OTC derivative contracts, the
national bank or Federal savings association generally may assume that
the current exposure methodology in paragraphs (c)(5) and (c)(6) of this
section meets the conservatism requirement of this section.
(ii) To calculate risk-weighted assets for purposes of the approach
in paragraph (d)(10)(i) of this section, the national bank or Federal
savings association must insert the assigned risk parameters for each
counterparty and netting set into the appropriate formula specified in
Table 1 of Sec. 3.131, multiply the output of the formula by the EAD for
the exposure as specified above, and multiply by 12.5.
(e) Credit valuation adjustment (CVA) risk-weighted assets--(1) In
general. With respect to its OTC derivative contracts, a national bank
or Federal savings association must calculate a CVA risk-weighted asset
amount for its portfolio of OTC derivative transactions that are subject
to the CVA capital requirement using the simple CVA approach described
in paragraph (e)(5) of this section or, with prior written approval of
the OCC, the advanced CVA approach described in paragraph (e)(6) of this
section. A national bank or Federal savings association that receives
prior OCC approval to calculate its CVA risk-weighted asset amounts for
a class of counterparties using the advanced CVA approach must continue
to use that approach for that class of counterparties until it notifies
the OCC in writing that the national bank or Federal savings association
expects to begin calculating its CVA risk-weighted asset amount using
the simple CVA approach. Such notice must include an explanation of the
national bank's or Federal savings association's rationale and the date
upon which the national bank or Federal savings association will begin
to calculate its CVA risk-weighted asset amount using the simple CVA
approach.
(2) Market risk national banks or Federal savings associations.
Notwithstanding the prior approval requirement in paragraph (e)(1) of
this section, a market risk national bank or Federal savings association
may calculate its CVA risk-weighted asset amount using
[[Page 136]]
the advanced CVA approach if the national bank or Federal savings
association has OCC approval to:
(i) Determine EAD for OTC derivative contracts using the internal
models methodology described in paragraph (d) of this section; and
(ii) Determine its specific risk add-on for debt positions issued by
the counterparty using a specific risk model described in Sec. 3.207(b).
(3) Recognition of hedges. (i) A national bank or Federal savings
association may recognize a single name CDS, single name contingent CDS,
any other equivalent hedging instrument that references the counterparty
directly, and index credit default swaps (CDSind) as a CVA
hedge under paragraph (e)(5)(ii) of this section or paragraph (e)(6) of
this section, provided that the position is managed as a CVA hedge in
accordance with the national bank's or Federal savings association's
hedging policies.
(ii) A national bank or Federal savings association shall not
recognize as a CVA hedge any tranched or nth-to-default
credit derivative.
(4) Total CVA risk-weighted assets. Total CVA risk-weighted assets
is the CVA capital requirement, KCVA, calculated for a
national bank's or Federal savings association's entire portfolio of OTC
derivative counterparties that are subject to the CVA capital
requirement, multiplied by 12.5.
(5) Simple CVA approach. (i) Under the simple CVA approach, the CVA
capital requirement, KCVA, is calculated according to the
following formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.035
(A) wi = the weight applicable to counterparty i under Table 3 to
Sec. 3.132;
(B) Mi = the EAD-weighted average of the effective maturity of each
netting set with counterparty i (where each netting set's effective
maturity can be no less than one year.)
(C) EADitotal = the sum of the EAD for all netting sets of OTC
derivative contracts with counterparty i calculated using the current
exposure methodology described in paragraph (c) of this section or the
internal models methodology described in paragraph (d) of this section.
When the national bank or Federal savings association calculates EAD
under paragraph (c) of this section, such EAD may be adjusted for
purposes of calculating EADitotal by multiplying EAD by (1-exp(-0.05 x
Mi))/(0.05 x Mi), where ``exp'' is the exponential function. When the
national bank or Federal savings association calculates EAD under
paragraph (d) of this section, EADitotal equals EADunstressed.
(D) Mihedge = the notional weighted average maturity of the hedge
instrument.
(E) Bi = the sum of the notional amounts of any purchased single
name CDS referencing counterparty i that is used to hedge CVA risk to
counterparty i multiplied by (1-exp(-0.05 x Mihedge))/(0.05 x Mihedge).
(F) Mind = the maturity of the CDSind or the
notional weighted average maturity of any CDSind purchased to
hedge CVA risk of counterparty i.
(G) Bind = the notional amount of one or more CDSind
purchased to hedge CVA risk for counterparty i multiplied by (1-exp(-
0.05 x Mind))/(0.05 x Mind)
(H) wind = the weight applicable to the CDSind based on
the average weight of the underlying reference names that comprise the
index under Table 3 to Sec. 3.132.
(ii) The national bank or Federal savings association may treat the
notional amount of the index attributable to a
[[Page 137]]
counterparty as a single name hedge of counterparty i (Bi,) when
calculating KCVA, and subtract the notional amount of Bi from
the notional amount of the CDSind. A national bank or Federal
savings association must treat the CDSind hedge with the
notional amount reduced by Bi as a CVA hedge.
Table 3 toSec. 3.132--Assignment of Counterparty Weight
------------------------------------------------------------------------
Weight wi (in
Internal PD (in percent) percent)
------------------------------------------------------------------------
0.00-0.07............................................... 0.70
0.070-0.15................................... 0.80
0.15-0.40.................................... 1.00
0.40-2.00.................................... 2.00
2.00-6.00.................................... 3.00
6.00......................................... 10.00
------------------------------------------------------------------------
(6) Advanced CVA approach. (i) A national bank or Federal savings
association may use the VaR model that it uses to determine specific
risk under Sec. 3.207(b) or another VaR model that meets the
quantitative requirements of Sec. 3.205(b) and Sec. 3.207(b)(1) to
calculate its CVA capital requirement for a counterparty by modeling the
impact of changes in the counterparties' credit spreads, together with
any recognized CVA hedges, on the CVA for the counterparties, subject to
the following requirements:
(A) The VaR model must incorporate only changes in the
counterparties' credit spreads, not changes in other risk factors. The
VaR model does not need to capture jump-to-default risk;
(B) A national bank or Federal savings association that qualifies to
use the advanced CVA approach must include in that approach any
immaterial OTC derivative portfolios for which it uses the current
exposure methodology in paragraph (c) of this section according to
paragraph (e)(6)(viii) of this section; and
(C) A national bank or Federal savings association must have the
systems capability to calculate the CVA capital requirement for a
counterparty on a daily basis (but is not required to calculate the CVA
capital requirement on a daily basis).
(ii) Under the advanced CVA approach, the CVA capital requirement,
KCVA, is calculated according to the following formulas:
[GRAPHIC] [TIFF OMITTED] TR11OC13.037
Where
(A) ti = the time of the i-th revaluation time bucket starting from
t0 = 0.
(B) tT = the longest contractual maturity across the OTC derivative
contracts with the counterparty.
(C) si = the CDS spread for the counterparty at tenor ti used to
calculate the CVA for the counterparty. If a CDS spread is not
available, the national bank or Federal savings association must use a
proxy spread based on the credit quality, industry and region of the
counterparty.
(D) LGDMKT = the loss given default of the counterparty based on the
spread of a publicly traded debt instrument of the counterparty, or,
where a publicly
[[Page 138]]
traded debt instrument spread is not available, a proxy spread based on
the credit quality, industry, and region of the counterparty. Where no
market information and no reliable proxy based on the credit quality,
industry, and region of the counterparty are available to determine
LGDMKT, a national bank or Federal savings association may
use a conservative estimate when determining LGDMKT, subject
to approval by the OCC.
(E) EEi = the sum of the expected exposures for all netting sets
with the counterparty at revaluation time ti, calculated according to
paragraphs (e)(6)(iv)(A) and (e)(6)(v)(A) of this section.
(F) Di = the risk-free discount factor at time ti, where D0 = 1.
(G) Exp is the exponential function.
(H) The subscript j refers either to a stressed or an unstressed
calibration as described in paragraphs (e)(6)(iv) and (v) of this
section.
(iii) Notwithstanding paragraphs (e)(6)(i) and (e)(6)(ii) of this
section, a national bank or Federal savings association must use the
formulas in paragraphs (e)(6)(iii)(A) or (e)(6)(iii)(B) of this section
to calculate credit spread sensitivities if its VaR model is not based
on full repricing.
(A) If the VaR model is based on credit spread sensitivities for
specific tenors, the national bank or Federal savings association must
calculate each credit spread sensitivity according to the following
formula:
[GRAPHIC] [TIFF OMITTED] TR11OC13.039
(iv) To calculate the CVAUnstressed measure for purposes
of paragraph (e)(6)(ii) of this section, the national bank or Federal
savings association must:
(A) Use the EEi calculated using the calibration of
paragraph (d)(3)(vii) of this section, except as provided in
Sec. 3.132(e)(6)(vi), and
(B) Use the historical observation period required under
Sec. 3.205(b)(2).
(v) To calculate the CVAStressed measure for purposes of
paragraph (e)(6)(ii) of this section, the national bank or Federal
savings association must:
(A) Use the EEi calculated using the stress calibration
in paragraph (d)(3)(viii) of this section except as provided in
paragraph (e)(6)(vi) of this section.
(B) Calibrate VaR model inputs to historical data from the most
severe twelve-month stress period contained within the three-year stress
period
[[Page 139]]
used to calculate EEi. The OCC may require a national bank or
Federal savings association to use a different period of significant
financial stress in the calculation of the CVAStressed
measure.
(vi) If a national bank or Federal savings association captures the
effect of a collateral agreement on EAD using the method described in
paragraph (d)(5)(ii) of this section, for purposes of paragraph
(e)(6)(ii) of this section, the national bank or Federal savings
association must calculate EEi using the method in paragraph
(d)(5)(ii) of this section and keep that EE constant with the maturity
equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting
set, and
(B) The notional weighted average maturity of all transactions in
the netting set.
(vii) For purposes of paragraph (e)(6) of this section, the national
bank's or Federal savings association's VaR model must capture the basis
between the spreads of any CDSind that is used as the hedging
instrument and the hedged counterparty exposure over various time
periods, including benign and stressed environments. If the VaR model
does not capture that basis, the national bank or Federal savings
association must reflect only 50 percent of the notional amount of the
CDSind hedge in the VaR model.
(viii) If a national bank or Federal savings association uses the
current exposure methodology described in paragraphs (c)(5) and (c)(6)
of this section to calculate the EAD for any immaterial portfolios of
OTC derivative contracts, the national bank or Federal savings
association must use that EAD as a constant EE in the formula for the
calculation of CVA with the maturity equal to the maximum of:
(A) Half of the longest maturity of a transaction in the netting
set, and
(B) The notional weighted average maturity of all transactions in
the netting set.
Sec. 3.133 Cleared transactions.
(a) General requirements. (1) A national bank or Federal savings
association that is a clearing member client must use the methodologies
described in paragraph (b) of this section to calculate risk-weighted
assets for a cleared transaction.
(2) A national bank or Federal savings association that is a
clearing member must use the methodologies described in paragraph (c) of
this section to calculate its risk-weighted assets for cleared
transactions and paragraph (d) of this section to calculate its risk-
weighted assets for its default fund contribution to a CCP.
(b) Clearing member client national banks or Federal savings
associations--(1) Risk-weighted assets for cleared transactions. (i) To
determine the risk-weighted asset amount for a cleared transaction, a
national bank or Federal savings association that is a clearing member
client must multiply the trade exposure amount for the cleared
transaction, calculated in accordance with paragraph (b)(2) of this
section, by the risk weight appropriate for the cleared transaction,
determined in accordance with paragraph (b)(3) of this section.
(ii) A clearing member client national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is the
sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. (i) For a cleared transaction that is a
derivative contract or a netting set of derivative contracts, trade
exposure amount equals the EAD for the derivative contract or netting
set of derivative contracts calculated using the methodology used to
calculate EAD for OTC derivative contracts set forth in Sec. 3.132(c) or
(d), plus the fair value of the collateral posted by the clearing member
client national bank or Federal savings association and held by the CCP
or a clearing member in a manner that is not bankruptcy remote. When the
national bank or Federal savings association calculates EAD for the
cleared transaction using the methodology in Sec. 3.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals the
EAD for the repo-style transaction calculated using the methodology set
forth in Sec. 3.132(b)(2), (b)(3), or (d), plus the fair
[[Page 140]]
value of the collateral posted by the clearing member client national
bank or Federal savings association and held by the CCP or a clearing
member in a manner that is not bankruptcy remote. When the national bank
or Federal savings association calculates EAD for the cleared
transaction under Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) For a cleared transaction
with a QCCP, a clearing member client national bank or Federal savings
association must apply a risk weight of:
(A) 2 percent if the collateral posted by the national bank or
Federal savings association to the QCCP or clearing member is subject to
an arrangement that prevents any loss to the clearing member client
national bank or Federal savings association due to the joint default or
a concurrent insolvency, liquidation, or receivership proceeding of the
clearing member and any other clearing member clients of the clearing
member; and the clearing member client national bank or Federal savings
association has conducted sufficient legal review to conclude with a
well-founded basis (and maintains sufficient written documentation of
that legal review) that in the event of a legal challenge (including one
resulting from an event of default or from liquidation, insolvency or
receivership proceedings) the relevant court and administrative
authorities would find the arrangements to be legal, valid, binding and
enforceable under the law of the relevant jurisdictions.
(B) 4 percent, if the requirements of Sec. 3.132(b)(3)(i)(A) are not
met.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member client national bank or Federal savings association must
apply the risk weight applicable to the CCP under Sec. 3.32.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member client national bank or
Federal savings association that is held by a custodian (in its capacity
as custodian) in a manner that is bankruptcy remote from the CCP, the
custodian, clearing member, and other clearing member clients of the
clearing member, is not subject to a capital requirement under this
section.
(ii) A clearing member client national bank or Federal savings
association must calculate a risk-weighted asset amount for any
collateral provided to a CCP, clearing member or a custodian in
connection with a cleared transaction in accordance with requirements
under Sec. 3.131.
(c) Clearing member national bank or Federal savings association--
(1) Risk-weighted assets for cleared transactions. (i) To determine the
risk-weighted asset amount for a cleared transaction, a clearing member
national bank or Federal savings association must multiply the trade
exposure amount for the cleared transaction, calculated in accordance
with paragraph (c)(2) of this section by the risk weight appropriate for
the cleared transaction, determined in accordance with paragraph (c)(3)
of this section.
(ii) A clearing member national bank's or Federal savings
association's total risk-weighted assets for cleared transactions is the
sum of the risk-weighted asset amounts for all of its cleared
transactions.
(2) Trade exposure amount. A clearing member national bank or
Federal savings association must calculate its trade exposure amount for
a cleared transaction as follows:
(i) For a cleared transaction that is a derivative contract or a
netting set of derivative contracts, trade exposure amount equals the
EAD calculated using the methodology used to calculate EAD for OTC
derivative contracts set forth in Sec. 3.132(c) or Sec. 3.132(d), plus
the fair value of the collateral posted by the clearing member national
bank or Federal savings association and held by the CCP in a manner that
is not bankruptcy remote. When the clearing member national bank or
Federal savings association calculates EAD for the cleared transaction
using the methodology in Sec. 3.132(d), EAD equals
EADunstressed.
(ii) For a cleared transaction that is a repo-style transaction or
netting set of repo-style transactions, trade exposure amount equals the
EAD calculated under Secs. 3.132(b)(2), (b)(3), or (d), plus the fair
value of the collateral posted by the clearing member national bank
[[Page 141]]
or Federal savings association and held by the CCP in a manner that is
not bankruptcy remote. When the clearing member national bank or Federal
savings association calculates EAD for the cleared transaction under
Sec. 3.132(d), EAD equals EADunstressed.
(3) Cleared transaction risk weights. (i) A clearing member national
bank or Federal savings association must apply a risk weight of 2
percent to the trade exposure amount for a cleared transaction with a
QCCP.
(ii) For a cleared transaction with a CCP that is not a QCCP, a
clearing member national bank or Federal savings association must apply
the risk weight applicable to the CCP according to Sec. 3.32.
(4) Collateral. (i) Notwithstanding any other requirement of this
section, collateral posted by a clearing member national bank or Federal
savings association that is held by a custodian in a manner that is
bankruptcy remote from the CCP is not subject to a capital requirement
under this section.
(ii) A clearing member national bank or Federal savings association
must calculate a risk-weighted asset amount for any collateral provided
to a CCP, clearing member or a custodian in connection with a cleared
transaction in accordance with requirements under Sec. 3.131
(d) Default fund contributions--(1) General requirement. A clearing
member national bank or Federal savings association must determine the
risk-weighted asset amount for a default fund contribution to a CCP at
least quarterly, or more frequently if, in the opinion of the national
bank or Federal savings association or the OCC, there is a material
change in the financial condition of the CCP.
(2) Risk-weighted asset amount for default fund contributions to
non-qualifying CCPs. A clearing member national bank's or Federal
savings association's risk-weighted asset amount for default fund
contributions to CCPs that are not QCCPs equals the sum of such default
fund contributions multiplied by 1,250 percent or an amount determined
by the OCC, based on factors such as size, structure and membership
characteristics of the CCP and riskiness of its transactions, in cases
where such default fund contributions may be unlimited.
(3) Risk-weighted asset amount for default fund contributions to
QCCPs. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for default fund contributions
to QCCPs equals the sum of its capital requirement, KCM for
each QCCP, as calculated under the methodology set forth in paragraph
(d)(3)(i) of this section (Method 1), multiplied by 1,250 percent or
paragraph (d)(3)(iv) of this section (Method 2).
(i) Method 1. The hypothetical capital requirement of a QCCP
(KCCP) equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.042
Where
(A) EBRMi = the EAD for each transaction cleared through
the QCCP by clearing member i, calculated using the methodology used to
calculate EAD for OTC derivative contracts set forth in Sec. 3.132(c)(5)
and Sec. 3.132.(c)(6) or the methodology used to calculate EAD for repo-
style transactions set forth in Sec. 3.132(b)(2) for repo-style
transactions, provided that:
(1) For purposes of this section, when calculating the EAD, the
national bank or Federal savings association may replace the formula
provided in Sec. 3.132(c)(6)(ii) with the following formula:
Anet = (0.15 x Agross) + (0.85 x NGR x
Agross); and
(2) For option derivative contracts that are cleared transactions,
the PFE described in Sec. 3.132(c)(5) must be adjusted by multiplying
the notional principal amount of the derivative contract by the
appropriate conversion factor in Table 2 to Sec. 3.132 and the absolute
value of the option's delta, that is, the ratio of the change in the
value of
[[Page 142]]
the derivative contract to the corresponding change in the price of the
underlying asset.
(3) For repo-style transactions, when applying Sec. 3.132(b)(2), the
national bank or Federal savings association must use the methodology in
Sec. 3.132(b)(2)(ii).
(B) VMi = any collateral posted by clearing member i to
the QCCP that it is entitled to receive from the QCCP but has not yet
received, and any collateral that the QCCP has actually received from
clearing member i;
(C) IMi = the collateral posted as initial margin by
clearing member i to the QCCP;
(D) DFi = the funded portion of clearing member i's
default fund contribution that will be applied to reduce the QCCP's loss
upon a default by clearing member i; and
(E) RW = 20 percent, except when the OCC has determined that a
higher risk weight is more appropriate based on the specific
characteristics of the QCCP and its clearing members; and
(F) Where a QCCP has provided its KCCP, a national bank
or Federal savings association must rely on such disclosed figure
instead of calculating KCCP under this paragraph (d), unless
the national bank or Federal savings association determines that a more
conservative figure is appropriate based on the nature, structure, or
characteristics of the QCCP.
(ii) For a national bank or Federal savings association that is a
clearing member of a QCCP with a default fund supported by funded
commitments, KCM equals:
[[Page 143]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.043
[[Page 144]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.044
Where:
(A) DFi = the national bank's or Federal savings
association's unfunded commitment to the default fund;
(B) DFCM = the total of all clearing members' unfunded
commitments to the default fund; and
(C) K*CM as defined in paragraph (d)(3)(ii) of this section.
(D) For a national bank or Federal savings association that is a
clearing member of a QCCP with a default fund supported by unfunded
commitments and that is unable to calculate KCM using the
methodology described above in this paragraph (d)(3)(iii),
KCM equals:
[GRAPHIC] [TIFF OMITTED] TR11OC13.046
[[Page 145]]
Where:
(1) IMi = the national bank's or Federal savings
association's initial margin posted to the QCCP;
(2) IMCM = the total of initial margin posted to the
QCCP; and
(3) K*CM as defined above in this paragraph (d)(3)(iii).
(iv) Method 2. A clearing member national bank's or Federal savings
association's risk-weighted asset amount for its default fund
contribution to a QCCP, RWADF, equals:
RWADF = Min {12.5 * DF; 0.18 * TE{time}
Where:
(A) TE = the national bank's or Federal savings association's trade
exposure amount to the QCCP calculated according to section 133(c)(2);
(B) DF = the funded portion of the national bank's or Federal
savings association's default fund contribution to the QCCP.
(v) Total risk-weighted assets for default fund contributions. Total
risk-weighted assets for default fund contributions is the sum of a
clearing member national bank's or Federal savings association's risk-
weighted assets for all of its default fund contributions to all CCPs of
which the national bank or Federal savings association is a clearing
member.
Sec. 3.134 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 national bank or Federal savings association 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 Sec. 3.141 through Sec. 3.145.
(3) A national bank or Federal savings association 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
Sec. 3.135. A national bank's or Federal savings association's PD and
LGD for the hedged exposure may not be lower than the PD and LGD floors
described in Sec. 3.131(d)(2) and (d)(3).
(4) If multiple eligible guarantees or eligible credit derivatives
cover a single exposure described in paragraph (a)(1) of this section, a
national bank or Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings
association may only recognize the credit risk mitigation benefits of
eligible guarantees and eligible credit derivatives.
(2) A national bank or Federal savings association 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:
[[Page 146]]
(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
national bank or Federal savings association may recognize the guarantee
or credit derivative in determining the national bank's or Federal
savings association'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 1 of Sec. 3.131 and using the appropriate LGD
as described in paragraph (c)(1)(iii) of this section. If the national
bank or Federal savings association determines that full substitution of
the protection provider's PD leads to an inappropriate degree of risk
mitigation, the national bank or Federal savings association 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 P of the guarantee or credit derivative is less than the EAD
of the hedged exposure, the national bank or Federal savings association
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 national bank or Federal savings association must calculate
its risk-based capital requirement for the protected exposure under
Sec. 3.131, 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
national bank or Federal savings association determines that full
substitution leads to an inappropriate degree of risk mitigation, the
national bank or Federal savings association may use a higher PD than
that of the protection provider.
(B) The national bank or Federal savings association must calculate
its risk-based capital requirement for the unprotected exposure under
Sec. 3.131, 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 paragraph (c)(1)(ii) of this section 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 paragraphs
(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
national bank or Federal savings association 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 national bank or Federal
savings association 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 national bank's or Federal savings
association's risk-
[[Page 147]]
based capital requirement for the hedged exposure is the greater of:
(A) The risk-based capital requirement for the exposure as
calculated under Sec. 3.131, 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 Sec. 3.131, using the PD for the
protection provider, 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 national
bank or Federal savings association 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 national bank's or Federal savings association'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 Sec. 3.131, 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 Sec. 3.131, using the PD for the
protection provider, the LGD for the guarantee or credit derivative, and
an EAD set equal to P.
(B) The national bank or Federal savings association must calculate
its risk-based capital requirement for the unprotected exposure under
Sec. 3.131, 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. For purposes of this paragraph (c), the M
of the hedged exposure is the same as the M of the exposure if it were
unhedged.
(d) Maturity mismatch. (1) A national bank or Federal savings
association 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 fulfil its
obligation on the exposure. If a credit risk mitigant has embedded
options that may reduce its term, the national bank or Federal savings
association (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 national bank or Federal savings association
(protection purchaser), but the terms of the arrangement at origination
of the credit risk mitigant contain a positive incentive for the
national bank or Federal savings association to call the transaction
before contractual maturity, the remaining time to the first call date
is the residual maturity of the credit risk mitigant.\26\
---------------------------------------------------------------------------
\26\ 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 national bank or Federal
savings association 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:
[[Page 148]]
(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
national bank or Federal savings association 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 national bank or Federal
savings association 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 national bank or Federal savings
association 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 national bank or Federal
savings association 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.
(2) A national bank or Federal savings association 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 national bank or Federal savings association qualifies
for the use of its own internal estimates of foreign exchange volatility
if it qualifies for:
(i) The own-estimates haircuts in Sec. 3.132(b)(2)(iii);
(ii) The simple VaR methodology in Sec. 3.132(b)(3); or
(iii) The internal models methodology in Sec. 3.132(d).
(3) A national bank or Federal savings association must adjust
HFX calculated in paragraph (f)(2) of this section upward if
the national bank or Federal savings association revalues the guarantee
or credit derivative less frequently than once every ten business days
using the square root of time formula provided in
Sec. 3.132(b)(2)(iii)(A)(2).
Sec. 3.135 Guarantees and credit derivatives: double default
treatment.
(a) Eligibility and operational criteria for double default
treatment. A national bank or Federal savings association may recognize
the credit risk mitigation benefits of a guarantee or credit derivative
covering an exposure described in Sec. 3.134(a)(1) 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
Sec. 3.134(b)(2) and that 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
[[Page 149]]
(ii) An nth-to-default credit derivative (subject to the
requirements of Sec. 3.142(m).
(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 national bank or Federal savings association 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 national bank or Federal savings association 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 national bank or Federal savings association
may not use the double default treatment for the hedged exposure.
(b) Full coverage. If a 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 national bank or Federal savings association may determine its risk-
weighted asset amount for the hedged exposure under paragraph (e) of
this section.
(c) Partial coverage. If a 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 national bank or Federal savings association 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 national bank or Federal savings
association must set EAD equal to P and calculate its risk-weighted
asset amount as provided in paragraph (e) of this section; and
(2) For the unprotected exposure, the national bank or Federal
savings association must set EAD equal to the EAD of the original
exposure minus P and then calculate its risk-weighted asset amount as
provided in Sec. 3.131.
(d) Mismatches. For any hedged exposure to which a national bank or
Federal savings association applies double default treatment under this
part, the national bank or Federal savings association must make
applicable adjustments to the protection amount as required in
Sec. 3.134(d), (e), and (f).
(e) The double default dollar risk-based capital requirement. The
dollar risk-based capital requirement for a hedged exposure to which a
national bank or Federal savings association 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] TR11OC13.048
(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
national bank or Federal savings association with the option to receive
immediate payout on triggering the protection; or
[[Page 150]]
(ii) The LGD of the guarantee or credit derivative, if the guarantee
or credit derivative does not provide the national bank or Federal
savings association with the option to receive immediate payout on
triggering the protection; and
(5) [rho]os (asset value correlation of the obligor) is
calculated according to the appropriate formula for (R) provided in
Table 1 in Sec. 3.131, with PD equal to PDo.
(6) b (maturity adjustment coefficient) is calculated according to
the formula for b provided in Table 1 in Sec. 3.131, with PD equal to
the lesser of PDo and PDg; and
(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.
Sec. 3.136 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) 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) The positive current exposure of a national bank or Federal
savings association 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 national bank or Federal savings association 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) Cleared transactions 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 Secs. 3.131 and 132);
(3) One-way cash payments on OTC derivative contracts (which are
addressed in Secs. 3. 131 and 132); 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 Secs. 3.131 and 132).
(c) System-wide failures. In the case of a system-wide failure of a
settlement or clearing system, or a central counterparty, 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 national bank or Federal savings association must hold
risk-based capital against any DvP or PvP transaction with a normal
settlement period if the national bank's or Federal savings
association's counterparty has not made delivery or payment within five
business days after the settlement date. The national bank or Federal
savings association must determine its risk-weighted asset amount for
such a transaction by multiplying the positive current exposure of the
transaction for the national bank or Federal savings association by the
appropriate risk weight in Table 1 to Sec. 3.136.
Table 1 toSec. 3.136--Risk Weights for Unsettled DvP and PvP
Transactions
------------------------------------------------------------------------
Risk weight to
be applied to
Number of business days after contractual settlement positive
date current
exposure (in
percent)
------------------------------------------------------------------------
From 5 to 15............................................ 100
From 16 to 30........................................... 625
From 31 to 45........................................... 937.5
46 or more.............................................. 1,250
------------------------------------------------------------------------
[[Page 151]]
(e) Non-DvP/non-PvP (non-delivery-versus-payment/non-payment-versus-
payment) transactions. (1) A national bank or Federal savings
association must hold risk-based capital against any non-DvP/non-PvP
transaction with a normal settlement period if the national bank or
Federal savings association 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 national bank or
Federal savings association must continue to hold risk-based capital
against the transaction until the national bank or Federal savings
association has received its corresponding deliverables.
(2) From the business day after the national bank or Federal savings
association has made its delivery until five business days after the
counterparty delivery is due, the national bank or Federal savings
association must calculate its risk-based capital requirement for the
transaction by treating the current fair value of the deliverables owed
to the national bank or Federal savings association as a wholesale
exposure.
(i) A national bank or Federal savings association may use a 45
percent LGD for the transaction rather than estimating LGD for the
transaction provided the national bank or Federal savings association
uses the 45 percent LGD for all transactions described in
Sec. 3.135(e)(1) and (e)(2).
(ii) A national bank or Federal savings association may use a 100
percent risk weight for the transaction provided the national bank or
Federal savings association uses this risk weight for all transactions
described in Secs. 3.135(e)(1) and (e)(2).
(3) If the national bank or Federal savings association has not
received its deliverables by the fifth business day after the
counterparty delivery was due, the national bank or Federal savings
association must apply a 1,250 percent risk weight to the current fair
value of the deliverables owed to the national bank or Federal savings
association.
(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.
Secs. 3.137-3.140 [Reserved]
Risk-Weighted Assets for Securitization Exposures
Sec. 3.141 Operational criteria for recognizing the transfer of risk.
(a) Operational criteria for traditional securitizations. A national
bank or Federal savings association 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 national bank or
Federal savings association that meets these conditions must hold risk-
based capital against any securitization exposures it retains in
connection with the securitization. A national bank or Federal savings
association 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 common equity tier 1 capital any after-
tax gain-on-sale resulting from the transaction. The conditions are:
(1) The exposures are not reported on the national bank's or Federal
savings association's consolidated balance sheet under GAAP;
(2) The national bank or Federal savings association has transferred
to one or more third parties credit risk associated with the underlying
exposures;
(3) Any clean-up calls relating to the securitization are eligible
clean-up calls; and
(4) The securitization does not:
(i) Include 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) Contain an early amortization provision.
(b) Operational criteria for synthetic securitizations. For
synthetic securitizations, a national bank or Federal savings
association may recognize for risk-based capital purposes under this
subpart the use of a credit
[[Page 152]]
risk mitigant to hedge underlying exposures only if each of the
conditions in this paragraph (b) is satisfied. A national bank or
Federal savings association that meets these conditions must hold risk-
based capital against any credit risk of the exposures it retains in
connection with the synthetic securitization. A national bank or Federal
savings association that fails to meet these conditions or chooses not
to recognize the credit risk mitigant for purposes of this section must
hold risk-based capital under this subpart against the underlying
exposures as if they had not been synthetically securitized. The
conditions are:
(1) The credit risk mitigant is:
(i) Financial collateral; or
(ii) A guarantee that meets all of the requirements of an eligible
guarantee in Sec. 3.2 except for paragraph (3) of the definition; or
(iii) A credit derivative that meets all of the requirements of an
eligible credit derivative except for paragraph (3) of the definition of
eligible guarantee in Sec. 3.2.
(2) The national bank or Federal savings association 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 national bank or Federal savings association to
alter or replace the underlying exposures to improve the credit quality
of the underlying exposures;
(iii) Increase the national bank's or Federal savings association'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 national
bank or Federal savings association 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 national bank or Federal savings
association after the inception of the securitization;
(3) The national bank or Federal savings association 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.
(c) Due diligence requirements for securitization exposures. (1)
Except for exposures that are deducted from common equity tier 1 capital
and exposures subject to Sec. 3.142(k), if a national bank or Federal
savings association is unable to demonstrate to the satisfaction of the
OCC a comprehensive understanding of the features of a securitization
exposure that would materially affect the performance of the exposure,
the national bank or Federal savings association must assign a 1,250
percent risk weight to the securitization exposure. The national bank's
or Federal savings association's analysis must be commensurate with the
complexity of the securitization exposure and the materiality of the
position in relation to regulatory capital according to this part.
(2) A national bank or Federal savings association must demonstrate
its comprehensive understanding of a securitization exposure under
paragraph (c)(1) of this section, for each securitization exposure by:
(i) Conducting an analysis of the risk characteristics of a
securitization exposure prior to acquiring the exposure and document
such analysis within three business days after acquiring the exposure,
considering:
(A) Structural features of the securitization that would materially
impact the performance of the exposure, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity enhancements, fair value triggers, the performance of
organizations that service the position, and deal-specific definitions
of default;
(B) Relevant information regarding the performance of the underlying
credit exposure(s), for example, the percentage of loans 30, 60, and 90
days past due; default rates; prepayment rates; loans in foreclosure;
property types; occupancy; average credit score
[[Page 153]]
or other measures of creditworthiness; average loan-to-value ratio; and
industry and geographic diversification data on the underlying
exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask
spreads, most recent sales price and historical price volatility,
trading volume, implied market rating, and size, depth and concentration
level of the market for the securitization; and
(D) For resecuritization exposures, performance information on the
underlying securitization exposures, for example, the issuer name and
credit quality, and the characteristics and performance of the exposures
underlying the securitization exposures; and
(ii) On an on-going basis (no less frequently than quarterly),
evaluating, reviewing, and updating as appropriate the analysis required
under this section for each securitization exposure.
Sec. 3.142 Risk-weighted assets for securitization exposures.
(a) Hierarchy of approaches. Except as provided elsewhere in this
section and in Sec. 3.141:
(1) A national bank or Federal savings association must deduct from
common equity tier 1 capital any after-tax gain-on-sale resulting from a
securitization and must apply a 1,250 percent risk weight to the portion
of any CEIO that does not constitute after tax gain-on-sale;
(2) If a securitization exposure does not require deduction or a
1,250 percent risk weight under paragraph (a)(1) of this section, the
national bank or Federal savings association must apply the supervisory
formula approach in Sec. 3.143 to the exposure if the national bank or
Federal savings association and the exposure qualify for the supervisory
formula approach according to Sec. 3.143(a);
(3) If a securitization exposure does not require deduction or a
1,250 percent risk weight under paragraph (a)(1) of this section and
does not qualify for the supervisory formula approach, the national bank
or Federal savings association may apply the simplified supervisory
formula approach under Sec. 3.144;
(4) If a securitization exposure does not require deduction or a
1,250 percent risk weight under paragraph (a)(1) of this section, does
not qualify for the supervisory formula approach in Sec. 3.143, and the
national bank or Federal savings association does not apply the
simplified supervisory formula approach in Sec. 3.144, the national bank
or Federal savings association must apply a 1,250 percent risk weight to
the exposure; and
(5) If a securitization exposure is a derivative contract (other
than protection provided by a national bank or Federal savings
association in the form of a credit derivative) that has a first
priority claim on the cash flows from the underlying exposures
(notwithstanding amounts due under interest rate or currency derivative
contracts, fees due, or other similar payments), a national bank or
Federal savings association 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
national bank's or Federal savings association's total risk-weighted
assets for securitization exposures is equal to the sum of its risk-
weighted assets calculated using Secs. 3.141 through 146.
(c) Deductions. A national bank or Federal savings association may
calculate any deduction from common equity tier 1 capital for a
securitization exposure net of any DTLs associated with the
securitization exposure.
(d) Maximum risk-based capital requirement. Except as provided in
Sec. 3.141(c), 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 national bank or Federal savings association
associated with a single securitization (excluding any risk-based
capital requirements that relate to the national bank's or Federal
savings association's gain-on-sale or CEIOs associated with the
securitization) may not exceed the sum of:
(1) The national bank's or Federal savings association's total risk-
based capital requirement for the underlying
[[Page 154]]
exposures calculated under this subpart as if the national bank or
Federal savings association directly held the underlying exposures; and
(2) The total ECL of the underlying exposures calculated under this
subpart.
(e) Exposure amount of a securitization exposure. (1) The exposure
amount of an on-balance sheet securitization exposure that is not a
repo-style transaction, eligible margin loan, OTC derivative contract,
or cleared transaction is the national bank's or Federal savings
association's carrying value.
(2) Except as provided in paragraph (m) of this section, the
exposure amount of an off-balance sheet securitization exposure that is
not an OTC derivative contract (other than a credit derivative), repo-
style transaction, eligible margin loan, or cleared transaction (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 an
eligible ABCP liquidity facility, the notional amount may be reduced to
the maximum potential amount that the national bank or Federal savings
association 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 exposure amount of a securitization exposure that is a repo-
style transaction, eligible margin loan, or OTC derivative contract
(other than a credit derivative) or cleared transaction (other than a
credit derivative) is the EAD of the exposure as calculated in
Sec. 3.132 or Sec. 3.133.
(f) Overlapping exposures. If a national bank or Federal savings
association has multiple securitization exposures that provide
duplicative coverage of the underlying exposures of a securitization
(such as when a national bank or Federal savings association provides a
program-wide credit enhancement and multiple pool-specific liquidity
facilities to an ABCP program), the national bank or Federal savings
association is not required to hold duplicative risk-based capital
against the overlapping position. Instead, the national bank or Federal
savings association may assign to the overlapping securitization
exposure the applicable risk-based capital treatment under this subpart
that results in the highest risk-based capital requirement.
(g) Securitizations of non-IRB exposures. Except as provided in
Sec. 3.141(c), if a national bank or Federal savings association has a
securitization exposure where any underlying exposure is not a wholesale
exposure, retail exposure, securitization exposure, or equity exposure,
the national bank or Federal savings association:
(1) Must deduct from common equity tier 1 capital any after-tax
gain-on-sale resulting from the securitization and apply a 1,250 percent
risk weight to the portion of any CEIO that does not constitute gain-on-
sale, if the national bank or Federal savings association is an
originating national bank or Federal savings association;
(2) May apply the simplified supervisory formula approach in
Sec. 3.144 to the exposure, if the securitization exposure does not
require deduction or a 1,250 percent risk weight under paragraph (g)(1)
of this section;
(3) Must assign a 1,250 percent risk weight to the exposure if the
securitization exposure does not require deduction or a 1,250 percent
risk weight under paragraph (g)(1) of this section, does not qualify for
the supervisory formula approach in Sec. 3.143, and the national bank or
Federal savings association does not apply the simplified supervisory
formula approach in Sec. 3.144 to the exposure.
(h) Implicit support. If a national bank or Federal savings
association provides support to a securitization in excess of the
national bank's or Federal savings association's contractual obligation
to provide credit support to the securitization (implicit support):
(1) The national bank or Federal savings association must calculate
a risk-weighted asset amount for underlying exposures associated with
the securitization as if the exposures had not been securitized and must
deduct from common equity tier 1 capital any after-tax gain-on-sale
resulting from the securitization; and
(2) The national bank or Federal savings association must disclose
publicly:
[[Page 155]]
(i) That it has provided implicit support to the securitization; and
(ii) The regulatory capital impact to the national bank or Federal
savings association of providing such implicit support.
(i) Undrawn portion of a servicer cash advance facility. (1)
Notwithstanding any other provision of this subpart, a national bank or
Federal savings association that is a servicer under an eligible
servicer cash advance facility is not required to hold risk-based
capital against potential future cash advance payments that it may be
required to provide under the contract governing the facility.
(2) For a national bank or Federal savings association that acts as
a servicer, the exposure amount for a servicer cash advance facility
that is not an eligible servicer cash advance facility is equal to the
amount of all potential future cash advance payments that the national
bank or Federal savings association may be contractually required to
provide during the subsequent 12 month period under the contract
governing the facility.
(j) Interest-only mortgage-backed securities. Regardless of any
other provisions in 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) Notwithstanding any other provisions of this subpart
E, a national bank or Federal savings association 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 national bank or Federal savings association establishes
and maintains, pursuant to GAAP, a non-capital reserve sufficient to
meet the national bank's or Federal savings association'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 et seq.); and
(iv) The national bank or Federal savings association is well-
capitalized, as defined in 12 CFR 6.4. For purposes of determining
whether a national bank or Federal savings association is well
capitalized for purposes of this paragraph (k), the national bank's or
Federal savings association'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 national
bank or Federal savings association on transfers of small-business
obligations subject to paragraph (k)(1) of this section cannot exceed 15
percent of the national bank's or Federal savings association's total
capital.
(3) If a national bank or Federal savings association ceases to be
well capitalized or exceeds the 15 percent capital limitation in
paragraph (k)(2) of this section, 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 national bank or Federal savings association
was well capitalized and did not exceed the capital limit.
(4) The risk-based capital ratios of a national bank or Federal
savings association 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.
(l) Nth-to-default credit derivatives--(1) Protection provider. A
national bank or Federal savings association must determine a risk
weight using the supervisory formula approach (SFA) pursuant to
Sec. 3.143 or the simplified supervisory formula approach (SSFA)
pursuant to Sec. 3.144 for an nth-to-default credit derivative in
accordance with this paragraph (l). In the case of credit protection
sold, a national bank or Federal savings association must determine its
exposure in the nth-to-default
[[Page 156]]
credit derivative as the largest notional amount of all the underlying
exposures.
(2) For purposes of determining the risk weight for an
nth-to-default credit derivative using the SFA or the SSFA,
the national bank or Federal savings association must calculate the
attachment point and detachment point of its exposure as follows:
(i) The attachment point (parameter A) is the ratio of the sum of
the notional amounts of all underlying exposures that are subordinated
to the national bank's or Federal savings association's exposure to the
total notional amount of all underlying exposures. For purposes of the
SSFA, parameter A is expressed as a decimal value between zero and one.
For purposes of using the SFA to calculate the risk weight for its
exposure in an nth-to-default credit derivative, parameter A
must be set equal to the credit enhancement level (L) input to the SFA
formula. In the case of a first-to-default credit derivative, there are
no underlying exposures that are subordinated to the national bank's or
Federal savings association's exposure. In the case of a second-or-
subsequent-to-default credit derivative, the smallest (n-1) risk-
weighted asset amounts of the underlying exposure(s) are subordinated to
the national bank's or Federal savings association's exposure.
(ii) The detachment point (parameter D) equals the sum of parameter
A plus the ratio of the notional amount of the national bank's or
Federal savings association's exposure in the nth-to-default
credit derivative to the total notional amount of all underlying
exposures. For purposes of the SSFA, parameter W is expressed as a
decimal value between zero and one. For purposes of the SFA, parameter D
must be set to equal L plus the thickness of tranche T input to the SFA
formula.
(3) A national bank or Federal savings association that does not use
the SFA or the SSFA to determine a risk weight for its exposure in an
nth-to-default credit derivative must assign a risk weight of
1,250 percent to the exposure.
(4) Protection purchaser--(i) First-to-default credit derivatives. A
national bank or Federal savings association that obtains credit
protection on a group of underlying exposures through a first-to-default
credit derivative that meets the rules of recognition of Sec. 3.134(b)
must determine its risk-based capital requirement under this subpart for
the underlying exposures as if the national bank or Federal savings
association synthetically securitized the underlying exposure with the
lowest risk-based capital requirement and had obtained no credit risk
mitigant on the other underlying exposures. A national bank or Federal
savings association must calculate a risk-based capital requirement for
counterparty credit risk according to Sec. 3.132 for a first-to-default
credit derivative that does not meet the rules of recognition of
Sec. 3.134(b).
(ii) Second-or-subsequent-to-default credit derivatives. (A) A
national bank or Federal savings association that obtains credit
protection on a group of underlying exposures through a nth-
to-default credit derivative that meets the rules of recognition of
Sec. 3.134(b) (other than a first-to-default credit derivative) may
recognize the credit risk mitigation benefits of the derivative only if:
(1) The national bank or Federal savings association 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 national bank or Federal savings association satisfies the
requirements of paragraph (l)(3)(ii)(A) of this section, the national
bank or Federal savings association must determine its risk-based
capital requirement for the underlying exposures as if the bank had only
synthetically securitized the underlying exposure with the
nth smallest risk-based capital requirement and had obtained
no credit risk mitigant on the other underlying exposures.
(C) A national bank or Federal savings association must calculate a
risk-based capital requirement for counterparty credit risk according to
Sec. 3.132 for a nth-to-default credit derivative that does
not meet the rules of recognition of Sec. 3.134(b).
[[Page 157]]
(m) Guarantees and credit derivatives other than nth-to-default
credit derivatives--(1) Protection provider. For a guarantee or credit
derivative (other than an nth-to-default credit derivative)
provided by a national bank or Federal savings association that covers
the full amount or a pro rata share of a securitization exposure's
principal and interest, the national bank or Federal savings association
must risk weight the guarantee or credit derivative as if it holds the
portion of the reference exposure covered by the guarantee or credit
derivative.
(2) Protection purchaser. (i) A national bank or Federal savings
association that purchases an OTC credit derivative (other than an
nth-to-default credit derivative) that is recognized under
Sec. 3.145 as a credit risk mitigant (including via recognized
collateral) is not required to compute a separate counterparty credit
risk capital requirement under Sec. 3.131 in accordance with
Sec. 3.132(c)(3).
(ii) If a national bank or Federal savings association cannot, or
chooses not to, recognize a purchased credit derivative as a credit risk
mitigant under Sec. 3.145, the national bank or Federal savings
association must determine the exposure amount of the credit derivative
under Sec. 3.132(c).
(A) If the national bank or Federal savings association purchases
credit protection from a counterparty that is not a securitization SPE,
the national bank or Federal savings association must determine the risk
weight for the exposure according Sec. 3.131.
(B) If the national bank or Federal savings association purchases
the credit protection from a counterparty that is a securitization SPE,
the national bank or Federal savings association must determine the risk
weight for the exposure according to this section, including paragraph
(a)(5) of this section for a credit derivative that has a first priority
claim on the cash flows from the underlying exposures of the
securitization SPE (notwithstanding amounts due under interest rate or
currency derivative contracts, fees due, or other similar payments.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Sec. 3.143 Supervisory formula approach (SFA).
(a) Eligibility requirements. A national bank or Federal savings
association must use the SFA to determine its risk-weighted asset amount
for a securitization exposure if the national bank or Federal savings
association can calculate on an ongoing basis each of the SFA parameters
in paragraph (e) of this section.
(b) Mechanics. The risk-weighted asset amount for a securitization
exposure equals its SFA risk-based capital requirement as calculated
under paragraph (c) and (d) of this section, multiplied by 12.5.
(c) The SFA risk-based capital requirement. (1) If KIRB
is greater than or equal to L + T, an exposure's SFA risk-based capital
requirement equals the exposure amount.
(2) If KIRB is less than or equal to L, an exposure's SFA
risk-based capital requirement is UE multiplied by TP multiplied by the
greater of:
(i) F [middot] T (where F is 0.016 for all securitization
exposures); or
(ii) S[L + T]-S[L].
(3) If KIRB is greater than L and less than L + T, the
national bank or Federal savings association must apply a 1,250 percent
risk weight to an amount equal to UE [middot] TP (KIRB-L),
and the exposure's SFA risk-based capital requirement is UE multiplied
by TP multiplied by the greater of:
(i) F [middot] (T-(KIRB-L)) (where F is 0.016 for all
other securitization exposures); or
(ii) S[L + T]-S[KIRB].
(d) The supervisory formula:
[[Page 158]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.049
(e) SFA parameters. For purposes of the calculations in paragraphs
(c) and (d) of this section:
(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
Sec. 3.142(e)) plus the adjusted carrying value of any underlying
exposures that are equity exposures (as defined in Sec. 3.151(b)).
(2) Tranche percentage (TP). TP is the ratio of the amount of the
national bank's or Federal savings association's securitization 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
[[Page 159]]
the underlying exposures (as determined under this subpart E as if the
underlying exposures were directly held by the national bank or Federal
savings association); 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 all of the 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 national bank's or Federal savings
association's securitization exposure; to
(B) UE.
(ii) A national bank or Federal savings association 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 national bank's or Federal savings association'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 national bank's or
Federal savings association's securitization exposure; to
(ii) UE.
(6) Effective number of exposures (N). (i) Unless the national bank
or Federal savings association elects to use the formula provided in
paragraph (f) of this section,
[GRAPHIC] [TIFF OMITTED] TR11OC13.050
where EADi represents the EAD associated with the ith
instrument in the underlying exposures.
(ii) Multiple exposures to one obligor must be treated as a single
underlying exposure.
(iii) In the case of a resecuritization, the national bank or
Federal savings association 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:
[[Page 160]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.051
where LGDi represents the average LGD associated with all
exposures to the ith obligor. In the case of a resecuritization, 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
national bank or Federal savings association may apply the SFA using the
following simplifications:
(i) h = 0; and
(ii) v = 0.
(2) Under the conditions in Secs. 3.143(f)(3) and (f)(4), a national
bank or Federal savings association may employ a simplified method for
calculating N and EWALGD.
(3) If C1 is no more than 0.03, a national bank or
Federal savings association may set EWALGD = 0.50 if none of the
underlying exposures is a securitization exposure, or may set 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] TR11OC13.052
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 national bank or
Federal savings association.
(4) Alternatively, if only C1 is available and
C1 is no more than 0.03, the national bank or Federal savings
association may set EWALGD = 0.50 if none of the underlying exposures is
a securitization exposure, or may set EWALGD = 1 if one or more of the
underlying exposures is a securitization exposure and may set N = 1/
C1.
Sec. 3.144 Simplified supervisory formula approach (SSFA).
(a) General requirements for the SSFA. To use the SSFA to determine
the risk weight for a securitization exposure, a national bank or
Federal savings association must have data that enables it to assign
accurately the parameters described in paragraph (b) of this section.
Data used to assign the parameters described in paragraph (b) of this
section must be the most currently available data; if the contracts
governing the underlying exposures of the securitization require
payments on a monthly or quarterly basis, the data used to assign the
parameters described in paragraph (b) of this section must be no more
than 91 calendar days old. A national bank or Federal savings
association that does not have the appropriate data to assign the
parameters described in paragraph (b) of this section must assign a risk
weight of 1,250 percent to the exposure.
(b) SSFA parameters. To calculate the risk weight for a
securitization exposure using the SSFA, a national bank or Federal
savings association must have accurate information on the following five
inputs to the SSFA calculation:
(1) KG is the weighted-average (with unpaid principal
used as the weight for each exposure) total capital requirement of the
underlying exposures calculated using subpart D of this part.
KG
[[Page 161]]
is expressed as a decimal value between zero and one (that is, an
average risk weight of 100 percent represents a value of KG
equal to 0.08).
(2) Parameter W is expressed as a decimal value between zero and
one. Parameter W is the ratio of the sum of the dollar amounts of any
underlying exposures of the securitization that meet any of the criteria
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the
balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other
than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms
of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student
loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide
for period(s) of deferral that are not initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
(3) Parameter A is the attachment point for the exposure, which
represents the threshold at which credit losses will first be allocated
to the exposure. Except as provided in section 142(l) for
nth-to-default credit derivatives, parameter A equals the
ratio of the current dollar amount of underlying exposures that are
subordinated to the exposure of the national bank or Federal savings
association to the current dollar amount of underlying exposures. Any
reserve account funded by the accumulated cash flows from the underlying
exposures that is subordinated to the national bank's or Federal savings
association's securitization exposure may be included in the calculation
of parameter A to the extent that cash is present in the account.
Parameter A is expressed as a decimal value between zero and one.
(4) Parameter D is the detachment point for the exposure, which
represents the threshold at which credit losses of principal allocated
to the exposure would result in a total loss of principal. Except as
provided in section 142(l) for nth-to-default credit
derivatives, parameter D equals parameter A plus the ratio of the
current dollar amount of the securitization exposures that are pari
passu with the exposure (that is, have equal seniority with respect to
credit risk) to the current dollar amount of the underlying exposures.
Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for
securitization exposures that are not resecuritization exposures and
equal to 1.5 for resecuritization exposures.
(c) Mechanics of the SSFA. KG and W are used to calculate
KA, the augmented value of KG, which reflects the
observed credit quality of the underlying exposures. KA is
defined in paragraph (d) of this section. The values of parameters A and
D, relative to KA determine the risk weight assigned to a
securitization exposure as described in paragraph (d) of this section.
The risk weight assigned to a securitization exposure, or portion of a
securitization exposure, as appropriate, is the larger of the risk
weight determined in accordance with this paragraph (c), paragraph (d)
of this section, and a risk weight of 20 percent.
(1) When the detachment point, parameter D, for a securitization
exposure is less than or equal to KA, the exposure must be
assigned a risk weight of 1,250 percent;
(2) When the attachment point, parameter A, for a securitization
exposure is greater than or equal to KA, the national bank or
Federal savings association must calculate the risk weight in accordance
with paragraph (d) of this section;
(3) When A is less than KA and D is greater than
KA, the risk weight is a weighted-average of 1,250 percent
and 1,250 percent times KSSFA calculated in accordance with
paragraph (d) of this section. For the purpose of this weighted-average
calculation:
[[Page 162]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.053
Sec. 3.145 Recognition of credit risk mitigants for securitization
exposures.
(a) General. An originating national bank or Federal savings
association that has obtained a credit risk mitigant to hedge its
securitization exposure to a synthetic or traditional securitization
that satisfies the operational criteria in Sec. 3.141 may recognize the
credit risk mitigant, but only as provided in this section. An investing
national bank or Federal savings association 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.
(b) Collateral. (1) Rules of recognition. A national bank or Federal
savings association may recognize financial collateral in determining
the national bank's or Federal savings association's risk-weighted asset
amount for a securitization exposure (other than a repo-style
transaction, an eligible margin loan, or an OTC derivative contract for
which the national bank or Federal savings association has reflected
collateral in its determination of exposure
[[Page 163]]
amount under Sec. 3.132) as follows. The national bank's or Federal
savings association's risk-weighted asset amount for the collateralized
securitization exposure is equal to the risk-weighted asset amount for
the securitization exposure as calculated under the SSFA in Sec. 3.144
or under the SFA in Sec. 3.143 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
Sec. 3.142(e);
(iii) C = the current fair 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.
[GRAPHIC] [TIFF OMITTED] TR11OC13.054
(3) Standard supervisory haircuts. Unless a national bank or Federal
savings association qualifies for use of and uses own-estimates haircuts
in paragraph (b)(4) of this section:
(i) A national bank or Federal savings association must use the
collateral type haircuts (Hs) in Table 1 to Sec. 3.132 of
this subpart;
(ii) A national bank or Federal savings association must use a
currency mismatch haircut (Hfx) of 8 percent if the exposure
and the collateral are denominated in different currencies;
(iii) A national bank or Federal savings association must multiply
the supervisory haircuts obtained in paragraphs (b)(3)(i) and (ii) of
this section by the square root of 6.5 (which equals 2.549510); and
(iv) A national bank or Federal savings association 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 national bank or Federal savings association may calculate
haircuts using its own internal estimates of market price volatility and
foreign exchange volatility, subject to Sec. 3.132(b)(2)(iii). The
minimum holding period (TM) for securitization exposures is
65 business days.
(c) Guarantees and credit derivatives--(1) Limitations on
recognition. A national bank or Federal savings association may only
recognize an eligible guarantee or eligible credit derivative provided
by an eligible guarantor in determining the national bank's or Federal
savings association's risk-weighted asset amount for a securitization
exposure.
(2) ECL for securitization exposures. When a national bank or
Federal savings association recognizes an eligible guarantee or eligible
credit derivative provided by an eligible guarantor in determining the
national bank's or Federal savings association's risk-weighted asset
amount for a securitization exposure, the national bank or Federal
savings association 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 national bank's or Federal
savings association's total ECL.
[[Page 164]]
(3) Rules of recognition. A national bank or Federal savings
association may recognize an eligible guarantee or eligible credit
derivative provided by an eligible guarantor in determining the national
bank's or Federal savings association's risk-weighted asset amount 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 national bank or Federal savings
association 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 guarantor (as determined in the
wholesale risk weight function described in Sec. 3.131), using the
national bank's or Federal savings association's PD for the guarantor,
the national bank's or Federal savings association's LGD for the
guarantee or credit derivative, and an EAD equal to the amount of the
securitization exposure (as determined in Sec. 3.142(e)).
(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 national bank or Federal savings
association 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 guarantor (as determined in the wholesale risk
weight function described in Sec. 3.131), using the national bank's or
Federal savings association's PD for the guarantor, the national bank's
or Federal savings association'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 Secs. 3.142 through
146).
(4) Mismatches. The national bank or Federal savings association
must make applicable adjustments to the protection amount as required in
Sec. 3.134(d), (e), and (f) 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 national bank or Federal savings
association must use the longest residual maturity of any of the hedged
exposures as the residual maturity of all the hedged exposures.
Secs. 3.146-3.150 [Reserved]
Risk-Weighted Assets for Equity Exposures
Sec. 3.151 Introduction and exposure measurement.
(a) General. (1) To calculate its risk-weighted asset amounts for
equity exposures that are not equity exposures to investment funds, a
national bank or Federal savings association may apply either the Simple
Risk Weight Approach (SRWA) in Sec. 3.152 or, if it qualifies to do so,
the Internal Models Approach (IMA) in Sec. 3.153. A national bank or
Federal savings association must use the look-through approaches
provided in Sec. 3.154 to calculate its risk-weighted asset amounts for
equity exposures to investment funds.
(2) A national bank or Federal savings association must treat an
investment in a separate account (as defined in Sec. 3.2), as if it were
an equity exposure to an investment fund as provided in Sec. 3.154.
(3) Stable value protection. (i) Stable value protection means a
contract where the provider of the contract is obligated to pay:
(A) The policy owner of a separate account an amount equal to the
shortfall between the fair value and cost basis of the separate account
when the policy owner of the separate account surrenders the policy, or
(B) The beneficiary of the contract an amount equal to the shortfall
between the fair value and book value of a specified portfolio of
assets.
[[Page 165]]
(ii) A national bank or Federal savings association that purchases
stable value protection on its investment in a separate account must
treat the portion of the carrying value of its investment in the
separate account attributable to the stable value protection as an
exposure to the provider of the protection and the remaining portion of
the carrying value of its separate account as an equity exposure to an
investment fund.
(iii) A national bank or Federal savings association that provides
stable value protection must treat the exposure as an equity derivative
with an adjusted carrying value determined as the sum of
Sec. 3.151(b)(1) and (2).
(b) Adjusted carrying value. For purposes of this subpart, the
adjusted carrying value of an equity exposure is:
(1) For the on-balance sheet component of an equity exposure, the
national bank's or Federal savings association's carrying value of the
exposure;
(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.
(3) 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 national bank's or Federal
savings association's best estimate of the amount that would be funded
under economic downturn conditions.
Sec. 3.152 Simple risk weight approach (SRWA).
(a) General. Under the SRWA, a national bank's or Federal savings
association'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 national bank's or Federal savings association'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 national bank's or Federal savings association's individual
equity exposures to an investment fund as determined in Sec. 3.154.
(b) SRWA computation for individual equity exposures. A national
bank or Federal savings association must determine the risk-weighted
asset amount for an individual equity exposure (other than an equity
exposure to an investment fund) by multiplying the adjusted carrying
value of the equity exposure or the effective portion and ineffective
portion of a hedge pair (as defined in paragraph (c) of this section) by
the lowest applicable risk weight in this section.
(1) Zero percent risk weight equity exposures. An equity exposure to
an entity whose credit exposures are exempt from the 0.03 percent PD
floor in Sec. 3.131(d)(2) is assigned a zero percent risk weight.
(2) 20 percent risk weight equity exposures. An equity exposure to a
Federal Home Loan Bank or the Federal Agricultural Mortgage Corporation
(Farmer Mac) is assigned a 20 percent risk weight.
(3) 100 percent risk weight equity exposures. The following equity
exposures are assigned a 100 percent risk weight:
(i) Community development equity exposures. An equity exposure that
qualifies as a community development investment under section 24
(Eleventh) of the National Bank Act, 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.
(ii) Effective portion of hedge pairs. The effective portion of a
hedge pair.
(iii) Non-significant equity exposures. Equity exposures, excluding
significant investments in the capital of an unconsolidated institution
in the form of common stock and exposures to an investment firm that
would meet the definition of a traditional securitization were it not
for the OCC's application of
[[Page 166]]
paragraph (8) of that definition in Sec. 3.2 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 national bank's
or Federal savings association's total capital.
(A) To compute the aggregate adjusted carrying value of a national
bank's or Federal savings association's equity exposures for purposes of
this section, the national bank or Federal savings association 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 national
bank or Federal savings association does not know the actual holdings of
the investment fund, the national bank or Federal savings association
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 national bank or
Federal savings association must assume for purposes of this section
that the investment fund invests to the maximum extent possible in
equity exposures.
(B) When determining which of a national bank's or Federal savings
association's equity exposures qualifies for a 100 percent risk weight
under this section, a national bank or Federal savings association 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, 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) 250 percent risk weight equity exposures. Significant
investments in the capital of unconsolidated financial institutions in
the form of common stock that are not deducted from capital pursuant to
Sec. 3.22(b)(4) are assigned a 250 percent risk weight.
(5) 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.
(6) 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.
(7) 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 in
Sec. 3.2; 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
national bank or Federal savings association acquires at least one of
the equity exposures); the documentation specifies the measure of
effectiveness (E) the national bank or Federal savings association 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
national bank or Federal savings association 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
national bank or Federal savings association
[[Page 167]]
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 zero. 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:
[GRAPHIC] [TIFF OMITTED] TR11OC13.055
(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.
Sec. 3.153 Internal models approach (IMA).
(a) General. A national bank or Federal savings association 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 paragraphs (c) and
(d) of this section).
(b) Qualifying criteria. To qualify to use the IMA to calculate
risk-weighted assets for equity exposures, a national bank or Federal
savings association must receive prior written approval from the OCC. To
receive such approval, the national bank or Federal savings association
must demonstrate to the OCC's satisfaction that the national bank or
Federal savings association meets the following criteria:
(1) The national bank or Federal savings association 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 national bank's or Federal savings association's modeled equity
exposures; and
(iii) Adequately capture both general market risk and idiosyncratic
risk.
(2) The national bank's or Federal savings association's model must
produce an estimate of potential losses
[[Page 168]]
for its modeled equity exposures that is no less than the estimate of
potential losses produced by a VaR methodology employing a 99th
percentile one-tailed confidence interval of the distribution of
quarterly returns for a benchmark portfolio of equity exposures
comparable to the national bank's or Federal savings association'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 national bank's or Federal
savings association's model and benchmarking exercise must be sufficient
to provide confidence in the accuracy and robustness of the national
bank's or Federal savings association's estimates.
(4) The national bank's or Federal savings association's model and
benchmarking process must incorporate data that are relevant in
representing the risk profile of the national bank's or Federal savings
association'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 national bank's or Federal savings
association's modeled equity exposures. In addition, the national bank's
or Federal savings association's benchmarking exercise must be based on
daily market prices for the benchmark portfolio. If the national bank's
or Federal savings association's model uses a scenario methodology, the
national bank or Federal savings association must demonstrate that the
model produces a conservative estimate of potential losses on the
national bank's or Federal savings association's modeled equity
exposures over a relevant long-term market cycle. If the national bank
or Federal savings association employs risk factor models, the national
bank or Federal savings association must demonstrate through empirical
analysis the appropriateness of the risk factors used.
(5) The national bank or Federal savings association must be able to
demonstrate, using theoretical arguments and empirical evidence, that
any proxies used in the modeling process are comparable to the national
bank's or Federal savings association's modeled equity exposures and
that the national bank or Federal savings association has made
appropriate adjustments for differences. The national bank or Federal
savings association must derive any proxies for its modeled equity
exposures and benchmark portfolio using historical market data that are
relevant to the national bank's or Federal savings association'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 national bank's or Federal savings association's
modeled equity exposures.
(c) Risk-weighted assets calculation for a national bank or Federal
savings association using the IMA for publicly traded and non-publicly
traded equity exposures. If a national bank or Federal savings
association models publicly traded and non-publicly traded equity
exposures, the national bank's or Federal savings association'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
Sec. 3.152(b)(1) through (b)(3)(i) (as determined under Sec. 3.152) and
each equity exposure to an investment fund (as determined under
Sec. 3.154); and
(2) The greater of:
(i) The estimate of potential losses on the national bank's or
Federal savings association's equity exposures (other than equity
exposures referenced in paragraph (c)(1) of this section) generated by
the national bank's or Federal savings association'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 national bank's or Federal savings association'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
Sec. 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an
investment fund;
[[Page 169]]
(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 national bank's or Federal savings association's equity exposures
that are not publicly traded, do not qualify for a 0 percent, 20
percent, or 100 percent risk weight under Sec. 3.152(b)(1) through
(b)(3)(i), and are not equity exposures to an investment fund.
(d) Risk-weighted assets calculation for a national bank or Federal
savings association using the IMA only for publicly traded equity
exposures. If a national bank or Federal savings association models only
publicly traded equity exposures, the national bank's or Federal savings
association'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
Secs. 3.152(b)(1) through (b)(3)(i) (as determined under Sec. 3.152),
each equity exposure that qualifies for a 400 percent risk weight under
Sec. 3.152(b)(5) or a 600 percent risk weight under Sec. 3.152(b)(6) (as
determined under Sec. 3.152), and each equity exposure to an investment
fund (as determined under Sec. 3.154); and
(2) The greater of:
(i) The estimate of potential losses on the national bank's or
Federal savings association's equity exposures (other than equity
exposures referenced in paragraph (d)(1) of this section) generated by
the national bank's or Federal savings association'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 national bank's or Federal savings association'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
Sec. 3.152(b)(1) through (b)(3)(i), and are not equity exposures to an
investment fund; and
(B) 200 percent multiplied by the aggregate ineffective portion of
all hedge pairs.
Sec. 3.154 Equity exposures to investment funds.
(a) Available approaches. (1) Unless the exposure meets the
requirements for a community development equity exposure in
Sec. 3.152(b)(3)(i), a national bank or Federal savings association 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, or the alternative modified look-through approach in
paragraph (d) 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 Sec. 3.152(b)(3)(i) is its adjusted carrying value.
(3) If an equity exposure to an investment fund is part of a hedge
pair and the national bank or Federal savings association does not use
the full look-through approach, the national bank or Federal savings
association may use the ineffective portion of the hedge pair as
determined under Sec. 3.152(c) 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 national bank or Federal savings
association 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 subpart E of this part as if the
proportional ownership share of each exposure were held directly by the
national bank or Federal savings association) may either:
(1) Set the risk-weighted asset amount of the national bank's or
Federal savings association'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 national bank or
Federal savings association; and
(ii) The national bank's or Federal savings association's
proportional ownership share of the fund; or
[[Page 170]]
(2) Include the national bank's or Federal savings association's
proportional ownership share of each exposure held by the fund in the
national bank's or Federal savings association's IMA.
(c) Simple modified look-through approach. Under this approach, the
risk-weighted asset amount for a national bank's or Federal savings
association's equity exposure to an investment fund equals the adjusted
carrying value of the equity exposure multiplied by the highest risk
weight assigned according to subpart D of this part 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 and that do not constitute a material
portion of the fund's exposures).
(d) Alternative modified look-through approach. Under this approach,
a national bank or Federal savings association may assign the adjusted
carrying value of an equity exposure to an investment fund on a pro rata
basis to different risk weight categories assigned according to subpart
D of this part 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 national
bank's or Federal savings association'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 all exposure types
within the fund exceeds 100 percent, the national bank or Federal
savings association must assume that the fund invests to the maximum
extent permitted under its investment limits in the exposure type with
the highest risk weight under subpart D of this part, and continues to
make investments in order of the exposure type with the next highest
risk weight under subpart D of this part until the maximum total
investment level is reached. If more than one exposure type applies to
an exposure, the national bank or Federal savings association must use
the highest applicable risk weight. A national bank or Federal savings
association 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.
Sec. 3.155 Equity derivative contracts.
(a) Under the IMA, in addition to holding risk-based capital against
an equity derivative contract under this part, a national bank or
Federal savings association 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 Sec. 3.132.
(b) Under the SRWA, a national bank or Federal savings association
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 national bank or Federal savings
association using the SRWA must either include all or exclude all of the
contracts from any measure used to determine counterparty credit risk
exposure.
Secs. 3.166--3.160 [Reserved]
Risk-Weighted Assets for Operational Risk
Sec. 3.161 Qualification requirements for incorporation of operational
risk mitigants.
(a) Qualification to use operational risk mitigants. A national bank
or Federal savings association may adjust its estimate of operational
risk exposure to reflect qualifying operational risk mitigants if:
(1) The national bank's or Federal savings association's operational
risk quantification system is able to generate an estimate of the
national bank's or Federal savings association's operational risk
exposure (which does not incorporate qualifying operational risk
mitigants) and an estimate of the
[[Page 171]]
national bank's or Federal savings association's operational risk
exposure adjusted to incorporate qualifying operational risk mitigants;
and
(2) The national bank's or Federal savings association's methodology
for incorporating the effects of insurance, if the national bank or
Federal savings association 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 the national bank or
Federal savings association deems to have strong capacity to meet its
claims payment obligations and the obligor rating category to which the
national bank or Federal savings association assigns the company is
assigned a PD equal to or less than 10 basis points;
(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;
(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 total capital.
Sec. 3.162 Mechanics of risk-weighted asset calculation.
(a) If a national bank or Federal savings association does not
qualify to use or does not have qualifying operational risk mitigants,
the national bank's or Federal savings association's dollar risk-based
capital requirement for operational risk is its operational risk
exposure minus eligible operational risk offsets (if any).
(b) If a national bank or Federal savings association qualifies to
use operational risk mitigants and has qualifying operational risk
mitigants, the national bank's or Federal savings association's dollar
risk-based capital requirement for operational risk is the greater of:
(1) The national bank's or Federal savings association'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 national bank's or Federal savings association's operational
risk exposure; and
(ii) Eligible operational risk offsets (if any).
(c) The national bank's or Federal savings association's risk-
weighted asset amount for operational risk equals the national bank's or
Federal savings association's dollar risk-based capital requirement for
operational risk determined under sections 162(a) or (b) multiplied by
12.5.
Secs. 3.163-3.170 [Reserved]
Disclosures
Sec. 3.171 Purpose and scope.
Secs. 3.171 through 3.173 establish public disclosure requirements
related to the capital requirements of a national bank or Federal
savings association that is an advanced approaches national bank or
Federal savings association.
Sec. 3.172 Disclosure requirements.
(a) A national bank or Federal savings association that is an
advanced approaches national bank or Federal savings association that
has completed the parallel run process and that has
[[Page 172]]
received notification from the OCC pursuant to section 121(d) of subpart
E of this part must publicly disclose each quarter its total and tier 1
risk-based capital ratios and their components as calculated under this
subpart (that is, common equity tier 1 capital, additional tier 1
capital, tier 2 capital, total qualifying capital, and total risk-
weighted assets).
(b) A national bank or Federal savings association that is an
advanced approaches national bank or Federal savings association that
has completed the parallel run process and that has received
notification from the OCC pursuant to section 121(d) of subpart E of
this part must comply with paragraph (c) of this section unless it is a
consolidated subsidiary of a bank holding company, savings and loan
holding company, or depository institution that is subject to these
disclosure requirements or a subsidiary of a non-U.S. banking
organization that is subject to comparable public disclosure
requirements in its home jurisdiction.
(c)(1) A national bank or Federal savings association described in
paragraph (b) of this section must provide timely public disclosures
each calendar quarter of the information in the applicable tables in
Sec. 3.173. If a significant change occurs, such that the most recent
reported amounts are no longer reflective of the national bank's or
Federal savings association's capital adequacy and risk profile, then a
brief discussion of this change and its likely impact must be disclosed
as soon as practicable thereafter. Qualitative disclosures that
typically do not change each quarter (for example, a general summary of
the national bank's or Federal savings association's risk management
objectives and policies, reporting system, and definitions) may be
disclosed annually after the end of the fourth calendar quarter,
provided that any significant changes to these are disclosed in the
interim. Management may provide all of the disclosures required by this
subpart in one place on the national bank's or Federal savings
association's public Web site or may provide the disclosures in more
than one public financial report or other regulatory reports, provided
that the national bank or Federal savings association publicly provides
a summary table specifically indicating the location(s) of all such
disclosures.
(2) A national bank or Federal savings association described in
paragraph (b) of this section must have a formal disclosure policy
approved by the board of directors that addresses its approach for
determining the disclosures it makes. The policy must address the
associated internal controls and disclosure controls and procedures. The
board of directors and senior management are responsible for
establishing and maintaining an effective internal control structure
over financial reporting, including the disclosures required by this
subpart, and must ensure that appropriate review of the disclosures
takes place. One or more senior officers of the national bank or Federal
savings association must attest that the disclosures meet the
requirements of this subpart.
(3) If a national bank or Federal savings association described in
paragraph (b) of this section believes that disclosure of specific
commercial or financial information would prejudice seriously its
position by making public information that is either proprietary or
confidential in nature, the national bank or Federal savings association
is not required to disclose those specific items, but must disclose more
general information about the subject matter of the requirement,
together with the fact that, and the reason why, the specific items of
information have not been disclosed.
Sec. 3.173 Disclosures by certain advanced approaches national banks
or Federal savings associations.
(a) Except as provided in Sec. 3.172(b), a national bank or Federal
savings association described in Sec. 3.172(b) must make the disclosures
described in Tables 1 through 12 to Sec. 3.173. The national bank or
Federal savings association must make these disclosures publicly
available for each of the last three years (that is, twelve quarters) or
such shorter period beginning on January 1, 2014.
[[Page 173]]
Table 1 toSec. 3.173--Scope of Application
Qualitative disclosures....... (a).............. The name of the top
corporate entity in
the group to which
subpart E of this
part applies.
(b).............. A brief description
of the differences
in the basis for
consolidating
entities\1\ for
accounting and
regulatory purposes,
with a description
of those entities:
(1) That are fully
consolidated;
(2) That are
deconsolidated and
deducted from total
capital;
(3) For which the
total capital
requirement is
deducted; and
(4) That are neither
consolidated nor
deducted (for
example, where the
investment in the
entity is assigned a
risk weight in
accordance with this
subpart).
(c).............. Any restrictions, or
other major
impediments, on
transfer of funds or
total capital within
the group.
Quantitative disclosures...... (d).............. The aggregate amount
of surplus capital
of insurance
subsidiaries
included in the
total capital of the
consolidated group.
(e).............. The aggregate amount
by which actual
total capital is
less than the
minimum total
capital requirement
in all subsidiaries,
with total capital
requirements and the
name(s) of the
subsidiaries with
such deficiencies.
------------------------------------------------------------------------
\1\ Such entities include securities, insurance and other financial
subsidiaries, commercial subsidiaries (where permitted), and
significant minority equity investments in insurance, financial and
commercial entities.
Table 2 toSec. 3.173--Capital Structure
Qualitative disclosures....... (a).............. Summary information
on the terms and
conditions of the
main features of all
regulatory capital
instruments.
Quantitative disclosures...... (b).............. The amount of common
equity tier 1
capital, with
separate disclosure
of:
(1) Common stock and
related surplus;
(2) Retained
earnings;
(3) Common equity
minority interest;
(4) AOCI (net of tax)
and other reserves;
and
(5) Regulatory
adjustments and
deductions made to
common equity tier 1
capital.
(c).............. The amount of tier 1
capital, with
separate disclosure
of:
(1) Additional tier 1
capital elements,
including additional
tier 1 capital
instruments and tier
1 minority interest
not included in
common equity tier 1
capital; and
(2) Regulatory
adjustments and
deductions made to
tier 1 capital.
(d).............. The amount of total
capital, with
separate disclosure
of:
(1) Tier 2 capital
elements, including
tier 2 capital
instruments and
total capital
minority interest
not included in tier
1 capital; and
(2) Regulatory
adjustments and
deductions made to
total capital.
------------------------------------------------------------------------
Table 3 toSec. 3.173--Capital Adequacy
Qualitative disclosures....... (a).............. A summary discussion
of the national
bank's or Federal
savings
association's
approach to
assessing the
adequacy of its
capital to support
current and future
activities.
Quantitative disclosures...... (b).............. Risk-weighted assets
for credit risk
from:
(1) Wholesale
exposures;
(2) Residential
mortgage exposures;
(3) Qualifying
revolving exposures;
(4) Other retail
exposures;
(5) Securitization
exposures;
(6) Equity exposures:
(7) Equity exposures
subject to the
simple risk weight
approach; and
(8) Equity exposures
subject to the
internal models
approach.
(c).............. Standardized market
risk-weighted assets
and advanced market
risk-weighted assets
as calculated under
subpart F of this
part:
(1) Standardized
approach for
specific risk; and
(2) Internal models
approach for
specific risk.
(d).............. Risk-weighted assets
for operational
risk.
(e).............. Common equity tier 1,
tier 1 and total
risk-based capital
ratios:
(1) For the top
consolidated group;
and
(2) For each
depository
institution
subsidiary.
(f).............. Total risk-weighted
assets.
------------------------------------------------------------------------
[[Page 174]]
Table 4 toSec. 3.173--Capital Conservation and Countercyclical Capital
Buffers
Qualitative disclosures....... (a).............. The national bank or
Federal savings
association must
publicly disclose
the geographic
breakdown of its
private sector
credit exposures
used in the
calculation of the
countercyclical
capital buffer.
Quantitative disclosures...... (b).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
the capital
conservation buffer
and the
countercyclical
capital buffer as
described under Sec.
3.11 of subpart B.
(c).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
the buffer retained
income of the
national bank or
Federal savings
association, as
described under Sec.
3.11 of subpart B.
(d).............. At least quarterly,
the national bank or
Federal savings
association must
calculate and
publicly disclose
any limitations it
has on distributions
and discretionary
bonus payments
resulting from the
capital conservation
buffer and the
countercyclical
capital buffer
framework described
underSec. 3.11 of
subpart B, including
the maximum payout
amount for the
quarter.
------------------------------------------------------------------------
(b) General qualitative disclosure requirement. For each separate
risk area described in Tables 5 through 12 to Sec. 3.173, the national
bank or Federal savings association must describe its risk management
objectives and policies, including:
(1) Strategies and processes;
(2) The structure and organization of the relevant risk management
function;
(3) The scope and nature of risk reporting and/or measurement
systems; and
(4) Policies for hedging and/or mitigating risk and strategies and
processes for monitoring the continuing effectiveness of hedges/
mitigants.
Table 5 \1\ toSec. 3.173--Credit Risk: General Disclosures
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to credit
risk (excluding
counterparty credit
risk disclosed in
accordance with
Table 7 to Sec.
3.173), including:
(1) Policy for
determining past due
or delinquency
status;
(2) Policy for
placing loans on
nonaccrual;
(3) Policy for
returning loans to
accrual status;
(4) Definition of and
policy for
identifying impaired
loans (for financial
accounting
purposes).
(5) Description of
the methodology that
the entity uses to
estimate its
allowance for loan
and lease losses,
including
statistical methods
used where
applicable;
(6) Policy for
charging-off
uncollectible
amounts; and
(7) Discussion of the
national bank's or
Federal savings
association's credit
risk management
policy
Quantitative disclosures...... (b).............. Total credit risk
exposures and
average credit risk
exposures, after
accounting offsets
in accordance with
GAAP,\2\ without
taking into account
the effects of
credit risk
mitigation
techniques (for
example, collateral
and netting not
permitted under
GAAP), over the
period categorized
by major types of
credit exposure. For
example, national
banks or Federal
savings associations
could use categories
similar to that used
for financial
statement purposes.
Such categories
might include, for
instance:
(1) Loans, off-
balance sheet
commitments, and
other non-derivative
off-balance sheet
exposures;
(2) Debt securities;
and
(3) OTC derivatives.
(c).............. Geographic \3\
distribution of
exposures,
categorized in
significant areas by
major types of
credit exposure.
(d).............. Industry or
counterparty type
distribution of
exposures,
categorized by major
types of credit
exposure.
(e).............. By major industry or
counterparty type:
(1) Amount of
impaired loans for
which there was a
related allowance
under GAAP;
(2) Amount of
impaired loans for
which there was no
related allowance
under GAAP;
(3) Amount of loans
past due 90 days and
on nonaccrual;
(4) Amount of loans
past due 90 days and
still accruing; \4\
[[Page 175]]
(5) The balance in
the allowance for
loan and lease
losses at the end of
each period,
disaggregated on the
basis of the
entity's impairment
method. To
disaggregate the
information required
on the basis of
impairment
methodology, an
entity shall
separately disclose
the amounts based on
the requirements in
GAAP; and
(6) Charge-offs
during the period.
(f).............. Amount of impaired
loans and, if
available, the
amount of past due
loans categorized by
significant
geographic areas
including, if
practical, the
amounts of
allowances related
to each geographical
area,\5\ further
categorized as
required by GAAP.
(g).............. Reconciliation of
changes in ALLL.\6\
(h).............. Remaining contractual
maturity breakdown
(for example, one
year or less) of the
whole portfolio,
categorized by
credit exposure.
------------------------------------------------------------------------
\1\ Table 5 toSec. 3.173 does not cover equity exposures, which should
be reported in Table 9.
\2\ See, for example, ASC Topic 815-10 and 210-20 as they may be amended
from time to time.
\3\ Geographical areas may comprise individual countries, groups of
countries, or regions within countries. A national bank or Federal
savings association might choose to define the geographical areas
based on the way the company's portfolio is geographically managed.
The criteria used to allocate the loans to geographical areas must be
specified.
\4\ A national bank or Federal savings association is encouraged also to
provide an analysis of the aging of past-due loans.
\5\ The portion of the general allowance that is not allocated to a
geographical area should be disclosed separately.
\6\ The reconciliation should include the following: A description of
the allowance; the opening balance of the allowance; charge-offs taken
against the allowance during the period; amounts provided (or
reversed) for estimated probable loan losses during the period; any
other adjustments (for example, exchange rate differences, business
combinations, acquisitions and disposals of subsidiaries), including
transfers between allowances; and the closing balance of the
allowance. Charge-offs and recoveries that have been recorded directly
to the income statement should be disclosed separately.
Table 6 toSec. 3.173--Credit Risk: Disclosures for Portfolios Subject
to IRB Risk-Based Capital Formulas
Qualitative disclosures....... (a).............. Explanation and
review of the:
(1) Structure of
internal rating
systems and relation
between internal and
external ratings;
(2) Use of risk
parameter estimates
other than for
regulatory capital
purposes;
(3) Process for
managing and
recognizing credit
risk mitigation (see
Table 8 to Sec.
3.173); and
(4) Control
mechanisms for the
rating system,
including discussion
of independence,
accountability, and
rating systems
review.
(b).............. Description of the
internal ratings
process, provided
separately for the
following:
(1) Wholesale
category;
(2) Retail
subcategories;
(i) Residential
mortgage exposures;
(ii) Qualifying
revolving exposures;
and
(iii) Other retail
exposures.
For each category and
subcategory above
the description
should include:
(A) The types of
exposure included in
the category/
subcategories; and
(B) The definitions,
methods and data for
estimation and
validation of PD,
LGD, and EAD,
including
assumptions employed
in the derivation of
these variables.\1\
Quantitative disclosures: risk (c).............. (1) For wholesale
assessment. exposures, present
the following
information across a
sufficient number of
PD grades (including
default) to allow
for a meaningful
differentiation of
credit risk: \2\
(i) Total EAD; \3\
(ii) Exposure-
weighted average LGD
(percentage);
(iii) Exposure-
weighted average
risk weight; and
(iv) Amount of
undrawn commitments
and exposure-
weighted average EAD
including average
drawdowns prior to
default for
wholesale exposures.
(2) For each retail
subcategory, present
the disclosures
outlined above
across a sufficient
number of segments
to allow for a
meaningful
differentiation of
credit risk.
Quantitative disclosures: (d).............. Actual losses in the
historical results. preceding period for
each category and
subcategory and how
this differs from
past experience. A
discussion of the
factors that
impacted the loss
experience in the
preceding period--
for example, has the
national bank or
Federal savings
association
experienced higher
than average default
rates, loss rates or
EADs.
[[Page 176]]
(e).............. The national bank's
or Federal savings
association's
estimates compared
against actual
outcomes over a
longer period.\4\ At
a minimum, this
should include
information on
estimates of losses
against actual
losses in the
wholesale category
and each retail
subcategory over a
period sufficient to
allow for a
meaningful
assessment of the
performance of the
internal rating
processes for each
category/
subcategory.\5\
Where appropriate,
the national bank or
Federal savings
association should
further decompose
this to provide
analysis of PD, LGD,
and EAD outcomes
against estimates
provided in the
quantitative risk
assessment
disclosures
above.\6\
------------------------------------------------------------------------
\1\ This disclosure item does not require a detailed description of the
model in full--it should provide the reader with a broad overview of
the model approach, describing definitions of the variables and
methods for estimating and validating those variables set out in the
quantitative risk disclosures below. This should be done for each of
the four category/subcategories. The national bank or Federal savings
association must disclose any significant differences in approach to
estimating these variables within each category/subcategories.
\2\ The PD, LGD and EAD disclosures in Table 6 (c) toSec. 3.173 should
reflect the effects of collateral, qualifying master netting
agreements, eligible guarantees and eligible credit derivatives as
defined under this part. Disclosure of each PD grade should include
the exposure-weighted average PD for each grade. Where a national bank
or Federal savings association aggregates PD grades for the purposes
of disclosure, this should be a representative breakdown of the
distribution of PD grades used for regulatory capital purposes.
\3\ Outstanding loans and EAD on undrawn commitments can be presented on
a combined basis for these disclosures.
\4\ These disclosures are a way of further informing the reader about
the reliability of the information provided in the ``quantitative
disclosures: Risk assessment'' over the long run. The disclosures are
requirements from year-end 2010; in the meantime, early adoption is
encouraged. The phased implementation is to allow a national bank or
Federal savings association sufficient time to build up a longer run
of data that will make these disclosures meaningful.
\5\ This disclosure item is not intended to be prescriptive about the
period used for this assessment. Upon implementation, it is expected
that a national bank or Federal savings association would provide
these disclosures for as long a set of data as possible--for example,
if a national bank or Federal savings association has 10 years of
data, it might choose to disclose the average default rates for each
PD grade over that 10-year period. Annual amounts need not be
disclosed.
\6\ A national bank or Federal savings association must provide this
further decomposition where it will allow users greater insight into
the reliability of the estimates provided in the ``quantitative
disclosures: Risk assessment.'' In particular, it must provide this
information where there are material differences between its estimates
of PD, LGD or EAD compared to actual outcomes over the long run. The
national bank or Federal savings association must also provide
explanations for such differences.
Table 7 toSec. 3.173--General Disclosure for Counterparty Credit Risk
of OTC Derivative Contracts, Repo-Style Transactions, and Eligible
Margin Loans
Qualitative Disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to OTC
derivatives,
eligible margin
loans, and repo-
style transactions,
including:
(1) Discussion of
methodology used to
assign economic
capital and credit
limits for
counterparty credit
exposures;
(2) Discussion of
policies for
securing collateral,
valuing and managing
collateral, and
establishing credit
reserves;
(3) Discussion of the
primary types of
collateral taken;
(4) Discussion of
policies with
respect to wrong-way
risk exposures; and
(5) Discussion of the
impact of the amount
of collateral the
national bank or
Federal savings
association would
have to provide if
the national bank or
Federal savings
association were to
receive a credit
rating downgrade.
Quantitative Disclosures...... (b).............. Gross positive fair
value of contracts,
netting benefits,
netted current
credit exposure,
collateral held
(including type, for
example, cash,
government
securities), and net
unsecured credit
exposure.\1\ Also
report measures for
EAD used for
regulatory capital
for these
transactions, the
notional value of
credit derivative
hedges purchased for
counterparty credit
risk protection,
and, for national
banks or Federal
savings associations
not using the
internal models
methodology in Sec.
3.132(d) , the
distribution of
current credit
exposure by types of
credit exposure.\2\
(c).............. Notional amount of
purchased and sold
credit derivatives,
segregated between
use for the national
bank's or Federal
savings
association's own
credit portfolio and
for its
intermediation
activities,
including the
distribution of the
credit derivative
products used,
categorized further
by protection bought
and sold within each
product group.
(d).............. The estimate of alpha
if the national bank
or Federal savings
association has
received supervisory
approval to estimate
alpha.
------------------------------------------------------------------------
\1\ Net unsecured credit exposure is the credit exposure after
considering the benefits from legally enforceable netting agreements
and collateral arrangements, without taking into account haircuts for
price volatility, liquidity, etc.
\2\ This may include interest rate derivative contracts, foreign
exchange derivative contracts, equity derivative contracts, credit
derivatives, commodity or other derivative contracts, repo-style
transactions, and eligible margin loans.
[[Page 177]]
Table 8 ToSec. 3.173--Credit Risk Mitigation \1 2\
------------------------------------------------------------------------
------------------------------------------------------------------------
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to credit
risk mitigation,
including:
(1) Policies and
processes for, and
an indication of the
extent to which the
national bank or
Federal savings
association uses, on-
or off-balance
sheet netting;
(2) Policies and
processes for
collateral valuation
and management;
(3) A description of
the main types of
collateral taken by
the national bank or
Federal savings
association;
(4) The main types of
guarantors/credit
derivative
counterparties and
their
creditworthiness;
and
(5) Information about
(market or credit)
risk concentrations
within the
mitigation taken.
Quantitative disclosures...... (b).............. For each separately
disclosed portfolio,
the total exposure
(after, where
applicable, on- or
off-balance sheet
netting) that is
covered by
guarantees/credit
derivatives.
------------------------------------------------------------------------
\1\ At a minimum, a national bank or Federal savings association must
provide the disclosures in Table 8 in relation to credit risk
mitigation that has been recognized for the purposes of reducing
capital requirements under this subpart. Where relevant, national
banks or Federal savings associations are encouraged to give further
information about mitigants that have not been recognized for that
purpose.
\2\ Credit derivatives and other credit mitigation that are treated for
the purposes of this subpart as synthetic securitization exposures
should be excluded from the credit risk mitigation disclosures (in
Table 8 toSec. 3.173) and included within those relating to
securitization (in Table 9 toSec. 3.173).
Table 9 toSec. 3.173--Securitization
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to
securitization
(including synthetic
securitizations),
including a
discussion of:
(1) The national
bank's or Federal
savings
association's
objectives for
securitizing assets,
including the extent
to which these
activities transfer
credit risk of the
underlying exposures
away from the
national bank or
Federal savings
association to other
entities and
including the type
of risks assumed and
retained with
resecuritization
activity; \1\
(2) The nature of the
risks (e.g.
liquidity risk)
inherent in the
securitized assets;
(3) The roles played
by the national bank
or Federal savings
association in the
securitization
process \2\ and an
indication of the
extent of the
national bank's or
Federal savings
association's
involvement in each
of them;
(4) The processes in
place to monitor
changes in the
credit and market
risk of
securitization
exposures including
how those processes
differ for
resecuritization
exposures;
(5) The national
bank's or Federal
savings
association's policy
for mitigating the
credit risk retained
through
securitization and
resecuritization
exposures; and
(6) The risk-based
capital approaches
that the national
bank or Federal
savings association
follows for its
securitization
exposures including
the type of
securitization
exposure to which
each approach
applies.
(b).............. A list of:
(1) The type of
securitization SPEs
that the national
bank or Federal
savings association,
as sponsor, uses to
securitize third-
party exposures. The
national bank or
Federal savings
association must
indicate whether it
has exposure to
these SPEs, either
on- or off- balance
sheet; and
(2) Affiliated
entities:
(i) That the national
bank or Federal
savings association
manages or advises;
and
(ii) That invest
either in the
securitization
exposures that the
national bank or
Federal savings
association has
securitized or in
securitization SPEs
that the national
bank or Federal
savings association
sponsors.\3\
[[Page 178]]
(c).............. Summary of the
national bank's or
Federal savings
association's
accounting policies
for securitization
activities,
including:
(1) Whether the
transactions are
treated as sales or
financings;
(2) Recognition of
gain-on-sale;
(3) Methods and key
assumptions and
inputs applied in
valuing retained or
purchased interests;
(4) Changes in
methods and key
assumptions and
inputs from the
previous period for
valuing retained
interests and impact
of the changes;
(5) Treatment of
synthetic
securitizations;
(6) How exposures
intended to be
securitized are
valued and whether
they are recorded
under subpart E of
this part; and
(7) Policies for
recognizing
liabilities on the
balance sheet for
arrangements that
could require the
national bank or
Federal savings
association to
provide financial
support for
securitized assets.
(d).............. An explanation of
significant changes
to any of the
quantitative
information set
forth below since
the last reporting
period.
Quantitative disclosures...... (e).............. The total outstanding
exposures
securitized \4\ by
the national bank or
Federal savings
association in
securitizations that
meet the operational
criteria in Sec.
3.141 (categorized
into traditional/
synthetic), by
underlying exposure
type \5\ separately
for securitizations
of third-party
exposures for which
the bank acts only
as sponsor.
(f).............. For exposures
securitized by the
national bank or
Federal savings
association in
securitizations that
meet the operational
criteria in Sec.
3.141:
(1) Amount of
securitized assets
that are impaired
\6\/past due
categorized by
exposure type; and
(2) Losses recognized
by the national bank
or Federal savings
association during
the current period
categorized by
exposure type.\7\
(g).............. The total amount of
outstanding
exposures intended
to be securitized
categorized by
exposure type.
(h).............. Aggregate amount of:
(1) On-balance sheet
securitization
exposures retained
or purchased
categorized by
exposure type; and
(2) Off-balance sheet
securitization
exposures
categorized by
exposure type.
(i).............. (1) Aggregate amount
of securitization
exposures retained
or purchased and the
associated capital
requirements for
these exposures,
categorized between
securitization and
resecuritization
exposures, further
categorized into a
meaningful number of
risk weight bands
and by risk-based
capital approach
(e.g. SA, SFA, or
SSFA).
(2) Exposures that
have been deducted
entirely from tier 1
capital, CEIOs
deducted from total
capital (as
described in Sec.
3.42(a)(1), and
other exposures
deducted from total
capital should be
disclosed separately
by exposure type.
(j).............. Summary of current
year's
securitization
activity, including
the amount of
exposures
securitized (by
exposure type), and
recognized gain or
loss on sale by
asset type.
(k).............. Aggregate amount of
resecuritization
exposures retained
or purchased
categorized
according to:
(1) Exposures to
which credit risk
mitigation is
applied and those
not applied; and
(2) Exposures to
guarantors
categorized
according to
guarantor
creditworthiness
categories or
guarantor name.
------------------------------------------------------------------------
\1\ The national bank or Federal savings association must describe the
structure of resecuritizations in which it participates; this
description must be provided for the main categories of
resecuritization products in which the national bank or Federal
savings association is active.
\2\ For example, these roles would include originator, investor,
servicer, provider of credit enhancement, sponsor, liquidity provider,
or swap provider.
\3\ For example, money market mutual funds should be listed
individually, and personal and private trusts, should be noted
collectively.
\4\ ``Exposures securitized'' include underlying exposures originated by
the bank, whether generated by them or purchased, and recognized in
the balance sheet, from third parties, and third-party exposures
included in sponsored transactions. Securitization transactions
(including underlying exposures originally on the bank's balance sheet
and underlying exposures acquired by the bank from third-party
entities) in which the originating bank does not retain any
securitization exposure should be shown separately but need only be
reported for the year of inception.
\5\ A national bank or Federal savings association is required to
disclose exposures regardless of whether there is a capital charge
under this part.
\6\ A national bank or Federal savings association must include credit-
related other than temporary impairment (OTTI).
\7\ For example, charge-offs/allowances (if the assets remain on the
bank's balance sheet) or credit-related OTTI of I/O strips and other
retained residual interests, as well as recognition of liabilities for
probable future financial support required of the bank with respect to
securitized assets.
[[Page 179]]
Table 10 toSec. 3.173--Operational Risk
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement for
operational risk.
(b).............. Description of the
AMA, including a
discussion of
relevant internal
and external factors
considered in the
national bank's or
Federal savings
association's
measurement
approach.
(c).............. A description of the
use of insurance for
the purpose of
mitigating
operational risk.
------------------------------------------------------------------------
Table 11 toSec. 3.173--Equities Not Subject to Subpart F of This Part
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement with
respect to the
equity risk of
equity holdings not
subject to subpart F
of this part,
including:
(1) Differentiation
between holdings on
which capital gains
are expected and
those held for other
objectives,
including for
relationship and
strategic reasons;
and
(2) Discussion of
important policies
covering the
valuation of and
accounting for
equity holdings not
subject to subpart F
of this part. This
includes the
accounting
methodology and
valuation
methodologies used,
including key
assumptions and
practices affecting
valuation as well as
significant changes
in these practices.
Quantitative disclosures...... (b).............. Carrying value on the
balance sheet of
equity investments,
as well as the fair
value of those
investments.
(c).............. The types and nature
of investments,
including the amount
that is:
(1) Publicly traded;
and
(2) Non-publicly
traded.
(d).............. The cumulative
realized gains
(losses) arising
from sales and
liquidations in the
reporting period.
(e).............. (1) Total unrealized
gains (losses) \1\
(2) Total latent
revaluation gains
(losses) \2\
(3) Any amounts of
the above included
in tier 1 and/or
tier 2 capital.
(f).............. Capital requirements
categorized by
appropriate equity
groupings,
consistent with the
national bank's or
Federal savings
association's
methodology, as well
as the aggregate
amounts and the type
of equity
investments subject
to any supervisory
transition regarding
total capital
requirements.\3\
------------------------------------------------------------------------
\1\ Unrealized gains (losses) recognized in the balance sheet but not
through earnings.
\2\ Unrealized gains (losses) not recognized either in the balance sheet
or through earnings.
\3\ This disclosure must include a breakdown of equities that are
subject to the 0 percent, 20 percent, 100 percent, 300 percent, 400
percent, and 600 percent risk weights, as applicable.
Table 12 toSec. 3.173--Interest Rate Risk for Non-Trading Activities
Qualitative disclosures....... (a).............. The general
qualitative
disclosure
requirement,
including the nature
of interest rate
risk for non-trading
activities and key
assumptions,
including
assumptions
regarding loan
prepayments and
behavior of non-
maturity deposits,
and frequency of
measurement of
interest rate risk
for non-trading
activities.
Quantitative disclosures...... (b).............. The increase
(decline) in
earnings or economic
value (or relevant
measure used by
management) for
upward and downward
rate shocks
according to
management's method
for measuring
interest rate risk
for non-trading
activities,
categorized by
currency (as
appropriate).
------------------------------------------------------------------------
Secs. 3.174-3.200 [Reserved]
Subpart F_Risk-Weighted Assets_Market Risk
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.201 Purpose, applicability, and reservation of authority.
(a) Purpose. This subpart F establishes risk-based capital
requirements for national banks or Federal savings associations with
significant exposure to market risk, provides methods for these national
banks or Federal savings associations to calculate their standardized
measure for market risk and, if applicable, advanced measure for market
risk, and establishes public disclosure requirements.
(b) Applicability. (1) This subpart F applies to any national bank
or Federal savings association with aggregate trading assets and trading
liabilities (as reported in the national bank's or
[[Page 180]]
Federal savings association's most recent quarterly [regulatory
report]), equal to:
(i) 10 percent or more of quarter-end total assets as reported on
the most recent quarterly [Call Report or FR Y-9C]; or
(ii) $1 billion or more.
(2) The OCC may apply this subpart to any national bank or Federal
savings association if the OCC deems it necessary or appropriate because
of the level of market risk of the national bank or Federal savings
association or to ensure safe and sound banking practices.
(3) The OCC may exclude a national bank or Federal savings
association that meets the criteria of paragraph (b)(1) of this section
from application of this subpart if the OCC determines that the
exclusion is appropriate based on the level of market risk of the
national bank or Federal savings association and is consistent with safe
and sound banking practices.
(c) Reservation of authority (1) The OCC may require a national bank
or Federal savings association to hold an amount of capital greater than
otherwise required under this subpart if the OCC determines that the
national bank's or Federal savings association's capital requirement for
market risk as calculated under this subpart is not commensurate with
the market risk of the national bank's or Federal savings association's
covered positions. In making determinations under paragraphs (c)(1)
through (c)(3) of this section, the OCC will apply notice and response
procedures generally in the same manner as the notice and response
procedures set forth in 12 CFR 3.404.
(2) If the OCC determines that the risk-based capital requirement
calculated under this subpart by the national bank or Federal savings
association for one or more covered positions or portfolios of covered
positions is not commensurate with the risks associated with those
positions or portfolios, the OCC may require the national bank or
Federal savings association to assign a different risk-based capital
requirement to the positions or portfolios that more accurately reflects
the risk of the positions or portfolios.
(3) The OCC may also require a national bank or Federal savings
association to calculate risk-based capital requirements for specific
positions or portfolios under this subpart, or under subpart D or
subpart E of this part, as appropriate, to more accurately reflect the
risks of the positions.
(4) Nothing in this subpart 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.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Sec. 3.202 Definitions.
(a) Terms set forth in Sec. ???.2 and used in this subpart have the
definitions assigned thereto in Sec. 3.2.
(b) For the purposes of this subpart, the following terms are
defined as follows:
Backtesting means the comparison of a national bank's or Federal
savings association's internal estimates with actual outcomes during a
sample period not used in model development. For purposes of this
subpart, backtesting is one form of out-of-sample testing.
Commodity position means a position for which price risk arises from
changes in the price of a commodity.
Corporate debt position means a debt position that is an exposure to
a company that is not a sovereign entity, the Bank for International
Settlements, the European Central Bank, the European Commission, the
International Monetary Fund, a multilateral development bank, a
depository institution, a foreign bank, a credit union, a public sector
entity, a GSE, or a securitization.
Correlation trading position means:
(1) A securitization position for which all or substantially all of
the value of the underlying exposures is based on the credit quality of
a single company for which a two-way market exists, or on commonly
traded indices based on such exposures for which a two-way market exists
on the indices; or
(2) A position that is not a securitization position and that hedges
[[Page 181]]
a position described in paragraph (1) of this definition; and
(3) A correlation trading position does not include:
(i) A resecuritization position;
(ii) A derivative of a securitization position that does not provide
a pro rata share in the proceeds of a securitization tranche; or
(iii) A securitization position for which the underlying assets or
reference exposures are retail exposures, residential mortgage
exposures, or commercial mortgage exposures.
Covered position means the following positions:
(1) A trading asset or trading liability (whether on- or off-balance
sheet),\27\ as reported on Call Report, that meets the following
conditions:
---------------------------------------------------------------------------
\27\ Securities subject to repurchase and lending agreements are
included as if they are still owned by the lender.
---------------------------------------------------------------------------
(i) The position is a trading position or hedges another covered
position; \28\ and
---------------------------------------------------------------------------
\28\ A position that hedges a trading position must be within the
scope of the bank's hedging strategy as described in paragraph (a)(2) of
section 203 of this subpart.
---------------------------------------------------------------------------
(ii) The position is free of any restrictive covenants on its
tradability or the national bank or Federal savings association is able
to hedge the material risk elements of the position in a two-way market;
(2) A foreign exchange or commodity position, regardless of whether
the position is a trading asset or trading liability (excluding any
structural foreign currency positions that the national bank or Federal
savings association chooses to exclude with prior supervisory approval);
and
(3) Notwithstanding paragraphs (1) and (2) of this definition, a
covered position does not include:
(i) An intangible asset, including any servicing asset;
(ii) Any hedge of a trading position that the OCC determines to be
outside the scope of the national bank's or Federal savings
association's hedging strategy required in paragraph (a)(2) of
Sec. 3.203;
(iii) Any position that, in form or substance, acts as a liquidity
facility that provides support to asset-backed commercial paper;
(iv) A credit derivative the national bank or Federal savings
association recognizes as a guarantee for risk-weighted asset amount
calculation purposes under subpart D or subpart E of this part;
(v) Any position that is recognized as a credit valuation adjustment
hedge under Sec. 3.132(e)(5) or Sec. 3.132(e)(6), except as provided in
Sec. 3.132(e)(6)(vii);
(vi) Any equity position that is not publicly traded, other than a
derivative that references a publicly traded equity and other than a
position in an investment company as defined in and registered with the
SEC under the Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.),
provided that all the underlying equities held by the investment company
are publicly traded;
(vii) Any equity position that is not publicly traded, other than a
derivative that references a publicly traded equity and other than a
position in an entity not domiciled in the United States (or a political
subdivision thereof) that is supervised and regulated in a manner
similar to entities described in paragraph (3)(vi) of this definition;
(viii) Any position a national bank or Federal savings association
holds with the intent to securitize; or
(ix) Any direct real estate holding.
Debt position means a covered position that is not a securitization
position or a correlation trading position and that has a value that
reacts primarily to changes in interest rates or credit spreads.
Default by a sovereign entity has the same meaning as the term
sovereign default under Sec. 3.2.
Equity position means a covered position that is not a
securitization position or a correlation trading position and that has a
value that reacts primarily to changes in equity prices.
Event risk means the risk of loss on equity or hybrid equity
positions as a result of a financial event, such as the announcement or
occurrence of a company merger, acquisition, spin-off, or dissolution.
Foreign exchange position means a position for which price risk
arises from changes in foreign exchange rates.
General market risk means the risk of loss that could result from
broad market movements, such as changes in the
[[Page 182]]
general level of interest rates, credit spreads, equity prices, foreign
exchange rates, or commodity prices.
Hedge means a position or positions that offset all, or
substantially all, of one or more material risk factors of another
position.
Idiosyncratic risk means the risk of loss in the value of a position
that arises from changes in risk factors unique to that position.
Incremental risk means the default risk and credit migration risk of
a position. Default risk means the risk of loss on a position that could
result from the failure of an obligor to make timely payments of
principal or interest on its debt obligation, and the risk of loss that
could result from bankruptcy, insolvency, or similar proceeding. Credit
migration risk means the price risk that arises from significant changes
in the underlying credit quality of the position.
Market risk means the risk of loss on a position that could result
from movements in market prices.
Resecuritization position means a covered position that is:
(1) An on- or off-balance sheet exposure to a resecuritization; or
(2) An exposure that directly or indirectly references a
resecuritization exposure in paragraph (1) of this definition.
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;
(2) The credit risk associated with the underlying exposures has
been separated into at least two tranches that reflect 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) For non-synthetic securitizations, 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;
(7) The underlying exposures are not owned by a firm an investment
in which qualifies as a community development investment under section
24(Eleventh) of the National Bank Act;
(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 size and composition of its assets,
liabilities, and off-balance sheet exposures is not a securitization
based on the transaction's leverage, risk profile, or economic
substance;
(9) The OCC may deem an exposure to a transaction that meets the
definition of a securitization, notwithstanding paragraph (5), (6), or
(7) of this definition, to be a securitization based on the
transaction's leverage, risk profile, or economic substance; and
(10) The transaction is not:
(i) An investment fund;
(ii) A collective investment fund (as defined in [12 CFR 208.34
(Board), 12 CFR 9.18 (OCC)]);
(iii) An employee benefit plan as defined in paragraphs (3) and (32)
of section 3 of ERISA, a ``governmental plan'' (as defined in 29 U.S.C.
1002(32)) that complies with the tax deferral qualification requirements
provided in the Internal Revenue Code, or any similar employee benefit
plan established under the laws of a foreign jurisdiction; or
(iv) Registered with the SEC under the Investment Company Act of
1940 (15 U.S.C. 80a-1 et seq.) or foreign equivalents thereof.
Securitization position means a covered position that is:
(1) An on-balance sheet or off-balance sheet credit exposure
(including credit-enhancing representations and warranties) that arises
from a securitization (including a resecuritization); or
(2) An exposure that directly or indirectly references a
securitization exposure described in paragraph (1) of this definition.
Sovereign debt position means a direct exposure to a sovereign
entity.
[[Page 183]]
Specific risk means the risk of loss on a position that could result
from factors other than broad market movements and includes event risk,
default risk, and idiosyncratic risk.
Structural position in a foreign currency means a position that is
not a trading position and that is:
(1) Subordinated debt, equity, or minority interest in a
consolidated subsidiary that is denominated in a foreign currency;
(2) Capital assigned to foreign branches that is denominated in a
foreign currency;
(3) A position related to an unconsolidated subsidiary or another
item that is denominated in a foreign currency and that is deducted from
the national bank's or Federal savings association's tier 1 or tier 2
capital; or
(4) A position designed to hedge a national bank's or Federal
savings association's capital ratios or earnings against the effect on
paragraphs (1), (2), or (3) of this definition of adverse exchange rate
movements.
Term repo-style transaction means a repo-style transaction that has
an original maturity in excess of one business day.
Trading position means a position that is held by the national bank
or Federal savings association for the purpose of short-term resale or
with the intent of benefiting from actual or expected short-term price
movements, or to lock in arbitrage profits.
Two-way market means a market where there are independent bona fide
offers to buy and sell so that a price reasonably related to the last
sales price or current bona fide competitive bid and offer quotations
can be determined within one day and settled at that price within a
relatively short time frame conforming to trade custom.
Value-at-Risk (VaR) means the estimate of the maximum amount that
the value of one or more positions could decline due to market price or
rate movements during a fixed holding period within a stated confidence
interval.
Sec. 3.203 Requirements for application of this subpart F.
(a) Trading positions--(1) Identification of trading positions. A
national bank or Federal savings association must have clearly defined
policies and procedures for determining which of its trading assets and
trading liabilities are trading positions and which of its trading
positions are correlation trading positions. These policies and
procedures must take into account:
(i) The extent to which a position, or a hedge of its material
risks, can be marked-to-market daily by reference to a two-way market;
and
(ii) Possible impairments to the liquidity of a position or its
hedge.
(2) Trading and hedging strategies. A national bank or Federal
savings association must have clearly defined trading and hedging
strategies for its trading positions that are approved by senior
management of the national bank or Federal savings association.
(i) The trading strategy must articulate the expected holding period
of, and the market risk associated with, each portfolio of trading
positions.
(ii) The hedging strategy must articulate for each portfolio of
trading positions the level of market risk the national bank or Federal
savings association is willing to accept and must detail the
instruments, techniques, and strategies the national bank or Federal
savings association will use to hedge the risk of the portfolio.
(b) Management of covered positions--(1) Active management. A
national bank or Federal savings association must have clearly defined
policies and procedures for actively managing all covered positions. At
a minimum, these policies and procedures must require:
(i) Marking positions to market or to model on a daily basis;
(ii) Daily assessment of the national bank's or Federal savings
association's ability to hedge position and portfolio risks, and of the
extent of market liquidity;
(iii) Establishment and daily monitoring of limits on positions by a
risk control unit independent of the trading business unit;
(iv) Daily monitoring by senior management of information described
in
[[Page 184]]
paragraphs (b)(1)(i) through (b)(1)(iii) of this section;
(v) At least annual reassessment of established limits on positions
by senior management; and
(vi) At least annual assessments by qualified personnel of the
quality of market inputs to the valuation process, the soundness of key
assumptions, the reliability of parameter estimation in pricing models,
and the stability and accuracy of model calibration under alternative
market scenarios.
(2) Valuation of covered positions. The national bank or Federal
savings association must have a process for prudent valuation of its
covered positions that includes policies and procedures on the valuation
of positions, marking positions to market or to model, independent price
verification, and valuation adjustments or reserves. The valuation
process must consider, as appropriate, unearned credit spreads, close-
out costs, early termination costs, investing and funding costs,
liquidity, and model risk.
(c) Requirements for internal models. (1) A national bank or Federal
savings association must obtain the prior written approval of the OCC
before using any internal model to calculate its risk-based capital
requirement under this subpart.
(2) A national bank or Federal savings association must meet all of
the requirements of this section on an ongoing basis. The national bank
or Federal savings association must promptly notify the OCC when:
(i) The national bank or Federal savings association plans to extend
the use of a model that the OCC has approved under this subpart to an
additional business line or product type;
(ii) The national bank or Federal savings association makes any
change to an internal model approved by the OCC under this subpart that
would result in a material change in the national bank's or Federal
savings association's risk-weighted asset amount for a portfolio of
covered positions; or
(iii) The national bank or Federal savings association makes any
material change to its modeling assumptions.
(3) The OCC may rescind its approval of the use of any internal
model (in whole or in part) or of the determination of the approach
under Sec. 3.209(a)(2)(ii) for a national bank's or Federal savings
association's modeled correlation trading positions and determine an
appropriate capital requirement for the covered positions to which the
model would apply, if the OCC determines that the model no longer
complies with this subpart or fails to reflect accurately the risks of
the national bank's or Federal savings association's covered positions.
(4) The national bank or Federal savings association must
periodically, but no less frequently than annually, review its internal
models in light of developments in financial markets and modeling
technologies, and enhance those models as appropriate to ensure that
they continue to meet the OCC's standards for model approval and employ
risk measurement methodologies that are most appropriate for the
national bank's or Federal savings association's covered positions.
(5) The national bank or Federal savings association must
incorporate its internal models into its risk management process and
integrate the internal models used for calculating its VaR-based measure
into its daily risk management process.
(6) The level of sophistication of a national bank's or Federal
savings association's internal models must be commensurate with the
complexity and amount of its covered positions. A national bank's or
Federal savings association's internal models may use any of the
generally accepted approaches, including but not limited to variance-
covariance models, historical simulations, or Monte Carlo simulations,
to measure market risk.
(7) The national bank's or Federal savings association's internal
models must properly measure all the material risks in the covered
positions to which they are applied.
(8) The national bank's or Federal savings association's internal
models must conservatively assess the risks arising from less liquid
positions and positions with limited price transparency under realistic
market scenarios.
(9) The national bank or Federal savings association must have a
rigorous
[[Page 185]]
and well-defined process for re-estimating, re-evaluating, and updating
its internal models to ensure continued applicability and relevance.
(10) If a national bank or Federal savings association uses internal
models to measure specific risk, the internal models must also satisfy
the requirements in paragraph (b)(1) of Sec. 3.207.
(d) Control, oversight, and validation mechanisms. (1) The national
bank or Federal savings association must have a risk control unit that
reports directly to senior management and is independent from the
business trading units.
(2) The national bank or Federal savings association must validate
its internal models initially and on an ongoing basis. The national
bank's or Federal savings association's validation process must be
independent of the internal models' 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 internal models;
(ii) An ongoing monitoring process that includes verification of
processes and the comparison of the national bank's or Federal savings
association's model outputs with relevant internal and external data
sources or estimation techniques; and
(iii) An outcomes analysis process that includes backtesting. For
internal models used to calculate the VaR-based measure, this process
must include a comparison of the changes in the national bank's or
Federal savings association's portfolio value that would have occurred
were end-of-day positions to remain unchanged (therefore, excluding
fees, commissions, reserves, net interest income, and intraday trading)
with VaR-based measures during a sample period not used in model
development.
(3) The national bank or Federal savings association must stress
test the market risk of its covered positions at a frequency appropriate
to each portfolio, and in no case less frequently than quarterly. The
stress tests must take into account concentration risk (including but
not limited to concentrations in single issuers, industries, sectors, or
markets), illiquidity under stressed market conditions, and risks
arising from the national bank's or Federal savings association's
trading activities that may not be adequately captured in its internal
models.
(4) The national bank or Federal savings association must have an
internal audit function independent of business-line management that at
least annually assesses the effectiveness of the controls supporting the
national bank's or Federal savings association's market risk measurement
systems, including the activities of the business trading units and
independent risk control unit, compliance with policies and procedures,
and calculation of the national bank's or Federal savings association's
measures for market risk under this subpart. At least annually, the
internal audit function must report its findings to the national bank's
or Federal savings association's board of directors (or a committee
thereof).
(e) Internal assessment of capital adequacy. The national bank or
Federal savings association must have a rigorous process for assessing
its overall capital adequacy in relation to its market risk. The
assessment must take into account risks that may not be captured fully
in the VaR-based measure, including concentration and liquidity risk
under stressed market conditions.
(f) Documentation. The national bank or Federal savings association
must adequately document all material aspects of its internal models,
management and valuation of covered positions, control, oversight,
validation and review processes and results, and internal assessment of
capital adequacy.
Sec. 3.204 Measure for market risk.
(a) General requirement. (1) A national bank or Federal savings
association must calculate its standardized measure for market risk by
following the steps described in paragraph (a)(2) of this section. An
advanced approaches
[[Page 186]]
national bank or Federal savings association also must calculate an
advanced measure for market risk by following the steps in paragraph
(a)(2) of this section.
(2) Measure for market risk. A national bank or Federal savings
association must calculate the standardized measure for market risk,
which equals the sum of the VaR-based capital requirement, stressed VaR-
based capital requirement, specific risk add-ons, incremental risk
capital requirement, comprehensive risk capital requirement, and capital
requirement for de minimis exposures all as defined under this paragraph
(a)(2), (except, that the national bank or Federal savings association
may not use the SFA in section 210(b)(2)(vii)(B) of this subpart for
purposes of this calculation)[, plus any additional capital requirement
established by the OCC]. An advanced approaches national bank or Federal
savings association that has completed the parallel run process and that
has received notifications from the OCC pursuant to Sec. 3.121(d) also
must calculate the advanced measure for market risk, which equals the
sum of the VaR-based capital requirement, stressed VaR-based capital
requirement, specific risk add-ons, incremental risk capital
requirement, comprehensive risk capital requirement, and capital
requirement for de minimis exposures as defined under this paragraph
(a)(2) [, plus any additional capital requirement established by the
OCC].
(i) VaR-based capital requirement. A national bank's or Federal
savings association's VaR-based capital requirement equals the greater
of:
(A) The previous day's VaR-based measure as calculated under
Sec. 3.205; or
(B) The average of the daily VaR-based measures as calculated under
Sec. 3.205 for each of the preceding 60 business days multiplied by
three, except as provided in paragraph (b) of this section.
(ii) Stressed VaR-based capital requirement. A national bank's or
Federal savings association's stressed VaR-based capital requirement
equals the greater of:
(A) The most recent stressed VaR-based measure as calculated under
Sec. 3.206; or
(B) The average of the stressed VaR-based measures as calculated
under Sec. 3.206 for each of the preceding 12 weeks multiplied by three,
except as provided in paragraph (b) of this section.
(iii) Specific risk add-ons. A national bank's or Federal savings
association's specific risk add-ons equal any specific risk add-ons that
are required under Sec. 3.207 and are calculated in accordance with
Sec. 3.210.
(iv) Incremental risk capital requirement. A national bank's or
Federal savings association's incremental risk capital requirement
equals any incremental risk capital requirement as calculated under
section 208 of this subpart.
(v) Comprehensive risk capital requirement. A national bank's or
Federal savings association's comprehensive risk capital requirement
equals any comprehensive risk capital requirement as calculated under
section 209 of this subpart.
(vi) Capital requirement for de minimis exposures. A national bank's
or Federal savings association's capital requirement for de minimis
exposures equals:
(A) The absolute value of the fair value of those de minimis
exposures that are not captured in the national bank's or Federal
savings association's VaR-based measure or under paragraph (a)(2)(vi)(B)
of this section; and
(B) With the prior written approval of the OCC, the capital
requirement for any de minimis exposures using alternative techniques
that appropriately measure the market risk associated with those
exposures.
(b) Backtesting. A national bank or Federal savings association must
compare each of its most recent 250 business days' trading losses
(excluding fees, commissions, reserves, net interest income, and
intraday trading) with the corresponding daily VaR-based measures
calibrated to a one-day holding period and at a one-tail, 99.0 percent
confidence level. A national bank or Federal savings association must
begin backtesting as required by this paragraph (b) no later than one
year after the later of January 1, 2014 and
[[Page 187]]
the date on which the national bank or Federal savings association
becomes subject to this subpart. In the interim, consistent with safety
and soundness principles, a national bank or Federal savings association
subject to this subpart as of January 1, 2014 should continue to follow
backtesting procedures in accordance with the OCC's supervisory
expectations.
(1) Once each quarter, the national bank or Federal savings
association must identify the number of exceptions (that is, the number
of business days for which the actual daily net trading loss, if any,
exceeds the corresponding daily VaR-based measure) that have occurred
over the preceding 250 business days.
(2) A national bank or Federal savings association must use the
multiplication factor in Table 1 to Sec. 3.204 that corresponds to the
number of exceptions identified in paragraph (b)(1) of this section to
determine its VaR-based capital requirement for market risk under
paragraph (a)(2)(i) of this section and to determine its stressed VaR-
based capital requirement for market risk under paragraph (a)(2)(ii) of
this section until it obtains the next quarter's backtesting results,
unless the OCC notifies the national bank or Federal savings association
in writing that a different adjustment or other action is appropriate.
Table 1 toSec. 3.204--Multiplication Factors 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
------------------------------------------------------------------------
Sec. 3.205 VaR-based measure.
(a) General requirement. A national bank or Federal savings
association must use one or more internal models to calculate daily a
VaR-based measure of the general market risk of all covered positions.
The daily VaR-based measure also may reflect the national bank's or
Federal savings association's specific risk for one or more portfolios
of debt and equity positions, if the internal models meet the
requirements of paragraph (b)(1) of Sec. 3.207. The daily VaR-based
measure must also reflect the national bank's or Federal savings
association's specific risk for any portfolio of correlation trading
positions that is modeled under Sec. 3.209. A national bank or Federal
savings association may elect to include term repo-style transactions in
its VaR-based measure, provided that the national bank or Federal
savings association includes all such term repo-style transactions
consistently over time.
(1) The national bank's or Federal savings association's internal
models for calculating its VaR-based measure must use risk factors
sufficient to measure the market risk inherent in all covered positions.
The market risk categories must include, as appropriate, interest rate
risk, credit spread risk, equity price risk, foreign exchange risk, and
commodity price risk. For material positions in the major currencies and
markets, modeling techniques must incorporate enough segments of the
yield curve--in no case less than six--to capture differences in
volatility and less than perfect correlation of rates along the yield
curve.
(2) The VaR-based measure may incorporate empirical correlations
within and across risk categories, provided the national bank or Federal
savings association validates and demonstrates the reasonableness of its
process for measuring correlations. If the VaR-based measure does not
incorporate empirical correlations across risk categories, the national
bank or Federal savings association must add the separate measures from
its internal models used to calculate the VaR-based measure for the
appropriate market risk categories (interest rate risk, credit spread
risk, equity price risk, foreign exchange rate risk, and/or commodity
price risk) to determine its aggregate VaR-based measure.
(3) The VaR-based measure must include the risks arising from the
nonlinear price characteristics of options positions or positions with
embedded optionality and the sensitivity of the fair value of the
positions to changes in the volatility of the underlying rates, prices,
or other material risk factors. A
[[Page 188]]
national bank or Federal savings association with a large or complex
options portfolio must measure the volatility of options positions or
positions with embedded optionality by different maturities and/or
strike prices, where material.
(4) The national bank or Federal savings association must be able to
justify to the satisfaction of the OCC the omission of any risk factors
from the calculation of its VaR-based measure that the national bank or
Federal savings association uses in its pricing models.
(5) The national bank or Federal savings association must
demonstrate to the satisfaction of the OCC the appropriateness of any
proxies used to capture the risks of the national bank's or Federal
savings association's actual positions for which such proxies are used.
(b) Quantitative requirements for VaR-based measure. (1) The VaR-
based measure must be calculated on a daily basis using a one-tail, 99.0
percent confidence level, and a holding period equivalent to a 10-
business-day movement in underlying risk factors, such as rates,
spreads, and prices. To calculate VaR-based measures using a 10-
business-day holding period, the national bank or Federal savings
association may calculate 10-business-day measures directly or may
convert VaR-based measures using holding periods other than 10 business
days to the equivalent of a 10-business-day holding period. A national
bank or Federal savings association that converts its VaR-based measure
in such a manner must be able to justify the reasonableness of its
approach to the satisfaction of the OCC.
(2) The VaR-based measure must be based on a historical observation
period of at least one year. Data used to determine the VaR-based
measure must be relevant to the national bank's or Federal savings
association's actual exposures and of sufficient quality to support the
calculation of risk-based capital requirements. The national bank or
Federal savings association must update data sets at least monthly or
more frequently as changes in market conditions or portfolio composition
warrant. For a national bank or Federal savings association that uses a
weighting scheme or other method for the historical observation period,
the national bank or Federal savings association must either:
(i) Use an effective observation period of at least one year in
which the average time lag of the observations is at least six months;
or
(ii) Demonstrate to the OCC that its weighting scheme is more
effective than a weighting scheme with an average time lag of at least
six months representing the volatility of the national bank's or Federal
savings association's trading portfolio over a full business cycle. A
national bank or Federal savings association using this option must
update its data more frequently than monthly and in a manner appropriate
for the type of weighting scheme.
(c) A national bank or Federal savings association must divide its
portfolio into a number of significant subportfolios approved by the OCC
for subportfolio backtesting purposes. These subportfolios must be
sufficient to allow the national bank or Federal savings association and
the OCC to assess the adequacy of the VaR model at the risk factor
level; the OCC will evaluate the appropriateness of these subportfolios
relative to the value and composition of the national bank's or Federal
savings association's covered positions. The national bank or Federal
savings association must retain and make available to the OCC the
following information for each subportfolio for each business day over
the previous two years (500 business days), with no more than a 60-day
lag:
(1) A daily VaR-based measure for the subportfolio calibrated to a
one-tail, 99.0 percent confidence level;
(2) The daily profit or loss for the subportfolio (that is, the net
change in price of the positions held in the portfolio at the end of the
previous business day); and
(3) The p-value of the profit or loss on each day (that is, the
probability of observing a profit that is less than, or a loss that is
greater than, the amount reported for purposes of paragraph (c)(2) of
this section based on the model used to calculate the VaR-based measure
described in paragraph (c)(1) of this section).
[[Page 189]]
Sec. 3.206 Stressed VaR-based measure.
(a) General requirement. At least weekly, a national bank or Federal
savings association must use the same internal model(s) used to
calculate its VaR-based measure to calculate a stressed VaR-based
measure.
(b) Quantitative requirements for stressed VaR-based measure. (1) A
national bank or Federal savings association must calculate a stressed
VaR-based measure for its covered positions using the same model(s) used
to calculate the VaR-based measure, subject to the same confidence level
and holding period applicable to the VaR-based measure under Sec. 3.205,
but with model inputs calibrated to historical data from a continuous
12-month period that reflects a period of significant financial stress
appropriate to the national bank's or Federal savings association's
current portfolio.
(2) The stressed VaR-based measure must be calculated at least
weekly and be no less than the national bank's or Federal savings
association's VaR-based measure.
(3) A national bank or Federal savings association must have
policies and procedures that describe how it determines the period of
significant financial stress used to calculate the national bank's or
Federal savings association's stressed VaR-based measure under this
section and must be able to provide empirical support for the period
used. The national bank or Federal savings association must obtain the
prior approval of the OCC for, and notify the OCC if the national bank
or Federal savings association makes any material changes to, these
policies and procedures. The policies and procedures must address:
(i) How the national bank or Federal savings association links the
period of significant financial stress used to calculate the stressed
VaR-based measure to the composition and directional bias of its current
portfolio; and
(ii) The national bank's or Federal savings association's process
for selecting, reviewing, and updating the period of significant
financial stress used to calculate the stressed VaR-based measure and
for monitoring the appropriateness of the period to the national bank's
or Federal savings association's current portfolio.
(4) Nothing in this section prevents the OCC from requiring a
national bank or Federal savings association to use a different period
of significant financial stress in the calculation of the stressed VaR-
based measure.
Sec. 3.207 Specific risk.
(a) General requirement. A national bank or Federal savings
association must use one of the methods in this section to measure the
specific risk for each of its debt, equity, and securitization positions
with specific risk.
(b) Modeled specific risk. A national bank or Federal savings
association may use models to measure the specific risk of covered
positions as provided in paragraph (a) of section 205 of this subpart
(therefore, excluding securitization positions that are not modeled
under section 209 of this subpart). A national bank or Federal savings
association must use models to measure the specific risk of correlation
trading positions that are modeled under Sec. 3.209.
(1) Requirements for specific risk modeling. (i) If a national bank
or Federal savings association uses internal models to measure the
specific risk of a portfolio, the internal models must:
(A) Explain the historical price variation in the portfolio;
(B) Be responsive to changes in market conditions;
(C) Be robust to an adverse environment, including signaling rising
risk in an adverse environment; and
(D) Capture all material components of specific risk for the debt
and equity positions in the portfolio. Specifically, the internal models
must:
(1) Capture event risk and idiosyncratic risk; and
(2) Capture and demonstrate sensitivity to material differences
between positions that are similar but not identical and to changes in
portfolio composition and concentrations.
(ii) If a national bank or Federal savings association calculates an
incremental risk measure for a portfolio of debt or equity positions
under section 208 of this subpart, the national bank or Federal savings
association is not
[[Page 190]]
required to capture default and credit migration risks in its internal
models used to measure the specific risk of those portfolios.
(2) Specific risk fully modeled for one or more portfolios. If the
national bank's or Federal savings association's VaR-based measure
captures all material aspects of specific risk for one or more of its
portfolios of debt, equity, or correlation trading positions, the
national bank or Federal savings association has no specific risk add-on
for those portfolios for purposes of paragraph (a)(2)(iii) of
Sec. 3.204.
(c) Specific risk not modeled. (1) If the national bank's or Federal
savings association's VaR-based measure does not capture all material
aspects of specific risk for a portfolio of debt, equity, or correlation
trading positions, the national bank or Federal savings association must
calculate a specific-risk add-on for the portfolio under the
standardized measurement method as described in Sec. 3.210.
(2) A national bank or Federal savings association must calculate a
specific risk add-on under the standardized measurement method as
described in Sec. 3.210 for all of its securitization positions that are
not modeled under Sec. 3.209.
Sec. 3.208 Incremental risk.
(a) General requirement. A national bank or Federal savings
association that measures the specific risk of a portfolio of debt
positions under Sec. 3.207(b) using internal models must calculate at
least weekly an incremental risk measure for that portfolio according to
the requirements in this section. The incremental risk measure is the
national bank's or Federal savings association's measure of potential
losses due to incremental risk over a one-year time horizon at a one-
tail, 99.9 percent confidence level, either under the assumption of a
constant level of risk, or under the assumption of constant positions.
With the prior approval of the OCC, a national bank or Federal savings
association may choose to include portfolios of equity positions in its
incremental risk model, provided that it consistently includes such
equity positions in a manner that is consistent with how the national
bank or Federal savings association internally measures and manages the
incremental risk of such positions at the portfolio level. If equity
positions are included in the model, for modeling purposes default is
considered to have occurred upon the default of any debt of the issuer
of the equity position. A national bank or Federal savings association
may not include correlation trading positions or securitization
positions in its incremental risk measure.
(b) Requirements for incremental risk modeling. For purposes of
calculating the incremental risk measure, the incremental risk model
must:
(1) Measure incremental risk over a one-year time horizon and at a
one-tail, 99.9 percent confidence level, either under the assumption of
a constant level of risk, or under the assumption of constant positions.
(i) A constant level of risk assumption means that the national bank
or Federal savings association rebalances, or rolls over, its trading
positions at the beginning of each liquidity horizon over the one-year
horizon in a manner that maintains the national bank's or Federal
savings association's initial risk level. The national bank or Federal
savings association must determine the frequency of rebalancing in a
manner consistent with the liquidity horizons of the positions in the
portfolio. The liquidity horizon of a position or set of positions is
the time required for a national bank or Federal savings association to
reduce its exposure to, or hedge all of its material risks of, the
position(s) in a stressed market. The liquidity horizon for a position
or set of positions may not be less than the shorter of three months or
the contractual maturity of the position.
(ii) A constant position assumption means that the national bank or
Federal savings association maintains the same set of positions
throughout the one-year horizon. If a national bank or Federal savings
association uses this assumption, it must do so consistently across all
portfolios.
(iii) A national bank's or Federal savings association's selection
of a constant position or a constant risk assumption must be consistent
between
[[Page 191]]
the national bank's or Federal savings association's incremental risk
model and its comprehensive risk model described in section 209 of this
subpart, if applicable.
(iv) A national bank's or Federal savings association's treatment of
liquidity horizons must be consistent between the national bank's or
Federal savings association's incremental risk model and its
comprehensive risk model described in section 209, if applicable.
(2) Recognize the impact of correlations between default and
migration events among obligors.
(3) Reflect the effect of issuer and market concentrations, as well
as concentrations that can arise within and across product classes
during stressed conditions.
(4) Reflect netting only of long and short positions that reference
the same financial instrument.
(5) Reflect any material mismatch between a position and its hedge.
(6) Recognize the effect that liquidity horizons have on dynamic
hedging strategies. In such cases, a national bank or Federal savings
association must:
(i) Choose to model the rebalancing of the hedge consistently over
the relevant set of trading positions;
(ii) Demonstrate that the inclusion of rebalancing results in a more
appropriate risk measurement;
(iii) Demonstrate that the market for the hedge is sufficiently
liquid to permit rebalancing during periods of stress; and
(iv) Capture in the incremental risk model any residual risks
arising from such hedging strategies.
(7) Reflect the nonlinear impact of options and other positions with
material nonlinear behavior with respect to default and migration
changes.
(8) Maintain consistency with the national bank's or Federal savings
association's internal risk management methodologies for identifying,
measuring, and managing risk.
(c) Calculation of incremental risk capital requirement. The
incremental risk capital requirement is the greater of:
(1) The average of the incremental risk measures over the previous
12 weeks; or
(2) The most recent incremental risk measure.
Sec. 3.209 Comprehensive risk.
(a) General requirement. (1) Subject to the prior approval of the
OCC, a national bank or Federal savings association may use the method
in this section to measure comprehensive risk, that is, all price risk,
for one or more portfolios of correlation trading positions.
(2) A national bank or Federal savings association that measures the
price risk of a portfolio of correlation trading positions using
internal models must calculate at least weekly a comprehensive risk
measure that captures all price risk according to the requirements of
this section. The comprehensive risk measure is either:
(i) The sum of:
(A) The national bank's or Federal savings association's modeled
measure of all price risk determined according to the requirements in
paragraph (b) of this section; and
(B) A surcharge for the national bank's or Federal savings
association's modeled correlation trading positions equal to the total
specific risk add-on for such positions as calculated under section 210
of this subpart multiplied by 8.0 percent; or
(ii) With approval of the OCC and provided the national bank or
Federal savings association has met the requirements of this section for
a period of at least one year and can demonstrate the effectiveness of
the model through the results of ongoing model validation efforts
including robust benchmarking, the greater of:
(A) The national bank's or Federal savings association's modeled
measure of all price risk determined according to the requirements in
paragraph (b) of this section; or
(B) The total specific risk add-on that would apply to the bank's
modeled correlation trading positions as calculated under section 210 of
this subpart multiplied by 8.0 percent.
(b) Requirements for modeling all price risk. If a national bank or
Federal savings association uses an internal model to measure the price
risk of a portfolio of correlation trading positions:
[[Page 192]]
(1) The internal model must measure comprehensive risk over a one-
year time horizon at a one-tail, 99.9 percent confidence level, either
under the assumption of a constant level of risk, or under the
assumption of constant positions.
(2) The model must capture all material price risk, including but
not limited to the following:
(i) The risks associated with the contractual structure of cash
flows of the position, its issuer, and its underlying exposures;
(ii) Credit spread risk, including nonlinear price risks;
(iii) The volatility of implied correlations, including nonlinear
price risks such as the cross-effect between spreads and correlations;
(iv) Basis risk;
(v) Recovery rate volatility as it relates to the propensity for
recovery rates to affect tranche prices; and
(vi) To the extent the comprehensive risk measure incorporates the
benefits of dynamic hedging, the static nature of the hedge over the
liquidity horizon must be recognized. In such cases, a national bank or
Federal savings association must:
(A) Choose to model the rebalancing of the hedge consistently over
the relevant set of trading positions;
(B) Demonstrate that the inclusion of rebalancing results in a more
appropriate risk measurement;
(C) Demonstrate that the market for the hedge is sufficiently liquid
to permit rebalancing during periods of stress; and
(D) Capture in the comprehensive risk model any residual risks
arising from such hedging strategies;
(3) The national bank or Federal savings association must use market
data that are relevant in representing the risk profile of the national
bank's or Federal savings association's correlation trading positions in
order to ensure that the national bank or Federal savings association
fully captures the material risks of the correlation trading positions
in its comprehensive risk measure in accordance with this section; and
(4) The national bank or Federal savings association must be able to
demonstrate that its model is an appropriate representation of
comprehensive risk in light of the historical price variation of its
correlation trading positions.
(c) Requirements for stress testing. (1) A national bank or Federal
savings association must at least weekly apply specific, supervisory
stress scenarios to its portfolio of correlation trading positions that
capture changes in:
(i) Default rates;
(ii) Recovery rates;
(iii) Credit spreads;
(iv) Correlations of underlying exposures; and
(v) Correlations of a correlation trading position and its hedge.
(2) Other requirements. (i) A national bank or Federal savings
association must retain and make available to the OCC the results of the
supervisory stress testing, including comparisons with the capital
requirements generated by the national bank's or Federal savings
association's comprehensive risk model.
(ii) A national bank or Federal savings association must report to
the OCC promptly any instances where the stress tests indicate any
material deficiencies in the comprehensive risk model.
(d) Calculation of comprehensive risk capital requirement. The
comprehensive risk capital requirement is the greater of:
(1) The average of the comprehensive risk measures over the previous
12 weeks; or
(2) The most recent comprehensive risk measure.
Sec. 3.210 Standardized measurement method for specific risk
(a) General requirement. A national bank or Federal savings
association must calculate a total specific risk add-on for each
portfolio of debt and equity positions for which the national bank's or
Federal savings association's VaR-based measure does not capture all
material aspects of specific risk and for all securitization positions
that are not modeled under Sec. 3.209. A national bank or Federal
savings association must calculate each specific risk add-on in
accordance with the requirements of this section. Notwithstanding any
other definition or requirement in
[[Page 193]]
this subpart, a position that would have qualified as a debt position or
an equity position but for the fact that it qualifies as a correlation
trading position under paragraph (2) of the definition of correlation
trading position in Sec. 3.202, shall be considered a debt position or
an equity position, respectively, for purposes of this section 210 of
this subpart.
(1) The specific risk add-on for an individual debt or
securitization position that represents sold credit protection is capped
at the notional amount of the credit derivative contract. The specific
risk add-on for an individual debt or securitization position that
represents purchased credit protection is capped at the current fair
value of the transaction plus the absolute value of the present value of
all remaining payments to the protection seller under the transaction.
This sum is equal to the value of the protection leg of the transaction.
(2) For debt, equity, or securitization positions that are
derivatives with linear payoffs, a national bank or Federal savings
association must assign a specific risk-weighting factor to the fair
value of the effective notional amount of the underlying instrument or
index portfolio, except for a securitization position for which the
national bank or Federal savings association directly calculates a
specific risk add-on using the SFA in paragraph (b)(2)(vii)(B) of this
section. A swap must be included as an effective notional position in
the underlying instrument or portfolio, with the receiving side treated
as a long position and the paying side treated as a short position. For
debt, equity, or securitization positions that are derivatives with
nonlinear payoffs, a national bank or Federal savings association must
risk weight the fair value of the effective notional amount of the
underlying instrument or portfolio multiplied by the derivative's delta.
(3) For debt, equity, or securitization positions, a national bank
or Federal savings association may net long and short positions
(including derivatives) in identical issues or identical indices. A
national bank or Federal savings association may also net positions in
depositary receipts against an opposite position in an identical equity
in different markets, provided that the national bank or Federal savings
association includes the costs of conversion.
(4) A set of transactions consisting of either a debt position and
its credit derivative hedge or a securitization position and its credit
derivative hedge has a specific risk add-on of zero if:
(i) The debt or securitization position is fully hedged by a total
return swap (or similar instrument where there is a matching of swap
payments and changes in fair value of the debt or securitization
position);
(ii) There is an exact match between the reference obligation of the
swap and the debt or securitization position;
(iii) There is an exact match between the currency of the swap and
the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the
swap and the maturity date of the debt or securitization position; or,
in cases where a total return swap references a portfolio of positions
with different maturity dates, the total return swap maturity date must
match the maturity date of the underlying asset in that portfolio that
has the latest maturity date.
(5) The specific risk add-on for a set of transactions consisting of
either a debt position and its credit derivative hedge or a
securitization position and its credit derivative hedge that does not
meet the criteria of paragraph (a)(4) of this section is equal to 20.0
percent of the capital requirement for the side of the transaction with
the higher specific risk add-on when:
(i) The credit risk of the position is fully hedged by a credit
default swap or similar instrument;
(ii) There is an exact match between the reference obligation of the
credit derivative hedge and the debt or securitization position;
(iii) There is an exact match between the currency of the credit
derivative hedge and the debt or securitization position; and
(iv) There is either an exact match between the maturity date of the
credit derivative hedge and the maturity date of the debt or
securitization position; or, in the case where the credit derivative
hedge has a standard maturity date:
[[Page 194]]
(A) The maturity date of the credit derivative hedge is within 30
business days of the maturity date of the debt or securitization
position; or
(B) For purchased credit protection, the maturity date of the credit
derivative hedge is later than the maturity date of the debt or
securitization position, but is no later than the standard maturity date
for that instrument that immediately follows the maturity date of the
debt or securitization position. The maturity date of the credit
derivative hedge may not exceed the maturity date of the debt or
securitization position by more than 90 calendar days.
(6) The specific risk add-on for a set of transactions consisting of
either a debt position and its credit derivative hedge or a
securitization position and its credit derivative hedge that does not
meet the criteria of either paragraph (a)(4) or (a)(5) of this section,
but in which all or substantially all of the price risk has been hedged,
is equal to the specific risk add-on for the side of the transaction
with the higher specific risk add-on.
(b) Debt and securitization positions. (1) The total specific risk
add-on for a portfolio of debt or securitization positions is the sum of
the specific risk add-ons for individual debt or securitization
positions, as computed under this section. To determine the specific
risk add-on for individual debt or securitization positions, a national
bank or Federal savings association must multiply the absolute value of
the current fair value of each net long or net short debt or
securitization position in the portfolio by the appropriate specific
risk-weighting factor as set forth in paragraphs (b)(2)(i) through
(b)(2)(vii) of this section.
(2) For the purpose of this section, the appropriate specific risk-
weighting factors include:
(i) Sovereign debt positions. (A) In accordance with Table 1 to
Sec. 3.210, a national bank or Federal savings association must assign a
specific risk-weighting factor to a sovereign debt position based on the
CRC applicable to the sovereign, and, as applicable, the remaining
contractual maturity of the position, or if there is no CRC applicable
to the sovereign, based on whether the sovereign entity is a member of
the OECD. Notwithstanding any other provision in this subpart, sovereign
debt positions that are backed by the full faith and credit of the
United States are treated as having a CRC of 0.
Table 1 toSec. 3.210--Specific Risk-Weighting Factors for Sovereign
Debt Positions
Specific risk-weighting factor
(in percent)
------------------------------------------------------------------------
CRC:
0-1.......................... 0.0
--------------------------------------
2-3.......................... Remaining 0.25
contractual
maturity of 6
months or less.
Remaining 1.0
contractual
maturity of
greater than 6 and
up to and
including 24
months.
Remaining 1.6
contractual
maturity exceeds
24 months.
======================
4-6.......................... 8.0
======================
7............................ 12.0
==================================
OECD Member with No CRC.......... 0.0
==================================
Non-OECD Member with No CRC...... 8.0
==================================
Sovereign Default................ 12.0
------------------------------------------------------------------------
(B) Notwithstanding paragraph (b)(2)(i)(A) of this section, a
national bank or Federal savings association may assign to a sovereign
debt position a specific risk-weighting factor that is lower than the
applicable specific risk-weighting factor in Table 1 to Sec. 3.210 if:
(1) The position is denominated in the sovereign entity's currency;
(2) The national bank or Federal savings association has at least an
equivalent amount of liabilities in that currency; and
[[Page 195]]
(3) The sovereign entity allows banks under its jurisdiction to
assign the lower specific risk-weighting factor to the same exposures to
the sovereign entity.
(C) A national bank or Federal savings association must assign a
12.0 percent specific risk-weighting factor to a sovereign debt position
immediately upon determination a default has occurred; or if a default
has occurred within the previous five years.
(D) A national bank or Federal savings association must assign a 0.0
percent specific risk-weighting factor to a sovereign debt position if
the sovereign entity is a member of the OECD and does not have a CRC
assigned to it, except as provided in paragraph (b)(2)(i)(C) of this
section.
(E) A national bank or Federal savings association must assign an
8.0 percent specific risk-weighting factor to a sovereign debt position
if the sovereign is not a member of the OECD and does not have a CRC
assigned to it, except as provided in paragraph (b)(2)(i)(C) of this
section.
(ii) Certain supranational entity and multilateral development bank
debt positions. A national bank or Federal savings association may
assign a 0.0 percent specific risk-weighting factor to a debt position
that is an exposure to the Bank for International Settlements, the
European Central Bank, the European Commission, the International
Monetary Fund, or an MDB.
(iii) GSE debt positions. A national bank or Federal savings
association must assign a 1.6 percent specific risk-weighting factor to
a debt position that is an exposure to a GSE. Notwithstanding the
foregoing, a national bank or Federal savings association must assign an
8.0 percent specific risk-weighting factor to preferred stock issued by
a GSE.
(iv) Depository institution, foreign bank, and credit union debt
positions. (A) Except as provided in paragraph (b)(2)(iv)(B) of this
section, a national bank or Federal savings association must assign a
specific risk-weighting factor to a debt position that is an exposure to
a depository institution, a foreign bank, or a credit union, in
accordance with Table 2 to Sec. 3.210, based on the CRC that corresponds
to that entity's home country or the OECD membership status of that
entity's home country if there is no CRC applicable to the entity's home
country, and, as applicable, the remaining contractual maturity of the
position.
Table 2 toSec. 3.210--Specific Risk-Weighting Factors for Depository
Institution, Foreign Bank, and Credit Union Debt Positions
Specific risk-weighting factor
(in percent)
------------------------------------------------------------------------
CRC 0-2 or OECD Member with No Remaining contractual 0.25
CRC. maturity of 6 months
or less.
Remaining contractual 1.0
maturity of greater
than 6 and up to and
including 24 months.
Remaining contractual 1.6
maturity exceeds 24
months.
------------------------------------------------------------------------
CRC 3......................... 8.0
------------------------------------------------------------------------
CRC 4-7....................... 12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC... 8.0
------------------------------------------------------------------------
Sovereign Default............. 12.0
------------------------------------------------------------------------
(B) A national bank or Federal savings association must assign a
specific risk-weighting factor of 8.0 percent to a debt position that is
an exposure to a depository institution or a foreign bank that is
includable in the depository institution's or foreign bank's regulatory
capital and that is not subject to deduction as a reciprocal holding
under Sec. 3.22.
(C) A national bank or Federal savings association must assign a
12.0 percent specific risk-weighting factor to a debt position that is
an exposure to a foreign bank immediately upon determination that a
default by the foreign bank's home country has occurred or if
[[Page 196]]
a default by the foreign bank's home country has occurred within the
previous five years.
(v) PSE debt positions. (A) Except as provided in paragraph
(b)(2)(v)(B) of this section, a national bank or Federal savings
association must assign a specific risk-weighting factor to a debt
position that is an exposure to a PSE in accordance with Tables 3 and 4
to Sec. 3.210 depending on the position's categorization as a general
obligation or revenue obligation based on the CRC that corresponds to
the PSE's home country or the OECD membership status of the PSE's home
country if there is no CRC applicable to the PSE's home country, and, as
applicable, the remaining contractual maturity of the position, as set
forth in Tables 3 and 4 of this section.
(B) A national bank or Federal savings association may assign a
lower specific risk-weighting factor than would otherwise apply under
Tables 3 and 4 of this section to a debt position that is an exposure to
a foreign PSE if:
(1) The PSE's home country allows banks under its jurisdiction to
assign a lower specific risk-weighting factor to such position; and
(2) The specific risk-weighting factor is not lower than the risk
weight that corresponds to the PSE's home country in accordance with
Tables 3 and 4 of this section.
(C) A national bank or Federal savings association must assign a
12.0 percent specific risk-weighting factor to a PSE debt position
immediately upon determination that a default by the PSE's home country
has occurred or if a default by the PSE's home country has occurred
within the previous five years.
Table 3 toSec. 3.210--Specific Risk-Weighting Factors for PSE General
Obligation Debt Positions
------------------------------------------------------------------------
------------------------------------------------------------------------
General obligation specific risk-
weighting factor
(in percent)
------------------------------------------------------------------------
CRC 0-2 or OECD Member with No Remaining contractual 0.25
CRC. maturity of 6 months
or less.
Remaining contractual 1.0
maturity of greater
than 6 and up to and
including 24 months.
Remaining contractual 1.6
maturity exceeds 24
months.
------------------------------------------------------------------------
CRC 3......................... 8.0
------------------------------------------------------------------------
CRC 4-7....................... 12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC... 8.0
------------------------------------------------------------------------
Sovereign Default............. 12.0
------------------------------------------------------------------------
Table 4 toSec. 3.210--Specific Risk-Weighting Factors for PSE Revenue
Obligation Debt Positions
Revenue obligation specific risk-
weighting factor
(in percent)
------------------------------------------------------------------------
CRC 0-1 or OECD Member with No Remaining contractual 0.25
CRC. maturity of 6 months
or less.
Remaining contractual 1.0
maturity of greater
than 6 and up to and
including 24 months.
Remaining contractual 1.6
maturity exceeds 24
months.
------------------------------------------------------------------------
CRC 2-3....................... 8.0
------------------------------------------------------------------------
CRC 4-7....................... 12.0
------------------------------------------------------------------------
Non-OECD Member with No CRC... 8.0
------------------------------------------------------------------------
[[Page 197]]
Sovereign Default............. 12.0
------------------------------------------------------------------------
(vi) Corporate debt positions. Except as otherwise provided in
paragraph (b)(2)(vi)(B) of this section, a national bank or Federal
savings association must assign a specific risk-weighting factor to a
corporate debt position in accordance with the investment grade
methodology in paragraph (b)(2)(vi)(A) of this section.
(A) Investment grade methodology. (1) For corporate debt positions
that are exposures to entities that have issued and outstanding publicly
traded instruments, a national bank or Federal savings association must
assign a specific risk-weighting factor based on the category and
remaining contractual maturity of the position, in accordance with Table
5 to Sec. 3.210. For purposes of this paragraph (b)(2)(vi)(A)(1), the
national bank or Federal savings association must determine whether the
position is in the investment grade or not investment grade category.
Table 5 toSec. 3.210--Specific Risk-Weighting Factors for Corporate
Debt Positions Under the Investment Grade Methodology
------------------------------------------------------------------------
Specific risk-
Category Remaining contractual weighting factor
maturity (in percent)
------------------------------------------------------------------------
Investment Grade.............. 6 months or less...... 0.50
Greater than 6 and up 2.00
to and including 24
months.
Greater than 24 months 4.00
------------------------------------------------------------------------
Non-investment Grade.................................. 12.00
------------------------------------------------------------------------
(2) A national bank or Federal savings association must assign an
8.0 percent specific risk-weighting factor for corporate debt positions
that are exposures to entities that do not have publicly traded
instruments outstanding.
(B) Limitations. (1) A national bank or Federal savings association
must assign a specific risk-weighting factor of at least 8.0 percent to
an interest-only mortgage-backed security that is not a securitization
position.
(2) A national bank or Federal savings association shall not assign
a corporate debt position a specific risk-weighting factor that is lower
than the specific risk-weighting factor that corresponds to the CRC of
the issuer's home country, if applicable, in table 1 of this section.
(vii) Securitization positions. (A) General requirements. (1) A
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association must assign a
specific risk-weighting factor to a securitization position using either
the simplified supervisory formula approach (SSFA) in paragraph
(b)(2)(vii)(C) of this section (and Sec. 3.211) or assign a specific
risk-weighting factor of 100 percent to the position.
(2) A national bank or Federal savings association that is an
advanced approaches national bank or Federal savings association must
calculate a specific risk add-on for a securitization position in
accordance with paragraph (b)(2)(vii)(B) of this section if the national
bank or Federal savings association and the securitization position each
qualifies to use the SFA in Sec. 3.143. A national bank or Federal
savings association that is an advanced approaches national bank or
Federal savings association with a securitization position that does not
qualify for the SFA under paragraph (b)(2)(vii)(B) of this section may
assign a specific risk-weighting factor to the securitization position
using the SSFA in accordance with paragraph (b)(2)(vii)(C) of this
section or assign a specific risk-weighting factor of 100 percent to the
position.
(3) A national bank or Federal savings association must treat a
short securitization position as if it is a long
[[Page 198]]
securitization position solely for calculation purposes when using the
SFA in paragraph (b)(2)(vii)(B) of this section or the SSFA in paragraph
(b)(2)(vii)(C) of this section.
(B) SFA. To calculate the specific risk add-on for a securitization
position using the SFA, a national bank or Federal savings association
that is an advanced approaches national bank or Federal savings
association must set the specific risk add-on for the position equal to
the risk-based capital requirement as calculated under Sec. 3.143.
(C) SSFA. To use the SSFA to determine the specific risk-weighting
factor for a securitization position, a national bank or Federal savings
association must calculate the specific risk-weighting factor in
accordance with Sec. 3.211.
(D) Nth-to-default credit derivatives. A national bank or Federal
savings association must determine a specific risk add-on using the SFA
in paragraph (b)(2)(vii)(B) of this section, or assign a specific risk-
weighting factor using the SSFA in paragraph (b)(2)(vii)(C) of this
section to an nth-to-default credit derivative in accordance
with this paragraph (b)(2)(vii)(D), regardless of whether the national
bank or Federal savings association is a net protection buyer or net
protection seller. A national bank or Federal savings association must
determine its position in the nth-to-default credit
derivative as the largest notional amount of all the underlying
exposures.
(1) For purposes of determining the specific risk add-on using the
SFA in paragraph (b)(2)(vii)(B) of this section or the specific risk-
weighting factor for an nth-to-default credit derivative
using the SSFA in paragraph (b)(2)(vii)(C) of this section the national
bank or Federal savings association must calculate the attachment point
and detachment point of its position as follows:
(i) The attachment point (parameter A) is the ratio of the sum of
the notional amounts of all underlying exposures that are subordinated
to the national bank's or Federal savings association's position to the
total notional amount of all underlying exposures. For purposes of the
SSFA, parameter A is expressed as a decimal value between zero and one.
For purposes of using the SFA in paragraph (b)(2)(vii)(B) of this
section to calculate the specific add-on for its position in an
nth-to-default credit derivative, parameter A must be set
equal to the credit enhancement level (L) input to the SFA formula in
section 143 of this subpart. In the case of a first-to-default credit
derivative, there are no underlying exposures that are subordinated to
the national bank's or Federal savings association's position. In the
case of a second-or-subsequent-to-default credit derivative, the
smallest (n-1) notional amounts of the underlying exposure(s) are
subordinated to the national bank's or Federal savings association's
position.
(ii) The detachment point (parameter D) equals the sum of parameter
A plus the ratio of the notional amount of the national bank's or
Federal savings association's position in the nth-to-default
credit derivative to the total notional amount of all underlying
exposures. For purposes of the SSFA, parameter A is expressed as a
decimal value between zero and one. For purposes of using the SFA in
paragraph (b)(2)(vii)(B) of this section to calculate the specific risk
add-on for its position in an nth-to-default credit
derivative, parameter D must be set to equal the L input plus the
thickness of tranche T input to the SFA formula in Sec. 3.143 of this
subpart.
(2) A national bank or Federal savings association that does not use
the SFA in paragraph (b)(2)(vii)(B) of this section to determine a
specific risk-add on, or the SSFA in paragraph (b)(2)(vii)(C) of this
section to determine a specific risk-weighting factor for its position
in an nth-to-default credit derivative must assign a specific
risk-weighting factor of 100 percent to the position.
(c) Modeled correlation trading positions. For purposes of
calculating the comprehensive risk measure for modeled correlation
trading positions under either paragraph (a)(2)(i) or (a)(2)(ii) of
Sec. 3.209, the total specific risk add-on is the greater of:
(1) The sum of the national bank's or Federal savings association's
specific risk add-ons for each net long correlation trading position
calculated under this section; or
[[Page 199]]
(2) The sum of the national bank's or Federal savings association's
specific risk add-ons for each net short correlation trading position
calculated under this section.
(d) Non-modeled securitization positions. For securitization
positions that are not correlation trading positions and for
securitizations that are correlation trading positions not modeled under
Sec. 3.209, the total specific risk add-on is the greater of:
(1) The sum of the national bank's or Federal savings association's
specific risk add-ons for each net long securitization position
calculated under this section; or
(2) The sum of the national bank's or Federal savings association's
specific risk add-ons for each net short securitization position
calculated under this section.
(e) Equity positions. The total specific risk add-on for a portfolio
of equity positions is the sum of the specific risk add-ons of the
individual equity positions, as computed under this section. To
determine the specific risk add-on of individual equity positions, a
national bank or Federal savings association must multiply the absolute
value of the current fair value of each net long or net short equity
position by the appropriate specific risk-weighting factor as determined
under this paragraph (e):
(1) The national bank or Federal savings association must multiply
the absolute value of the current fair value of each net long or net
short equity position by a specific risk-weighting factor of 8.0
percent. For equity positions that are index contracts comprising a
well-diversified portfolio of equity instruments, the absolute value of
the current fair value of each net long or net short position is
multiplied by a specific risk-weighting factor of 2.0 percent.\29\
---------------------------------------------------------------------------
\29\ A portfolio is well-diversified if it contains a large number
of individual equity positions, with no single position representing a
substantial portion of the portfolio's total fair value.
---------------------------------------------------------------------------
(2) For equity positions arising from the following futures-related
arbitrage strategies, a national bank or Federal savings association may
apply a 2.0 percent specific risk-weighting factor to one side (long or
short) of each position with the opposite side exempt from an additional
capital requirement:
(i) Long and short positions in exactly the same index at different
dates or in different market centers; or
(ii) Long and short positions in index contracts at the same date in
different, but similar indices.
(3) For futures contracts on main indices that are matched by
offsetting positions in a basket of stocks comprising the index, a
national bank or Federal savings association may apply a 2.0 percent
specific 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 is
comprised of stocks representing at least 90.0 percent of the
capitalization of the index. A main index refers to the Standard &
Poor's 500 Index, the FTSE All-World Index, and any other index for
which the national bank or Federal savings association can demonstrate
to the satisfaction of the OCC that the equities represented in the
index have liquidity, depth of market, and size of bid-ask spreads
comparable to equities in the Standard & Poor's 500 Index and FTSE All-
World Index.
(f) Due diligence requirements for securitization positions. (1) A
national bank or Federal savings association must demonstrate to the
satisfaction of the OCC a comprehensive understanding of the features of
a securitization position that would materially affect the performance
of the position by conducting and documenting the analysis set forth in
paragraph (f)(2) of this section. The national bank's or Federal savings
association's analysis must be commensurate with the complexity of the
securitization position and the materiality of the position in relation
to capital.
(2) A national bank or Federal savings association must demonstrate
its comprehensive understanding for each securitization position by:
(i) Conducting an analysis of the risk characteristics of a
securitization position prior to acquiring the position and document
such analysis within three
[[Page 200]]
business days after acquiring position, considering:
(A) Structural features of the securitization that would materially
impact the performance of the position, for example, the contractual
cash flow waterfall, waterfall-related triggers, credit enhancements,
liquidity enhancements, fair value triggers, the performance of
organizations that service the position, and deal-specific definitions
of default;
(B) Relevant information regarding the performance of the underlying
credit exposure(s), for example, the percentage of loans 30, 60, and 90
days past due; default rates; prepayment rates; loans in foreclosure;
property types; occupancy; average credit score or other measures of
creditworthiness; average loan-to-value ratio; and industry and
geographic diversification data on the underlying exposure(s);
(C) Relevant market data of the securitization, for example, bid-ask
spreads, most recent sales price and historical price volatility,
trading volume, implied market rating, and size, depth and concentration
level of the market for the securitization; and
(D) For resecuritization positions, performance information on the
underlying securitization exposures, for example, the issuer name and
credit quality, and the characteristics and performance of the exposures
underlying the securitization exposures.
(ii) On an on-going basis (no less frequently than quarterly),
evaluating, reviewing, and updating as appropriate the analysis required
under paragraph (f)(1) of this section for each securitization position.
Sec. 3.211 Simplified supervisory formula approach (SSFA).
(a) General requirements. To use the SSFA to determine the specific
risk-weighting factor for a securitization position, a national bank or
Federal savings association must have data that enables it to assign
accurately the parameters described in paragraph (b) of this section.
Data used to assign the parameters described in paragraph (b) of this
section must be the most currently available data; if the contracts
governing the underlying exposures of the securitization require
payments on a monthly or quarterly basis, the data used to assign the
parameters described in paragraph (b) of this section must be no more
than 91 calendar days old. A national bank or Federal savings
association that does not have the appropriate data to assign the
parameters described in paragraph (b) of this section must assign a
specific risk-weighting factor of 100 percent to the position.
(b) SSFA parameters. To calculate the specific risk-weighting factor
for a securitization position using the SSFA, a national bank or Federal
savings association must have accurate information on the five inputs to
the SSFA calculation described in paragraphs (b)(1) through (b)(5) of
this section.
(1) KG is the weighted-average (with unpaid principal
used as the weight for each exposure) total capital requirement of the
underlying exposures calculated using subpart D. KG is
expressed as a decimal value between zero and one (that is, an average
risk weight of 100 percent represents a value of KG equal to
0.08).
(2) Parameter W is expressed as a decimal value between zero and
one. Parameter W is the ratio of the sum of the dollar amounts of any
underlying exposures of the securitization that meet any of the criteria
as set forth in paragraphs (b)(2)(i) through (vi) of this section to the
balance, measured in dollars, of underlying exposures:
(i) Ninety days or more past due;
(ii) Subject to a bankruptcy or insolvency proceeding;
(iii) In the process of foreclosure;
(iv) Held as real estate owned;
(v) Has contractually deferred payments for 90 days or more, other
than principal or interest payments deferred on:
(A) Federally-guaranteed student loans, in accordance with the terms
of those guarantee programs; or
(B) Consumer loans, including non-federally-guaranteed student
loans, provided that such payments are deferred pursuant to provisions
included in the contract at the time funds are disbursed that provide
for period(s) of deferral that are not initiated based on changes in the
creditworthiness of the borrower; or
(vi) Is in default.
[[Page 201]]
(3) Parameter A is the attachment point for the position, which
represents the threshold at which credit losses will first be allocated
to the position. Except as provided in Sec. 3.210(b)(2)(vii)(D) for
nth-to-default credit derivatives, parameter A equals the
ratio of the current dollar amount of underlying exposures that are
subordinated to the position of the national bank or Federal savings
association to the current dollar amount of underlying exposures. Any
reserve account funded by the accumulated cash flows from the underlying
exposures that is subordinated to the position that contains the
national bank's or Federal savings association's securitization exposure
may be included in the calculation of parameter A to the extent that
cash is present in the account. Parameter A is expressed as a decimal
value between zero and one.
(4) Parameter D is the detachment point for the position, which
represents the threshold at which credit losses of principal allocated
to the position would result in a total loss of principal. Except as
provided in Sec. 3.210(b)(2)(vii)(D) for nth-to-default
credit derivatives, parameter D equals parameter A plus the ratio of the
current dollar amount of the securitization positions that are pari
passu with the position (that is, have equal seniority with respect to
credit risk) to the current dollar amount of the underlying exposures.
Parameter D is expressed as a decimal value between zero and one.
(5) A supervisory calibration parameter, p, is equal to 0.5 for
securitization positions that are not resecuritization positions and
equal to 1.5 for resecuritization positions.
(c) Mechanics of the SSFA. KG and W are used to calculate
KA, the augmented value of KG, which reflects the
observed credit quality of the underlying exposures. KA is
defined in paragraph (d) of this section. The values of parameters A and
D, relative to KA determine the specific risk-weighting
factor assigned to a position as described in this paragraph (c) and
paragraph (d) of this section. The specific risk-weighting factor
assigned to a securitization position, or portion of a position, as
appropriate, is the larger of the specific risk-weighting factor
determined in accordance with this paragraph (c), paragraph (d) of this
section, and a specific risk-weighting factor of 1.6 percent.
(1) When the detachment point, parameter D, for a securitization
position is less than or equal to KA, the position must be
assigned a specific risk-weighting factor of 100 percent.
(2) When the attachment point, parameter A, for a securitization
position is greater than or equal to KA, the national bank or
Federal savings association must calculate the specific risk-weighting
factor in accordance with paragraph (d) of this section.
(3) When A is less than KA and D is greater than
KA, the specific risk-weighting factor is a weighted-average
of 1.00 and KSSFA calculated under paragraphs (c)(3)(i) and
(c)(3)(ii) of this section. For the purpose of this calculation:
(i) The weight assigned to 1.00 equals
[[Page 202]]
[GRAPHIC] [TIFF OMITTED] TR11OC13.057
Sec. 3.212 Market risk disclosures.
(a) Scope. A national bank or Federal savings association must
comply with this section unless it is a consolidated subsidiary of a
bank holding company or a depository institution that is subject to
these requirements or of a non-U.S. banking organization that is subject
to comparable public disclosure requirements in its home jurisdiction. A
national bank or Federal savings association must make timely public
disclosures each calendar quarter. If a significant change occurs, such
that the most recent reporting amounts are no longer reflective of the
national bank's or Federal savings association's capital adequacy and
risk profile, then a brief discussion of this change and its likely
impact must be provided as soon as practicable thereafter. Qualitative
disclosures that typically do not change each quarter may be disclosed
annually, provided any significant changes are disclosed in the interim.
If a national bank or Federal savings association believes that
disclosure of specific commercial or financial information would
prejudice seriously its position by making public certain information
that is either proprietary or confidential in nature, the national bank
or Federal savings association is not required to disclose these
specific items, but must disclose more general information about the
subject matter of the requirement, together with the fact that, and the
reason why, the specific items of information have not been disclosed.
The national bank's or Federal
[[Page 203]]
savings association's management may provide all of the disclosures
required by this section in one place on the national bank's or Federal
savings association's public Web site or may provide the disclosures in
more than one public financial report or other regulatory reports,
provided that the national bank or Federal savings association publicly
provides a summary table specifically indicating the location(s) of all
such disclosures.
(b) Disclosure policy. The national bank or Federal savings
association must have a formal disclosure policy approved by the board
of directors that addresses the national bank's or Federal savings
association's approach for determining its market risk disclosures. The
policy must address the associated internal controls and disclosure
controls and procedures. The board of directors and senior management
must ensure that appropriate verification of the disclosures takes place
and that effective internal controls and disclosure controls and
procedures are maintained. One or more senior officers of the national
bank or Federal savings association must attest that the disclosures
meet the requirements of this subpart, and the board of directors and
senior management are responsible for establishing and maintaining an
effective internal control structure over financial reporting, including
the disclosures required by this section.
(c) Quantitative disclosures. (1) For each material portfolio of
covered positions, the national bank or Federal savings association must
provide timely public disclosures of the following information at least
quarterly:
(i) The high, low, and mean VaR-based measures over the reporting
period and the VaR-based measure at period-end;
(ii) The high, low, and mean stressed VaR-based measures over the
reporting period and the stressed VaR-based measure at period-end;
(iii) The high, low, and mean incremental risk capital requirements
over the reporting period and the incremental risk capital requirement
at period-end;
(iv) The high, low, and mean comprehensive risk capital requirements
over the reporting period and the comprehensive risk capital requirement
at period-end, with the period-end requirement broken down into
appropriate risk classifications (for example, default risk, migration
risk, correlation risk);
(v) Separate measures for interest rate risk, credit spread risk,
equity price risk, foreign exchange risk, and commodity price risk used
to calculate the VaR-based measure; and
(vi) A comparison of VaR-based estimates with actual gains or losses
experienced by the national bank or Federal savings association, with an
analysis of important outliers.
(2) In addition, the national bank or Federal savings association
must disclose publicly the following information at least quarterly:
(i) The aggregate amount of on-balance sheet and off-balance sheet
securitization positions by exposure type; and
(ii) The aggregate amount of correlation trading positions.
(d) Qualitative disclosures. For each material portfolio of covered
positions, the national bank or Federal savings association must provide
timely public disclosures of the following information at least annually
after the end of the fourth calendar quarter, or more frequently in the
event of material changes for each portfolio:
(1) The composition of material portfolios of covered positions;
(2) The national bank's or Federal savings association's valuation
policies, procedures, and methodologies for covered positions including,
for securitization positions, the methods and key assumptions used for
valuing such positions, any significant changes since the last reporting
period, and the impact of such change;
(3) The characteristics of the internal models used for purposes of
this subpart. For the incremental risk capital requirement and the
comprehensive risk capital requirement, this must include:
(i) The approach used by the national bank or Federal savings
association to determine liquidity horizons;
(ii) The methodologies used to achieve a capital assessment that is
[[Page 204]]
consistent with the required soundness standard; and
(iii) The specific approaches used in the validation of these
models;
(4) A description of the approaches used for validating and
evaluating the accuracy of internal models and modeling processes for
purposes of this subpart;
(5) For each market risk category (that is, interest rate risk,
credit spread risk, equity price risk, foreign exchange risk, and
commodity price risk), a description of the stress tests applied to the
positions subject to the factor;
(6) The results of the comparison of the national bank's or Federal
savings association's internal estimates for purposes of this subpart
with actual outcomes during a sample period not used in model
development;
(7) The soundness standard on which the national bank's or Federal
savings association's internal capital adequacy assessment under this
subpart is based, including a description of the methodologies used to
achieve a capital adequacy assessment that is consistent with the
soundness standard;
(8) A description of the national bank's or Federal savings
association's processes for monitoring changes in the credit and market
risk of securitization positions, including how those processes differ
for resecuritization positions; and
(9) A description of the national bank's or Federal savings
association's policy governing the use of credit risk mitigation to
mitigate the risks of securitization and resecuritization positions.
Secs. 3.213-3.299 [Reserved]
Subpart G_Transition Provisions
Source: 78 FR 62157, 62273, Oct. 11, 2013, unless otherwise noted.
Sec. 3.300 Transitions.
(a) Capital conservation and countercyclical capital buffer. (1)
From January 1, 2014 through December 31, 2015, a national bank or
Federal savings association is not subject to limits on distributions
and discretionary bonus payments under Sec. 3.11 of subpart B of this
part notwithstanding the amount of its capital conservation buffer or
any applicable countercyclical capital buffer amount.
(2) Beginning January 1, 2016 through December 31, 2018 a national
bank's or Federal savings association's maximum payout ratio shall be
determined as set forth in Table 1 to Sec. 3.300.
Table 1 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
Maximum payout ratio (as
Transition period Capital conservation buffer a percentage of eligible
retained income)
----------------------------------------------------------------------------------------------------------------
Calendar year 2016.................... Greater than 0.625 percent (plus 25 percent of No payout ratio
any applicable countercyclical capital buffer limitation applies
amount). under this section.
Less than or equal to 0.625 percent (plus 25 60 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.469 percent (plus 17.25 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 40 percent.
17.25 percent of any applicable
countercyclical capital buffer amount), and
greater than 0.313 percent (plus 12.5 percent
of any applicable countercyclical capital
buffer amount).
Less than or equal to 0.313 percent (plus 12.5 20 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.156 percent (plus 6.25 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 0.156 percent (plus 6.25 0 percent.
percent of any applicable countercyclical
capital buffer amount).
Calendar year 2017.................... Greater than 1.25 percent (plus 50 percent of No payout ratio
any applicable countercyclical capital buffer limitation applies
amount). under this section.
Less than or equal to 1.25 percent (plus 50 60 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.938 percent (plus 37.5 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 0.938 percent (plus 37.5 40 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.625 percent (plus 25 percent of any
applicable countercyclical capital buffer
amount).
[[Page 205]]
Less than or equal to 0.625 percent (plus 25 20 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.313 percent (plus 12.5 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 0.313 percent (plus 12.5 0 percent.
percent of any applicable countercyclical
capital buffer amount).
Calendar year 2018.................... Greater than 1.875 percent (plus 75 percent of No payout ratio
any applicable countercyclical capital buffer limitation applies
amount). under this section.
Less than or equal to 1.875 percent (plus 75 60 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
1.406 percent (plus 56.25 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 1.406 percent (plus 40 percent.
56.25 percent of any applicable
countercyclical capital buffer amount), and
greater than 0.938 percent (plus 37.5 percent
of any applicable countercyclical capital
buffer amount).
Less than or equal to 0.938 percent (plus 37.5 20 percent.
percent of any applicable countercyclical
capital buffer amount), and greater than
0.469 percent (plus 18.75 percent of any
applicable countercyclical capital buffer
amount).
Less than or equal to 0.469 percent (plus 0 percent.
18.75 percent of any applicable
countercyclical capital buffer amount).
----------------------------------------------------------------------------------------------------------------
(b) Regulatory capital adjustments and deductions. Beginning January
1, 2014 for an advanced approaches national bank or Federal savings
association, and beginning January 1, 2015 for a national bank or
Federal savings association that is not an advanced approaches national
bank or Federal savings association, and in each case through December
31, 2017, a national bank or Federal savings association must make the
capital adjustments and deductions in Sec. 3.22 in accordance with the
transition requirements in this paragraph (b). Beginning January 1,
2018, a national bank or Federal savings association must make all
regulatory capital adjustments and deductions in accordance with
Sec. 3.22.
(1) Transition deductions from common equity tier 1 capital.
Beginning January 1, 2014 for an advanced approaches national bank or
Federal savings association, and beginning January 1, 2015 for a
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association, and in each
case through December 31, 2017, a national bank or Federal savings
association, must make the deductions required under Sec. 3.22(a)(1)-(8)
from common equity tier 1 or tier 1 capital elements in accordance with
the percentages set forth in Table 2 and Table 3 to Sec. 3.300.
(i) A national bank or Federal savings association must deduct the
following items from common equity tier 1 and additional tier 1 capital
in accordance with the percentages set forth in Table 2 to Sec. 3.300:
goodwill (Sec. 3.22(a)(1)), DTAs that arise from net operating loss and
tax credit carryforwards (Sec. 3.22(a)(3)), a gain-on-sale in connection
with a securitization exposure (Sec. 3.22(a)(4)), defined benefit
pension fund assets (Sec. 3.22(a)(5)), expected credit loss that exceeds
eligible credit reserves (for advanced approaches national banks or
Federal savings associations that have completed the parallel run
process and that have received notifications from the OCC pursuant to
Sec. 3.121(d) of subpart E) and financial subsidiaries
(Sec. 3.22(a)(7)), and nonincludable subsidiaries of a Federal savings
association (Sec. 3.22(a)(8)).
[[Page 206]]
Table 2 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
Transition deductions Transition deductions underSec. 3.22(a)(3)-(6)
underSec. 3.22(a)(1) and (8)
and (7) ---------------------------------------------------
Transition period --------------------------
Percentage of the Percentage of the Percentage of the
deductions from common deductions from common deductions from tier 1
equity tier 1 capital equity tier 1 capital capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2014................ 100 20 80
Calendar year 2015................ 100 40 60
Calendar year 2016................ 100 60 40
Calendar year 2017................ 100 80 20
Calendar year 2018, and thereafter 100 100 0
----------------------------------------------------------------------------------------------------------------
(ii) A national bank or Federal savings association must deduct from
common equity tier 1 capital any intangible assets other than goodwill
and MSAs in accordance with the percentages set forth in Table 3 to
Sec. 3.300.
(iii) A national bank or Federal savings association must apply a
100 percent risk-weight to the aggregate amount of intangible assets
other than goodwill and MSAs that are not required to be deducted from
common equity tier 1 capital under this section.
Table 3 toSec. 3.300
------------------------------------------------------------------------
Transition deductions under Sec.
3.22(a)(2)--percentage of the deductions
Transition period from common equity tier 1 capital
------------------------------------------------------------------------
Calendar year 2014.......... 20
Calendar year 2015.......... 40
Calendar year 2016.......... 60
Calendar year 2017.......... 80
Calendar year 2018, and 100
thereafter.................
------------------------------------------------------------------------
(2) Transition adjustments to common equity tier 1 capital.
Beginning January 1, 2014 for an advanced approaches national bank or
Federal savings association, and beginning January 1, 2015 for a
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association, and in each
case through December 31, 2017, a national bank or Federal savings
association, must allocate the regulatory adjustments related to changes
in the fair value of liabilities due to changes in the national bank's
or Federal savings association's own credit risk (Sec. 3.22(b)(1)(iii))
between common equity tier 1 capital and tier 1 capital in accordance
with the percentages set forth in Table 4 to Sec. 3.300.
(i) If the aggregate amount of the adjustment is positive, the
national bank or Federal savings association must allocate the deduction
between common equity tier 1 and tier 1 capital in accordance with Table
4 to Sec. 3.300.
(ii) If the aggregate amount of the adjustment is negative, the
national bank or Federal savings association must add back the
adjustment to common equity tier 1 capital or to tier 1 capital, in
accordance with Table 4 to Sec. 3.300.
Table 4 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
Transition adjustments underSec. 3.22(b)(2)
-------------------------------------------------------------------------
Transition period Percentage of the adjustment
applied to common equity tier 1 Percentage of the adjustment
capital applied to tier 1 capital
----------------------------------------------------------------------------------------------------------------
Calendar year 2014.................... 20 80
Calendar year 2015.................... 40 60
Calendar year 2016.................... 60 40
Calendar year 2017.................... 80 20
Calendar year 2018, and thereafter.... 100 0
----------------------------------------------------------------------------------------------------------------
[[Page 207]]
(3) Transition adjustments to AOCI for an advanced approaches
national bank or Federal savings association and a national bank or
Federal savings association that has not made an AOCI opt-out election
under Sec. 3.22(b)(2). Beginning January 1, 2014 for an advanced
approaches national bank or Federal savings association, and beginning
January 1, 2015 for a national bank or Federal savings association that
is not an advanced approaches national bank or Federal savings
association that has not made an AOCI opt-out election under
Sec. 3.22(b)(2), and in each case through December 31, 2017, a national
bank or Federal savings association must adjust common equity tier 1
capital with respect to the transition AOCI adjustment amount
(transition AOCI adjustment amount):
(i) The transition AOCI adjustment amount is the aggregate amount of
a national bank's or Federal savings association's:
(A) Unrealized gains on available-for-sale securities that are
preferred stock classified as an equity security under GAAP or
available-for-sale equity exposures, plus
(B) Net unrealized gains or losses on available-for-sale securities
that are not preferred stock classified as an equity security under GAAP
or available-for-sale equity exposures, plus
(C) Any amounts recorded in AOCI attributed to defined benefit
postretirement plans resulting from the initial and subsequent
application of the relevant GAAP standards that pertain to such plans
(excluding, at the national bank's or Federal savings association's
option, the portion relating to pension assets deducted under section
22(a)(5)), plus
(D) Accumulated net gains or losses on cash flow hedges related to
items that are reported on the balance sheet at fair value included in
AOCI, plus
(E) Net unrealized gains or losses on held-to-maturity securities
that are included in AOCI.
(ii) A national bank or Federal savings association must make the
following adjustment to its common equity tier 1 capital:
(A) If the transition AOCI adjustment amount is positive, the
appropriate amount must be deducted from common equity tier 1 capital in
accordance with Table 5 to Sec. 3.300.
(B) If the transition AOCI adjustment amount is negative, the
appropriate amount must be added back to common equity tier 1 capital in
accordance with Table 5 to Sec. 3.300.
Table 5 toSec. 3.300
------------------------------------------------------------------------
Percentage of the transition AOCI
Transition period adjustment amount to be applied to common
equity tier 1 capital
------------------------------------------------------------------------
Calendar year 2014.......... 80
Calendar year 2015.......... 60
Calendar year 2016.......... 40
Calendar year 2017.......... 20
Calendar year 2018 and 0
thereafter.................
------------------------------------------------------------------------
(iii) A national bank or Federal savings association may include in
tier 2 capital the percentage of unrealized gains on available-for-sale
preferred stock classified as an equity security under GAAP and
available-for-sale equity exposures as set forth in Table 6 to
Sec. 3.300.
Table 6 toSec. 3.300
------------------------------------------------------------------------
Percentage of unrealized gains on
available-for-sale preferred stock
classified as an equity security under
Transition period GAAP and available-for-sale equity
exposures that may be included in tier 2
capital
------------------------------------------------------------------------
Calendar year 2014.......... 36
Calendar year 2015.......... 27
Calendar year 2016.......... 18
Calendar year 2017.......... 9
[[Page 208]]
Calendar year 2018 and 0
thereafter.................
------------------------------------------------------------------------
(4) Additional transition deductions from regulatory capital. (i)
Beginning January 1, 2014 for an advanced approaches national bank or
Federal savings association, and beginning January 1, 2015 for a
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association, and in each
case through December 31, 2017, a national bank or Federal savings
association, must use Table 7 to Sec. 3.300 to determine the amount of
investments in capital instruments and the items subject to the 10 and
15 percent common equity tier 1 capital deduction thresholds
(Sec. 3.22(d)) (that is, MSAs, DTAs arising from temporary differences
that the national bank or Federal savings association could not realize
through net operating loss carrybacks, and significant investments in
the capital of unconsolidated financial institutions in the form of
common stock) that must be deducted from common equity tier 1 capital.
(ii) Beginning January 1, 2014 for an advanced approaches national
bank or Federal savings association, and beginning January 1, 2015 for a
national bank or Federal savings association that is not an advanced
approaches national bank or Federal savings association, and in each
case through December 31, 2017, a national bank or Federal savings
association must apply a 100 percent risk-weight to the aggregate amount
of the items subject to the 10 and 15 percent common equity tier 1
capital deduction thresholds that are not deducted under this section.
As set forth in Sec. 3.22(d)(2), beginning January 1, 2018, a national
bank or Federal savings association must apply a 250 percent risk-weight
to the aggregate amount of the items subject to the 10 and 15 percent
common equity tier 1 capital deduction thresholds that are not deducted
from common equity tier 1 capital.
Table 7 toSec. 3.300
------------------------------------------------------------------------
Transitions for deductions under Sec.
3.22(c) and (d)--Percentage of additional
Transition period deductions from regulatory capital
------------------------------------------------------------------------
Calendar year 2014.......... 20
Calendar year 2015.......... 40
Calendar year 2016.......... 60
Calendar year 2017.......... 80
Calendar year 2018 and 100
thereafter.................
------------------------------------------------------------------------
(iii) For purposes of calculating the transition deductions in this
paragraph (b)(4) beginning January 1, 2014 for an advanced approaches
national bank or Federal savings association, and beginning January 1,
2015 for a national bank or Federal savings association that is not an
advanced approaches national bank or Federal savings association, and in
each case through December 31, 2017, a national bank's or Federal
savings association's 15 percent common equity tier 1 capital deduction
threshold for MSAs, DTAs arising from temporary differences that the
national bank or Federal savings association could not realize through
net operating loss carrybacks, and significant investments in the
capital of unconsolidated financial institutions in the form of common
stock is equal to 15 percent of the sum of the national bank's or
Federal savings association's common equity tier 1 elements, after
[[Page 209]]
regulatory adjustments and deductions required under Sec. 3.22(a)
through (c) (transition 15 percent common equity tier 1 capital
deduction threshold).
(iv) Beginning January 1, 2018, a national bank or Federal savings
association must calculate the 15 percent common equity tier 1 capital
deduction threshold in accordance with Sec. 3.22(d).
(c) Non-qualifying capital instruments (1)--(3) [Reserved]
(4) Depository institutions. (i) Beginning on January 1, 2014, a
depository institution that is an advanced approaches national bank or
Federal savings association, and beginning on January 1, 2015, all other
depository institutions, may include in regulatory capital debt or
equity instruments issued prior to September 12, 2010 that do not meet
the criteria for additional tier 1 or tier 2 capital instruments in
Sec. 3.20 but that were included in tier 1 or tier 2 capital
respectively as of September 12, 2010 (non-qualifying capital
instruments issued prior to September 12, 2010) up to the percentage of
the outstanding principal amount of such non-qualifying capital
instruments as of January 1, 2014 in accordance with Table 9 to
Sec. 3.300.
(ii) Table 9 to Sec. 3.300 applies separately to tier 1 and tier 2
non-qualifying capital instruments.
(iii) The amount of non-qualifying capital instruments that cannot
be included in additional tier 1 capital under this section may be
included in tier 2 capital without limitation, provided that the
instruments meet the criteria for tier 2 capital instruments under
Sec. 3.20(d).
Table 9 toSec. 3.300
----------------------------------------------------------------------------------------------------------------
Percentage of non-qualifying capital
Transition period (calendar year) instruments includable in additional tier
1 or tier 2 capital
---------------------------------------------------------------------------------------------------------------
Calendar year 2014................................................ 80
Calendar year 2015................................................ 70
Calendar year 2016................................................ 60
Calendar year 2017................................................ 50
Calendar year 2018................................................ 40
Calendar year 2019................................................ 30
Calendar year 2020................................................ 20
Calendar year 2021................................................ 10
Calendar year 2022 and thereafter................................. 0
----------------------------------------------------------------------------------------------------------------
(d) Minority interest--(1) Surplus minority interest. Beginning
January 1, 2014 for an advanced approaches national bank or Federal
savings association, and beginning January 1, 2015 for a national bank
or Federal savings association that is not an advanced approaches
national bank or Federal savings association, and in each case through
December 31, 2017, a national bank or Federal savings association may
include in common equity tier 1 capital, tier 1 capital, or total
capital the percentage of the common equity tier 1 minority interest,
tier 1 minority interest and total capital minority interest outstanding
as of January 1, 2014 that exceeds any common equity tier 1 minority
interest, tier 1 minority interest or total capital minority interest
includable under Sec. 3.21 (surplus minority interest), respectively, as
set forth in Table 10 to Sec. 3.300.
(2) Non-qualifying minority interest. Beginning January 1, 2014 for
an advanced approaches national bank or Federal savings association, and
beginning January 1, 2015 for a national bank or Federal savings
association that is not an advanced approaches national bank or Federal
savings association, and in each case through December 31, 2017, a
national bank or Federal savings association may include in tier 1
capital or total capital the percentage of the tier 1 minority interest
and total capital minority interest outstanding as of January 1, 2014
that does not meet the criteria for additional tier 1 or tier 2 capital
instruments in Sec. 3.20 (non-qualifying minority interest), as set
forth in Table 10 to Sec. 3.300.
[[Page 210]]
Table 10 toSec. 3.300
------------------------------------------------------------------------
Percentage of the amount of surplus or non-
qualifying minority interest that can be
Transition period included in regulatory capital during the
transition period
------------------------------------------------------------------------
Calendar year 2014.......... 80
Calendar year 2015.......... 60
Calendar year 2016.......... 40
Calendar year 2017.......... 20
Calendar year 2018 and 0
thereafter.................
------------------------------------------------------------------------
(e) Prompt corrective action. For purposes of 12 CFR part 6, a
national bank or Federal savings association must calculate its capital
measures and tangible equity ratio in accordance with the transition
provisions in this section.
[78 FR 62157, 62273, 62274, Oct. 11, 2013]
Subpart H_Establishment of Minimum Capital Ratios for an Individual Bank
or Individual Federal Savings Association
Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.
Sec. 3.401 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 national bank or Federal savings
association under subpart B of this part. The OCC is authorized under 12
U.S.C. 1464(s)(2) and 3907(a)(2) to establish such minimum capital
requirements for a national bank or Federal savings association as the
OCC, in its discretion, deems appropriate in light of the particular
circumstances at that national bank or Federal savings association.
Proceedings under this subpart also may be initiated to require a
national bank or Federal savings association having capital ratios above
those set forth in subpart B of this part, or other legal authority to
continue to maintain those higher ratios.
Sec. 3.402 Applicability.
The OCC may require higher minimum capital ratios for an individual
national bank or Federal savings association in view of its
circumstances. For example, higher capital ratios may be appropriate
for:
(a) A newly chartered national bank or Federal savings association;
(b) A national bank or Federal savings association receiving special
supervisory attention;
(c) A national bank or Federal savings association that has, or is
expected to have, losses resulting in capital inadequacy;
(d) A national bank or Federal savings association 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 national bank or Federal savings association with significant
exposure to declines in the economic value of its capital due to changes
in interest rates;
(f) A national bank or Federal savings association with significant
exposure due to fiduciary or operational risk;
(g) A national bank or Federal savings association exposed to a high
degree of asset depreciation, or a low level of liquid assets in
relation to short term liabilities;
(h) A national bank or Federal savings association exposed to a high
volume of, or particularly severe, problem loans;
(i) A national bank or Federal savings association that is growing
rapidly, either internally or through acquisitions; or
(j) A national bank or Federal savings association 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
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which it has significant business relationships.
Sec. 3.403 Standards for determination of appropriate individual
minimum capital ratios.
The appropriate minimum capital ratios for an individual national
bank or Federal savings association 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:
(a) The conditions or circumstances leading to the OCC's
determination that higher minimum capital ratios are appropriate or
necessary for the national bank or Federal savings association;
(b) The exigency of those circumstances or potential problems;
(c) The overall condition, management strength, and future prospects
of the national bank or Federal savings association and, if applicable,
its holding company and/or affiliate(s);
(d) The national bank's or Federal savings association's liquidity,
capital, risk asset and other ratios compared to the ratios of its peer
group; and
(e) The views of the national bank's or Federal savings
association's directors and senior management.
Sec. 3.404 Procedures.
(a) Notice. When the OCC determines that minimum capital ratios
above those set forth in subpart B of this part or other legal authority
are necessary or appropriate for a particular national bank or Federal
savings association, the OCC will notify the national bank or Federal
savings association 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 national bank or Federal savings
association.
(b) Response. (1) The national bank or Federal savings association
may respond to any or all of the items in the notice. The response
should include any matters which the national bank or Federal savings
association would have the OCC consider in deciding whether individual
minimum capital ratios should be established for the national bank or
Federal savings association, 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 national bank or Federal savings association
received the notice. The OCC may shorten the time period when, in the
opinion of the OCC, the condition of the national bank or Federal
savings association so requires, provided that the national bank or
Federal savings association is informed promptly of the new time period,
or with the consent of the national bank or Federal savings association.
In its discretion, the OCC 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 OCC 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 national bank's or Federal
savings association's response period, the OCC will decide, based on a
review of the national bank's or Federal savings association's response
and other information concerning the national bank or Federal savings
association, whether individual minimum capital ratios should be
established for the national bank or Federal savings association and, if
so, the ratios and the date the requirements will become effective. The
national bank or Federal savings association 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 national bank or Federal savings
association.
(d) Submission of plan. The decision may require the national bank
or Federal savings association to develop and submit to the OCC, within
a time period specified, an acceptable plan to reach the minimum capital
ratios established for the national bank or Federal savings association
by the date required.
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(e) Change in circumstances. If, after the OCC's decision in
paragraph (c) of this section, there is a change in the circumstances
affecting the national bank's or Federal savings association's capital
adequacy or its ability to reach the required minimum capital ratios by
the specified date, the national bank or Federal savings association may
propose to the OCC, or the OCC may propose to the national bank or
Federal savings association, a change in the minimum capital ratios for
the national bank or Federal savings association, the date when the
minimums must be achieved, or the national bank's or Federal savings
association's plan (if applicable). The OCC 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
OCC's original decision and any plan required under that decision shall
continue in full force and effect.
Sec. 3.405 Relation to other actions.
In lieu of, or in addition to, the procedures in this subpart, the
required minimum capital ratios for a national bank or Federal savings
association 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 for national banks and 12 CFR part 109 for Federal
savings associations) or as a condition for approval of an application.
Subpart I_Enforcement
Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.
Sec. 3.501 Remedies.
A national bank or Federal savings association that does not have or
maintain the minimum capital ratios applicable to it, whether required
in subpart B of this part, in a decision pursuant to subpart H 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
national bank or Federal savings association 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 J 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 or Federal savings
association's failure to achieve or maintain minimum capital ratios in
subpart B of this part may also be the basis for an action by the
Federal Deposit Insurance Corporation
Subpart J_Issuance of a Directive
Source: 78 FR 62269, Oct. 11, 2013, unless otherwise noted.
Sec. 3.601 Purpose and scope.
(a) This subpart is applicable to proceedings by the OCC to issue a
directive under 12 U.S.C. 3907(b)(2) or 12 U.S.C. 1464(s), as
appropriate. A directive is an order issued to a national bank or
Federal savings association that does not have or maintain capital at or
above the minimum ratios set forth in subpart B of this part, or
established for the national bank or Federal savings association under
subpart H of this part, 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 national bank or Federal savings association to:
(1) Achieve the minimum capital ratios applicable to it by a
specified date;
(2) Adhere to a previously submitted plan to achieve the applicable
capital ratios;
(3) Submit and adhere to a plan acceptable to the OCC describing the
means and time schedule by which the national bank or Federal savings
association shall achieve the applicable capital ratios;
(4) 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
(5) A combination of any of these or similar actions.
(b) 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
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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. 3.602 Notice of intent to issue a directive.
The OCC will notify a national bank or Federal savings association
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. 3.603 Response to notice.
(a) A national bank or Federal savings association 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 national bank or Federal savings
association would have the OCC 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 national bank or Federal savings association. The
response must be in writing and delivered to the designated OCC official
within 30 days after the date on which the national bank or Federal
savings association received the notice. The OCC may shorten the 30-day
time period:
(1) When, in the opinion of the OCC, the condition of the national
bank or Federal savings association so requires, provided that the
national bank or Federal savings association shall be informed promptly
of the new time period;
(2) With the consent of the national bank or Federal savings
association; or
(3) When the national bank or Federal savings association already
has advised the OCC that it cannot or will not achieve its applicable
minimum capital ratios.
(b) In its discretion, the OCC may extend the time period for good
cause.
(c) Failure to respond within 30 days or such other time period as
may be specified by the OCC shall constitute a waiver of any objections
to the proposed directive.
Sec. 3.604 Decision.
After the closing date of the national bank's or Federal savings
association's response period, or receipt of the national bank's or
Federal savings association's response, if earlier, the OCC will
consider the national bank's or Federal savings association's response,
and may seek additional information or clarification of the response.
Thereafter, the OCC 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. 3.605 Issuance of a directive.
(a) A directive will be served by delivery to the national bank or
Federal savings association. 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
national bank or Federal savings association, 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 OCC.
Sec. 3.606 Change in circumstances.
Upon a change in circumstances, a national bank or Federal savings
association may request the OCC to reconsider the terms of its directive
or may propose changes in the plan to achieve the national bank's or
Federal savings association's applicable minimum capital ratios. The OCC
also may take such action on its own motion. The OCC 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. 3.607 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
[[Page 214]]
applications. The OCC also may, in its discretion, take any action
authorized by law, in lieu of a directive, in response to a national
bank's or Federal savings association's failure to achieve or maintain
the applicable minimum capital ratios.
Subpart K_Interpretations
Source: 78 FR 62272, Oct. 11, 2013, unless otherwise noted.
Sec. 3.701 Capital and surplus.
For purposes of determining statutory limits that are based on the
amount of a national bank's capital and/or surplus, the provisions of
this section are to be used, rather than the definitions of capital
contained in subparts A through J of this part.
(a) Capital. The term capital as used in provisions of law relating
to the capital of national banks 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 banks, 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 banks 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 percent 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 banks 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 national bank other than for capital
stock;
(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
national bank that is allocated to minority shareholders of such
subsidiaries.
(7) Mortgage servicing assets means the national bank-owned rights
to service for a fee mortgage loans that are owned by others.
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(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 national
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 national 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 surplus up to 25
percent of the sum of paragraphs (a) and (c)(1) of this section.
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.
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(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 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
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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 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
[[Page 218]]
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 decline in interest rates or other
change in market conditions.
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\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.
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(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
[[Page 219]]
state or municipal corporation. This definition does not include
commercial companies owned by the public sector. \1a\
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\1a\ See Definition (5), Central government, for further explanation
of commercial companies owned by the public sector.
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(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.
(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\
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\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.
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(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:
[[Page 220]]
(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;
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\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.
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(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\
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\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.
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(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 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.
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\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.
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(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
[[Page 221]]
(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:
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\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.
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(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 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
[[Page 222]]
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 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.
[[Page 223]]
(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 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
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\7\ The OCC may require deduction of investments in other
subsidiaries and associated companies, on a case-by-case basis.
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(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
[[Page 224]]
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.
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\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.
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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.
(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\
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\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.
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(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
[[Page 225]]
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\
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\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.
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(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\
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\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.
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(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
[[Page 226]]
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\
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\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).
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(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 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%
[[Page 227]]
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\
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\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 ra