[Federal Register Volume 75, Number 18 (Thursday, January 28, 2010)]
[Rules and Regulations]
[Pages 4636-4654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-825]
[[Page 4635]]
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Part II
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Part 3
Office of Thrift Supervision
12 CFR Part 567
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Federal Reserve System
12 CFR Parts 208 and 225
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Federal Deposit Insurance Corporation
12 CFR Part 325
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Risk-Based Capital Guidelines; Capital Adequacy Guidelines; Capital
Maintenance: Regulatory Capital; Impact of Modifications to Generally
Accepted Accounting Principles; Consolidation of Asset-Backed
Commercial Paper Programs; and Other Related Issues; Final Rule
Federal Register / Vol. 75 , No. 18 / Thursday, January 28, 2010 /
Rules and Regulations
[[Page 4636]]
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DEPARTMENT OF THE TREASURY
Office of the Comptroller of the Currency
12 CFR Part 3
[Docket ID: OCC-2009-0020]
RIN 1557-AD26
FEDERAL RESERVE SYSTEM
12 CFR Parts 208 and 225
[Regulations H and Y; Docket No. R-1368]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 325
RIN 3064-AD48
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Part 567
[No. OTS-2010-0002]
RIN 1550-AC36
Risk-Based Capital Guidelines; Capital Adequacy Guidelines;
Capital Maintenance: Regulatory Capital; Impact of Modifications to
Generally Accepted Accounting Principles; Consolidation of Asset-Backed
Commercial Paper Programs; and Other Related Issues
AGENCIES: Office of the Comptroller of the Currency, Department of the
Treasury; Board of Governors of the Federal Reserve System; Federal
Deposit Insurance Corporation; and Office of Thrift Supervision,
Department of the Treasury.
ACTION: Final rule.
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SUMMARY: The Office of the Comptroller of the Currency (OCC), Board of
Governors of the Federal Reserve System (Board), Federal Deposit
Insurance Corporation (FDIC), and the Office of Thrift Supervision
(OTS) (collectively, the agencies) are amending their general risk-
based and advanced risk-based capital adequacy frameworks by adopting a
final rule that eliminates the exclusion of certain consolidated asset-
backed commercial paper programs from risk-weighted assets; provides
for an optional two-quarter implementation delay followed by an
optional two-quarter partial implementation of the effect on risk-
weighted assets that will result from changes to U.S. generally
accepted accounting principles; provides for an optional two-quarter
delay, followed by an optional two-quarter phase-in, of the application
of the agencies' regulatory limit on the inclusion of the allowance for
loan and lease losses (ALLL) in tier 2 capital for the portion of the
ALLL associated with the assets a banking organization consolidates as
a result of changes to U.S. generally accepted accounting principles;
and provides a reservation of authority to permit the agencies to
require a banking organization to treat entities that are not
consolidated under accounting standards as if they were consolidated
for risk-based capital purposes, commensurate with the risk
relationship of the banking organization to the structure. The delay
and subsequent phase-in periods of the implementation will apply only
to the agencies' risk-based capital requirements, not the leverage
ratio requirement.
DATES: This rule is effective March 29, 2010. Banking organizations may
elect to comply with this final rule as of the beginning of their first
annual reporting period that begins after November 15, 2009.
FOR FURTHER INFORMATION CONTACT: OCC: Paul Podgorski, Risk Expert,
Capital Policy Division, (202) 874-5070, or Carl Kaminski, Senior
Attorney, (202) 874-5090, or Hugh Carney, Attorney, Legislative and
Regulatory Activities Division, (202) 874-5090, Office of the
Comptroller of the Currency, 250 E Street, SW., Washington, DC 20219.
Board: Barbara J. Bouchard, Associate Director, (202) 452-3072, or
Anna Lee Hewko, Manager, Supervisory Policy and Guidance, (202) 530-
6260, Division of Banking Supervision and Regulation; or April C.
Snyder, Counsel, (202) 452-3099, or Benjamin W. McDonough, Counsel,
(202) 452-2036, Legal Division. For the hearing impaired only,
Telecommunication Device for the Deaf (TDD), (202) 263-4869.
FDIC: James Weinberger, Senior Policy Analyst (Capital Markets),
(202) 898-7034, Christine Bouvier, Senior Policy Analyst (Bank
Accounting), (202) 898-7289, Division of Supervision and Consumer
Protection; or Mark Handzlik, Senior Attorney, (202) 898-3990, or
Michael Phillips, Counsel, (202) 898-3581, Supervision Branch, Legal
Division.
OTS: Teresa A. Scott, Senior Policy Analyst, (202) 906-6478,
Capital Risk, Christine Smith, Senior Policy Analyst, (202) 906-5740,
Capital Risk, or Marvin Shaw, Senior Attorney, (202) 906-6639,
Legislation and Regulation Division, Office of Thrift Supervision, 1700
G Street, NW., Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
I. Background
A. Changes to U.S. Accounting Standards and the Effect on Regulatory
Capital
On June 12, 2009, the Financial Accounting Standard Board (FASB)
issued Statement of Financial Accounting Standards No. 166, Accounting
for Transfers of Financial Assets, an Amendment of FASB Statement No.
140 (FAS 166), and Statement of Financial Accounting Standards No. 167,
Amendments to FASB Interpretation No. 46(R) (FAS 167). Among other
things, FAS 166 and FAS 167 modified the accounting treatment under
U.S. generally accepted accounting principles (GAAP) of certain
structured finance transactions involving a special purpose entity.\1\
FAS 166 and FAS 167 are effective as of the beginning of a banking
organization's \2\ first annual reporting period that begins after
November 15, 2009 (implementation date), including interim periods
therein, and for interim and annual periods thereafter.\3\
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\1\ The accounting treatment of these transactions and
structures was previously governed by the FASB's Statement of
Financial Accounting Standards No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities
(2000) (FAS 140) and FASB Interpretation No. 46(R), Consolidation of
Variable Interest Entities (2003) (FIN 46(R)). References herein to
FASB Statements of Financial Accounting Standards and
Interpretations are to the FASB's ``pre-Codification standards''
documents and do not reflect modifications that have been made by
the FASB as the related text is incorporated in the FASB Accounting
Standards Codification that FASB announced on July 1, 2009.
\2\ Unless otherwise indicated, the term ``banking
organization'' includes banks, savings associations, and bank
holding companies (BHCs). The terms ``bank holding company'' and
``BHC'' refer only to bank holding companies regulated by the Board.
\3\ See relevant provisions in FAS 166, paragraphs 5-7, and FAS
167, paragraphs 7-10.
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The agencies' risk-based measures for banking organizations (the
general risk-based capital rules\4\ and the advanced approaches
rules,\5\ collectively the risk-based capital rules) establish capital
requirements intended to reflect the risks associated with on-balance
sheet exposures as well as off-balance sheet exposures, such as
guarantees, commitments, and derivative transactions. The agencies use
GAAP as the initial basis for determining whether an exposure is
treated as on- or off-balance sheet for risk-based capital
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purposes. Additionally, the agencies' leverage measure (leverage rule)
\6\ uses consolidated on-balance sheet assets as the basis for setting
minimum capital requirements that are intended to limit the degree to
which a banking organization can leverage its equity capital base.
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\4\ 12 CFR part 3, appendix A (OCC); 12 CFR parts 208 and 225,
appendix A (Board); 12 CFR part 325, appendix A (FDIC); and 12 CFR
part 567, subpart B (OTS). The risk-based capital rules generally do
not apply to BHCs with $500 million or less in consolidated assets.
\5\ 12 CFR part 3, appendix C (OCC); 12 CFR part 208, appendix
F; and 12 CFR part 225, appendix G (Board); 12 CFR part 325,
appendix D (FDIC); 12 CFR 567, Appendix C (OTS).
\6\ 12 CFR part 3 (OCC);12 CFR part 208, appendix B and 12 CFR
part 225 appendix D (Board); 12 CFR 325.3 (FDIC); 12 CFR 567.8
(OTS).
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FAS 166 and FAS 167, among other things, establish new standards
for reporting companies' transfers of assets to special purpose
entities, known as variable interest entities (VIEs) under GAAP, and
for consolidating VIEs. Under FAS 167, banking organizations may be
required to consolidate assets, liabilities, and equity in certain VIEs
that were not consolidated under the standards that FAS 166 and FAS 167
replaced. Most banking organizations will be required to implement the
new consolidation standards as of January 1, 2010.\7\ The agencies'
risk-based capital and leverage rules (collectively, the capital rules)
generally would require a banking organization to include assets held
by newly consolidated VIEs in its leverage and risk-based capital
ratios determined under those rules. At the same time, a consolidating
banking organization may need to establish an ALLL \8\ to cover
estimated credit losses on the assets consolidated under FAS 167. As a
consequence, absent a change in the capital rules and all other factors
remaining constant, both the leverage and risk-based capital ratios of
banking organizations that must consolidate due to FAS 167 VIEs that
they did not previously consolidate are likely to fall by varying
amounts.
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\7\ While most banking organizations affected by FAS 166 and FAS
167 will implement the new standards on January 1, 2010, some
banking organizations use annual reporting periods other than the
calendar year and will implement the new standards at the beginning
of their first annual reporting period that starts after November
15, 2009.
\8\ Under GAAP, an ALLL should be recognized when events have
occurred indicating that it is probable that an asset has been
impaired or that a liability has been incurred as of the balance
sheet date and the amount of the loss can be reasonably estimated.
Furthermore, under the risk-based capital rules, the ALLL is a
component of tier 2 capital and, therefore, included in the
numerator of the total risk-based capital ratio. However, the amount
of the ALLL that may be included in tier 2 capital is limited to
1.25 percent of gross risk-weighted assets under the risk-based
capital rules. 12 CFR part 3, appendix A Sec. 2(b)(1) (OCC); 12 CFR
part 208, appendix A Sec. II.A.2.a and 12 CFR part 225, appendix A
Sec. II.A.2.a (Board); 12 CFR part 325, appendix A Sec. I.A.2.i.
(FDIC); 12 CFR 567.5 (OTS).
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B. Notice of Proposed Rulemaking
On September 15, 2009, the agencies published a notice of proposed
rulemaking (NPR) that solicited information and views from the public
on the effect the accounting changes mandated by FAS 166 and FAS 167
would have on regulatory capital, the appropriateness of adjusting the
risk-based capital treatment of some classes of assets that would be
consolidated by banking organizations as a result of their
implementation of FAS 167, and the utility of a phase-in of the
regulatory capital effects of the accounting changes, among other
issues.\9\
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\9\ 74 FR 47138 (September 15, 2009).
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In addition, the NPR proposed modifying the agencies' risk-based
capital rules by eliminating provisions that permit a banking
organization to exclude assets of consolidated asset-backed commercial
paper (ABCP) programs from risk-weighted assets (ABCP exclusion) and
instead assess a risk-based capital requirement against any contractual
exposures of the banking organization to such ABCP programs.\10\ The
NPR also proposed eliminating an associated provision in the general
risk-based capital rules (incorporated by reference in the advanced
approaches) that excludes from tier 1 capital the minority interest in
a consolidated ABCP program not included in a banking organization's
risk-weighted assets.\11\ In addition, the NPR proposed a new
reservation of authority for the agencies' risk-based capital rules to
permit a banking organization's primary Federal supervisor to treat
entities that are not consolidated under GAAP as if they were
consolidated for risk-based capital purposes, commensurate with the
risk relationship of the banking organization to the entity.
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\10\ 12 CFR part 3, appendix A, Sec. 3(a)(5) and 12 CFR part 3,
appendix C Sec. 42(l) (OCC); 12 CFR part 208, appendix A, Sec.
III.B.6.b and appendix F Sec. 42(l); and 12 CFR part 225, appendix
A, Sec. III.B.6.b and appendix G Sec. 42(l) (Board); 12 CFR part
325, appendix A, Sec. II.B.6.b and 12 CFR part 325, appendix D,
Sec. 42(l) (FDIC); 12 CFR 567.6(a)(2)(vi)(E) and 12 CFR part 567,
appendix C, Sec. 42(l) (OTS).
\11\ 12 CFR part 3, appendix A, Sec. 2(a)(3)(ii) (OCC); 12 CFR
parts 208 and 225, appendix A, Sec. II A.1.c (Board); 12 CFR part
325, appendix A, Sec. I.A.1.(d) (FDIC); 12 CFR 567.5(a)(iii)(OTS).
See 12 CFR part 3, appendix C Sec. 11(a) (OCC); 12 CFR part 208,
appendix F, Sec. 11(a) and 12 CFR part 225, appendix G, Sec. 11(a)
(Board) ; 12 CFR part 325, appendix D, Sec. 11(a) (FDIC); 12 CFR
part 567, appendix C, Sec. 11(a) (OTS).
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Collectively, the agencies received approximately 41 comment
letters from banking organizations, banking industry associations,
mortgage companies, investment and asset management firms, and
individuals. Commenters generally agreed with the agencies' preliminary
identification of VIEs that are likely to be consolidated by banking
organizations as a result of FAS 167. Most notably, these included VIEs
associated with (1) ABCP programs; (2) revolving securitizations
structured as master trusts, including credit card and home equity line
of credit (HELOC) securitizations; (3) certain mortgage loan
securitizations not guaranteed by the U.S. government or a U.S.
government-sponsored agency; and (4) certain term loan securitizations
in which a banking organization retains a residual interest and
servicing rights, including some student loan and automobile loan
securitizations.\12\
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\12\ Many commenters also expressed concern regarding the
possibility that VIEs used for asset management, money market, and
private equity investments where the fund manager earns more than a
non-significant performance fee could be subject to consolidation
under FAS 167, and urged the agencies to implement alternative
regulatory capital treatments for such funds. On December 4, 2009,
FASB proposed that the application of FAS 167 to such entities be
deferred for an undetermined period of time. As a result, both risk-
based and leverage capital requirements related to these assets
would remain unchanged for the duration of the deferral. The
agencies are taking no action with respect to these assets at this
time.
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A number of commenters asserted that the implementation of FAS 166
and FAS 167 without changes to the agencies' risk-based capital and
leverage rules would increase regulatory capital requirements for
banking organizations, as would the proposed elimination of the ABCP
exclusion. They argued this would have a negative and procyclical
impact on financial markets and the economy, particularly as banking
organizations recover from the recent financial crises and recession,
by increasing the cost of and ultimately curtailing lending. Most
commenters also argued that there would be negative competitive equity
effects from increased regulatory capital requirements that would
disadvantage U.S. banking organizations relative to foreign and
domestic competitors not subject to similarly high capital
requirements. A few commenters asserted that competitive equity
concerns were most severe with respect to foreign banking competitors.
Some commenters also expressed concern that higher capital requirements
would provide incentives for banking organizations to conduct more
activity in less stringently regulated foreign jurisdictions.
Many commenters also argued that such implementation would
inappropriately align regulatory capital requirements with GAAP's
control-based approach to consolidation, in contrast to the credit-risk
focus of the agencies' risk-based capital rules. Commenters
overwhelmingly supported a delay and/or phase-in of the regulatory
capital requirements associated with the implementation of FAS 167 for
a period
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of up to three years. A number of commenters asserted that the proposed
elimination of the exclusion of consolidated ABCP program assets from
risk-weighted assets would lead to an inappropriate capital requirement
for ABCP programs with certain structural features.
II. Final Rule
A. Transition Mechanism for Risk-Based Capital Requirements Associated
With the Implementation of FAS 166 and FAS 167
In the final rule, the agencies are instituting a transition
mechanism consisting of: (1) An optional two-quarter delay, through the
end of the second quarter after the implementation date of FAS 166 and
FAS 167 for a banking organization, of recognition of the effect on
risk-weighted assets and ALLL includable in tier 2 capital that results
from a banking organization's implementation of FAS 167 and (2) an
optional phase-in, for a banking organization that has opted for the
delay, of those effects over the next two quarters.\13\ A banking
organization that chooses to implement this transition mechanism must
apply it to all relevant VIEs. The effect of the transition mechanism
on a banking organization's risk-based capital ratios would be
reflected in the regulatory capital information the organization
reports in its regulatory reports \14\ for the four calendar quarter-
end regulatory report dates following the banking organization's
implementation date.
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\13\ For example, if a banking organization has a calendar year
reporting period, the optional two-quarter delay period ends June
30, 2010, and the optional phase-in period ends December 31, 2010.
\14\ For banks, Schedule RC-R of the Consolidated Reports of
Condition and Income (Call Report); for savings associations,
Schedule CCR of the Thrift Financial Report (TFR); and for bank
holding companies, Schedule HC-R of the Consolidated Financial
Statements for Bank Holding Companies (FR Y-9C).
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In the NPR, the agencies requested comment on any significant costs
or burdens, or other relevant considerations that the agencies should
consider with respect to phasing-in the impact on capital requirements
relating to banking organizations' implementation of FAS 167. The
agencies also requested specific and detailed rationales, evidence, and
data in support of commenters' positions and requested comment on one
potential four-quarter phase-in method.
Almost every commenter asserted that a four-quarter phase-in of any
additional capital requirements resulting from banking organizations'
implementation of FAS 167 would be insufficient. The majority of
commenters requested at least a three-year phase-in period. The
commenters offered three primary rationales for a longer phase-in
period: (1) Any shorter phase-in would unfairly penalize banking
organizations given their already established businesses, practices,
and programs conceived in good faith to comply with the current capital
standards; (2) banking organizations need a longer period to phase out
structures designed for current regulatory capital treatment and/or
adopt the more risk-sensitive capital treatment of the advanced
approaches rules; and (3) corporate financing and capital planning
covers more than a four-quarter horizon. In addition, some commenters
asserted that the cost of raising new capital in the current economic
environment is high. Several commenters requested, in addition to the
increased phase-in time, a six-month delay on the effect of
implementation of FAS 167 on capital requirements, during which the
agencies would further study the effects of FAS 166 and FAS 167
implementation, including the appropriate regulatory capital treatment
for VIEs consolidated as a result of FAS 167 implementation. A few
commenters indicated that there should be no phase-in or that any
phase-in should be as short as possible, on the grounds that any phase-
in would delay needed changes.
The agencies have long maintained that a banking organization
should hold capital commensurate with the level and nature of the risks
to which it is exposed. As described below, the agencies believe that
the effects of FAS 166 and FAS 167 on banking organizations' risk-based
capital ratios will result in regulatory capital requirements that
better reflect, in many cases, banking organizations' exposure to
credit risk. As a result, the agencies do not believe it is appropriate
for banking organizations to delay recognizing VIEs consolidated under
FAS 167 and the risks associated with them in their risk-based capital
ratios for several years, as some commenters proposed. However, as
discussed below, in order to avoid abrupt adjustments that could
undermine or complicate government actions to support the provision of
credit to U.S. households and businesses in the current economic
environment, the agencies are providing banking organizations with an
optional two-quarter implementation delay followed by an optional two-
quarter partial implementation of the effect of FAS 167 on risk-
weighted assets and ALLL includable in tier 2 capital.
Many commenters asserted that banking organizations' implementation
of FAS 166 and FAS 167 without a change to the regulatory capital rules
would decrease the volume and increase the cost of lending to consumers
and businesses. Commenters did not, however, provide adequate empirical
analyses and projections of this impact. The agencies note that both
the supply of and demand for credit has decreased over recent quarters
due to many factors, including household, business, and financial
sector deleveraging. As described in the NPR, affected banking
organizations' risk-based and leverage capital ratios likely will
decrease with their implementation of FAS 166 and FAS 167. However,
based on public disclosures by some banking organizations and
supervisory information, including the Supervisory Capital Assessment
Program (SCAP),\15\ risk-based and leverage capital ratios at the
largest banking organizations (the banking organizations most affected
by FAS 166 and FAS 167) will remain substantially in excess of
regulatory minimums. The agencies thus believe that, based on available
information, these banking organizations will not encounter an
immediate or near-term need to decrease lending or raise substantial
amounts of new capital for risk-based capital purposes related to the
incremental effects of this final rule. In addition, smaller banking
organizations, including community banking organizations, generally did
not raise concerns about an adverse impact on smaller banking
organizations from the implementation of FAS 166 and FAS 167.
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\15\ The SCAP was a supervisory exercise conducted in the first
half of 2009 to determine if the 19 largest banking organizations
(the banking organizations most affected by FAS 166 and FAS 167 due
to the volume of their securitization activities) held regulatory
capital sufficient to absorb losses under a specified adverse
scenario. The exercise included consideration of estimates of the
impact of FAS 166 and FAS 167 on banking organizations' balance
sheets and resulting risk-based capital requirements. Further
information about SCAP results is available at http://www.federalreserve.gov/bankinforeg/scap.htm.
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Although the agencies believe that a banking organization's
implementation of FAS 166 and FAS 167 will result in regulatory capital
requirements that more appropriately reflect risks to which the banking
organization is exposed, the agencies also recognize that government
initiatives may affect the securitization market in the near term.
Several government programs supporting the securitization market,
including the Commercial Paper Funding Facility and the non-commercial
mortgage-backed securities
[[Page 4639]]
portion of the Term Asset-Backed Securities Loan Facility, are
scheduled to terminate in the first quarter of 2010. Moreover, the
Congress and financial regulators, including the agencies, are
considering a number of legislative and regulatory changes that would
affect securitization activities. Because the agencies cannot fully
assess the combined impact of these potential changes on the
securitization market, and because securitization remains an important
source of funding for banking organizations, the agencies are providing
in the final rule an optional transition mechanism that permits a
banking organization to phase in the impact of FAS 167 on its risk-
weighted assets and ALLL includable in tier 2 capital.
The transition mechanism consists of an optional two-quarter delay
in implementation followed by an optional two-quarter partial
implementation of the effect of FAS 167 on risk-weighted assets and
ALLL includable in tier 2 capital.\16\ The timing of the transition
reflects the termination dates of the government programs supporting
the securitization market and the potential for uncertainty regarding
securitization reform initiatives to extend through 2010. The delay and
partial implementation periods also provide time for financial market
participants and the agencies to observe the effects of these changes
on bank lending, financial markets and the overall economy. The
transition mechanism is optional because it requires a banking
organization to maintain two sets of records for the duration of the
delay and partial implementation periods--to account for affected VIEs
for financial reporting under GAAP and separately to track the
implementation-date contractual exposures to these VIEs and the ALLLs
attributable to their assets for regulatory capital reporting--a dual
recordkeeping requirement that banking organizations have expressed
concerns about in the past.
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\16\ One commenter expressed concern about a statutory provision
in the Home Owner's Lending Act (HOLA), uniquely applicable to
savings associations, which limits the amount of consumer loans to
35 percent of the amount of a savings association's total assets.
OTS notes that any provision under HOLA would be treated consistent
with the transition mechanism.
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A banking organization generally would adopt the transition
mechanism as of the date it implements FAS 166 and FAS 167, which is
the starting date of its first annual reporting period beginning after
November 15, 2009.
1. Transition for Risk-Weighted Assets
For the banking organization's first two quarters after the date it
implements FAS 166 and FAS 167 (exclusion period), including for the
two calendar quarter-end regulatory report dates within the exclusion
period, the banking organization may choose to exclude from risk-
weighted assets those assets held by VIEs that the banking organization
must consolidate as a result of implementing FAS 167, provided that (1)
the VIE existed prior to the banking organization's implementation date
and (2) the banking organization did not consolidate the VIE on its
balance sheet for calendar quarter-end regulatory report dates prior to
the implementation date. A banking organization that applies this
exclusion to any VIE must apply the exclusion to all VIEs that qualify
for the exclusion.
During the exclusion period, the banking organization may also
exclude from risk-weighted assets those assets held by VIEs that are
consolidated ABCP programs (ABCP program VIEs), provided that the
banking organization is the sponsor of the ABCP program and the banking
organization consolidated the ABCP program VIE onto its balance sheet
under GAAP and excluded the VIE's assets from its risk-weighted assets
prior to the implementation date. A banking organization that applies
this exclusion to any ABCP program VIE must apply the exclusion to all
ABCP program VIEs that qualify for the exclusion.
A banking organization electing to exclude assets of any VIE
pursuant to the transition mechanism described above may not, however,
exclude from risk-weighted assets the assets of a VIE to which the
banking organization has provided recourse through credit enhancement
beyond any contractual obligation to support assets it has sold
(implicit support).
During the exclusion period, the banking organization would include
in risk-weighted assets an amount equal to the risk-weighted assets it
would have been required to calculate for its contractual exposures to
these VIEs on the implementation date, including direct-credit
substitutes, recourse obligations, residual interests, liquidity
facilities, and loans, under the risk-based capital rules prior to its
implementation of FAS 166 and FAS 167. The agencies expect a banking
organization would calculate risk-weighted assets using a methodology
similar to the methodology used to calculate the risk weights of
exposures to ABCP programs pursuant to the ABCP exclusion.
The amount of risk-weighted assets associated with assets held by
VIEs subject to exclusion as described above as of the implementation
date of FAS 166 and FAS 167 is the exclusion amount. For the third and
fourth quarters after the implementation date (phase-in period),
including for the two calendar quarter-end regulatory report dates
within those quarters, a banking organization that has adopted the
optional transition mechanism for the first two quarters may exclude
from risk-weighted assets 50 percent of the exclusion amount. However,
the banking organization may not include in risk-weighted assets an
amount less than the aggregate risk-weighted assets it held based on
its contractual exposures to these VIEs as of the implementation date,
had the VIEs not been consolidated. This floor on risk-weighted assets
ensures that, notwithstanding these transition provisions, a banking
organization always calculates risk-weighted assets in a manner that at
a minimum reflects its contractual risk exposure to its consolidated
VIEs as of the implementation date.
2. Transition for Allowance for Loan and Lease Losses
During the exclusion period, including for the two calendar
quarter-end regulatory report dates within the exclusion period, a
banking organization that adopts the transition mechanism for risk-
weighted assets described in section II.A.1. above by excluding assets
of consolidated VIEs from risk-weighted assets may also include without
limit in tier 2 capital the full amount of the ALLL calculated as of
the implementation date that is attributable to the assets it excluded
pursuant to the transition mechanism for risk-weighted assets
(inclusion amount). That is, the ALLL included in tier 2 capital
pursuant to this transition mechanism during the exclusion period would
not be subject to (1) the 1.25 percent of risk-weighted assets limit
(1.25 percent limit) on the ALLL in tier 2 capital contained in the
agencies' general risk-based capital rules; \17\ or (2) the limits in
section 13 of the agencies' advanced approaches rules on including ALLL
in tier 2 capital.\18\
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\17\ See footnote 8.
\18\ 12 CFR part 3, appendix C Sec. 13(a)(2) and (b) (OCC); 12
CFR part 208, appendix F Sec. 13(a)(2) and (b); and 12 CFR part
225, appendix G Sec. 13(a)(2) and (b) (Board); 12 CFR part 325,
appendix D, Sec. 13(a)(2) and (b) (FDIC); 12 CFR part 567, appendix
C, Sec. 13(a)(2) and (b) (OTS).
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[[Page 4640]]
During the phase-in period, including for the two calendar quarter-
end regulatory report dates within the phase-in period, a banking
organization that has adopted the transition mechanism for risk-
weighted assets during the phase-in period may include in tier 2
capital without limit 50 percent of the inclusion amount. The banking
organization's ALLL in excess of 50 percent of the inclusion amount may
be included in tier 2 capital subject to the 1.25 percent limit. As
with the transition for risk-weighted assets, a banking organization
may not adopt the transition mechanism for the ALLL for VIEs that it
must consolidate after implementing FAS 167 to which it has provided
implicit support. Therefore, a banking organization must count toward
the 1.25 percent limit all ALLL it includes in tier 2 capital that is
associated with assets of a VIE to which it has provided implicit
support.
B. Regulatory Capital Requirements Associated With the Implementation
of FAS 166 and FAS 167
1. Risk-Based Capital Rules
The agencies have concluded that it is appropriate to provide an
optional delay of and then phase in the effect of banking
organizations' implementation of FAS 166 and FAS 167 on risk-weighted
assets and the ALLL included in tier 2 capital as described above.
However, after careful consideration and analyses of commenters'
arguments and supporting information, as well as banking organizations'
financial disclosures, and supervisory data and analyses, the agencies
have concluded that there is insufficient justification to warrant a
permanent modification of the risk-based capital rules in response to
banking organizations' implementation of FAS 166 and FAS 167.
a. Risk-Weighted Assets
As the agencies noted in the NPR, the qualitative analysis required
under FAS 167, as well as enhanced requirements for recognizing
transfers of financial assets under FAS 166, converge in many respects
with the agencies' assessment of a banking organization's ongoing
credit risk exposure to the VIEs that are required to be consolidated
under FAS 167. Experience from the recent financial crisis demonstrates
that credit risk exposure of sponsoring banking organizations to such
structures (and to the assets of these structures) has in fact been
greater than the agencies previously estimated, and more associated
with non-contractual risks, including reputational risk, than the
agencies had previously anticipated. In the NPR, the agencies noted
situations in which banking organizations provided implicit support to
some securitization structures, revolving structures in particular, to
reduce the likelihood that senior securities of the structures would
experience credit ratings downgrades.\19\ These examples were intended
to demonstrate that risk-based capital requirements based solely on a
banking organization's contractual exposure may underestimate the true
exposure of a sponsoring banking organization to the credit risk of
securitization structures and other VIEs.\20\
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\19\ Typical structures of this type include securitizations
that are backed by credit card or HELOC receivables, single- and
multi-seller ABCP conduits, and structured investment vehicles.
\20\ Some commenters expressed concern that the accounting
changes coupled with the agencies' proposal would result in
duplicative capital requirements and excessive regulatory capital
being held on a system-wide basis. The agencies recognize that there
will be some overlap in regulatory capital held by sponsoring and
investing banking organizations in relation to the same assets.
However, the agencies believe this overlap results in a fair
reflection of the risks to which sponsoring and investing banking
organizations are exposed on an individual basis.
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In the NPR, the agencies sought specific views from commenters,
with supporting data and other documentation, regarding the types of
VIEs and other special purpose entities that are more or less likely to
elicit implicit support. The agencies also sought comment on any types
of consolidated VIEs that might merit a different risk-based capital
treatment than that which will result from the implementation of FAS
166 and FAS 167 without any change to regulatory capital requirements,
together with a detailed explanation and supporting empirical analysis
of why the features and characteristics of these structure types merit
an alternative treatment, how the risks to the consolidating banking
organization of the structures should be measured, and what an
appropriate alternative capital treatment would be.
Many commenters identified reputational and operational risks as
most likely to induce a banking organization to provide implicit
support to a VIE. Some commenters noted that certain banking
organizations did not follow their peers in providing implicit support
during the recent crisis despite reputational risks. However,
commenters generally argued that the risk-based capital rules should be
modified to mitigate the effect of FAS 166 and FAS 167 on risk-based
capital requirements, taking into account risks borne by third-party
investors in VIEs; a substantial number of commenters asserted that
risk-based capital requirements should be limited to a banking
organization's contractual exposure to VIEs consolidated under FAS 167.
Other commenters suggested that the agencies consider using a sliding-
scale to risk weight assets subject to consolidation under FAS 167
based on the likelihood of the VIE holding the assets receiving
implicit support, as demonstrated by historical experience. Some
commenters suggested an implicit support trigger approach that would
require higher capital requirements based on a decrease in a VIE's
excess spread (that is, the amount of income the VIE receives from
assets in excess of that it pays to holders of its obligations),
deterioration in VIE asset quality, downward changes in the credit
ratings of the VIE's obligations, or other adverse credit events.
Many commenters recommended an approach to risk weighting assets
held by consolidated VIEs that would consider each structure
independently, calculate a banking organization's ``net exposure'' to
the structure by subtracting third-party investor interests in the
structure from the structure's total assets, and then consider the
appropriate risk weight to be applied to the resulting net exposure
based on the risk characteristics of the structure. Some commenters
similarly suggested the agencies adjust risk weights for securitized
assets case-by-case on the basis of credit risk mitigation instruments
supporting the assets, or include in regulatory capital some
subordinated debt instruments issued by consolidated VIEs. Others
argued that the agencies should separate regulatory capital reporting
from GAAP when establishing regulatory capital requirements for banking
organizations' exposures to VIEs and look to the way banking
organizations manage VIE exposures internally to determine treatment as
``on''- or- ``off'' balance sheet for regulatory capital purposes. Some
commenters suggested that the size and risk profile of a banking
organization should determine capital requirements for consolidated
assets. Other commenters suggested the agencies develop risk weights
for consolidated VIEs based on the agencies' guidance on synthetic
securitizations. With regard to specific types of structures, many
commenters asserted that certain multi-seller ABCP conduits (as
discussed further below) and non-revolving, amortizing asset
securitizations with certain features, such as term residential
mortgage-backed securities structures, should receive more favorable
capital
[[Page 4641]]
treatment based on their low historical loss levels to sponsoring
banking organizations or low likelihood of implicit support. Some
commenters also requested the agencies provide capital relief for
consolidated residential and commercial mortgage-backed securities
structures in order to aid the real estate market.
Although commenters provided some empirical data in support of
their arguments for favorable treatment of ABCP conduits (as discussed
below), they provided much less data in support of other proposed
alternative risk-based capital treatments. Commenters provided some
examples of structural features (such as tax consequences) that may
effectively minimize the possibility that a sponsoring banking
organization will provide implicit support to certain structures. They
did not, however, provide an explicit set of criteria, supported by
broad-based empirical evidence, that the agencies could use to identify
structures with minimal likelihood of implicit support, particularly
during times of financial market stress, nor did they identify
alternative risk-based capital treatments that would appropriately
identify and measure risk and allay the agencies' concerns regarding
regulatory capital arbitrage (that is, the structuring of transactions
to obtain lower regulatory capital requirements without a commensurate
reduction in risk). Commenters also did not empirically demonstrate the
degree of competitive harm relative to foreign banks and other
competitors that banking organizations would likely suffer as a result
of the regulatory capital effects of their implementation of FAS 166
and FAS 167.
The agencies therefore are not implementing modifications to the
risk-based capital rules to provide an alternative risk-based capital
treatment for assets that will be newly consolidated on a banking
organization's balance sheet following implementation of FAS 166 and
FAS 167. The agencies believe that the optional interim relief provided
by this final rule, through the delay and phase-in of the effects of
FAS 167 upon risk-based capital requirements as described above, will
give a banking organization that elects the option adequate time to
adjust its risk profiles to address competitive concerns and to plan to
develop structural features needed for future transactions with due
consideration to its regulatory capital profiles.
b. Qualifying Total Capital
In the NPR, the agencies sought comment on whether securitized
loans subject to consolidation on banking organizations' balance sheets
under FAS 167 would be subject to the same ALLL provisioning process,
including applicable loss rates, as similar loans that are not
securitized. The agencies asked for comment on how banking
organizations would reflect the benefits of risk sharing in cases where
investors in VIEs holding such loans absorb realized credit losses, and
for a quantification of such benefits and any other effects of loss
sharing, wherever possible. The agencies also asked whether they should
consider policy alternatives with regard to the ALLL provisioning
process, including the limit on ALLL that may be included in tier 2
capital.
Commenters indicated that the ALLL provisioning process and amounts
for loans held in VIEs consolidated under FAS 167 would be the same as
for loans not held in VIEs. Commenters asserted that the addition to
ALLL that would result from this consolidation would be significantly
greater than the actual losses contractually borne by the consolidating
banking organization and would distort the relationship of the ALLL to
the contractual risk of the consolidating banking organization to the
assets held in the affected VIEs. Commenters further noted that,
because additions to ALLL are deducted from retained earnings, the
additions have the effect of reducing tier 1 capital.
Many commenters also noted that a higher ALLL would result in
higher deferred tax assets (DTAs) \21\ and significantly affect banking
organizations' regulatory capital ratios due to the capital rules'
limits on including DTAs and the ALLL in regulatory capital.\22\ Many
commenters requested that the agencies relax or eliminate the
restrictions on including DTAs in tier 1 capital and the ALLL in tier 2
capital to mitigate the effects of consolidation due to the
implementation of FAS 167 on regulatory capital. Specifically, some
commenters recommended that the current limit (1.25 percent of risk-
weighted assets) on the inclusion of the ALLL in tier 2 capital be
increased, or that the entire ALLL related to the assets supporting
VIEs' contractual obligations to third parties be included in tier 2
capital. Other commenters recommended that all ALLL related to losses
contractually borne by third parties be eligible for inclusion in tier
1 capital. Commenters also noted that DTA balances will increase along
with the ALLL, and recommended that either the current limit on DTAs in
regulatory capital be removed or that all DTAs arising from ALLL
related to the contractual loss absorption responsibilities of third
parties to consolidated VIEs be included in tier 1 capital.
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\21\ Under GAAP, a DTA arises as a result of the recognition of
an expense, in this case a loss provision, for financial reporting
purposes in advance of its recognition as a deduction for income tax
reporting purposes.
\22\ The agencies' risk-based capital rules limit the amount of
DTAs dependent upon future taxable income that may be included in
tier 1 capital to the lesser of two measures: (a) The amount of such
DTAs that a banking organization could reasonably expect to realize
within one year; or (b) ten percent of tier 1 capital that exists
before the deduction of any disallowed servicing assets, any
disallowed purchased credit card relationships, any disallowed
credit-enhancing interest-only strips, and any disallowed deferred
tax assets. See 12 CFR part 3, Appendix A, Sec. 2(c)(1)(iii) (OCC);
12 CFR parts 208 and 225, Appendix A Sec. II.B.4 (Board); 12 CFR
325.5(g) (FDIC); and 12 CFR 567.12(h) (OTS).
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Under FAS 167, banking organizations have several financial
reporting methods for recognizing the initial and ongoing consolidation
of VIEs. One method is the fair value option, under which the assets of
the VIE are recorded at fair value upon consolidation and no associated
ALLL is recognized. Another method is to record newly consolidated
assets at carrying value, which requires the establishment of an ALLL
at a level appropriate to cover estimated credit losses.\23\ Commenters
suggested that by not relaxing the limit on the amount of ALLL that may
be included in tier 2 capital, the agencies may encourage banking
organizations to elect the fair value option for initial consolidation
and/or ongoing accounting of affected consolidated VIEs.
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\23\ If a banking organization makes use of a practicability
exception to record the assets at fair value as of the date FAS 166
and FAS 167 are first implemented, no associated ALLL is recognized
on that date, but an associated ALLL will be recognized in future
periods.
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The agencies have considered the concerns raised by commenters with
respect to ALLL provisioning and DTAs created as a result of a banking
organization's implementation of FAS 167. The agencies recognize the
effects on tier 1 and tier 2 capital of the increased ALLL provisioning
that will result from the consolidation of VIEs, and note the concern
of some commenters that, in some cases, the provisioning may be
disproportionate to the contractual risks borne by a banking
organization with respect to the consolidated assets. However, as
described above, a regulatory focus on contractual exposures may
understate a banking organization's exposure to loss
[[Page 4642]]
with regard to a VIE's assets that the banking organization must
consolidate under FAS 167. Moreover, the agencies have determined that
the current limits on ALLL are appropriate given the policy benefits of
maintaining consistency among international capital standards absent
compelling policy justifications for deviating from such standards. The
limit of 1.25 percent of risk-weighted assets on the amount of the ALLL
that a banking organization may include in tier 2 capital is a standard
included in the first capital accord of the Basel Committee on Banking
Supervision (Basel Accord).\24\ The agencies also note that the current
limit on DTAs that a banking organization may include in tier 1 capital
is currently being considered as part of an international review of the
components of regulatory capital, including deductions from capital.
Moreover, commenters generally did not quantify the effect of FAS 167
on banking organizations' ALLLs and DTAs, and the agencies believe that
it may be difficult to identify on an ongoing basis the ALLLs and DTAs
associated only with assets newly subject to consolidation under FAS
167.
---------------------------------------------------------------------------
\24\ Basel Committee on Banking Supervision, International
Convergence of Capital Measurement and Capital Standards (1988),
paragraph 21.
---------------------------------------------------------------------------
For the above reasons, the agencies have decided not to modify
current limits on the inclusion of the ALLL in tier 2 capital and of
DTAs in tier 1 capital. However, as described in section II.A.2., this
final rule provides substantial transitional relief from the agencies'
limits on including ALLL in tier 2 capital to a banking organization
implementing FAS 167 that elects to adopt the transition mechanism for
risk-weighted assets described in section II.A.1 above. The agencies
believe that this relief, along with the transitional relief for risk-
weighted assets included in the final rule, will aid banking
organizations with capital planning as they implement FAS 166 and FAS
167 and adjust their business practices accordingly.
2. Leverage Requirement
Under the leverage rule, tier 1 capital is assessed against a
measure of a banking organization's total on-balance sheet assets, net
of ALLL and certain other exposures (leverage ratio).\25\ Therefore,
previously unconsolidated assets that now must be recognized on a
banking organization's balance sheet as a result of its implementation
of FAS 167 will increase the denominator of the banking organization's
leverage ratio. The agencies have maintained the leverage rule as a
balance-sheet assessment to supplement the risk-based capital rules and
limit the degree to which a banking organization can leverage its
equity capital base.\26\ By design, the leverage rule does not
recognize the risk profile of on-balance sheet exposures, including any
risk transference associated with those exposures.
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\25\ See 12 CFR 3.2(a) (OCC); 12 CFR part 208, appendix B Sec.
II.b and 12 CFR part 225, appendix D, Sec. II.b (Board); 12 CFR
325.2(m) (FDIC); 12 CFR 567.5(b)(4) (OTS).
\26\ 12 CFR 3.6(b) and (c) (OCC); 12 CFR part 208, appendix B,
Sec. I.a. and 12 CFR part 225, appendix D, Sec. I.a (Board); 12
CFR 325.3 (FDIC); 12 CFR 567.5 (OTS).
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Some commenters suggested, based on the same risk transference
arguments referred to above with respect to the risk-based capital
rules, that the agencies exclude the assets of VIEs consolidated by
banking organizations under FAS 167 from the leverage ratio. Other
commenters urged that the agencies apply any phase-in of capital
requirements associated with the implementation of FAS 167 to the
leverage rule as well as the risk-based capital rules.
Having considered commenters' views, the anticipated impact of the
implementation of FAS 166 and FAS 167 on banking organizations'
leverage ratios, and the history and purpose of the leverage rule, the
agencies have concluded that a delay or phase-in of the effect of
consolidation under FAS 167 on the leverage rule is not appropriate or
justified. The agencies believe the maintenance of the leverage rule as
a balance-sheet assessment separate from the assessment of relative
risk is a particularly important feature of prudential regulation and
did not find evidence that the impact of FAS 166 and FAS 167 on banking
organizations' leverage ratios justifies any alteration of the leverage
rule.
C. Asset-Backed Commercial Paper Programs
In the NPR, the agencies proposed to eliminate the ABCP exclusion,
which permits a banking organization to exclude from risk-weighted
assets the assets of an ABCP program that the banking organization is
required to consolidate under GAAP and for which the banking
organization acts as sponsor. Under the current risk-based capital
rules, a banking organization that elects the ABCP exclusion must
instead assess risk-based capital requirements only on its contractual
exposures to the program. As proposed in the NPR, as with all other
consolidated VIEs, a banking organization would be required to include
the assets of a consolidated ABCP program in risk-weighted assets. The
agencies also proposed to eliminate the associated provision in the
general risk-based capital rules (incorporated by reference in the
advanced approaches) that excludes from tier 1 capital the minority
interest in a consolidated ABCP program not included in a banking
organization's risk-weighted assets.
Commenters generally opposed the proposal to eliminate the ABCP
exclusion, particularly with respect to customer-focused, multi-seller
ABCP programs (customer conduits). These commenters argued that such
ABCP programs have a history of low loss rates (including during the
recent financial crisis) and are important sources of funding for many
businesses. These commenters also suggested that if the agencies
eliminate the ABCP exclusion, the increased capital requirement
associated with ABCP programs would increase the cost of funding and
decrease credit availability for businesses that have used customer
conduits to fund their operations, and therefore would adversely affect
the economy and financial markets. Commenters also argued that the
proposed elimination of the ABCP exclusion would raise significant
competitive equity concerns for domestic banking organizations relative
to foreign banks and domestic entities not subject to banking
regulation. Some commenters additionally argued that the elimination of
the ABCP exclusion would decrease incentives for banking organizations
to transfer risk and might encourage banking organizations to invest in
riskier, higher yield assets than those typically associated with
consumer conduits. One commenter suggested that elimination of the ABCP
exclusion was appropriate where liquidity facilities act as credit
enhancement or where affiliates of the conduit sponsor are the largest
holder of the ABCP obligations.
Additionally, in response to the agencies' proposal, a number of
commenters suggested that the agencies allow early adoption of the
advanced approaches rules' Internal Assessment Approach (IAA)
methodology \27\ for risk weighting these assets, or delay
[[Page 4643]]
eliminating the ABCP exclusion until banking organizations could
operate fully under the advanced approaches rules. Other commenters
urged the agencies not to implement the proposal to eliminate the ABCP
exclusion at all, particularly for customer conduits.
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\27\ See 12 CFR part 3, appendix C, (OCC) Sec. 44; 12 CFR part
208, appendix F, Sec. 44; and 12 CFR part 225, appendix G, Sec. 44
(Board); 12 CFR part 325, appendix D, Sec. 44 (FDIC); 12 CFR 567,
Appendix C, Sec. 44 (OTS). Qualifying banking organizations using
the IAA may calculate risk-weighted asset amounts for securitization
exposures (as defined in the advanced approaches rule) to qualifying
ABCP programs by using an internal credit assessment process mapped
to equivalent external ratings.
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The agencies have weighed the concerns raised by commenters, as
described above, related to the proposal to eliminate the ABCP
exclusion from the risk-based capital rules, against the agencies' own
concerns regarding the possibility of sponsors providing implicit
support to ABCP programs and regulatory capital arbitrage, among
others. The agencies acknowledge that customer conduits appear to
present a lower risk of loss to the sponsoring banking organization
relative to other ABCP programs. However, recent events have raised
serious questions about the original rationale for allowing the
exclusion of consolidated ABCP programs from risk-weighted assets. As
the agencies noted in the NPR, the 2004 implementation of the ABCP
exclusion was based on the agencies' belief that sponsoring banking
organizations' risk exposure to these entities was limited to their
contractual exposure. However, as a result of some banking
organizations having provided implicit support to a number of ABCP
programs they sponsored during the recent financial turmoil, the
agencies have observed that the premise of a contractual limit on risk
was incorrect for some ABCP programs. In addition, and notwithstanding
commenters' assertions to the contrary, the agencies believe that the
type of customer conduit advocated by commenters to be considered for
preferential exclusion from risk-weighted assets cannot be
distinguished from other ABCP programs to a degree of certainty that
would effectively mitigate the risk of regulatory capital arbitrage.
Furthermore, commenters did not describe the features and
characteristics of customer conduits that would effectively mitigate
the risk of a banking organization providing implicit support to
sponsored structures under the broadest range of circumstances. The
agencies are sensitive to competitive concerns and recognize that some
ABCP programs include generally high credit-quality assets. However,
given the absence of a workable alternative proposal that
satisfactorily addresses the agencies' concerns about regulatory
capital arbitrage and implicit support, the agencies have decided to
eliminate as proposed the ABCP exclusion, subject to the delay and
phase-in described above.
With respect to the recommendation that the agencies allow early
adoption of the IAA, the agencies note that the IAA is applicable
exclusively to a banking organization's exposures to off-balance sheet
ABCP programs and not to a program's underlying assets when reported on
balance sheet. Moreover, the IAA, like the ABCP exclusion, focuses on a
banking organization's contractual exposures to an ABCP conduit. The
IAA does not capture implicit support and thus an extension of the IAA
to consolidated ABCP programs would not sufficiently reflect the risk
to a sponsoring banking organization of such programs.
D. Reservation of Authority
The NPR proposed a new reservation of authority for the risk-based
capital rules specifying that a banking organization's primary Federal
supervisor would have the authority to require the banking organization
to treat an off-balance sheet VIE (or similar entity) as if it were
consolidated onto the banking organization's balance sheet. The banking
organization would have to hold capital against the entity's exposures
for risk-based capital purposes if the primary Federal supervisor
determined that the banking organization's exposure or other
relationship to the entity was not commensurate with the actual risk
relationship of the banking organization to the entity.
The agencies received little comment with respect to the proposed
reservation of authority. The few comments received regarding the
proposed reservation of authority suggested that it be used in
conjunction with recognition of contractual risk transfer. One
commenter opposed the reservation of authority as proposed and
requested that the agencies specify standards for the exercise of the
authority. The agencies asked in the NPR if there are any features and
characteristics of transactions not subject to consolidation on banking
organizations' balance sheets under GAAP as modified by FAS 166 and FAS
167 that should be recognized as on-balance sheet exposures for
regulatory capital purposes to more appropriately reflect risk.
Commenters generally stated that they were not aware of any such
transactions. Many commenters also asserted that such transactions were
unlikely.
As stated in the NPR, the agencies believe the reservation of
authority is essential to address instances when a banking organization
structures a financial transaction with a VIE to avoid consolidation
under FAS 167, and the resulting capital treatment is not commensurate
with all risks of the banking organization to the VIE, including non-
contractual risks. The agencies have therefore decided to incorporate
the reservation of authority in their risk-based capital rules as
proposed in the NPR.
E. Other Related Matters
1. Department of the Treasury's Home Affordable Mortgage Program
In the NPR, the agencies solicited comment on whether banking
organizations that service securitized residential mortgages,
participate in the United States Department of the Treasury's Home
Affordable Mortgage Program (HAMP), and receive certain incentive
payments in connection with the program, would be required under FAS
167 to consolidate VIEs holding such mortgages solely due to loan
modifications under HAMP. The agencies also asked if such consolidation
were required, whether such assets should be included in regulatory
capital requirements and what alternative capital treatment may be
appropriate.
Commenters generally did not think that incentive payments under
HAMP would independently trigger consolidation under FAS 167. Most also
argued that if such consolidation were to occur as a result of actions
related to or required by HAMP participation, regulatory capital
treatment should be modified with respect to the relevant consolidated
mortgage loan assets.
The agencies agree with commenters' assessment that it is unlikely
that incentive payments under HAMP independently would cause servicers
participating in HAMP to consolidate VIEs holding mortgage loans
modified under HAMP. The agencies therefore do not see a basis for any
modification of their capital requirements in relation to incentive
payments made pursuant to HAMP.
2. Denial of Extension of Comment Period
A few commenters requested that the agencies extend the NPR comment
period. As noted above, the agencies received approximately 41 comments
following the publication of the NPR, which indicates that commenters
had adequate time to express their views. Furthermore, the possible
regulatory capital implications of FAS 166 and FAS 167 were publicly
known for months prior to the NPR and several commenters expressed
viewpoints on these matters to the agencies well before the publication
of the NPR. The agencies therefore have concluded that the 30-day
comment period provided
[[Page 4644]]
adequate time for commenters to provide views to the agencies and deny
requests to extend the NPR comment period.
VI. Regulatory Analysis
Riegle Community Development and Regulatory Improvement Act
Section 302 of Riegle Community Development and Regulatory
Improvement Act \28\ (RCDRIA) generally requires that regulations
prescribed by Federal banking agencies which impose additional
reporting, disclosures or other new requirements on insured depository
institutions take effect on the first day of a calendar quarter unless
an agency finds good cause that the regulations should become effective
sooner and publishes its finding with the rule. The effective date of
this rule is March 29, 2010.\29\ The agencies believe that it is
important to make this final rule effective before banking
organizations generally must calculate their regulatory risk-based
capital ratios at the end of the first quarter of 2010. This will allow
banking organizations to implement the rule prior to calculating their
first quarter 2010 risk-based capital ratios and mitigate possible
negative impacts on securitization and financial markets as described
in section II.A above. The RCDRIA also provides that an entity that is
subject to such a regulation may elect to comply with the regulation
before its effective date.\30\ Accordingly, banking organizations may
elect to comply with this final rule before the effective date (as of
the beginning of their first annual reporting period that begins after
November 15, 2009).
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\28\ 12 U.S.C. 4802.
\29\ This final rule is a ``major rule'' under the Congressional
Review Act and therefore may not take effect until at least 60 days
after publication in the Federal Register. See 5 U.S.C. 801.
\30\ 12 U.S.C. 4802(b)(2).
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Regulatory Flexibility Act
In accordance with Section 3(a) of the Regulatory Flexibility Act
(RFA),\31\ the agencies are publishing a final regulatory flexibility
analysis for amendments to their capital rules. Under regulations
issued by the Small Business Administration,\32\ a small entity
includes a commercial bank, BHC, or savings association with assets of
$175 million or less (a small banking organization). As of September
30, 2009, there were approximately 2,484 small BHCs, 379 small savings
associations, 722 small national banks, 419 small State member banks,
and 2,818 small State nonmember banks. As a general matter, the Board's
general risk-based capital rules apply only to a BHC that has
consolidated assets of $500 million or more. Therefore, the proposed
changes to the Board's general risk-based capital rules for BHCs will
not affect small BHCs.
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\31\ 5 U.S.C. 601 et seq.
\32\ See 13 CFR 121.201.
---------------------------------------------------------------------------
The agencies have determined that the final rule will not have a
significant impact on a substantial number of small banking
organizations. Small banking organizations do not sponsor ABCP programs
and very few will be required to consolidate VIEs as a result of
implementing FAS 167. The agencies expect that few small banking
organizations will elect to implement the transition mechanism set
forth in the final rule and they will not be affected by the removal of
the ABCP exclusion. Therefore, the agencies certify that the final rule
will not have a significant economic impact on a substantial number of
small banking organizations.
Paperwork Reduction Act
In accordance with the requirements of the Paperwork Reduction Act
of 1995,\33\ the agencies have reviewed the final rule. The Board
reviewed the final rule under the authority delegated to the Board by
the Office of Management and Budget. The Board, the FDIC, and the OCC
note that instructions related to ABCP conduits in Schedule RC-R of the
Consolidated Reports of Condition and Income \34\ and Schedule HC-R of
the Consolidated Financial Statements for Bank Holding Companies \35\
will require revision.\36\ The Board, the FDIC, and the OCC also note
that the instructions for other items in Schedules RC-R and HC-R will
require revisions related to the delay and phase-in options included in
the final rule. If these revisions are determined to be significant,
the revisions would be incorporated into a proposal that the agencies
would publish with a request for comment in accordance with the
requirements of the PRA.
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\33\ 44 U.S.C. 3506.
\34\ OMB Nos. 7100-0036, 1557-0081, and 3064-0052; FFIEC 031 and
041.
\35\ OMB No. 7100-0128; FR Y-9C.
\36\ OTS notes that the Thrift Financial Report (TFR) does not
need any revisions, given that it does not currently ask for
specific information like the call report. OTS does not anticipate
the need to revise the TFR, but if the need arises OTS would request
comment in accordance with the requirements of the PRA.
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Executive Order 12866
Executive Order 12866 requires Federal agencies to prepare a
regulatory impact analysis for agency actions that are found to be
``significant regulatory actions.'' Significant regulatory actions
include, among other things, rulemakings that ``have an annual effect
on the economy of $100 million or more or adversely affect in a
material way the economy, a sector of the economy, productivity,
competition, jobs, the environment, public health or safety, or State,
local, or Tribal governments or communities.'' Regulatory actions that
satisfy one or more of these criteria are referred to as ``economically
significant regulatory actions.''
The OCC and OTS have determined that this rulemaking is an
economically significant regulatory action for purposes of Executive
Order 12866. However, because the rule addresses changes to accounting
standards that will become effective for national banks and savings
associations as of the beginning of their first annual reporting period
that begins after November 15, 2009, the issuance of this rule is
subject to the procedures set forth in Section 6(a)(3)(D) of Executive
Order 12866.
OCC/OTS Unfunded Mandates Reform Act of 1995 Determination
The Unfunded Mandates Reform Act of 1995 \37\ (UMRA) requires that
an agency prepare a budgetary impact statement before promulgating a
rule that includes a Federal mandate that may result in the expenditure
by State, local, and Tribal governments, in the aggregate, or by the
private sector of $100 million or more (adjusted annually for
inflation) in any one year. If a budgetary impact statement is
required, section 205 of the UMRA also requires an agency to identify
and consider a reasonable number of regulatory alternatives before
promulgating a rule. The OCC and the OTS each have determined that its
proposed rule will not result in expenditures by State, local, and
Tribal governments, in the aggregate, or by the private sector, of $100
million or more in any one year. Accordingly, neither the OCC nor the
OTS has prepared a budgetary impact statement or specifically addressed
the regulatory alternatives considered.
---------------------------------------------------------------------------
\37\ See Public Law 104-4.
---------------------------------------------------------------------------
Use of Plain Language
Section 722 of the Gramm-Leach-Bliley Act \38\ requires the Federal
banking agencies to use plain language in all proposed and final rules
published after January 1, 2000. The agencies invited comment on how to
make the proposed rule easier to understand. The agencies received no
comment on plain language.
---------------------------------------------------------------------------
\38\ Public Law 106-102.
---------------------------------------------------------------------------
[[Page 4645]]
Nevertheless, the agencies have endeavored to present this final
rule, and all their capital rules, in a manner that is as brief,
comprehensible, and straightforward as possible, in light of the nature
and complexity of the subject matter.
List of Subjects
12 CFR Part 3
Administrative practice and procedure, Banks, Banking, Capital,
National banks, Reporting and recordkeeping requirements, Risk.
12 CFR Part 208
Confidential business information, Crime, Currency, Federal Reserve
System, Mortgages, Reporting and recordkeeping requirements,
Securities.
12 CFR Part 225
Administrative practice and procedure, Banks, Banking, Federal
Reserve System, Holding companies, Reporting and recordkeeping
requirements, Securities.
12 CFR Part 325
Administrative practice and procedure, Banks, Banking, Capital
Adequacy, Reporting and recordkeeping requirements, Savings
associations, State nonmember banks.
12 CFR Part 567
Capital, Reporting and recordkeeping requirements, Risk, Savings
associations.
Department of the Treasury
Office of the Comptroller of the Currency
12 CFR Chapter I
Authority and Issuance
For the reasons stated in the common preamble, the Office of the
Comptroller of the Currency is amending Part 3 of chapter I of Title
12, Code of Federal Regulations as follows:
PART 3--MINIMUM CAPITAL RATIOS; ISSUANCE OF DIRECTIVES
0
1. The authority citation for part 3 continues to read as follows:
Authority: 12 U.S.C. 93a, 161, 1818, 1828(n), 1828 note, 1831n
note, 1835, 3907, and 3909.
0
2. Section 3.4 is amended by adding paragraph (c) to read as follows:
Sec. 3.4 Reservation of authority.
* * * * *
(c) The OCC may find that the capital treatment for an exposure not
subject to consolidation on the bank's balance sheet does not
appropriately reflect the risks imposed on the bank. Accordingly, the
OCC may require the bank to treat the exposure as if it were
consolidated onto the bank's balance sheet for the purpose of
determining compliance with the bank's minimum risk-based capital
requirements set forth in Appendix A or Appendix C to this Part. The
OCC will look to the substance of and risk associated with the
transaction as well as other relevant factors the OCC deems appropriate
in determining whether to require such treatment and in determining the
bank's compliance with minimum risk-based capital requirements.
0
3. In appendix A to Part 3:
0
a. In section 2, remove and reserve paragraph (a)(3)(ii);
0
b. In section 3, remove and reserve paragraph (a)(5) and revise
paragraph (a)(6); and
0
c. Revise section 5.
The revisions read as set forth below.
Appendix A to Part 3--Risk-Based Capital Guidelines
* * * * *
Section 3. * * *
* * * * *
(a) * * *
(6) Other variable interest entities subject to consolidation.
If a bank is required to consolidate the assets of a variable
interest entity under generally accepted accounting principles, the
bank must assess a risk-based capital charge based on the
appropriate risk weight of the consolidated assets in accordance
with sections 3(a) and 4 of this appendix A. Any direct credit
substitutes and recourse obligations (including residual interests),
and loans that a bank may provide to such a variable interest entity
are not subject to a capital charge under section 4 of this appendix
A.
Section 5. Optional transition provisions related to the
implementation of consolidation requirements under FAS 167.
(a) This section 5 provides optional transition provisions for a
national bank that is required for financial and regulatory
reporting purposes, as a result of its implementation of Statement
of Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (FAS 167), to consolidate certain variable
interest entities (VIEs) as defined under United States generally
accepted accounting principles (GAAP). These transition provisions
apply through the end of the fourth quarter following the date of a
bank's implementation of FAS 167 (implementation date).
(b) Exclusion period. (1) Exclusion of risk-weighted assets for
the first and second quarters. For the first two quarters after the
implementation date (exclusion period), including for the two
calendar quarter-end regulatory report dates within those quarters,
a bank may exclude from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of this section
5, assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date;
(B) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date;
(C) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167; and
(D) The bank excludes all assets held by VIEs described in
paragraphs (b)(1)(i)(A) through (C) of this section 5; and
(ii) Subject to the limitations of paragraph (d) of this section
5, assets held by a VIE that is a consolidated asset-backed
commercial paper (ABCP) program, provided that the following
conditions are met:
(A) The bank is the sponsor of the ABCP program;
(B) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets; and
(C) The bank chooses to exclude all assets held by ABCP program
VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section
5.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including the two calendar quarter-end regulatory
report dates within the exclusion period, a bank adopting the
optional provisions of this paragraph (b) of this section 5 must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in paragraph (b)(1) of this section 5 on the
implementation date and include this calculated amount in its risk-
weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank that excludes VIE assets from risk-weighted assets
pursuant to paragraph (b)(1) of this section may include in Tier 2
capital the full amount of the allowance for loan and lease losses
(ALLL) calculated as of the implementation date that is attributable
to the assets it excludes pursuant to paragraph (b)(1) of this
section 5 (inclusion amount). The amount of ALLL includable in Tier
2 capital in accordance with this paragraph shall not be subject to
the limitations set forth in section 2(b)(1) of this Appendix A.
(c) Phase-in period. (1) Exclusion amount. For purposes of this
paragraph (c), exclusion amount is defined as the amount of risk-
weighted assets excluded in paragraph (b)(1) of this section as of
the implementation date.
(2) Risk-weighted assets during the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to paragraph (b)(1) of this section may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory
report dates
[[Page 4646]]
within those quarters, exclude from risk-weighted assets 50 percent
of the exclusion amount, provided that the bank may not include in
risk-weighted assets pursuant to this paragraph an amount less than
the aggregate risk-weighted assets calculated pursuant to paragraph
(b)(2) of this section.
(3) Inclusion of ALLL in Tier 2 capital during the third and
fourth quarters. A bank that excludes assets of consolidated VIEs
from risk-weighted assets pursuant to paragraph (c)(2) of this
section may, for the phase-in period, include in Tier 2 capital 50
percent of the inclusion amount it included in Tier 2 capital during
the exclusion period, notwithstanding the limit on including ALLL in
Tier 2 capital in section 2(b)(1) of this Appendix A.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 5, assets held by a VIE to which the bank
has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
* * * * *
0
4. In Appendix C to part 3, amend the Table of Contents by adding a new
Part IX and Section 81 as follows:
Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
Part I--General Provisions
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
0
5. Further amend appendix C to Part 3 as follows:
0
a. In section 1, redesignate paragraph (c)(3) as paragraph (c)(4), and
add a new paragraph (c)(3); and
0
b. Remove section 42(l) and redesignate section 42(m) as section 42(l).
The addition reads as set forth below.
Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
Section 1. * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. If
the OCC determines that the capital treatment for a bank's exposure
or other relationship to an entity not consolidated on the bank's
balance sheet is not commensurate with the actual risk relationship
of the bank to the entity, for risk-based capital purposes, it may
require the bank to treat the entity as if it were consolidated onto
the bank's balance sheet and require the bank to hold capital
against the entity's exposures. The OCC will look to the substance
of and risk associated with the transaction as well as other
relevant factors the OCC deems appropriate in determining whether to
require such treatment and in determining the bank's compliance with
minimum risk-based capital requirements. In making a determination
under this paragraph, the OCC will apply notice and response
procedures in the same manner and to the same extent as the notice
and response procedures in 12 CFR 3.12.
0
6. Further amend Appendix C to part 3 by adding a new part IX and
section 81 to read as follows:
Appendix C to Part 3--Capital Adequacy Guidelines for Banks: Internal-
Ratings-Based and Advanced Measurement Approaches
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
(a) Scope, applicability, and purpose. This section 81 provides
optional transition provisions for a bank that is required for
financial and regulatory reporting purposes, as a result of its
implementation of Statement of Financial Accounting Standards No.
167, Amendments to FASB Interpretation No. 46(R) (FAS 167), to
consolidate certain variable interest entities (VIEs) as defined
under GAAP. These transition provisions apply through the end of the
fourth quarter following the date of a bank's implementation of FAS
167 (implementation date).
(b) Exclusion period. (1) Exclusion of risk-weighted assets for
the first and second quarters. For the first two quarters after the
implementation date (exclusion period), including for the two
calendar quarter-end regulatory report dates within those quarters,
a bank may exclude from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date;
(B) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date;
(C) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167; and
(D) The bank chooses to exclude all assets held by VIEs
described in paragraphs (b)(1)(i)(A) through (C) of this section 81;
and
(ii) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE that is a consolidated asset-backed
commercial paper (ABCP) program, provided that the following
conditions are met:
(A) The bank is the sponsor of the ABCP program;
(B) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets; and
(C) The bank excludes all assets held by ABCP program VIEs
described in paragraphs (b)(1)(ii)(A) and (B) of this section 81.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including for the two calendar quarter-end
regulatory report dates within the exclusion period, a bank adopting
the optional provisions in paragraph (b) of this section must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in paragraph (b)(1) of this section 81 on the
implementation date and include this calculated amount in risk-
weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank that excludes VIE assets from risk-weighted assets
pursuant to paragraph (b)(1) of this section 81 may include in Tier
2 capital the full amount of the ALLL calculated as of the
implementation date that is attributable to the assets it excludes
pursuant to paragraph (b)(1) of this section 81 (inclusion amount).
The amount of ALLL includable in Tier 2 capital in accordance with
this paragraph shall not be subject to the limitations set forth in
section 13(a)(2) and (b) of this Appendix C.
(c) Phase-in period. (1) Exclusion amount. For purposes of this
paragraph (c), exclusion amount is defined as the amount of risk-
weighted assets excluded in paragraph (b)(1) of this section as of
the implementation date.
(2) Risk-weighted assets for the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to paragraph (b)(1) of this section may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory
report dates within those quarters, exclude from risk-weighted
assets 50 percent of the exclusion amount, provided that the bank
may not include in risk-weighted assets pursuant to this paragraph
an amount less than the aggregate risk-weighted assets calculated
pursuant to paragraph (b)(2) of this section 81.
(3) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (c)(2) of this section
may, for the phase-in period, include in Tier 2 capital 50 percent
of the inclusion amount it included in Tier 2 capital during the
exclusion period, notwithstanding the limit on including ALLL in
Tier 2 capital in section 13(a)(2) and (b) of this Appendix.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 81, assets held by a VIE to which the bank
has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
[[Page 4647]]
Board of Governors of the Federal Reserve System
12 CFR Chapter II
Authority and Issuance
0
For the reasons stated in the common preamble, the Board of Governors
of Federal Reserve System amends parts 208 and 225 of Chapter II of
title 12 of the Code of Federal Regulations as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
7. The authority citation for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1818, 1820(d)(9),1833(j),
1828(o)1831, 1831o, 1831p-1, 1831r-1, 1831w, 1831x 1835a, 1882,
2901-2907, 3105, 3310, 3331-3351, and 3905-3909; 15 U.S.C. 78b,
78I(b), 78l(i),780-4(c)(5), 78q, 78q-1, and 78w, 1681s, 1681w, 6801,
and 6805; 31 U.S.C. 5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106 and
4128.
0
8. In appendix A to part 208:
0
A. Amend section I by adding a new paragraph immediately prior to the
last undesignated paragraph;
0
B. Amend paragraph c. of section II.A.1 by removing the last sentence;
0
C. Remove paragraph b. of section III.B.6 and redesignate paragraph c.
of section III.B.6 as paragraph b.;
0
D. Add new section IV.C after attachment 1.
The additions and revisions read as follows:
Appendix A to Part 208--Capital Adequacy Guidelines for State Member
Banks: Risk-Based Measure
I. * * *
The Federal Reserve may determine that the regulatory capital
treatment for a bank's exposure or other relationship to an entity
not consolidated on the bank's balance sheet is not commensurate
with the actual risk relationship of the bank to the entity. In
making this determination, the Federal Reserve may require the bank
to treat the entity as if it were consolidated onto the balance
sheet of the bank for risk-based capital purposes and calculate the
appropriate risk-based capital ratios accordingly, all as specified
by the Federal Reserve.
* * * * *
IV. Minimum Supervisory Ratios and Standards
* * * * *
C. Optional Transition Provisions Related to the Implementation of
Consolidation Requirements Under FAS 167
This section IV.C. provides optional transition provisions for a
bank that is required for financial and regulatory reporting
purposes, as a result of its implementation of Statement of
Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (FAS 167), to consolidate certain variable
interest entities (VIEs) as defined under United States generally
accepted accounting principles (GAAP). These transition provisions
apply through the end of the fourth quarter following the date of a
bank's implementation of FAS 167 (implementation date).
1. Exclusion Period
a. Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank may exclude
from risk-weighted assets:
i. Subject to the limitations in section IV.C.3, assets held by
a VIE, provided that the following conditions are met:
(1) The VIE existed prior to the implementation date,
(2) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date,
(3) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167, and
(4) The bank excludes all assets held by VIEs described in
paragraphs C.1.a.i.(1) through (3) of this section IV.C.1.a.i; and
ii. Subject to the limitations in section IV.C.3, assets held by
a VIE that is a consolidated ABCP program, provided that the
following conditions are met:
(1) The bank is the sponsor of the ABCP program,
(2) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets, and
(3) The bank chooses to exclude all assets held by ABCP program
VIEs described in paragraphs (1) and (2) of this section
IV.C.1.a.ii.
b. Risk-weighted assets during exclusion period. During the
exclusion period, including for the two-calendar quarter-end
regulatory report dates within the exclusion period, a bank adopting
the optional provisions in section IV.C.1.a must calculate risk-
weighted assets for its contractual exposures to the VIEs referenced
in section IV.C.1.a on the implementation date and include this
calculated amount in its risk-weighted assets. Such contractual
exposures may include direct-credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans.
c. Inclusion of allowance for loan and lease losses in tier 2
capital for the first and second quarters. During the exclusion
period, including for the two calendar quarter-end regulatory report
dates within the exclusion period, a bank that excludes VIE assets
from risk-weighted assets pursuant to section IV.C.1.a may include
in tier 2 capital the full amount of the allowance for loan and
lease losses (ALLL) calculated as of the implementation date that is
attributable to the assets it excludes pursuant to section IV.C.1.a
(inclusion amount). The amount of ALLL includable in tier 2 capital
in accordance with this paragraph shall not be subject to the
limitations set forth in section II.A.2.a. of this Appendix.
2. Phase-In Period
a. Exclusion amount. For purposes of this section IV.C.,
exclusion amount is defined as the amount of risk-weighted assets
excluded in section IV.C.1.a. as of the implementation date.
b. Risk-weighted assets for the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to section IV.C.1.a. may, for the third and fourth
quarters after the implementation date (phase-in period), including
for the two calendar quarter-end regulatory report dates within
those quarters, exclude from risk-weighted assets 50 percent of the
exclusion amount, provided that the bank may not include in risk-
weighted assets pursuant to this paragraph an amount less than the
aggregate risk-weighted assets calculated pursuant to section
IV.C.1.b.
c. Inclusion of ALLL in tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to section IV.C.2.b. may, for the
phase-in period, include in tier 2 capital 50 percent of the
inclusion amount it included in tier 2 capital during the exclusion
period, notwithstanding the limit on including ALLL in tier 2
capital in section II.A.2.a. of this Appendix.
3. Implicit recourse limitation. Notwithstanding any other
provision in this section IV.C., assets held by a VIE to which the
bank has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
0
9. In appendix F to part 208:
0
A. In section 1(c), redesignate paragraph (3) as paragraph (4), and add
a new paragraph (3);
0
B. Remove section 42(l) and redesignate section 42(m) as section 42(l);
0
C. Add a new part IX and section 81 at the end of appendix F.
The additions read as follows:
Appendix F to Part 208--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
1. * * *
(c) * * *
* * * * *
(3) Regulatory capital treatment of unconsolidated entities. The
Federal Reserve may determine that the regulatory capital treatment
for a bank's exposure or other
[[Page 4648]]
relationship to an entity not consolidated on the bank's balance
sheet is not commensurate with the actual risk relationship of the
bank to the entity. In making this determination, the Federal
Reserve may require the bank to treat the entity as if it were
consolidated onto the balance sheet of the bank for risk-based
capital purposes and calculate the appropriate risk-based capital
ratios accordingly, all as specified by the Federal Reserve.
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of, Consolidation Requirements Under FAS 167
(a) Scope, applicability, and purpose. This section 81 provides
optional transition provisions for a State member bank that is
required for financial and regulatory reporting purposes, as a
result of its implementation of Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
167), to consolidate certain variable interest entities (VIEs) as
defined under GAAP. These transition provisions apply through the
end of the fourth quarter following the date of a bank's
implementation of FAS 167 (implementation date).
(b) Exclusion period.
(1) Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank may exclude
from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date,
(B) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date,
(C) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167, and
(D) The bank excludes all assets held by VIEs described in
paragraphs (b)(1)(i)(A) through (C) of this section 81; and
(ii) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE that is a consolidated asset-backed
commercial paper (ABCP) program, provided that the following
conditions are met:
(A) The bank is the sponsor of the ABCP program,
(B) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets, and
(C) The bank chooses to exclude all assets held by ABCP program
VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section
81.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including for the two calendar quarter-end
regulatory report dates within the exclusion period, a bank adopting
the optional provisions in paragraph (b) of this section must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in paragraph (b)(1) of this section 81 on the
implementation date and include this calculated amount in risk-
weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank that excludes VIE assets from risk-weighted assets
pursuant to paragraph (b)(1) of this section 81 may include in Tier
2 capital the full amount of the ALLL calculated as of the
implementation date that is attributable to the assets it excludes
pursuant to paragraph (b)(1) of this section 81 (inclusion amount).
The amount of ALLL includable in Tier 2 capital in accordance with
this paragraph shall not be subject to the limitations set forth in
section 13(a)(2) and (b) of this Appendix.
(c) Phase-in period.
(1) Exclusion amount. For purposes of this paragraph (c),
exclusion amount is defined as the amount of risk-weighted assets
excluded in paragraph (b)(1) of this section as of the
implementation date.
(2) Risk-weighted assets for the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to paragraph (b)(1) of this section may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory
report dates within those quarters, exclude from risk-weighted
assets 50 percent of the exclusion amount, provided that the bank
may not include in risk-weighted assets pursuant to this paragraph
an amount less than the aggregate risk-weighted assets calculated
pursuant to paragraph (b)(2) of this section 81.
(3) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (c)(2) of this section
may, for the phase-in period, include in Tier 2 capital 50 percent
of the inclusion amount it included in Tier 2 capital during the
exclusion period, notwithstanding the limit on including ALLL in
Tier 2 capital in section 13(a)(2) and (b) of this Appendix.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 81, assets held by a VIE to which the bank
has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
PART 225--BANK HOLDING COMPANIES AND CHANGE IN BANK CONTROL
(REGULATION Y)
0
10. The authority citation for part 225 continues to read as follows:
Authority: 12 U.S.C. 1817(j)(13), 1818, 1828(o), 1831i, 1831p-1,
1843(c)(8), 1844(b), 1972(1), 3106, 3108, 3310, 3331-3351, 3907, and
3909; 15 U.S.C. 1681s, 1681w, 6801 and 6805.
0
11. In appendix A to part 225,
0
A. Amend section I by adding a paragraph immediately prior to the last
undesignated paragraph;
0
B. Amend paragraph iii. of section II.A.1.c by removing the last
sentence;
0
C. Remove paragraph b. of section III.B.6 and redesignate paragraph c.
of section III.B.6 as paragraph b.;
0
D. Add new section IV.C.
The additions and revisions read as follows:
Appendix A to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Risk-Based Measure
I. * * *
The Federal Reserve may determine that the regulatory capital
treatment for a banking organization's exposure or other
relationship to an entity not consolidated on the banking
organization's balance sheet is not commensurate with the actual
risk relationship of the banking organization to the entity. In
making this determination, the Federal Reserve may require the
banking organization to treat the entity as if it were consolidated
onto the balance sheet of the banking organization for risk-based
capital purposes and calculate the appropriate risk-based capital
ratios accordingly, all as specified by the Federal Reserve.
* * * * *
IV. * * *
C. Optional Transition Provisions Related to the Implementation of
Consolidation Requirements under FAS 167
This section IV.C. provides optional transition provisions for a
banking organization that is required for financial and regulatory
reporting purposes, as a result of its implementation of Statement
of Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (FAS 167), to consolidate certain variable
interest entities (VIEs) as defined under United States generally
accepted accounting principles (GAAP). These transition provisions
apply through the end of the fourth quarter following the date of a
banking organization's implementation of FAS 167 (implementation
date).
1. Exclusion Period
a. Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a banking
organization may exclude from risk-weighted assets:
i. Subject to the limitations in section IV.C.3, assets held by
a VIE, provided that the following conditions are met:
(1) The VIE existed prior to the implementation date,
(2) The banking organization did not consolidate the VIE on its
balance sheet for
[[Page 4649]]
calendar quarter-end regulatory report dates prior to the
implementation date,
(3) The banking organization must consolidate the VIE on its
balance sheet beginning as of the implementation date as a result of
its implementation of FAS 167, and
(4) The banking organization excludes all assets held by VIEs
described in paragraphs C.1.a.i. (1) through (3) of this section
IV.C.1.a.i; and
ii. Subject to the limitations in section IV.C.3, assets held by
a VIE that is a consolidated ABCP program, provided that the
following conditions are met:
(1) The banking organization is the sponsor of the ABCP program,
(2) Prior to the implementation date, the banking organization
consolidated the VIE onto its balance sheet under GAAP and excluded
the VIE's assets from the banking organization's risk-weighted
assets, and
(3) The banking organization chooses to exclude all assets held
by ABCP program VIEs described in paragraphs (1) and (2) of this
section IV.C.1.a.ii.
b. Risk-weighted assets during exclusion period. During the
exclusion period, including the two calendar quarter-end regulatory
report dates during the exclusion period, a banking organization
adopting the optional provisions in section IV.C.1.a must calculate
risk-weighted assets for its contractual exposures to the VIEs
referenced in section IV.C.1.a on the implementation date and
include this calculated amount in its risk-weighted assets. Such
contractual exposures may include direct-credit substitutes,
recourse obligations, residual interests, liquidity facilities, and
loans.
c. Inclusion of allowance for loan and lease losses in tier 2
capital for the first and second quarters. During the exclusion
period, including for the two calendar quarter-end regulatory report
dates within the exclusion period, a banking organization that
excludes VIE assets from risk-weighted assets pursuant to section
IV.C.1.a may include in tier 2 capital the full amount of the
allowance for loan and lease losses (ALLL) calculated as of the
implementation date that is attributable to the assets it excludes
pursuant to section IV.C.1.a (inclusion amount). The amount of ALLL
includable in tier 2 capital in accordance with this paragraph shall
not be subject to the limitations set forth in section II.A.2.a of
this Appendix.
2. Phase-In Period
a. Exclusion amount. For purposes of this section IV.C.,
exclusion amount is defined as the amount of risk-weighted assets
excluded in section IV.C.1.a as of the implementation date.
b. Risk-weighted assets for the third and fourth quarters. A
banking organization that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to section IV.C.1.a. may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory
report dates within those quarters, exclude from risk-weighted
assets 50 percent of the exclusion amount, provided that the banking
organization may not include in risk-weighted assets pursuant to
this paragraph an amount less than the aggregate risk-weighted
assets calculated pursuant to section IV.C.1.b.
c. Inclusion of ALLL in tier 2 capital for the third and fourth
quarters. A banking organization that excludes assets of
consolidated VIEs from risk-weighted assets pursuant to section
IV.C.2.b. may, for the phase-in period, include in tier 2 capital 50
percent of the inclusion amount it included in tier 2 capital during
the exclusion period, notwithstanding the limit on including ALLL in
tier 2 capital in section II.A.2.a. of this Appendix.
3. Implicit recourse limitation. Notwithstanding any other
provision in this section IV.C., assets held by a VIE to which the
banking organization has provided recourse through credit
enhancement beyond any contractual obligation to support assets it
has sold may not be excluded from risk-weighted assets.
0
12. In appendix G to part 225,
0
A. In section 1(c), redesignate paragraph (3) as paragraph (4), and add
a new paragraph (3);
0
B. Remove section 42(l) and redesignating section 42(m) as section
42(l);
0
C. Add a new part IX and section 81 at the end of appendix G.
The added text will read as follows:
Appendix G to Part 225--Capital Adequacy Guidelines for Bank Holding
Companies: Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
1. * * *
(c) * * *
* * * * *
(3) Regulatory capital treatment of unconsolidated entities. The
Federal Reserve may determine that the regulatory capital treatment
for a bank holding company's exposure or other relationship to an
entity not consolidated on the bank holding company's balance sheet
is not commensurate with the actual risk relationship of the bank
holding company to the entity. In making this determination, the
Federal Reserve may require the bank holding company to treat the
entity as if it were consolidated onto the balance sheet of the bank
holding company for risk-based capital purposes and calculate the
appropriate risk-based capital ratios accordingly, all as specified
by the Federal Reserve.
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of, Consolidation Requirements Under FAS 167
(a) Scope, applicability, and purpose. This section 81 provides
optional transition provisions for a bank holding company that is
required for financial and regulatory reporting purposes, as a
result of its implementation of Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
167), to consolidate certain variable interest entities (VIEs) as
defined under GAAP. These transition provisions apply through the
end of the fourth quarter following the date of a bank holding
company's implementation of FAS 167 (implementation date).
(b) Exclusion period.
(1) Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank holding
company may exclude from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date,
(B) The bank holding company did not consolidate the VIE on its
balance sheet for calendar quarter-end regulatory report dates prior
to the implementation date,
(C) The bank holding company must consolidate the VIE on its
balance sheet beginning as of the implementation date as a result of
its implementation of FAS 167, and
(D) The bank holding company excludes all assets held by VIEs
described in paragraphs (b)(1)(i)(A) through (C) of this section 81;
and
(ii) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE that is a consolidated ABCP program,
provided that the following conditions are met:
(A) The bank holding company is the sponsor of the ABCP program,
(B) Prior to the implementation date, the bank holding company
consolidated the VIE onto its balance sheet under GAAP and excluded
the VIE's assets from the bank holding company's risk-weighted
assets, and
(C) The bank holding company chooses to exclude all assets held
by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B)
of this section 81.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including for the two calendar quarter-end
regulatory report dates within the exclusion period, a bank holding
company adopting the optional provisions in paragraph (b) of this
section must calculate risk-weighted assets for its contractual
exposures to the VIEs referenced in paragraph (b)(1) of this section
81 on the implementation date and include this calculated amount in
risk-weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank holding company that excludes VIE assets from risk-
weighted assets pursuant to paragraph (b)(1) of this section 81 may
include in Tier 2 capital the full amount of the ALLL calculated as
of the implementation date that is attributable to the assets it
excludes pursuant to paragraph (b)(1) of this section 81
[[Page 4650]]
(inclusion amount). The amount of ALLL includable in Tier 2 capital
in accordance with this paragraph shall not be subject to the
limitations set forth in section 13(a)(2) and (b) of this Appendix.
(c) Phase-in period.
(1) Exclusion amount. For purposes of this paragraph (c),
exclusion amount is defined as the amount of risk-weighted assets
excluded in paragraph (b)(1) of this section as of the
implementation date.
(2) Risk-weighted assets for the third and fourth quarters. A
bank holding company that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (b)(1) of this section
may, for the third and fourth quarters after the implementation date
(phase-in period), including for the two calendar quarter-end
regulatory report dates within those quarters, exclude from risk-
weighted assets 50 percent of the exclusion amount, provided that
the bank holding company may not include in risk-weighted assets
pursuant to this paragraph an amount less than the aggregate risk-
weighted assets calculated pursuant to paragraph (b)(2) of this
section 81.
(3) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A bank holding company that excludes assets of
consolidated VIEs from risk-weighted assets pursuant to paragraph
(c)(2) of this section may, for the phase-in period, include in Tier
2 capital 50 percent of the inclusion amount it included in Tier 2
capital during the exclusion period, notwithstanding the limit on
including ALLL in Tier 2 capital in section 13(a)(2) and (b) of this
Appendix.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 81, assets held by a VIE to which the bank
holding company has provided recourse through credit enhancement
beyond any contractual obligation to support assets it has sold may
not be excluded from risk-weighted assets.
Federal Deposit Insurance Corporation
12 CFR Chapter III
Authority for Issuance
0
For the reasons stated in the common preamble, the Federal Deposit
Insurance Corporation amends Part 325 of Chapter III of Title 12, Code
of the Federal Regulations as follows:
PART 325--CAPITAL MAINTENANCE
0
13. The authority citation for part 325 continues to read as follows:
Authority: 12 U.S.C. 1815(a), 1815(b), 1816, 1818(a), 1818(b),
1818(c), 1818(t), 1819(Tenth), 1828(c), 1828(d), 1828(i), 1828(n),
1828(o), 1831o, 1835, 3907, 3909, 4808; Pub. L. 102-233, 105 Stat.
1761, 1789, 1790, (12 U.S.C. 1831n note); Pub. L. 102-242, 105 Stat.
2236, as amended by Pub. L. 103-325, 108 Stat. 2160, 2233 (12 U.S.C.
1828 note); Pub. L. 102-242, 105 Stat. 2236, 2386, as amended by
Pub. L. 102-550, 106 Stat. 3672, 4089 (12 U.S.C. 1828 note).
0
14. In Appendix A to part 325, revise section I.A.1.iii.(d) to read as
follows:
Appendix A to Part 325--Statement of Policy on Risk Based Capital
* * * * *
I. * * *
A. * * *
1. * * *
iii. * * *
(d) Minority interests in small business investment companies,
investment funds that hold nonfinancial equity investments (as
defined in section II.B.(6)(ii) of this appendix A), and
subsidiaries that are engaged in non-financial activities are not
included in the bank's Tier 1 or total capital base if the bank's
interest in the company or fund is held under one of the legal
authorities listed in section II.B.(6)(ii) of this appendix A.
0
15. Further amend Appendix A to part 325 in section II.A. by adding new
paragraphs 4. and 5. as follows:
Appendix A to Part 325--Statement of Policy on Risk Based Capital
* * * * *
II. * * *
A. * * *
4. The Director of the Division of Supervision and Consumer
Protection (DSC) may, on a case-by-case basis, determine that the
regulatory capital treatment for an exposure or other relationship
to an entity that is not subject to consolidation on the balance
sheet is not commensurate with the risk of the exposure and the
relationship of the bank to the entity. In making this
determination, the Director of DSC may require the bank to treat the
entity as if it were consolidated on the balance sheet of the bank
for risk-based capital purposes and calculate the appropriate risk-
based capital ratios accordingly.
5. Optional Transition Provisions Related to the Implementation of
Consolidation Requirements Under FAS 167
Section II.A.5 of this appendix provides optional transition
provisions for a State nonmember bank that is required for financial
and regulatory reporting purposes, as a result of its implementation
of Statement of Financial Accounting Standards No. 167, Amendments
to FASB Interpretation No. 46(R) (FAS 167), to consolidate certain
variable interest entities (VIEs) as defined under United States
generally accepted accounting principles (GAAP). These transition
provisions apply through the end of the fourth quarter following the
date of a bank's implementation of FAS 167 (implementation date).
i. Exclusion period.
(a) Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank may exclude
from risk-weighted assets:
(1) Subject to the limitations in paragraph iii. of this section
II.A.5, assets held by a VIE, provided that the following conditions
are met:
(i) The VIE existed prior to the implementation date,
(ii) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date,
(iii) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167, and
(iv) The bank excludes all assets held by VIEs described in
paragraphs i.(a)(1)(i) through (iii) of this section II.A.5; and
(2) Subject to the limitations in paragraph iii. of this section
II.A.5, assets held by a VIE that is a consolidated asset-backed
commercial paper (ABCP) program, provided that the following
conditions are met:
(i) The bank is the sponsor of the ABCP program,
(ii) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets, and
(iii) The bank chooses to exclude all assets held by ABCP
program VIEs described in paragraphs i.(a)(2)(i) and (ii) of this
section II.A.5.
(b) Risk-weighted assets during exclusion period. During the
exclusion period, including the two calendar quarter-end regulatory
report dates within the exclusion period, a bank adopting the
optional provisions of this paragraph i. of this section II.A.5 must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in paragraph i.(a) of this section II.A.5 on the
implementation date and include this calculated amount in its risk-
weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(c) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank that excludes VIE assets from risk-weighted assets
pursuant to paragraph i.(a) of this section II.A.5 may include in
Tier 2 capital the full amount of the allowance for loan and lease
losses (ALLL) calculated as of the implementation date that is
attributable to the assets it excludes pursuant to paragraph i.(a)
of this section II.A.5 (inclusion amount). The amount of ALLL
includable in Tier 2 capital in accordance with this paragraph shall
not be subject to the limitations set forth in paragraph i. of
section I.A.2.
ii. Phase-in period.
(a) Exclusion amount. For purposes of this paragraph ii. of this
section II.A.5, exclusion amount is defined as the amount of risk-
weighted assets excluded in paragraph i.(a) of this section II.A.5
as of the implementation date.
(b) Risk-weighted assets for the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to paragraph i.(a) of this section II.A.5 may, for
the third and fourth quarters after the implementation date (phase-
in period), including for the two calendar quarter-end regulatory
report dates
[[Page 4651]]
within those quarters, exclude from risk-weighted assets 50 percent
of the exclusion amount, provided that the bank may not include in
risk-weighted assets pursuant to this paragraph an amount less than
the aggregate risk-weighted assets calculated pursuant to paragraph
i.(b) of this section II.A.5.
(c) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph ii.(b) of this section
II.A.5 may, for the phase-in period, include in Tier 2 capital 50
percent of the inclusion amount it included in Tier 2 capital during
the exclusion period, notwithstanding the limit on including ALLL in
Tier 2 capital in paragraph i. of section I.A.2.
iii. Implicit recourse limitation. Notwithstanding any other
provision in this section II.A.5, assets held by a VIE to which the
bank has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
0
16. Further amend Appendix A to part 325 by removing section II.B.6.b.
and redesignating section II.B.6.c. as section II.B.6.b.
0
17. In Appendix D to part 325, amend the Table of Contents by adding a
new Part IX and Section 81 as follows:
Appendix D to Part 325--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
Part I--General Provisions
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
0
18. Further amend Appendix D to part 325 in section 1(c) by
redesignating paragraph (3) as paragraph (4) and adding new paragraph
(3) as follows:
Appendix D to Part 325--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
Part I. * * *
Section 1. * * *
(c) * * *
(3) The FDIC may, on a case-by-case basis, determine that the
regulatory capital treatment for an exposure or other relationship
to an entity that is not subject to consolidation on the balance
sheet is not commensurate with the risk of the exposure and the
relationship of the bank to the entity. In making this
determination, the FDIC may require the bank to treat the entity as
if it were consolidated on the balance sheet of the bank for risk-
based capital purposes and calculate the appropriate risk-based
capital ratios accordingly.
* * * * *
0
19. Further amend Appendix D to part 325 by removing section 42(l) and
redesignating section 42(m) as section 42(l).
0
20. Further amend Appendix D to part 325 by adding a new part IX and
section 81 to read as follows:
Appendix D to Part 325--Capital Adequacy Guidelines for Banks:
Internal-Ratings-Based and Advanced Measurement Approaches
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
(a) Scope, applicability, and purpose. This section 81 provides
optional transition provisions for a State nonmember bank that is
required for financial and regulatory reporting purposes, as a
result of its implementation of Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
167), to consolidate certain variable interest entities (VIEs) as
defined under GAAP. These transition provisions apply through the
end of the fourth quarter following the date of a bank's
implementation of FAS 167 (implementation date).
(b) Exclusion period.
(1) Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a bank may exclude
from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date,
(B) The bank did not consolidate the VIE on its balance sheet
for calendar quarter-end regulatory report dates prior to the
implementation date,
(C) The bank must consolidate the VIE on its balance sheet
beginning as of the implementation date as a result of its
implementation of FAS 167, and
(D) The bank excludes all assets held by VIEs described in
paragraphs (b)(1)(i)(A) through (C) of this section 81; and
(ii) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE that is a consolidated ABCP program,
provided that the following conditions are met:
(A) The bank is the sponsor of the ABCP program,
(B) Prior to the implementation date, the bank consolidated the
VIE onto its balance sheet under GAAP and excluded the VIE's assets
from the bank's risk-weighted assets, and
(C) The bank chooses to exclude all assets held by ABCP program
VIEs described in paragraphs (b)(1)(ii)(A) and (B) of this section
81.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including for the two calendar quarter-end
regulatory report dates within the exclusion period, a bank adopting
the optional provisions in paragraph (b) of this section must
calculate risk-weighted assets for its contractual exposures to the
VIEs referenced in paragraph (b)(1) of this section 81 on the
implementation date and include this calculated amount in risk-
weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in Tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a bank that excludes VIE assets from risk-weighted assets
pursuant to paragraph (b)(1) of this section 81 may include in Tier
2 capital the full amount of the ALLL calculated as of the
implementation date that is attributable to the assets it excludes
pursuant to paragraph (b)(1) of this section 81 (inclusion amount).
The amount of ALLL includable in Tier 2 capital in accordance with
this paragraph shall not be subject to the limitations set forth in
section 13(a)(2) and (b) of this Appendix.
(c) Phase-in period.
(1) Exclusion amount. For purposes of this paragraph (c),
exclusion amount is defined as the amount of risk-weighted assets
excluded in paragraph (b)(1) of this section as of the
implementation date.
(2) Risk-weighted assets for the third and fourth quarters. A
bank that excludes assets of consolidated VIEs from risk-weighted
assets pursuant to paragraph (b)(1) of this section may, for the
third and fourth quarters after the implementation date (phase-in
period), including for the two calendar quarter-end regulatory
report dates within those quarters, exclude from risk-weighted
assets 50 percent of the exclusion amount, provided that the bank
may not include in risk-weighted assets pursuant to this paragraph
an amount less than the aggregate risk-weighted assets calculated
pursuant to paragraph (b)(2) of this section 81.
(3) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A bank that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (c)(2) of this section
may, for the phase-in period, include in Tier 2 capital 50 percent
of the inclusion amount it included in Tier 2 capital during the
exclusion period, notwithstanding the limit on including ALLL in
Tier 2 capital in section 13(a)(2) and (b) of this Appendix.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 81, assets held by a VIE to which the bank
has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
Department of the Treasury
Office of Thrift Supervision
12 CFR Chapter V
0
For reasons set forth in the common preamble, the Office of Thrift
[[Page 4652]]
Supervision amends part 567 of Chapter V of title 12 of the Code of
Federal Regulations as follows:
PART 567--CAPITAL
0
21. The authority citation for part 567 continues to read as follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828
(note).
0
22. Section 567.0 is amended by adding paragraph (c) to read as
follows:
Sec. 567.0 Scope.
* * * * *
(c) Optional transition provisions related to the implementation of
consolidation requirements under FAS 167--(1) Scope, applicability, and
purpose. The section provides optional transition provisions for a
savings association that is required for financial and regulatory
reporting purposes, as a result of its implementation of Statement of
Financial Accounting Standards No. 167, Amendments to FASB
Interpretation No. 46(R) (referred to in this section as FAS 167), to
consolidate certain variable interest entities (VIEs) as defined under
United States generally accepted accounting principles (GAAP). These
transition provisions apply through the end of the fourth quarter
following the date of a savings association's implementation of FAS 167
(implementation date).
(2) Exclusion period--(i) Exclusion of risk-weighted assets for
first and second quarters. For the first two quarters, after the
implementation date (exclusion period), including for the two calendar
quarter-end regulatory report dates within those quarters, a savings
association may exclude from risk-weighted assets:
(A) Subject to the limitations in paragraph (c)(4) of this section,
assets held by a VIE, provided that the following conditions are met:
(1) The VIE existed prior to the implementation date;
(2) The savings association did not consolidate the VIE on its
balance sheet for calendar quarter-end regulatory report dates prior to
the implementation date;
(3) The savings association must consolidate the VIE on its balance
sheet beginning as of the implementation date as a result of its
implementation of FAS 167; and
(4) The savings association excludes all assets held by VIEs
described in paragraphs (c)(2)(i)(A)(1) through (3) of this section.
(B) Subject to the limitations in paragraph (c)(4) of this section,
assets held by a VIE that is a consolidated asset-backed commercial
paper (ABCP) program, provided that the following conditions are met:
(1) The savings association is the sponsor of the ABCP program,
(2) Prior to the implementation date, the savings association
consolidated the VIE onto its balance sheet under GAAP and excluded the
VIE's assets from the savings association's risk-weighted assets; and
(3) The savings association chooses to exclude all assets held by
ABCP program VIEs described in paragraphs (c)(2)(i)(B)(i) and (ii) of
this section.
(ii) Risk-weighted assets during exclusion period. During the
exclusion period, including the two calendar quarter-end regulatory
report dates within the exclusion period, a savings association
adopting the optional provisions of paragraph (c)(2) of this section
must calculate risk-weighted assets for its contractual exposures to
the VIEs referenced in paragraph (c)(2)(i) on the implementation date
and include this calculated amount in its risk-weighted assets. Such
contractual exposures may include direct-credit substitutes, recourse
obligations, residual interests, liquidity facilities, and loans.
(iii) Inclusion of Allowance for Loan and Lease Losses (ALLL) in
tier 2 capital for the first and second quarters. During the exclusion
period, including for the two calendar quarter-end regulatory report
dates within the exclusion period, a savings association that excludes
VIE assets from risk-weighted assets pursuant to paragraph (c)(2)(i) of
this section may include in tier 2 capital the full amount of the
allowance for loan and lease losses (ALLL) calculated as of the
implementation date that is attributable to the assets it excludes
pursuant to paragraph (c)(2)(i) of this section (inclusion amount). The
amount of ALLL includable in tier 2 capital in accordance with this
paragraph shall not be subject to the limitations set forth at Sec.
567.5(b)(4).
(3) Phase-in period--(i) Exclusion amount. For purposes of this
paragraph, exclusion amount is defined as the amount of risk-weighted
assets excluded in paragraph (c)(2)(i) of this section as of the
implementation date.
(ii) Risk-weighted assets for the third and fourth quarters. A
savings association that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (c)(2)(i) of this section
may, for the third and fourth quarters, after the implementation date
(phase-in period), including for the two calendar quarter-end
regulatory report dates within those quarters exclude from risk-
weighted assets 50 percent of the exclusion amount, provided that the
savings association may not include in risk-weighted assets pursuant to
this paragraph an amount less than the aggregate risk-weighted assets
calculated pursuant to paragraph (b)(2)(ii) of this section.
(iii) Inclusion of ALLL in Tier 2 capital for the third and fourth
quarters. A savings association that excludes assets of consolidated
VIEs from risk-weighted assets pursuant to paragraph (c)(3)(ii) of this
section may, for the phase-in period, include in tier 2 capital 50
percent of the inclusion amount it included in tier 2 capital during
the exclusion period, notwithstanding the limit on including ALLL in
tier 2 capital in Sec. 567.5(b)(4).
(4) Implicit recourse limitation. Notwithstanding any other
provision in Sec. 567.0(c), assets held by a VIE to which a savings
association has provided recourse through credit enhancement beyond any
contractual obligation to support assets it has sold may not be
excluded from risk-weighted assets.
0
23. Section 567.5 (a)(1)(iii) is revised to read as follows:
Sec. 567.5 Components of capital.
* * * * *
(a) * * *
(1) * * *
(iii) Minority interests in the equity accounts of the subsidiaries
that are fully consolidated.
* * * * *
0
24. Section 567.6 is amended by revising paragraph (a)(3) to read as
follows:
Sec. 567.6 Risk-based capital credit risk-weight categories.
* * * * *
(a) * * *
(3) If a savings association has multiple overlapping exposures
(such as a program-wide credit enhancement and a liquidity facility) to
an ABCP program that is not consolidated for risk-based capital
purposes, the savings association is not required to hold duplicative
risk-based capital under this part against the overlapping position.
Instead, the savings association should apply to the overlapping
position the applicable risk-based capital treatment that results in
the highest capital charge.
* * * * *
0
25. Section 567.11 is amended by redesignating paragraph (c)(3) as
paragraph (c)(4), and adding new paragraphs (c)(3) and (d) to read as
follows:
Sec. 567.11 Reservation of authority.
* * * * *
[[Page 4653]]
(c) * * *
(3) OTS may find that the capital treatment for an exposure to a
transaction not subject to consolidation on the savings association's
balance sheet does not appropriately reflect the risks imposed on the
savings association. Accordingly, OTS may require the savings
association to treat the transaction as if it were consolidated on the
savings association's balance sheet. OTS will look to the substance of
and risk associated with the transaction as well as other relevant
factors in determining whether to require such treatment and in
calculating risk based capital as OTS deems appropriate.
* * * * *
(d) In making a determination under this paragraph (c) of this
section, the OTS will notify the savings association of the
determination and solicit a response from the savings association.
After review of the response by the savings association, the OTS shall
issue a final supervisory decision regarding the determination made
under paragraph (c) of this section.
0
26. In Appendix C to part 567, amend the Table of Contents by adding a
new Part IX and Section 81 as follows:
Appendix C to Part 567--Risk-Based Capital Requirements--Internal-
Ratings-Based and Advanced Measurement Approaches
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
0
27. Further amend Appendix C to part 567 by redesignating paragraph
(c)(3) as paragraph (c)(4) and adding a new paragraph (c)(3) to Part 1,
Section 1 as follows:
Appendix C to Part 567--Risk-Based Capital Requirements--Internal-
Ratings-Based and Advanced Measurement Approaches
* * * * *
(c) * * *
(3) Regulatory capital treatment of unconsolidated entities. OTS
may find that the capital treatment for an exposure to a transaction
not subject to consolidation on the savings association's balance
sheet does not appropriately reflect the risks imposed on the
savings association. Accordingly, OTS may require the savings
association to treat the transaction as if it were consolidated on
the savings association's balance sheet. OTS will look to the
substance of and risk associated with the transaction as well as
other relevant factors in determining whether to require such
treatment and in calculating risk-based capital as OTS deems
appropriate.
* * * * *
0
28. Further amend appendix C to part 567 by removing section 42(l) and
redesignating section 42(m) as section 42(l).
0
29. Further amend Appendix C to part 567 by adding a new part IX and
section 81 to read as follows:
Appendix C to Part 567--Risk-Based Capital Requirements: Internal-
Ratings-Based and Advanced Measurement Approaches
* * * * *
Part IX--Transition Provisions
Section 81--Optional Transition Provisions Related to the
Implementation of Consolidation Requirements Under FAS 167
(a) Scope, applicability, and purpose. This section 81 provides
optional transition provisions for a savings association that is
required for financial and regulatory reporting purposes, as a
result of its implementation of Statement of Financial Accounting
Standards No. 167, Amendments to FASB Interpretation No. 46(R) (FAS
167), to consolidate certain variable interest entities (VIEs) as
defined under GAAP. These transition provisions apply through the
end of the fourth quarter following the date of a savings
association's implementation of FAS 167 (implementation date).
(b) Exclusion period.
(1) Exclusion of risk-weighted assets for the first and second
quarters. For the first two quarters after the implementation date
(exclusion period), including for the two calendar quarter-end
regulatory report dates within those quarters, a savings association
may exclude from risk-weighted assets:
(i) Subject to the limitations in paragraph (d) of section 81,
assets held by a VIE, provided that the following conditions are
met:
(A) The VIE existed prior to the implementation date,
(B) The savings association did not consolidate the VIE on its
balance sheet for calendar quarter-end regulatory report dates prior
to the implementation date,
(C) The savings association must consolidate the VIE on its
balance sheet beginning as of the implementation date as a result of
its implementation of FAS 167, and
(D) The savings association excludes all assets held by VIEs
described in paragraphs (b)(1)(i)(A) through (C) of this section 81;
and
(ii) Subject to the limitations in paragraph (d) of this section
81, assets held by a VIE that is a consolidated ABCP program,
provided that the following conditions are met:
(A) The savings association is the sponsor of the ABCP program,
(B) Prior to the implementation date, the savings association
consolidated the VIE onto its balance sheet under GAAP and excluded
the VIE's assets from the savings association's risk-weighted
assets, and
(C) The savings association chooses to exclude all assets held
by ABCP program VIEs described in paragraphs (b)(1)(ii)(A) and (B)
of this section 81.
(2) Risk-weighted assets during exclusion period. During the
exclusion period, including for the two calendar quarter-end
regulatory report dates within the exclusion period, a savings
association adopting the optional provisions in paragraph (b) of
this section must calculate risk-weighted assets for its contractual
exposures to the VIEs referenced in paragraph (b)(1) of this section
81 on the implementation date and include this calculated amount in
risk-weighted assets. Such contractual exposures may include direct-
credit substitutes, recourse obligations, residual interests,
liquidity facilities, and loans.
(3) Inclusion of ALLL in tier 2 capital for the first and second
quarters. During the exclusion period, including for the two
calendar quarter-end regulatory report dates within the exclusion
period, a savings association that excludes VIE assets from risk-
weighted assets pursuant to paragraph (b)(1) of this section 81 may
include in tier 2 capital the full amount of the ALLL calculated as
of the implementation date that is attributable to the assets it
excludes pursuant to paragraph (b)(1) of this section 81 (inclusion
amount). The amount of ALLL includable in tier 2 capital in
accordance with this paragraph shall not be subject to the
limitations set forth in section 13(A)(2) and 13(b) of this
Appendix.
(c) Phase-in period.
(1) Exclusion amount. For purposes of this paragraph (c),
exclusion amount is defined as the amount of risk-weighted assets
excluded in paragraph (b)(1) of this section as of the
implementation date.
(2) Risk-weighted assets for the third and fourth quarters. A
savings association that excludes assets of consolidated VIEs from
risk-weighted assets pursuant to paragraph (b)(1) of this section
may, for the third and fourth quarters after the implementation date
(phase-in period), including for the two calendar quarter-end
regulatory report dates within those quarters, exclude from risk-
weighted assets 50 percent of the exclusion amount, provided that
the savings association may not include in risk-weighted assets
pursuant to this paragraph an amount less than the aggregate risk-
weighted assets calculated pursuant to paragraph (b)(2) of this
section 81.
(3) Inclusion of ALLL in tier 2 capital for the third and fourth
quarters. A savings association that excludes assets of consolidated
VIEs from risk-weighted assets pursuant to paragraph (c)(2) of this
section may, for the phase-in period, include in tier 2 capital 50
percent of the inclusion amount it included in tier 2 capital,
during the exclusion period, notwithstanding the limit on including
ALLL in tier 2 capital in section 13(a)(2) and 13(b) of this
Appendix.
(d) Implicit recourse limitation. Notwithstanding any other
provision in this section 81, assets held by a VIE to which the
savings association has provided recourse through credit enhancement
beyond any contractual obligation to support assets it has sold may
not be excluded from risk-weighted assets.
[[Page 4654]]
Dated: January 7, 2010.
John C. Dugan,
Comptroller of Currency.
By Order of the Board of Governors of the Federal Reserve
System.
Jennifer J. Johnson,
Secretary of the Board.
Dated at Washington, DC, at this 17th day of December 2009.
By order of the Board of Directors.
Robert E. Feldman,
Executive Secretary.
Federal Deposit Insurance Corporation.
Dated: December 18, 2009.
By the Office of Thrift Supervision.
John E. Bowman,
Acting Director.
[FR Doc. 2010-825 Filed 1-27-10; 8:45 am]
BILLING CODE 6720-01-P; 6210-01-P; 6714-01-P; 6720-01-P